See accompanying notes to condensed consolidated financial statements
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LYFE Communications, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2013
(Unaudited)
1. Business
The business of LYFE Communications, Inc. (the “Company”) is to develop, deploy, and operate next media and communications network based services in single-family, multi-family, high-rise, resort and hospitality properties.
2. Summary of Significant Accounting Policies
Basis of Presentation
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 periods ended September 30, 2013 are not necessarily indicative of the operating results for the full year.
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, capitalization of costs for software developed for internal use, and derivative liabilities. Actual results may differ from estimates provided.
Principles of Consolidation
The consolidated financial statements include the accounts of LYFE Communications, Inc. and its wholly-owned subsidiary, Connected Lyfe, Inc. All inter-company balances and transactions have been eliminated.
Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
Level one - Quoted market prices in active markets for identical assets or liabilities;
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Level two - Inputs other than level one inputs that are either directly or indirectly observable; and
Level three - Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.
All cash, accounts payable and accrued liabilities are carried at fair value. Additionally, we measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at September 30, 2013:
| | | | | | | | | | | | | |
| | | Total | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | | | | | | |
Total Assets Measured at Fair Value | | | $ | - | | $ | - | | $ | - | | $ | - |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | |
Derivative Liability | | | $ | 15,420 | | $ | - | | $ | - | | $ | 15,420 |
Total Liabilities Measured at Fair Value | | | $ | 15,420 | | $ | - | | $ | - | | $ | 15,420 |
Recently Enacted Accounting Pronouncements
We have reviewed all recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on our consolidated results of operations, financial position or cash flows. Based on that review, we believe that none of these pronouncements will have a significant effect on our consolidated financial statements.
Comprehensive Income (Loss)
Comprehensive income (loss) is the same as net income (loss).
3. Going Concern and Liquidity
The Company has an accumulated deficit through September 30, 2013 of $17,513,999, and has had negative cash flows from operating activities. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
In 2012 and through the first nine months of 2013, sources of funding did not materialize as committed, and as a result, we have received insufficient funding to execute our business plan. We have accrued significant liabilities for which we do not have liquidity or committed funding to meet our current obligations. 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. 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 the short term.
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4. Property and Equipment
Property and equipment consisted of the following:
| | |
| September 30,
2013 | December 31,
2012 |
| | |
Computer equipment | $ 514,840 | $ 496,733 |
Furniture and fixtures | 2,824 | 2,824 |
Software | 9,196 | 9,196 |
| 526,860 | 508,753 |
Less accumulated depreciation | (458,018) | (372,085) |
| | |
Property and equipment, net | $ 68,842 | $ 136,668 |
5. Goodwill
Goodwill of $233,100 was recorded in the acquisition of properties from a telecom and video service provider in June 2011 and was equal to the excess of the purchase price over the fair value of the net assets acquired. Goodwill is tested for impairment annually as of December 31 or more frequently if indications of impairment arise. We did not impair any Goodwill during the three months and nine months ended September 30, 2013 and 2012.
6. Intangible Assets
Intangible assets include internally developed software. We account for the costs of developing software in accordance with the provisions of FASB ASC Topic 350. We record our internal and external costs to develop software to be used internally for the deployment of the next generation video systems. We capitalize the costs during the application development stage when it is probable that the project will be completed and the software will be used to perform the function intended. We did not capitalize any development costs related to the application development of the next generation video systems in the three months and nine months ended September 30, 2013 and 2012. We will begin amortizing internally developed software when it is placed into service and will amortize the costs on a straight-line basis over the estimated useful life, as determined by management. As of September 30, 2013 and December 31, 2012, the software has not been placed in service, no amortization has been recorded, and the software is recorded at cost of $282,861. We assess the projects for impairment when there are events or changes in circumstances that indicate the carrying amount might not be recoverable or when it is no longer probable that the project will be competed and placed in service. We did not impair any projects during the three months and nine months ended September 30, 2013 and 2012.
Rights of entry agreements were acquired in the acquisition of properties from a telecom and video service provider in June 2011. The rights of entry agreements are negotiated with property owners at multiple dwelling properties such as apartment and condo complexes. The agreements allow the telecom service provider access to the customers on the property or exclusive marketing rights in exchange for a fee paid to the property owners. The agreements are typically for a five year period with options to renew at the end of the period. The right of entry agreements were recorded at their estimated fair value of $52,000 and amortized over a five year life on a straight line basis. Accumulated amortization of rights of entry was $23,400 and $15,600 as of September 30, 2013 and December 31, 2012. We assess the agreements for impairment when there are events or changes in circumstances
that indicate the carrying amount might not be recoverable or when the properties that the agreements cover are no longer providing contribution margin. We did not impair any agreements during the three months and nine months ended September 30, 2013 and 2012.
