See accompanying notes to condensed consolidated financial statements
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LYFE Communications, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2014
(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 period ended June 30, 2014 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. Liabilities measured at fair value on a recurring basis are as follows at June 30, 2014 and December 31, 2013:
| | | | | | | | | | | | | |
June 30, 2014 | | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | |
Derivative Liability | | | $ | 11,394 | | $ | - | | $ | - | | $ | 11,394 |
Total Liabilities Measured at Fair Value | | | $ | 11,394 | | $ | - | | $ | - | | $ | 11,394 |
| | | | | | | | | | | | | |
December 31, 2013 | | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | |
Derivative Liability | | | $ | 11,475 | | $ | - | | $ | - | | $ | 11,475 |
Total Liabilities Measured at Fair Value | | | $ | 11,475 | | $ | - | | $ | - | | $ | 11,475 |
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 accompanying consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities, and commitments in the normal course of business. The accompanying consolidated financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company has an accumulated deficit through June 30, 2014 of $18,566,627, and has had negative cash flows from operating activities since its inception. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
In 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,
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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 2014.
4. Property and Equipment
Property and equipment consisted of the following:
| | |
| June 30,
2014 | December 31,
2013 |
| | |
Computer equipment | $ 519,076 | $ 519,076 |
Furniture and fixtures | 2,824 | 2,824 |
Software | 9,196 | 9,196 |
| 531,096 | 531,096 |
Less accumulated depreciation | (516,113) | (479,758) |
| | |
Property and equipment, net | $ 14,983 | $ 51,338 |
5. 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 six months ended June 30, 2014 and 2013. 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 June 30, 2014 and December 31, 2013, 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 six months ended June 30, 2014 and 2013.
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 $31,200 and $26,000 as of June 30, 2014 and December 31, 2013, respectively. 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 six months ended June 30, 2014 and 2013.
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6. Other Assets
Other assets at June 30, 2014 and December 31, 2013 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. The Video Systems Agreement is currently in dispute as further discussed in Note 14. We assess the other assets for impairment when there are events or changes in circumstances that indicate the carrying amount might not be recoverable or when the assets are no longer providing or have the potential to provide contribution margin. We did not impair any agreements during the three months or six months ended June 30, 2014 and 2013.
7. Notes Payable
Our notes payable consisted of the following at:
| | |
| June 30, 2014 | December 31, 2013 |
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 |
Note payable to an institutional investor, dated May 23, 2014, interest at 8% per annum and maturing on May 23, 2015 | 25,000 | - |
Beneficial conversion feature on convertible note payable | 6,347 | 6,105 |
| | |
| $ 151,347 | $ 126,105 |
We have recorded a liability for the beneficial conversion feature 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 $6,347 and $6,105 at June 30, 2014 and December 31, 2013, respectively.
At June 30, 2014 and December 31, 2013, interest payable on notes payable was $60,767 and $49,595, respectively.
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8. Notes Payable – Related Party
Our notes payable – related party consisted of the following at:
| | |
| June 30, 2014 | December 31, 2013 |
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 |
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 |
Note payable to an officer of the Company, with interest at 12% per annum | - | 2,500 |
| | |
| $ 290,000 | $ 292,500 |
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.
Interest payable – related party was $125,620 and $105,705 at June 30, 2014 and December 31, 2013, respectively.
9. Derivative Liability
During the six months ended June 30, 2014, we had the following activity in the accounts related to our convertible notes payable:
| | |
| Derivative Liability | Gain on Derivative Liability |
| | |
Balance at December 31, 2013 | $ 11,475 | |
Gain on derivative liability | (81) | $ 81 |
| | |
Balance at June 30, 2014 | $ 11,394 | $ 81 |
We estimated the fair value of the derivative for the conversion feature at June 30, 2014 using the Black-Scholes pricing model with the following assumptions:
| |
| |
Risk-free interest rate | 0.07% |
Expected life in years | 0.42 |
Dividend yield | 0% |
Expected volatility | 227.91% |
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10. Stockholders’ Deficit
During the six months ended June 30, 2014, we issued a total of 33,236,111 common shares, including 22,000,000 shares for cash proceeds of $257,500 and 11,236,111 shares for accrued liabilities of $606,750 (see Note 13).
During the six months ended June 30, 2013, we issued a total of 20,948,134 common shares, including 18,189,845 shares for cash proceeds of $617,529, 375,450 shares for accounts payable of $22,527, 1,375,000 shares for services valued at $106,500, and 1,007,839 shares for payment of notes payable of $30,000, reduction in debt discount of $6,600, reduction in derivative liability of $22,752 and loss on extinguishment of debt of $2,832.
11. Warrants
During the year ended December 31, 2013, we issued warrants to purchase 2,000,000 shares of our common stock in connection with a portion of the shares of our common stock we issued for services provided to the Company.
A summary of warrant activity for the six months ended June 30, 2014 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 June 30, 2014 of $0.051 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 June 30, 2014.
