SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2012
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________ to _____________.
Commission file number 000-51688
Bitzio, Inc.
(Exact name of registrant as specified in its charter)
| Nevada | | 16-1734022 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | |
548 Market Street, Suite 18224 San Francisco, CA | | 94104 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code (866) 824-7881
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | | Name of each exchange on which registered |
| None | | None |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes x No o
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | o | Accelerated filer | o |
| Non-accelerated filer | o | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Aggregate market value of the voting stock held by non-affiliates: $12,051,428, based on the closing sales price of our common stock on June 30, 2012 of $0.40 per share. The voting stock held by non-affiliates on that date consisted of 30,128,570 shares of common stock.
Applicable Only to Registrants Involved in Bankruptcy Proceedings During the Preceding Five Years:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of April 8, 2013, there were 80,018,621 shares of common stock, par value $0.001, issued and outstanding.
Documents Incorporated by Reference
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to rule 424(b) or (c) of the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).
None.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2012
TABLE OF CONTENTS
| | PART I | | | |
| | | | | |
| ITEM 1 | BUSINESS | | | 11 | |
| ITEM 1A | RISK FACTORS | | | 18 | |
| ITEM 1B | UNRESOLVED STAFF COMMENTS | | | 18 | |
| ITEM 2 | PROPERTIES | | | 18 | |
| ITEM 3 | LEGAL PROCEEDINGS | | | 18 | |
| ITEM 4 | MINE SAFETY DISCLOSURES | | | 18 | |
| | | | | | |
| | PART II | | | | |
| | | | | | |
| ITEM 5 | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | | | 19 | |
| ITEM 6 | SELECTED FINANCIAL DATA | | | 25 | |
| ITEM 7 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION | | | 25 | |
| ITEM 7A | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | | | 33 | |
| ITEM 8 | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | | | 34 | |
| ITEM 9 | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | | | 35 | |
| ITEM 9A | CONTROLS AND PROCEDURES35 | | | 35 | |
| ITEM 9B | OTHER INFORMATION | | | 37 | |
| | | | | | |
| | PART III | | | | |
| | | | | | |
| ITEM 10 | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE | | | 38 | |
| ITEM 11 | EXECUTIVE COMPENSATION | | | 41 | |
| ITEM 12 | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS | | | 43 | |
| ITEM 13 | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE | | | 45 | |
| ITEM 14 | PRINCIPAL ACCOUNTING FEES AND SERVICES | | | 47 | |
| | | | | | |
| | PART IV | | | | |
| | | | | | |
| ITEM 15 | EXHIBITS, FINANCIAL STATEMENT SCHEDULES | | | 48 | |
Cautionary Statement Regarding Forward Looking Statements
This Annual Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on management’s beliefs and assumptions, and on information currently available to management. Forward-looking statements include the information concerning possible or assumed future results of operations of the Company set forth under the heading “Management's Discussion and Analysis of Financial Condition or Plan of Operation.” Forward-looking statements also include statements in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “consider” or similar expressions are used.
Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. The Company's future results and shareholder values may differ materially from those expressed in these forward-looking statements. Readers are cautioned not to put undue reliance on any forward-looking statements.
Corporate History
Bitzio, Inc. was originally formed as Rocky Mountain Fudge Company, Inc. (“the Company,” “we”) on January 4, 1990 as a Utah corporation. On July 28, 1998, the Company converted from a Utah corporation to a Nevada corporation. Effective June 10, 2011, the Company changed its name from Rocky Mountain Fudge Company, Inc. to Bitzio, Inc. Pursuant to this transaction, shares of the Company’s common stock are now trading under the Company’s new trading symbol, BTZO. Bitzio, Inc. is focused on smartphone applications. Bitzio licenses media rights of sports and entertainment properties to create mobile apps and web experiences for fans of these properties.
On July 27, 2011, Bitzio, Inc. and Bitzio, LLC. entered into share exchange agreement wherein Bitzio, Inc. issued 5,000,000 shares of the Company's common stock in exchange for 100% of the members' equity of Bitzio, LLC. Through this transaction Bitzio, LLC became a wholly owned subsidiary of Bitzio, Inc.