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7. Other Assets
Other assets include payments of $350,000 made under a Video Systems Agreement for video distribution and content rights, as well as payments of $11,950 made for other separate security deposits. As discussed elsewhere in this report, the Video Systems Agreement is currently in dispute.
8. Notes Payable
Our notes payable consisted of the following at:
| | |
| September 30, 2013 | December 31, 2012 |
Short-term note payable with interest at 12% per annum, currently in default | $ 10,000 | $ 10,000 |
Short-term note payable with interest at 18% per annum, due on demand | 5,000 | 5,000 |
Convertible note payable with interest at 18% per annum, convertible into shares of common stock at a price of $0.70 per share, currently in default | 50,000 | 50,000 |
Convertible note payable with interest at 8% per annum, convertible along with accrued interest into shares of common stock at a price equal to 50% of the market price on the date of conversion, currently in default | 5,000 | 5,000 |
Convertible note payable with interest at 8% per annum, convertible into shares of common stock at a price equal to $0.02 per share, currently in default | 65,000 | 65,000 |
Convertible note payable to an institutional investor, dated October 16, 2012, converted in full to common stock in the current year | - | 53,000 |
Convertible note payable to an institutional investor, dated November 29, 2012, converted in full to common stock in the current year | - | 37,500 |
Other short-term notes payable with interest ranging from 12% to 18% per annum | 7,500 | 7,500 |
Beneficial conversion factor on convertible note payable | 5,991 | 5,000 |
Discount on convertible notes payable to institutional investor | - | (70,691) |
| | |
| $ 148,491 | $ 167,309 |
We had three convertible notes payable to an institutional investor: $53,000 dated October 22, 2012; $37,500 dated November 29, 2012; and $47,500 dated February 5, 2013. During the nine months ended September 30, 2013, each of these convertible notes payable was converted in full into shares of our common stock. For each of these convertible notes payable, we recorded debt issuance costs, a debt discount related to the estimated value of the derivative for the conversion feature of the note, and
a derivative liability at the inception of the note. We amortized the debt discount to interest expense over the life of each respective note on a straight-line basis. The total discount on these convertible notes payable was $0 and $70,691 at September 30, 2013 and December 31, 2012, respectively.
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We have recorded a liability for the beneficial conversion factor attributed to the $5,000 note payable which is convertible into shares of our common stock at a price equal to 50% of the market price, and recognized this amount as interest expense. The liability was $5,991 and $5,000 at September 30, 2013 and December 31, 2012, respectively.
At September 30, 2013 and December 31, 2012, interest payable on notes payable was $55,280 and $38,907, respectively.
9. Notes Payable – Related Party
Our notes payable – related party consisted of the following at:
| | |
| September 30, 2013 | December 31, 2012 |
Note payable to a former officer of the Company, with interest at 9% per annum, currently in default | $ 175,000 | $ 175,000 |
Note payable to an officer of the Company, with interest at 12% per annum, currently in default | 100,000 | 100,000 |
Note payable to an officer of the Company, with interest at 12% per annum, currently in default | 6,000 | 15,000 |
Convertible note payable to an officer of the Company, with interest at 12% per annum, convertible into shares of common stock at a discount of 10% to the previous three day average market price, currently in default | 15,000 | 15,000 |
Discount on convertible note payable to officer | - | (8,898) |
| | |
| $ 296,000 | $ 296,102 |
For the convertible note payable to an officer, we recorded a debt discount related to the estimated value of the derivative for the conversion feature of the note, and a derivative liability at the inception of the note. We amortized the debt discount to interest expense over the life of the note on a straight-line basis. The discount on this convertible note payable was $0 and $8,898 at September 30, 2013 and 2012, respectively.
Interest payable – related party was $96,917 and $68,300 at September 30, 2013 and December 31, 2012, respectively.