13. Assignment Agreement
On May 21, 2014, the Company, Garrett R. Daw, our President and CEO (“Daw”), and Keith and Kent Cornelison (“KC”), a significant stockholder of the Company, entered into an Assignment Agreement (the “Agreement”) where KC assumed $606,750 in accrued payroll to Daw. As a result, Daw has no further rights or claims for this accrued payroll against the Company. Further, KC received 11,236,111 shares of the Company’s common stock in exchange for the liability assumption.
14. Supplemental Statement of Cash Flows Information
During the six months ended June 30, 2014 and 2013, we paid no amounts for income taxes and interest.
During the six months ended June 30, 2014, we had the following non-cash investing and financing activities:
·
Issued common stock in payment of accrued expenses of $606,750.
During the six months ended June 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 $30,000, decrease in debt discount of $6,600 and decrease in derivative liability of $22,152.
·
Increased derivative liability and debt discount by $47,500
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15. Legal Matters
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 tried several times to reach out to Siegfried & Jensen to settle this debt. We 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. In February 2014, the parties reached a settlement requiring the Company to make the following payments: $10,000 upon execution of the settlement; $15,000 on or before February 24, 2014; $5,000 on or before March 25, 2014; and $5,000 on or before the 25th day of each month thereafter to and including December 25, 2014, for a total of $75,000. We have made no payments in 2014.
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 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 our customers that were transferred as a result of Utopia’s actions in October 2012. We are seeking
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$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 June 30, 2014, 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.
16. Subsequent Events
We have evaluated events occurring after the date of our accompanying consolidated balance sheets through the date the financial statements were issued. We identified the following subsequent event that we believe requires disclosure:
In July 2014, we issued 4,000,000 shares of our common stock for cash of $50,000.
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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 2014. 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.
Going Concern Uncertainty
Our consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities, and commitments in the normal course of business. Our consolidated financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company has an accumulated deficit through June 30, 2014 of $18,566,627, and has had negative cash flows from operating activities since its inception. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
In 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 2014.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities. We believe our assumptions to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions.
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. FASB Accounting Standards Codification (“ASC”) Topic 820 establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value. The hierarchy gives the highest
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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 1 - Quoted market prices in active markets for identical assets or liabilities;
Level 2 - Inputs other than level one inputs that are either directly or indirectly observable; and
Level 3 - 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 receivable, accounts payable and accrued liabilities are carried at cost, which approximates fair value due to the short-term nature of these financial instruments. Additionally, we measure certain financial instruments at fair value on a recurring basis. Liabilities measured at fair value on a recurring basis are as follows at June 30, 2014 and December 31, 2013:
| | | | | | | | | | | | | |
June 30, 2014 | | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | |
Derivative Liability | | | $ | 11,394 | | $ | - | | $ | - | | $ | 11,394 |
Total Liabilities Measured at Fair Value | | | $ | 11,394 | | $ | - | | $ | - | | $ | 11,394 |
| | | | | | | | | | | | | |
December 31, 2013 | | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | |
Derivative Liability | | | $ | 11,475 | | $ | - | | $ | - | | $ | 11,475 |
Total Liabilities Measured at Fair Value | | | $ | 11,475 | | $ | - | | $ | - | | $ | 11,475 |
Accounts Receivable
Accounts receivable are recorded 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. The allowance for doubtful accounts was $72,725 at June 30, 2014 and December 31, 2013.
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.
We record revenues on a net basis, which excludes taxes and fees that are collected from the customer to be remitted to the taxing and regulatory agencies.
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Stock-Based Compensation
We have accounted for stock-based compensation under the provisions of FASB ASC 718-10-55. We measure stock-based compensation at the grant date based on the value of the award granted using the Black-Scholes option pricing model, and recognize the expense over the period in which the award vests. Option pricing models require the input of highly subjective assumptions, including the expected price volatility and the market price of our common stock during periods of infrequent trades and transactions. Changes in these assumptions can materially affect the fair value estimate.
Income Taxes
We account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the enactment date. At June 30, 2014 and December 31, 2013, we have recorded a full valuation allowance against the net deferred tax assets related to temporary differences and operating losses because there is significant uncertainty of the net deferred tax assets being realized. 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.
Impairment of Long-Lived Assets
Our long-lived assets include costs of internally developed software, costs of rights of entry agreements, and costs of video distribution and content rights. We assess the related 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 six months ended June 30, 2014 and 2013.
Recently Enacted Accounting Pronouncements
No new accounting pronouncements were issued during the six months ended June 30, 2014 and through the date of filing this report that we believe are applicable or would have a material impact on our consolidated financial statements.
Results of Operations
Revenues – We recorded revenues of $11,870 and $58,726 in the three months ended June 30, 2014 and 2013, and $40,438 and $110,258 in the six months ended June 30, 2014 and 2013, respectively. The continuing decline in revenue 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. Direct costs were $0 and $33,939 in the three months ended June 30, 2014 and 2013, and $0 and $84,643 in the six months ended June 30, 2014 and
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2013, respectively. The continuing decrease in direct costs 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 decreased $329,886 to $171,874 in the three months ended June 30, 2014 from $501,760 in the three months ended June 30, 2013. Selling, general and administrative expenses decreased $758,527 to $371,333 in the six months ended June 30, 2014 from $1,129,860 in the six months ended June 30, 2013. Due to lack of funding and to the decrease in the subscriber base on the properties acquired in June 2011, we have scaled back our operations and reduced our overhead. We also had a decrease in our stock-based compensation.
