See accompanying notes to condensed consolidated financial statements
5
LYFE Communications, Inc.
[A Development Stage Company]
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Nature of Business
LYFE Communications, Inc. (the “Company” or “LYFE”) was incorporated under the laws of the State of Utah in August, 1999. LYFE merged with and into Connected Lyfe, Inc. (“Connected Lyfe”) a wholly-owned subsidiary of the Company. The Company is a holding company parent of Connected Lyfe, and the Company’s business operations following the merger are those of Connected Lyfe.
The Company’s business is to develop, deploy, and operate next media and communications network based services in single-family, multi-family, high-rise, resort and hospitality properties.
The Company is in the development stage as planned principal operations have commenced, but there has been no significant revenue there from. The primary activities to date have included conducting research and development, developing markets for its products, securing strategic alliances, recruiting personnel and obtaining financing and beginning operations and testing of services.
2. Summary of Significant Accounting Policies
The accompanying condensed consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These interim financial statements include all adjustments consisting of normal recurring entries, which in the opinion of management, are necessary to present a fair statement of the results for the period. The results of operations for the period ended March 31, 2011, are not necessarily indicative of the operating results for the full year. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
Use of Accounting Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Generally, matters subject to estimation and judgment include amounts related to asset impairments, useful lives of fixed assets and capitalization of costs for software developed for internal use. Actual results may differ from estimates provided.
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LYFE Communications, Inc.
[A Development Stage Company]
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Taxes
At March 31, 2011, management had recorded a full valuation allowance against the net deferred tax assets related to temporary differences and operating losses in the current period because there is significant uncertainty as to the realizability of the deferred tax assets. Based on a number of factors, the currently available, objective evidence indicates that it is more-likely-than-not that the net deferred tax assets will not be realized.
The Company has accrued for unremitted payroll taxes, employee withholdings, and sales taxes due to various state and federal agencies along with accrued interest and penalties on the amounts outstanding as of March 31, 2011.
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition, (SAB 104). The criteria to meet this guideline are: (i) persuasive evidence of a sales arrangement exists, (ii) the sales terms are fixed and determinable, (iii) title and risk of loss have transferred, and (iv) collectability is reasonably assured. The Company derives its revenue primarily from the sale of Video, Data and Voice over Internet Protocol services and recognizes revenues in the period the related services are provided and the amount of revenue is determinable and collection is reasonably assured.
Stock-Based Compensation
The Company has accounted for stock-based compensation under the provisions of FASB Accounting Standards Codification (ASC) 718-10-55. This statement requires us to record an expense associated with the fair value of stock-based compensation. We use the Black-Scholes option valuation model to calculate stock based compensation at the date of grant. We used a market approach for stock compensation issued to consultants. Option pricing models require the input of highly subjective assumptions, including the expected price volatility. Market approach analysis for pricing stock with infrequent trades and transactions require highly subjective assumptions, including restriction discount and blockage discounts. Changes in these assumptions can materially affect the fair value estimate.
Recently Enacted Accounting Pronouncements
The Company has reviewed all recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its consolidated results of operation, financial position or cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect on its consolidated financial statements.
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LYFE Communications, Inc.
[A Development Stage Company]
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. Going Concern and Liquidity
The Company has accumulated losses from inception through March 31, 2011 of ($11,005,794), and has had negative cash flows from operating activities during the period from inception through March 31, 2011. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans are to further develop new and innovative products and services that target the telecommunications industry. Historically, we have funded operating, administrative and development costs through the sale of equity capital and short term loans. Management plans to continue raising funds in this manner. If management is unsuccessful in these efforts, discontinuance of operations is possible. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
4. Equity-Based Compensation
On January 1, 2010, the Company’s board of directors approved a stock plan. The stock plan known as the 2010 Stock Plan (the “Plan”) reserves up to 15,000,000 shares of the Company’s authorized common stock for issuance to officers, directors, employees and consultants under the terms of the Plan. The Plan permits the board of directors to issue stock options and restricted stock.
The fair value of each option granted under the Plan is estimated on the date of grant, using the Black-Scholes option pricing model, based on the following weighted average assumptions:
| | | | | |
Expected life | | 1.0 - 4.25 years | |
Expected stock price volatility | | 71.10 – 96.31 | % |
Expected dividend yield | | 0.0 | % |
Risk-free interest rate | | 0.34 – 1.94 | % |
The risk-free interest rate is based upon the U.S. Treasury yield curve at the time of grant for the respective expected life of the option. The expected life (estimated period of time outstanding) of options was estimated using the simplified method for each option under ASC 718-10-S99-1 with the expected term equal to the vesting period. The Company was unable to rely on historical exercise data due to the early stage of the Company and no historical exercise data. The simplified method was applied to all options for all periods presented. The expected volatility of the Company’s options was calculated using historical data of comparable companies in the Company’s industry. Expected dividend yield was not considered in the option pricing formula since the Company does not pay dividends and has no plans to do so in the future. If actual periods of time outstanding and rate of forfeitures differs from the expected rates, the Company may be required to make additional adjustments to compensation expense in future periods.