10. Derivative Liability
During the nine months ended September 30, 2013, we had the following activity in the accounts related to our convertible notes payable:
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| | | |
| Derivative Liability | Debt Discount | Gain (Loss) on Derivative Liability |
| | | |
Balance at December 31, 2012 | $ 136,116 | $ (70,691) | |
Derivative liability at inception of the February 2013 note | 56,945 | (47,500) | $ (9,445) |
Conversion of convertible debt | (172,714) | 15,599 | - |
Gain on derivative liability | (4,927) | - | 4,927 |
Amortization of debt discount to interest expense | - | 102,592 | - |
| | | |
Balance at September 30, 2013 | $ 15,420 | $ - | $ (4,518) |
We estimated the fair value of the derivative for the conversion feature at the inception of the February 2013 convertible note payable to an institutional investor and for the remaining convertible note payable to an officer at September 30, 2013 using the Black-Scholes pricing model with the following assumptions:
| | |
| February 2013 Note Inception | Convertible Note September 30, 2013 |
| | |
Risk-free interest rate | 0.13% | 0.04% |
Expected life in years | 0.75 | 0.41 |
Dividend yield | 0% | 0% |
Expected volatility | 190.10% | 267.56% |
11. Stockholders’ Deficit
During the nine months ended September 30, 2013, we issued a total of 36,415,572 common shares which included 25,189,845 shares for cash proceeds of $687,529, 375,450 shares for accounts payable of $22,527, 1,375,000 shares for services valued at $106,500, and 9,475,277 shares for payment of notes payable of $138,000 and accrued interest of $5,520, reduction in debt discount of $15,598, reduction in derivative liability of $172,714 and gain on extinguishment of debt of $6,560.
During the nine months ended September 30, 2012, we issued a total of 9,825,916 common shares which included 1,450,000 shares for services valued at $88,000, 990,000 shares for cash proceeds of $198,000, and 7,385,916 shares for payment of debt of $224,439 and a loss of $1,669.
12. Warrants
During the nine months ended September 30, 2013, we issued warrants to purchase 2,000,000 shares of our common stock in connection with 550,000 of the 1,375,000 shares of our common stock we issued for services provided to the Company. Of the 2,000,000 warrants issued, 1,000,000 warrants have an exercise price of $0.40 per share with a two year expiration and immediate vesting, and 1,000,000 warrants have an exercise price of $0.20 per share with a one year expiration and immediate vesting. We estimated the value of the warrants granted at
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$58,892 using the Black-Scholes option pricing model and have included this amount in selling, general and administrative expenses. As of September 30, 2013, no warrants have been exercised.
We estimated the grant date fair value of the warrants using the Black-Scholes option pricing model with the following range of assumptions:
| |
| |
Risk-free interest rate | 0.15 - 0.27% |
Expected life in years | 1.0 – 2.0 |
Dividend yield | 0% |
Expected volatility | 113.86 – 201.39% |
A summary of warrant activity for the nine months ended September 30, 2013 is presented below:
The aggregate intrinsic values in the table above represent the total pretax intrinsic value (the difference between the closing market price of our common stock on September 30, 2013 of $0.0189 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2013.
14. Supplemental Statement of Cash Flows Information
During the nine months ended September 30, 2013 and 2012, we paid no amounts for income taxes.
During the nine months ended September 30, 2013 and 2012, we paid interest of $0 and $5,000, respectively.
During the nine months ended September 30, 2013, we had the following non-cash investing and financing activities:
·
Issued common stock in payment of accounts payable of $22,527.
·
Issued common stock in payment of notes payable of $138,000 and interest payable of $5,520, decrease in debt discount of $15,598 and decrease in derivative liability of $172,714.
·
Increased derivative liability and debt discount by $47,500.
During the nine months ended September 30, 2012, we had the following non-cash investing and financing activities:
·
Issued common stock in payment of notes payable of $205,989.
·
Issued common stock in payment of accounts payable or prepaid expenses of $18,450.
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15. Subsequent Events
On October 17, 2013, we issued a total of 980,000 shares of our common stock in payment of notes payable totaling $22,500.
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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
LYFE Communications, Inc. is developing a technology base for next generation entertainment and communications. Through our wholly owned subsidiary, Connected Lyfe, Inc., our primary customer acquisition, operations and services division, LYFE Communications is truly integrating television, ultra high-speed Internet and enhanced voice services for delivery via Internet using IP (Internet Protocol).
Our technology innovations take traditional digital television delivery and convert it to an adaptive IP-based service. The result is dramatically lower cost of operation, new interactive capabilities and delivery to any device, in any location, at any time.
We provide high-speed data and voice services to consumers in six cities and will deploy next generation television services, with voice and data access, into each of these markets, offering the most innovative and compelling media and communications services to residential customers. Beyond these markets, we will deploy our innovative platform through acquisitions, partnerships, and technology licensing to major existing service providers.