On November 9, 2011 Bitzio, Inc. and Thinking Drone, Inc., entered into a share exchange agreement wherein Bitzio, Inc. acquired all of the issued and outstanding stock of Thinking Drone, Inc. Bitzio, Inc. received all of the outstanding shares of Thinking Drone in exchange for a $500,000 promissory note and 5,000,000 shares of Bitzio, Inc. common stock. Through this transaction Thinking Drone, Inc. became a wholly-owned subsidiary of Bitzio, Inc.
Our Business
We produce mobile apps and media content for fan based communities. Our goal is to sign licenses with high profile celebrities, teams and leagues. These celebrities can be athletes or entertainers, but they will have an established, significant number of fans. Based on these licenses we will create apps and content that will deepen the engagement between celebrities and fans. The apps are of various types, including games, informational and educational. They are based on the “freemium” model, where the app is free to download but users are charged for additional functionality, features or content.
Bitzio partners with its licensors and does not pay for the license, nor charge for the development of apps. The celebrity and Bitzio are sharing in the revenue stream from the apps, thus ensuring an alignment of interests and shared incentive to market the apps.
Our operations are predominantly based in the U.S., with international operations in Europe and Canada. Our apps have been downloaded approximately 45 million times.
Important developments during the year
On May 23, 2012, we entered into an agreement to acquire all of the shares of Motion Pixel Corporation, a Puerto Rico animation company (“Pixel”). We issued 6.5 million shares to the owners of Pixel and received ownership of the studio together with an agreement that Pixel’s previous owners would fund it for twelve months. Pixel was used to develop two apps and make marketing material to secure further licenses. At the end of the year, we determined that the ongoing costs of operating Pixel, once the full cost was borne by us, would be too high, and we made an agreement with the previous owners to sell Pixel back to them.
We acquired all the shares of ACT Smartware GmbH on June 4, 2012 (“ACT”). ACT is a developer of mobile apps. The acquisition was intended to obtain access to the team of developers in ACT. Subsequently, an agreement was reached with ACT to unwind the purchase agreement. ACT developers will join Bitzio as independent contractors.
On August 15, 2012, we entered into a Compromise and Settlement Agreement and General Release with regards to certain intellectual property rights, trade names, marks, domain names, websites and related goodwill and certain contracts and relationships with vendors, dealers, buyers and customers of Digispace Solutions, LLC (“Digispace”). It was determined that the training business done through the Digispace subsidiary was no longer in the best interest of Bitzio and Digispace was sold back to its original owners
On February 19, 2013, we entered into a Letter of Intent (“LOI”) with Grandstand Sports and Memorabilia, Inc. (“Grandstand”) to acquire the company. Founded in 1999, Grandstand is one of the largest providers of unique memorabilia in the sports and entertainment industry. Grandstand generated $11 million in revenues in 2012, with a large focus of its business on fundraising events and charity auctions.
On April 1, 2013, we terminated formal negotiations regarding our proposed acquisition of all outstanding capital stock of Grandstand. However, informal discussions may continue.
Our acquisition of Grandstand would create a multi-channel business singularly focused on sports and entertainment fans and their communities. Through merging Bitzio’s digital marketing expertise and fan reach with Grandstand’s history in sports and entertainment products, the new Bitzio will aim to be a leader in connecting fans to their favorite athletes, teams and celebrities across online and offline channels. The platform will bring together physical products, virtual goods, e-commerce, offline commerce, digital engagement and physical experiences all centered around one common thread: the fanatic.
Intellectual property
Our intellectual property is an essential element of our business. We use a combination of trademark, patent, copyright, trade secret and other intellectual property laws, confidentiality agreements and license agreements to protect our intellectual property. Our employees and independent contractors are required to sign agreements acknowledging that all inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property, and assigning to us any ownership that they may claim in those works. Despite our precautions, it may be possible for third parties to obtain and use without consent intellectual property that we own or license. Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.