During the three months ended March 31, 2011 no options were issued to employees and 1,000,000 unvested options were forfeited and 300,000 expired unexercised. A summary of the status of the Company’s outstanding stock options as of March 31, 2011 and changes during the period then ended is presented below:
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LYFE Communications, Inc.
[A Development Stage Company]
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | | | | | | |
| | | | | | | |
| | |
|
Shares | | Weighted Average Exercise Price | |
Outstanding, January 1, 2011 | 9,261,000 | | $ | 0.34 | |
Granted | - | | | - | |
Expired/Cancelled | (1,300,000) | | | 0.70 | |
Exercised | - | | | | | | |
Outstanding, March 31, 2011 | 7,961,000 | | | 0.26 | |
Exercisable | 2,015,750 | | $ | 0.25 | |
| | | |
| | Weighted Average | |
Range of Exercise | Number Outstanding | Remaining | Number Exercisable at |
Prices | at March 31, 2011 | Contractual Life | March 31, 2011 |
$ 0.25 | 7,870,000 | 2.18 | 2,001,250 |
$ 0.75 | 58,000 | 2.91 | 14,500 |
$ 1.10 | 8,000 | 3.25 | |
Option-based compensation expense totaled $57,157 for the three months ended March 31, 2011. As of March 31, 2011, the Company had $672,018 in unrecognized compensation costs related to non-vested stock options granted under the Plan with a remaining amortization period of approximately 3 years.
| | | | | |
| | | | | |
| Nonvested Shares | | | | Weighted Average Exercise Price |
January 1, 2011 | 9,261,000 | | | $ | 0.34 |
| | | | | |
Granted | - | | | | - |
Vested | (2,315,750) | | | | 0.26 |
Forfeited | (1,300,000) | | | | 0.60 |
| | | | | |
Nonvested at March 31, 2011 | 5,645,250 | | | $ | 0.33 |
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LYFE Communications, Inc.
[A Development Stage Company]
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5. Composition of Certain Financial Statement Captions
Other Assets
In February 2010, the Company signed a letter of intent to enter into a services and asset acquisition agreement with a network operator. The agreement provides for a payment of $350,000, which was fully paid in October 2010. The payments were made in advance of taking possession of the video distribution system and video content rights provided in the agreement. If the network operator does not fulfill remaining conditions of the agreement pertaining to the transfer of rights and licenses, which are subject to content provider approval, the asset may be determined to be impaired. If the Company does not obtain the necessary financing to operate the system, the asset may be determined to be impaired.
On March 3, 2011 the Company received a “notice of exercise of video system reversionary rights.” Currently, there is a dispute between UTOPIA and Connected Lyfe as to who has not performed under the existing contract. As stated in the notice, UTOPIA is working with Connected Lyfe on a resolution. However, if a resolution, satisfactory to both companies, cannot be found the situation could escalate to additional legal action. As of May 23, 2011 no resolution has been made.
On May 14, 2010, the Company entered into a Purchase Agreement with a telecom and cable services provider. Under the terms of the agreement, Connected Lyfe would acquire for specified properties, (i) property rights of entry, (ii) network infrastructure, (iii) subscribers, (iv) certain regional assets, and (v) license to the telecom and cable services provider back office system for use on acquired subscribers and future subscribers of the subsidiary of the Company in exchange for $500,000 in cash, which was received by the telecom and cable services provider on execution of the agreement, and 240,000 shares of the Company’s common stock. As of March 31, 2011 all conditions related to the purchase have not been completed. The remaining condition relate to the transfer of the assets and the ability of LYFE to operate and service the customer base in the specified properties. If LYFE is unable to obtain the financing or operating structure to service the customers the asset may be determined to be impaired. If the assets do not provide sufficient revenues to cover expenses associated with the properties, the asset may be determined to be impaired. If the suppliers do not honor the contracts or provide the necessary services to the customers or network infrastructure, the asset may be determined to be impaired.
6. Equity
During the quarter ended March 31, 2011 the Company issued 58,000 shares of common stock. The Company issued 50,000 shares for cash received in 2010 at $1.20 per share. As of March 31, 2011, there were 45,833 shares to be issued for proceeds of $55,000. The Company issued 8,000 shares for services valued at $0.75 per share, or $6,000.
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LYFE Communications, Inc.
[A Development Stage Company]
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. Related Party Transactions
On May 28, 2010 LYFE entered into a short-term note payable of $175,000 with Robert Bryson, CEO and Chairman of the Board of LYFE. The note has a 60 day maturity and 9% interest rate. As of March 31, 2011 LYFE has accrued $13,577 interest on the note payable to Robert Bryson and recorded $4,180 in interest expense for the three months ending March 31, 2011. As of May 16, 2011 no payments have been made on the note.