Our technologies are the foundation for many exciting, customer-valued IP services for a rapidly growing market segment that lives “always on and connected,” accessing all the people, information and entertainment in their lives, on their terms – any time, any place, on any device.
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We expect to significantly increase our subscriber base in 2013. We are currently under contract to provide our Data and Telephony services to 28 MDU properties spanning 6 cities in 2 states. These properties present a total market opportunity of over 12,000 units. These contracts can be characterized in one of two ways: bulk, or subscription. A “bulk” contract allows us to provide services to each and every tenant at the complex. We currently have 3 bulk contracts with a total customer base of 600. The remaining 25 contracts are “subscription”, meaning we have either an exclusive or non-exclusive marketing contract and/or Right of Entry (ROE) at the property. Our average penetration rate at the subscription properties is 10%, which represents a tremendous growth opportunity for us. Further, all of these contracts provide us with the opportunity to extend more services in the future. We are currently negotiating with some of the country’s largest REIT’s and property management groups to provide services to the properties they own and manage.
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 condensed consolidated 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. During the period ended September 30, 2013, we believe there have been no significant changes to the items disclosed as significant accounting policies in management's notes to the consolidated financial statements in our annual report on Form 10-K for the year ended December 31, 2012, filed on April 15, 2013.
Nevertheless, our financial statements contained in this report have been prepared assuming that the Company will continue as a going concern. As discussed in the notes to the condensed consolidated 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.
Share-Based Compensation
We account for share-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 share-based compensation. We use the Black-Scholes option pricing model to calculate share-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.
Principles of Consolidation
The consolidated financial statements include the accounts of LYFE Communications, Inc. and its wholly-owned subsidiary, Connected Lyfe, Inc. All inter-company balances and transactions have been eliminated.
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Revenue Recognition
We recognize 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. We derive our revenue primarily from the sale of Video, Data and Voice over Internet Protocol services and recognize revenues in the period the related services are provided and the amount of revenue is determinable and collection is reasonably assured.
Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
Level one - Quoted market prices in active markets for identical assets or liabilities;
Level two - Inputs other than level one inputs that are either directly or indirectly observable; and
Level three - Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.
All cash, accounts payable and accrued liabilities are carried at fair value. Additionally, we measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at September 30, 2013.
| | | | | | | | | | | | | |
| | | Total | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | | | | | | |
Total Assets Measured at Fair Value | | | $ | - | | $ | - | | $ | - | | $ | - |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | |
Derivative Liability | | | $ | 15,420 | | $ | - | | $ | - | | $ | 15,420 |
Total Liabilities Measured at Fair Value | | | $ | 15,420 | | $ | - | | $ | - | | $ | 15,420 |
Accounts Receivable
Accounts receivable are reflected at estimated net realizable value, do not bear interest and do not generally require collateral. We provide an allowance for doubtful accounts equal to the estimated collection losses based on historical experience coupled with a review of the current status of existing receivables. Customer accounts are reviewed and written off as they are determined to be uncollectible.
Results of Operations
Revenue - During the three months ended September 30, 2013 and 2012, we recorded revenues of $46,743 and $133,107, respectively. During nine months ended September 30, 2013 and
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2012, we recorded revenues of $157,001 and $458,654, respectively. The decline in revenue in the current year is both a result of the transition in the subscriber base on the properties acquired in June 2011, which initially resulted in a decline of customers, as well as the sale of the UTOPIA customer base in October of 2012.
Direct Costs - Direct costs are comprised of programming costs, monthly recurring Internet broadband connections and VOIP costs. During the three months ended September 30, 2013 and 2012, direct costs were $22,163 and $97,779, respectively. During the nine months ended September 30, 2013 and 2012, direct costs were $106,806 and $330,458, respectively. The decrease in direct costs in the current year is a result of the sale of the UTOPIA customer base in October of 2012, as well as a decrease in the subscriber base on the properties acquired in June 2011.
Selling, General and Administrative Expenses – Selling, general and administrative expenses increased $77,859 to $351,673 for the three months ended September 30, 2013 from $273,814 for the three months ended September 30, 2012. Selling, general and administrative expenses increased $536,129 to $1,481,533 for the nine months ended September 30, 2013 from $945,404 for the nine months ended September 30, 2012. The increase in the current year is primarily the result of a growth in contractor and employee head count, due to an increase in operating costs related to the upgrade of services to the properties acquired in June 2011.