Depreciation and Amortization Expense – Depreciation and amortization expense was $17,793 and $30,858 in the three months ended June 30, 2014 and 2013, and $41,555 and $68,091 in the six months ended June 30, 2014 and 2013, respectively. We have fully depreciation a significant portion of our depreciable assets, resulting in decreasing amounts of depreciation expense.
Other Income (Expense) – We reported a gain on derivative liability of $1,620 and $54,264 in the three months ended June 30, 2014 and 2013, and a gain of $81 and $59,194 during the six months ended June 30, 2014 and 2013. 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 reported a gain on extinguishment of debt of $668 in the three months and six months ended June 30, 2014 and a loss on extinguishment of debt of $2,832 in the three months and six months ended June 30, 2013.
Our interest expense was $15,149 and $66,691 in the three months ended June 30, 2014 and 2013, and $31,411 and $132,549 in the six months ended June 30, 2014 and 2013,respectively. The decrease in interest expense in the current year is due to reductions of debt and to debt discount being fully amortized prior to the current year.
Net Loss – As a result, our net loss was $190,658 and $523,090 for the three months ended June 30, 2014 and 2013, and $403,112 and $1,248,523 for the six months ended June 30, 2014 and 2013, respectively.
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 negative cash flows from operations, pending growth in our 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.
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As of June 30, 2014, our total current assets were $50,308 and our total current liabilities were $3,438,433, resulting in a working capital deficit of $3,388,125. As discussed in the notes to our consolidated financial statements, we are currently in default on several notes payable. We also had an accumulated deficit of $18,566,627 and a total stockholders’ deficit of $2,707,531 at June 30, 2014.
During the six months ended June 30, 2014, we used net cash of $264,594 in operating activities as a result of our net loss of $403,112, non-cash gains totaling $749, increase in accounts receivable, net of $838, and decreases in accounts payable of $38,413, payroll and sales tax payable of $3,732 and deferred revenue of $6,372, partially offset by non-cash expenses totaling $58,546, decrease in prepaid expenses of $12,362, and increases in accrued payroll and related expenses of $85,959 and accrued interest of $31,755.
By comparison, during six months ended June 30, 2013, we used net cash of $488,992 in operating activities as a result of our net loss of $1,248,523, non-cash gain of $59,194, increase in prepaid expenses of $2,000, and decreases in accounts payable of $6,492, payroll and sales tax payable of $4,740, and deferred revenue of $976, partially offset by non-cash expenses totaling $436,627, decrease in accounts receivable, net of $4,583 and increases in accrued payroll and related expenses of $356,251 and accrued interest of $35,472.
We had no cash provided by or used in investing activities during the six months ended June 30, 2014. During the six months ended June 30, 2013, we used $17,858 in investing activities for the purchase of property and equipment.
During the six months ended June 30, 2014, we had net cash provided by financing activities of $280,000, comprised of proceeds from notes payable of $75,000 and proceeds from the issuance of common stock of $257,500, partially offset by payment of notes payable of $50,000 and payment of notes payable – related party of $2,500.
During the six months ended June 30, 2013, we had net cash provided by financing activities of $653,529, comprised of proceeds from notes payable of $47,500 and proceeds from the issuance of common stock of $617,529, partially offset by the payment of debt issuance costs of $2,500, and payment of notes payable – related party of $9,000.
We eliminated substantial accrued liabilities in May 2014 when the Company, Garrett R. Daw, our President and CEO (“Daw”), and Keith and Kent Cornelison (“KC”), a significant shareholder, entered into an Assignment Agreement (the “Agreement”) where KC assumed $606,750 in accrued payroll to Daw. As a result, Daw has no further rights or claims for this accrued payroll against the Company. Further, KC received 11,236,111 shares of the Company’s common stock in exchange for the liability assumption.
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 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
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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 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 June 30, 2014 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 tried several times to reach out to Siegfried & Jensen to settle this debt. We 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. In February 2014, the parties reached a settlement requiring the Company to make the following payments: $10,000 upon execution of the settlement; $15,000 on or before February 24, 2014; $5,000 on or before March 25, 2014; and $5,000 on or before the 25th day of each month thereafter to and including December 25, 2014, for a total of $75,000. We have made no payments in 2014.
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.
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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 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 our 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 June 30, 2014, 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, 2013, filed on April 15, 2014. There have been no material changes in our assessment of our risk factors during the quarter ended June 30, 2014.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three months ended June 30, 2014, we issued 11,236,111 shares of our restricted common stock in exchange for $606,750 in accrued liabilities and 2,500,000 shares of our restricted common stock in exchange for $37,500 cash.
Item 3. Defaults Upon Senior Securities.
None, not applicable.
Item 4. Mine Safety Disclosures.
None, not applicable.
Item 5. Other Information.
None
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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: | August 19, 2014 | | By: | /s/Garrett Daw |
| | | | Garrett Daw Chief Executive Officer Principal Executive and Financial Officer |
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