On July 1, 2010 LYFE entered into a short-term note payable of $35,000 with Smith Consulting Services (SCS) and affiliates. SCS and affiliates are shareholders of greater than 10% of voting common stock. The loan does not have an interest rate or due date.
A shareholder loaned the Company $5,000 on a short-term note payable. The note has a 1 year maturity and 12% interest rate. As of March 31, 2011, the Company had accrued interest of $479 and recorded interest of $171 for the period ending March 31, 2011.
On February 16, 2011 an officer of the Company loaned the Company $100,000. The note has a 1 year maturity and 12% interest rate. As of March 31, 2011 LYFE has accrued $1,433 interest on the note payable and recorded $1,433 in interest expense for the three months ending March 31, 2011. As of May 16, 2011 no payments have been made on the note.
On March 25, 2011 the Company entered into a short-term note payable of $7,500 with Smith Consulting Services (SCS). The note is due on demand with an 18% interest rate. As of March 31, 2011 LYFE has accrued $343 interest on the note payable and recorded $343 in interest expense for the three months ending March 31, 2011. As of May 16, 2011 no payments have been made on the note.
8. Notes Payable
During 2010, the Company borrowed $65,000 with a stated interest rate of 18%. Of which, $15,000 was due on November 5, 2010. The remaining $50,000 is due on October 1, 2011.
On October 1, 2010, the Company signed a $50,000 convertible promissory note with a third party. The note bears interest at 18% per annum and was due on November 5, 2010. The note has conversion rights that allow the holder of the note at any time to convert all or any part of the remaining principle balance into the Company’s common stock at a price of $0.70.
On December 9, 2010, the Company signed a $40,000 convertible promissory note with a third party. The note bears interest at 8% per annum and is due on September 13, 2011. The note has conversion rights that allow the holder of the note at any time to convert all or any part of the remaining principle balance into the Company’s common stock at a price equal to 55% of the average of the lowest three trading prices for the Common Stock during the most recent ten day period.
11
LYFE Communications, Inc.
[A Development Stage Company]
Notes to Condensed Consolidated Financial Statements
(Unaudited)
8. Notes Payable (Continued)
On January 21, 2011, the Company signed a $40,000 convertible promissory note with a third party. The note bears interest at 8% per annum and is due on October 24, 2011. The note has conversion rights that allow the holder of the note at any time to convert all or any part of the remaining principle balance into the Company’s common stock at a price equal to 55% of the average of the lowest three trading prices for the Common Stock during the most recent ten day period.
In accordance with ASC 470, the Company has analyzed the beneficial nature of the conversion terms on the above-mentioned notes and determined that a beneficial conversion feature (BCF) exists. The Company calculated the value of the BCF using the intrinsic method as stipulated in ASC 470. The value of the BCF was determined based on the stock price on the day of commitments, the discounts as agreed to in the notes, the number of convertible shares, and the difference between the effective conversion price and the fair value of the common stock. The value of the BCF of the two notes has been calculated at $83,702. The BCF has been recorded as a discount to the note payable and to Additional Paid-in Capital and will be amortized over the life of the note. For the three months ended March 31, 2011, the Company recorded $21,159 in amortization. As of March 31, 2011 the accumulated amortization was $49,188. As of May 16, 2011 no payments have been made on these notes and no conversion has been made.
As of March 31, 2011, the Company has accrued interest of $13,784 on these notes and recorded interest expense of $8,693 for the three months ended March 31, 2011.
9. Subsequent Events
On April 13, 2011 the Company’s board of directors, approved, priced and granted 5,160,000 options to purchase 5,160,000 shares of the Company’s common stock. The options were priced at $0.21. On May 5, 2011 the Company’s board of directors cancelled the 5,160,000 options granted on April 13, 2011 and reissued 5,196,000 options to purchase 5,196,000 shares of the Company’s common stock. The options were priced at $0.12.
Subsequent to quarter end, the Company issued 1,950,000 shares for services related to fund raising and investor relations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking Statements
Statements made in this Quarterly Report which are not purely historical are forward-looking statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and our business, including, without limitation, (i) our ability to raise capital, and (ii) statements preceded by, followed by or that include the words “may,” “would,” “could,” “should,” “expects,” “projects,” “anticipates,” “believes,” “estimates,” “plans,” “intends,” “targets” or similar expressions.
Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following, general economic or industry conditions, nationally and/or in the communities in which we may conduct business, changes in the interest rate environment, international gold prices, legislation or regulatory requirements, conditions of the securities markets, our ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting our current or potential business and related matters.