Depreciation and Amortization Expense – Depreciation and amortization expense is currently not material to the results of our operations. Depreciation and amortization expense was $25,641 and $51,847 for the three months ended September 30, 2013 and 2012, and $93,732 and $154,404 for the nine months ended September 30, 2013 and 2012, respectively.
Other Income (Expense) – During the three months and nine months ended September 30, 2013, we reported a loss on derivative liability of $63,712 and $4,518, respectively. We estimate the fair value of the derivative for the conversion feature of certain convertible notes payable at the inception of notes and at each reporting date, using the Black-Scholes pricing model. As changes in the derivative liability are recorded at each reporting date, a gain or loss on derivative liability is recorded. We had no gain or loss on derivative liability for the three months and the nine months ended September 30, 2012.
We reported a gain on extinguishment of debt of $9,392 and $6,560 for the three months and nine months ended September 30, 2013, respectively. We reported a loss on extinguishment of debt of $1,669 for the three months and nine months ended September 30, 2012, respectively.
Our interest expense was $44,665 and $30,532 for the three months ended September 30, 2013 and 2012, and $177,214 and $106,718 for the nine months ended September 30, 2013 and 2012, respectively. The increase in interest expense in the current year is due primarily to the amortization of debt discount recorded in connection with our convertible notes payable.
Net Loss – We had a net loss of $451,719 and $322,534 for the three months ended September 30, 2013 and 2012, and $1,700,242 and $1,079,999 for the nine months ended September 30, 2013 and 2012, respectively. We have ramped up operations and increased services to the properties acquired in June 2011. As a result, expenditures and operating costs have increased and we expect a growth in revenue to occur in the latter part 2013 and in 2014.
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Liquidity and Capital Resources
Liquidity is a measure of a company’s ability to meet potential cash requirements. 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 debt 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 debt. There can be no assurance we will be successful in raising the necessary funds to execute our business plan.
As of September 30, 2013, our total current assets were $143,581 and our total current liabilities were $3,726,306, resulting in a working capital deficit of $3,582,725. As discussed in the notes to our condensed consolidated financial statements, we are currently in default on several notes payable. We also had an accumulated deficit of $17,513,999 and a total stockholders’ deficit of $2,607,372 at September 30, 2013.
During the nine months ended September 30, 2013, we used net cash of $577,879 in operating activities as a result of our net loss of $1,700,242, bad debt expense of $19,252, gain on extinguishment of debt of $6,560, increase in prepaid expenses of $2,000, and decreases in accounts payable of $21,633 and payroll and sales tax payable of $3,995, partially offset by non-cash expenses (excluding bad debt expense and gain on extinguishment of debt) totaling $540,124, decrease in accounts receivable, net of $23,817, and increases in deferred revenue of $26,978, accrued liabilities of $539,894 and accrued interest of $44,990.
By comparison, during the nine months ended September 30, 2012, we used net cash of $498,994 in operating activities as a result of our net loss of $1,079,999, increase in accounts receivable of $3,636, and decreases in accounts payable of $26,313 and payroll and sales tax payable of $154,817, partially offset by non-cash expenses totaling $439,608, decrease in other assets of $1,075 and increases in deferred revenue of $4,255 and accrued expenses of $320,833.
During the nine months ended September 30, 2013 and 2012, we used $18,106 and $2,499, respectively, comprised of purchases of property and equipment.
During the nine months ended September 30, 2013, we had net cash provided by financing activities of $723,529, comprised of proceeds from notes payable of $47,500 and proceeds from the issuance of common stock of $687,529, partially offset by the payment of debt issuance costs of $2,500 and payment of notes payable of $9,000.
During the nine months ended September 30, 2012, we had net cash provided by financing activities of $503,000, comprised of proceeds from notes payable of $400,000 and proceeds from the issuance of common of $198,000, partially offset by payment of notes payable of $95,000.
We anticipate that we are likely to incur operating losses during the next twelve months. Our current cash is not sufficient to fund our operations during this period. Our 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 early operations, particularly companies in new and rapidly evolving markets. Such risks include, but are not limited to, an evolving and unpredictable business model and the
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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.
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 2013 and 2014.