Accordingly, results actually achieved may differ materially from expected results in these statements. Forward-looking statements speak only as of the date they are made. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
Overview
We are developing, deploying and operating, we believe, the next generation media and communications network based services to single-family, multi-family, high-rise, resort and hospitality properties. LYFE Communications has commenced providing video, Internet and telephone services to consumers and businesses and is planning on transitioning those services to our next generation platform. We function as a network and service provider and rely on our underlying facilities based network partners to provide the basic telecommunications network connections to our end customers. We are an application services provider (“ASP”) of Internet protocol television (“IPTV”), Internet services (“ISP”) and voice over Internet protocol (“VOIP”) telephone services. We launched services with a fiber to the home (“FTTH”) network provider along the Wasatch front in Utah and are seeking to expand our reach through partnerships with other networks. To provide services along the Wasatch front in Utah, we have entered into two agreements with Utah Telecommunications Open Infrastructure Agency ( “UTOPIA”) to: (1) become a non-exclusive service provider over its network and (2) to acquire its video systems and provide video services over its system and make such video services available to other providers.
Our primary products are IPTV, Broadband Internet Access and VOIP Telephony. The markets currently planned to be served are along the Wasatch front in Utah. We are planning to expand our markets by building data connections to multi-dwelling units (“MDUs”) and are actively seeking partnerships with other last mile network providers. The last mile network refers to connections the actual home, business or apartment.
IPTV: Our planned television service will include local and basic cable network channels, a premium or extended channel package and individual add on channel packages. The channel packages are typical of IPTV packages provided by other telecommunications companies and negotiated by industry intermediaries or directly with channel providers. We will differ from other cable and satellite providers by our ability to have an interactive feel as we roll out our software packages and set top boxes. Additionally, we will focus on the mobility of our offering so our programming is not just tethered to the traditional television but can be viewed over multiple media devices such as smart phones, laptops and tablets.
Broadband Internet Access: The Internet product will come in varying speeds depending on the location of the customer and the type of network connecting that particular customer to our backbone network.
Current operational subscribers will be connected via fiber and have a choice of regular broadband or higher speed broadband access.
VOIP Telephony: The telephone product will provide a dial tone in the home or business from which the customer can place local or long distance calls. Rates will vary based on the call destination and type of service provided.
We are developing, deploying and operating the networked platform for the next generation of communications and
13
entertainment services. By leveraging our IP (“Internet Protocol”) technologies, we can provide, we believe, an innovative and compelling media and communication services to consumers and businesses who increasingly want access to their television, Internet and voice services on their terms – from any device, at home, in the office, or on the go.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the unaudited Financial Statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. The Company believes there have been no significant changes during the three month period ended March 31, 2011, to the items disclosed as significant accounting policies in management's Notes to the Financial Statements in the Company's Form 10-K, filed on April 15, 2011, for the year ended December 31, 2010.
Nevertheless, the Company’s financial statements contained in this report have been prepared assuming that the Company will continue as a going concern. As discussed in the footnotes to the financial statements and elsewhere in this report, the Company has not established any significant source of revenue to sustain operations, has had negative cash flows from operations and has not received sufficient capital to sustain operations. These factors raise substantial doubt that the Company will be able to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Stock-Based Compensation
The Company has accounted for stock-based compensation under the provisions of FASB Accounting Standards Codification (ASC) 718-10-55. This statement requires us to record an expense associated with the fair value of stock-based compensation. We use the Black-Scholes option valuation model to calculate stock based compensation at the date of grant. Option pricing models require the input of highly subjective assumptions, including the expected price volatility. Market approach analysis for pricing stock with infrequent trades and transactions require highly subjective assumptions, including restriction discount and blockage discounts. Changes in these assumptions can materially affect the fair value estimate.
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition, (SAB 104). The criteria to meet this guideline are: (i) persuasive evidence of a sales arrangement exists, (ii) the sales terms are fixed and determinable, (iii) title and risk of loss have transferred, and (iv) collectability is reasonably assured. The Company derives its revenue primarily from the sale of Video, Data and Voice over Internet Protocol services and recognizes revenues in the period the related services are provided and the amount of revenue is determinable and collection is reasonably assured.
Results of Operations
LYFE Communications is in the development phase as our planned principal operations have commenced but there has not been significant revenue therefrom.
Revenue - During the quarterly period ended March 31, 2011, we recognized $115,708 in revenues. The Company had no revenues for the three months ended March 31, 2010. Sales over our provider network commenced in April 2010.
Direct Costs - Direct costs are comprised of programming costs, monthly recurring Internet broadband connections and VOIP costs. During the three months ended March 31, 2011 direct costs were $51,124. The Company incurred no direct costs in the same period in 2010. Sales and associated direct costs did not commence until April 2010.
Sales and Marketing – Sales and marketing costs are comprised of sales commissions and salaries, marketing relationships and materials. Sales costs in total decreased for the three month period ended March 31, 2011 to $62,580 from $118,291 for the same period in 2010. The decrease is a result of headcount decreases of in-house sales personnel as the Company developed marketing operations in 2010.
Customer Service and Operating Expenses – Customer Service and Operating costs are comprised of the Company’s call center, technical support, project management and general operations. Customer Service costs increased in total
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to $71,270 for the three months ended March 31, 2011 from $0 for the same period in 2010 primarily as a result of increases in head count in customer service.
General and Administrative – General and Administrative costs increased $155,857 for the three months ended March 31, 2011 from the three months ended March 31, 2010 due to an increase in employee head count and increases due to increasing operating activities.
Research and Development – Research and development costs are comprised of the costs to develop our next generation media and communications network. The costs decreased $147,552 for the three months ended March 31, 2011 from the three months ended March 31, 2010 due to a decrease in software developers and an increase in capitalized software development.
Net Loss - We had a net loss for the three months ended March 31, 2011, of $820,547 and for the three months ended March 31, 2010 $803,617, respectively. This represents a loss per share of $0.02 and $0.01 respectively.
Lyfe’s R&D teams continue to build, test, and pilot the full foundation of our all IP next generation “TV Anywhere” technologies and systems, with commercial deployment slated for end of Q3 2011. We continue to operate and extend our current generation all IP services to an expanding base of subscribers and networks which will be readily migrated onto the next generation platform and services.
Total Addressable Market
Lyfe anticipates expansion into Texas, Arizona, Washington, and California. These markets beyond the Wasatch Front in Utah represent hundreds of new high density communities across which Lyfe can deliver services into over 1,500,000 residential units. In addition to these reachable communities Lyfe is also developing flexible partnership operating models with existing TV and Network Operators seeking to replace legacy TV providers like Cable and Satellite offerings with more advanced and competitive than the analog/digital services available today. However, in order for Lyfe to expand it must first secure sufficient funding.
Liquidity and Capital Resources
Liquidity is a measure of a Company’s ability to meet potential cash requirements. We have historically met our capital requirements through the issuance of stock and by borrowings.
Since inception, we have financed our cash flow requirements through issuance of common stock and notes payable. As we expand our activities, we may, and most likely will, continue to experience net negative cash flows from operations, pending additional revenues. Additionally, we anticipate obtaining additional financing to fund operations through common stock offerings to the extent available or to obtain additional financing to the extent necessary to augment our working capital. In the future we need to generate sufficient revenues from product and software sales in order to eliminate or reduce the need to sell additional stock or obtain additional loans. There can be no assurance we will be successful in raising the necessary funds to execute our business plan.
During the three months ended March 31, 2011, the current assets decreased by $7,478 when compared to December 31, 2010.
During the three months ended March 31, 2011, the current liabilities increased by $716,322 when compared to December 31, 2010. The primary reason for the increase is due to the fact that the Company has experienced an increase in notes payable and accrued liabilities. The majority of the increase is attributable to an increase in accrued wages which is categorized as accrued liabilities on the balance sheet. Also, toward the end of 2010, two significant funding commitments were unable to provide working capital for the Company which resulted in a significant increase in current liabilities.
We anticipate that we may incur operating losses during the next twelve months. The Company’s lack of operating history makes predictions of future operating results difficult to ascertain. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets. Such risks include, but are not limited to, an evolving and unpredictable business model and the management of growth. These factors raise substantial doubt about our ability to continue as a going concern. To address these risks, we must, among other things, increase our customer base, implement and successfully execute our business and marketing strategy, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations.
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If new sources of financing are insufficient or unavailable, we will modify our growth and operating plans to the extent of available funding, if any. Any decision to modify our business plans would harm our ability to pursue our growth plans. If we cease or stop operations, our shares could become valueless. Historically, we have funded operating, administrative and development costs through the sale of equity capital and short term related party and other shareholder loans. If our plans and/or assumptions change or prove inaccurate, and we are unable to obtain further financing, or such financing and other capital resources, in addition to projected cash flow, if any, prove to be insufficient to fund operations, our continued viability could be at risk. To the extent that any such financing involves the sale of our equity, our current stockholders could be substantially diluted. There is no assurance that we will be successful in achieving any or all of these objectives in 2011.
Management is currently seeking sources of equity and debt financing from current and potential investors. Additionally, the Company has halted the purchase of video customer premise equipment and sales of video services to conserve costs. Additionally, the Company has cut expenses and reduced headcount to reduce expenses. Currently the Company is in negotiations with suppliers to reduce operation costs for providing services to customers. Management believes that if further funding is not received more cuts in headcount and customer services will be made.
Going Concern
The Company has accumulated losses since inception and has not yet been able to generate profits from operations. Operating capital has been raised through the sale of common stock or through loans from stockholders. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
Management plans are to further develop new and innovative products and services that target the telecommunications industry. If management is unsuccessful in these efforts, discontinuance of operations is possible. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not required.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures
Our management, with the participation of our chief financial and executive officers evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on that evaluation, our chief financial and chief executive officers concluded that, as of March 31, 2011, our disclosure controls and procedures were, subject to the limitations noted above, not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules, regulations and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting
There have been no changes in internal control over financial reporting during the quarter ending March 31, 2011.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On March 2, 2011 the Company received from UTOPIA a notice of termination in conjunction with the agreement between Connected Lyfe and UTOPIA entitled Non-Exclusive Network Access and Use Agreement. According to the notice, Connected Lyfe has until May 2, 2011 to transition its customers to another service provider on the UTOPIA network or cure the breach by working out an arrangement with UTOPIA that is acceptable. The notice of termination is due to non-payment of network access fees. The Company plans to work out an arrangement with UTOPIA thereby retaining its customer base on the network. If the Company is unable to reach an agreement with UTOPIA it may be forced to transition its customers on the UTOPIA network to another service provider.