Management is currently seeking sources of equity and debt financing from current and potential investors. We have signed agreements with AT&T to upgrade services to all the existing Ygnition properties acquired in the June 2011 acquisition. We consider the upgrades to potentially increase revenue by offering improved services. The potential for increased revenue does not include a large capital investment. We will improve services without increasing but reducing the direct costs of providing services to each of the properties. There can however be no assurance that improving services will lead to increased revenue. To address the risks involved, we have to increase the customer base at each of the properties. Additionally, we have to receive more funding to provide sales and marketing, and increase the revenues in the properties.
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 principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”). as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, in a manner that allows timely decisions regarding required disclosure.
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Changes in internal control over financial reporting
There was no change in our internal control over financial reporting during the quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Siegfried and Jensen
On September 26, 2012, we received a “Summons & Complaint” from Ned P. Siegfried and Mitchell R. Jensen in conjunction with an outstanding $50,000 “Convertible Promissory Note.” Under the complaint Siegfried and Jensen are asking for $68,000, interest to date and attorney fees. The $50,000 Convertible Promissory Note was signed on October 1, 2010 and had a conversion price of $0.70. Throughout the duration of the note, we have tried several times to reach out to Siegfried & Jensen to settle this debt. We have offered reduced conversion prices, none of which were satisfactory to Siegfried & Jensen. On October 23, 2012, we filed an “Answer to Complaint”, in the Third Judicial District Court in the State of Utah. As of November 2013, the complaint continues in legal proceedings.
UTOPIA
On March 2, 2011, we 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 had 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.
On March 3, 2011, we received a “notice of exercise of video system reversionary rights” from UTOPIA. 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 had been working with Connected Lyfe on a resolution.
On September 28, 2012, we received a “notice of transfer of customers” from UTOPIA to transfer the existing customer base to another provider on their network.
On October 2, 2012, we received a “Summons & Complaint” from UTOPIA in conjunction with their claim that we failed to comply with both the “Network Access Agreement” and the “Video Systems Agreement”. Under the complaint, UTOPIA is asking for $495,000 in relief from Connected Lyfe, Inc.
On October 10, 2012, we signed an agreement with Veracity Networks to transfer those customers remaining on the UTOPIA network.
On November 2, 2012, we filed our official answer and subsequent counter complaint to the Utopia allegations. We allege in our answer and counter claim to the court that Utopia failed to deliver the Video Head End as per the “Video Systems Agreement” which was executed on June 21, 2010, and seek reimbursement of $375,000. Further, we allege in our answer and counter
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claim that Utopia has consistently overbilled for services, and prevented us from managing our customer accounts on the Utopia network, resulting in $240,000 of damages. Further, we are also claiming the full value of its customers that were transferred as a result of Utopia’s actions in October 2012. We are seeking $1,900,000 in damages. Finally, we are claiming substantial additional consequential and punitive damages. These actions came after years of failed negotiations between Utopia and us. We decided it was in the best interest of our shareholders to take decisive action in a court of law against Utopia in order to recover any losses that Utopia has caused us to incur and believe that we will be successful in this pursuit. As of September 30, 2013, we have a $350,000 deposit recorded on the balance sheet in other assets as well as $446,212 recorded in accounts payable related to this matter.
Item 1A. Risk Factors.
For a discussion of our risk factors, please refer to Part 1, “Item 1A. Risk Factors” in the our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on April 14, 2013. There have been no material changes in our assessment of our risk factors during the quarter ended September 30, 2013.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the quarter ended September 30, 2013, we issued a total of 15,467,438 shares of our restricted common stock in exchange for $70,000 cash, $108,000 in notes payable principal, $5,520 in interest payable, a reduction of $149,963 in derivative liability, a reduction of $8,999 in debt discount, and a gain on extinguishment of debt of $9,392.
Item 3. Defaults Upon Senior Securities.
None; not applicable.
Item 4. Mine Safety Disclosures.
None, not applicable.
Item 5. Other Information.
None
Item 6. Exhibits.
Exhibit No. Identification of Exhibit
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31.1
32 | Certification Pursuant to Section 302 of the Sarbanes-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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101.INS | XBRL Instance** |
101.SCH | XBRL Schema** |
101.CAL | XBRL Calculations** |
101.DEF | XBRL Definitions** |
101.LAB | XBRL Label** |
101.PRE | XBRL Presentation** |
*Filed herewith.
** The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
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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: | November 14, 2013 | | By: | /s/Gregory Smith |
| | | | Gregory Smith Chief Executive Officer and Chairman of the Board |
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Date: | November 14, 2013 | | By: | /s/ Garrett Daw |
| | | | Garrett Daw Executive Vice President, Chief Accounting Officer, Secretary and Director |
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