On March 3, 2011 the Company received a “notice of exercise of video system reversionary rights.” Currently, there is a dispute between UTOPIA and Connected Lyfe as to who has not performed under the existing contract. As stated in the notice, UTOPIA is working with Connected Lyfe on a resolution. However, if a resolution, satisfactory to both companies, cannot be found the situation could escalate to additional legal action.
Item 1A. Risk Factors.
An investment in our common stock involves a high degree of risk, and should not be made by anyone who cannot afford to lose their entire investment. You should consider carefully the risks set forth in this section, together with the other information contained in this prospectus, before making a decision to invest in our common stock. Our business, operating results and financial condition could be seriously harmed and you could lose your entire investment if any of the following risks were to occur.
Risks Related to Our Business
We are a start-up company with limited operating history, limited revenue and have to rely on our ability to raise capital to fund operations and there can be no assurance we will ever reach profitability or be able to continue to raise capital to fund operations.
LYFE Communications commenced limited operations in April of 2010, therefore, we have limited operating history on which to make an investment decision. Accordingly, LYFE Communications has a limited operating history and the business strategy may not be successful. Failure to implement the business strategy could materially adversely affect our business, financial condition and results of operations. Through March 31, 2011, LYFE Communication’s business has not shown a profit in operations and has generated modest revenues. There can be no assurance we will achieve or attain profitability or be able to raise sufficient capital to stay in business. If we cannot achieve operating profitability or raise capital, we may not be able to meet our working capital requirements, which could have a material adverse effect on our business operating results and financial condition resulting in the loss of an investors’ entire investment in us.
We need substantial additional capital to grow and fund our present and planned business and business strategy.
Our current and planned operations contemplate funding with milestones totaling at least $24,500,000 in 2011. Failure to meet these funding milestones may have a significant adverse effect on our growth and anticipated revenues and we may have to curtail our business strategy. If we receive less funding than planned, we will have to revise our business model and reduce proposed expansion. Without significant funding, we will not be able to execute on our business operations and may be forced to cease operations. At this time, there can be no assurance we will be able to obtain the funding we need and even if we obtain such funding that it will be on terms and conditions favorable to us and our existing shareholders. Without funding we will not be able to proceed with planned operations or meet existing obligations.
Our auditor’s “Going Concern” qualification in our financial statements might create additional doubt about our ability to stay in business, which could result in a total loss on investment by our shareholders.
Our accompanying financial statements have been prepared assuming that we will continue as a “going concern.” As discussed in Note 3 to the LYFE Communications Inc’s March 31, 2011 financial statements, we have limited revenues, have incurred a loss from operations and have negative operating cash flows since inception. These issues raise substantial doubt about our ability to continue as a “going concern.” Our ability to stay in business will, in part, depend on our ability to raise additional funding. Our financial statements do not include any adjustment that might result from the outcome of this uncertainty.
Our internal systems and operations are untested and may not be adequate and could adversely affect our ability to continue our planned business.
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Our internal systems and operations are new and unproven at scale. Subscriber growth could place unanticipated strain on our systems used to efficiently manage and operate our planned services. This could have a material adverse effect upon our business, results of operations and financial condition and could force us to halt our planned operations or continued expansion of those planned operations, causing us to lose any opportunity to gain significant anticipated market share in our industry. Our ability to compete effectively as a provider of IPTV, Broadband Internet Access and VOIP services and to manage future growth will require us to continue to improve our operational systems, our organization and our financial and management controls, reporting systems and procedures. We may fail to make these improvements effectively. Additionally, our efforts to make these improvements may divert the focus of our personnel and we may not be able to effectively continue our planned operations, which may materially and adversely affect our business, results of operations and financial condition.
Our inability to attract and maintain key personnel required to implement our business strategy could adversely affect our ability to continue our current and planned business resulting in slower growth.
We are trying to grow our effort to provide services and we are still hiring key positions and integrating personnel at all levels into a cohesive team. If executives or other new hires integrate poorly, perform badly, or do not have the anticipated experience or skill sets required, our current and planned business endeavors could be harmed. Planned personnel, management practices and controls may also prove to be inadequate to provide services, acquire customers and partners and operate the business, and any gaps or failures may have a material adverse affect on our business, financial condition and results of operations.
Increased competition may have an adverse effect on our ability to continue our current and planned business operations and result in our going out of business and may have a material adverse affect on our business, financial condition and results of operations.
We may see increased competition in our markets. We do not have an exclusive relationship with our network partners and other providers may attempt to provide similar services over the same infrastructure. Furthermore, alternative network providers with closed systems through which we cannot provide services may enter the markets in which we sell services. The competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements and devote greater resources to develop, promote and sell their products or services. In addition, increased competition could result in reduced subscriber fees, reduced margins and loss of market share, any of which could harm our business. We cannot guarantee that we can compete successfully against current or future competitors, many of which have substantially more capital, existing brand recognition, resources and access to additional financing. All these competitive pressures may result in increased marketing costs, or loss of market share or otherwise may materially and adversely affect our business, results of operations and financial condition.
Our inability to patent, protect and update our technology may result in our inability to effectively compete in our selected industry.
We use technology advancements of our own and from suppliers to provide a more advanced service with more efficient economics. Technology advancement is very fast paced in digital media and can lead to changing standards and new modes of providing services. The advancement of other technology not available to or usable within our operations could make our current or future products or services obsolete or non-competitive. Keeping pace with the introduction of new standards and technological developments could result in additional costs or prove difficult or impossible. The failure to keep pace with these changes and to continue to enhance and improve the responsiveness, functionality and features of our services could harm our ability to attract and retain users.
Our pursuit of technology or process patents may prove to be fruitless. While our management has experience in these areas and intends to pursue patent applications around our technologies and business processes, we cannot guarantee that other patents have not already superseded those, which we intend to pursue. We have applied the knowledge and insight from our management teams’ industry experience and relationships to research the platform and technology directions of other industry participants and are unaware of other providers of the specific capabilities of LYFE Communications’ technology development; however, patents filed with the U. S. Patent Office during the past fifteen (15) months are not publicly available, and patent applications that cover our concepts could have already been filed by others which may materially and adversely affect our business, results of operations and financial condition..
Our operating results could be impaired if we become subject to burdensome government regulation and legal uncertainties, all of which would increase our cash requirements which may materially and adversely affect our business, results of operations and financial condition.
We are not currently subject to direct regulation by any domestic or foreign governmental agency, other than regulations applicable to businesses generally. However, due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may be adopted with respect to the Internet, relating to:
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· user privacy;
· pricing;
· content;
· copyrights;
· distribution; and
· characteristics and quality of products and services.
The adoption of any additional laws or regulations may decrease the expansion of the Internet. A decline in the growth of the Internet could decrease demand for our products and services and increase our cost of doing business. Moreover, the applicability of existing laws to the Internet is uncertain with regard to many issues, including property ownership, export of specialized technology, sales tax, libel and personal privacy.
Our business, financial condition and results of operations could be seriously impaired by any new legislation or regulation. The application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other online services which may materially and adversely affect our business, results of operations and financial condition.
The secure transmission over the Internet from our services to customers and back is important to customers trust in our ability to deliver services and if we should experience a breach in our security, we could lose customers or incur potential liability.
The secure transmission of confidential information over public networks is critical to electronic commerce and communications. Anyone who can circumvent our security measures could misappropriate confidential information or cause interruptions in our operations. We may have to spend large amounts of money and other resources to protect against potential security breaches or to alleviate problems caused by any breach. These costs may not be able to pass along to customers making our operations less profitable. Additionally, we could be liable for breaches of security resulting in customers’ information being obtained in such breaches, which could subject us to potential liability, which may materially and adversely affect our business, results of operations and financial condition.
We rely on providers of content to provide rights for the distribution of their content to our customers, which could be withdrawn, or prices for providing content could become cost prohibitive.
We do not own the video content that we provide to our customers. We pay the content providers a fee for the rights to provide their content to subscribers. The providers of the content may withdraw their rights, revoke rights, refuse rights, or increase the cost of their content rights, which may materially and adversely affect our business, results of operations and financial condition.
Planned acquisitions come with various risks, along with dilution to our shareholders, which could negatively affect our stock prices and may materially and adversely affect our business, results of operations and financial condition.
Acquisitions, mergers and joint ventures entered into by us may have an adverse effect on our business. We expect to engage in acquisitions, mergers or joint ventures as part of our long-term business strategy. These transactions involve significant challenges and risks including that the transaction does not advance our business strategy, that we don't realize a satisfactory return on our investment, or that we experience difficulty in the integration of new assets, employees, business systems, and technology, or diversion of management's attention from our other businesses. These events may materially and adversely affect our business, results of operations and financial condition.
The current and future state of the economy may materially and adversely affect our business, results of operations and financial condition.
Our business may be adversely affected by changes in domestic economic conditions, including inflation, changes in consumer preferences, changes in consumer spending rates, personal bankruptcy and the ability to collect our customer accounts. Changes in economic conditions may adversely affect the demand for our products and make it more difficult to collect customer accounts, thereby negatively affecting our business, operating results and financial condition. The recent disruptions in credit and other financial markets and deterioration of national and global economic conditions could, among other things, impair the financial condition of some of our customers and suppliers, thereby increasing customer bad debts or non-performance by suppliers. If we experience bad debts or slow paying customers in significant quantities, our cash flow will be limited and our ability to pay our own obligations will questionable. As a small business these issues will affect us more than our larger competitors putting financial strain on our business and threatening our survival particularly since we have limited capital to rely on to overcome cash flow issues of slow paying customers. If our customers are unable to pay or pay slowly it may materially and adversely affect our business, results of operations and financial condition.
Present members of management currently own in excess of a majority of our outstanding voting securities
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and can elect all directors who in turn elect all officers, without the votes of any other shareholders effectively giving management complete control over our direction and limiting shareholders’ ability to change management if they do not like our direction or management.
Messrs. Bryson, Daw and Smith, who comprise all of the members of our current directors collectively own 71.5% of our outstanding voting securities and accordingly, have effective control of us and may have effective control of us for the near and long term future. Votes of other shareholders can have little effect when we are managed by our Board of Directors and operated through our officers, all of whom can be elected by these persons.
Future stock issuances could severely dilute our current shareholders’ interests.
Our Board of Directors has the authority to issue up to 200,000,000 authorized shares of our common stock or stock options to acquire such common stock; or up to 10,000,000 shares of preferred stock with rights, privileges and preferences designated by the Board of Directors. The future issuance of common stock or preferred stock may result in dilution in the percentage of our common stock held by our existing stockholders. Also, any stock we sell in the future may be valued on an arbitrary basis by us and the issuance of shares of common stock or preferred stock for future services, acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our existing stockholders.
We do not expect to pay dividends in the near future.
We do not expect to declare or pay any dividends on our common stock in the foreseeable future. The declaration and payment in the future of any cash or stock dividends on the common stock will be at the discretion of our Board of Directors and will depend upon a variety of factors, including our ability to service our outstanding indebtedness, if any, and to pay dividends on securities ranking senior to the common stock, our future earnings, if any, capital requirements, financial condition and such other factors as our Board of Directors may consider to be relevant from time to time. Our earnings, if any, are expected to be retained for use in expanding our business.
Risks Related to Our Common Stock
Our common stock is classified as a “penny stock” under SEC Rules and Regulations, which means there is a very limited trading market for our shares.
Our common stock is deemed to be “penny stock” as that term is defined in Rule 3a51-1 of the SEC. Penny stocks are stocks (i) with a price of less than five dollars per share; (ii) that are not traded on a “recognized” national exchange; (iii) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must still meet requirement (i) above); or (iv) in issuers with net tangible assets less than $2,000,000 (if the issuer has been in continuous operation for at least three years); or $5,000,000 (if in continuous operation for less than three years); or with average revenues of less than $6,000,000 for the last three years.
Section 15(g) of the Exchange Act and Rule 15g-2 of the SEC require broker dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account. Potential investors in our common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be “penny stock.”
Moreover, Rule 15g-9 of the SEC requires broker dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker dealer to (i) obtain from the investor information concerning his, her or its financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor, and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for investors in our common stock to resell their shares to third parties or to otherwise dispose of such shares.
Due to the substantial instability in our common stock price, you may not be able to sell your shares at a profit or at all, and as a result, any investment in our shares could be totally lost.
The public market for our common stock is very limited. As with the market for many other small companies, any market price for our shares is likely to continue to be very volatile. Our common stock has very limited volume and as a “penny stock,” many brokers will not trade in our stock limiting our stocks’ liquidity. As such it may be difficult to sell shares of our common stock.
Our common stock has a limited trading history, and it will be difficult to determine any market trends or prices for our shares and additional shares that become available under Rule 144 could cause the price of our
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stock to decrease.
Our common stock currently is quoted on the OTC Bulletin Board, under the symbol “LYFE.” However, with very little trading history, a trading market that does not represent an “established trading market,” volatility in the bid and asked prices and the fact that our common stock is very thinly traded, you could lose all or a substantial portion of your funds if you make an investment in us. Additionally as more shares become available for resale, it is likely there will be negative pressures on our stock price.The sale or potential sale of shares of our common stock that may become publicly tradable under Rule 144 in the future may have a severe adverse impact on any market that develops for our common stock, and you may lose your entire investment or be unable to resell any shares in us that you purchase.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three months ended March 31, 2011 the Company did not sell any shares of unregistered equity securities.
Item 3. Defaults Upon Senior Securities.
None; not applicable.
Item 4. (Removed and Reserved).
Item 5. Other Information.
None
Item 6. Exhibits.
Exhibit No. Identification of Exhibit
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31.1
31.2
32 | Certification of Gregory Smith Pursuant to Section 302 of the Sarbanes-Oxley Act.
Certification of Garrett Daw Pursuant to Section 302 of the Sarganes-Oxley Act.
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized
LYFE COMMUNICATIONS, INC.
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Date: | May 23, 2011 | | By: | /s/Gregory Smith |
| | | | Gregory Smith, CEO, director |
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Date: | May 23, 20211 | | By: | /s/Garrett Daw |
| | | | Garrett Daw, Executive Vice President, acting CFO and director |
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