From time to time, we may encounter disputes over rights and obligations concerning intellectual property. While we believe that our product and service offerings do not infringe the intellectual property rights of any third party, we cannot assure you that we will prevail in any intellectual property dispute. If we do not prevail in such disputes, we may lose some or all of our intellectual property protection, be enjoined from further sales of the applications determined to infringe the rights of others, and/or be forced to pay substantial royalties to a third party.
The Market
The mobile app market has experienced extremely rapid growth in its 3-4 year existence. In 2010, the mobile application market generated $10.2 billion dollars of revenue from 10.9 billion downloads, according to Research2Guidance and IDC. Those same reports predict revenue in excess of $100 billion dollars by 2015, representing a 158% compound annual growth rate (“CAGR”), from over 182 billion downloads.
According to AppStoreHQ and MobileDevHQ, the number of Apple iPhone developers grew from 41,000 in 2010 to 67,000 in 2011, representing a 63% growth rate. In those same reports, Google Android developers grew over 500% from 10,000 to 51,000 developers.
According to IDC and Appcelerator, in 2010, Apple had 27.9% market share, RIM had 27.4%, Google had 22.7% and Windows had 14.0%. Developer preferences tell a different story. According to those same sources, 92% of developers prefer to build mobile apps for the Apple iPhone, 87% for both the Apple iPad and Google Android Phones with 74% preferring to build for Google Android Tablets. Despite the significant market share held by RIM, only 38% of developers prefer to build for their Blackberry phones and 28% for their tablet offering the Blackberry Playbook. 36% of developers preferred to build mobile applications for Windows phones.
Apple has over 500,000 apps in its app store and recently celebrated the download of the 25 billionth app. Based on this information and the market share and developer preferences, we believe the core market opportunity is with Apple and Google. We also believe that Facebook is likely to become the next core market for developing and deploying mobile applications as Zynga, the publisher of the games Farmville and Mafia Wars, has discovered and exploited.
In addition to the developer market – many of which today are quite technically competent, we believe an enormous opportunity exists with non-technical individuals who want to share information and interact via mobile apps. We don’t believe anybody has been able to measure the number of consumers that want to create apps, though our belief is that it represents a significant multiple over the number of actual developers that exist today.
We see significant unmet needs for both mobile app developers and consumers. The market, while very large, is still quite immature which is making it harder for developers to effectively monetize. Some of the reasons and unmet needs are:
For consumers:
| · | search and discovery for apps is very difficult, |
| there are many duplicate and redundant apps, |
| there is no easy way to share app ratings, |
| the quality of apps is extremely variable. |
For developers:
| many developers simply don’t know how to promote their apps or monetize them, |
| it’s very difficult to deploy apps across platforms (Apple iOS and Google Android, for example), |
| a significant barrier to entry still exists for consumer power users to create apps, |
| the failure rate of apps in the app stores and markets in increasing. |
We believe the right way to measure and approach this market opportunity is to look at one key metric – “reach.” Reach measures the number of consumers a company can dialogue with, gather intelligence about and market to. Four examples of companies in this space that we believe exemplify this principal are:
| 1. | Facebook: They have over 800 million users, a market capitalization of $62.01 billion dollars, and 2012 revenue of $5.1 billion dollars. |
| 2. | Zynga: They have over 360 million users and 6 of the top 10 Facebook games, a market capitalization of $2.65 billion dollars, and a on 2012 revenue of $1.3 billion dollars. |
| 3. | Rovio: The maker of the popular mobile game Angry Birds has over 150 million active users. Rovio’s games have been downloaded over 400 million times and the company was recently offered $2.5 billion dollars in cash by Zynga and declined. |
| 4. | LinkedIn: The popular social network for professionals have over 125 million users, a market capitalization of $19.1 billion dollars, and 2012 revenue of $0.97 billion dollars. |
We believe the enterprise value and P/E of these businesses are measured largely in their ‘reach’ and active user bases and not solely against traditional metrics and fundamentals like revenue.
Demand for Mobile Apps
Business executives are increasingly asking, “Is there an app for that?” And that means mobile app developers are commanding a premium for their salaries.
A recent Robert Half Technology survey found one in two chief information officers across the country either have a mobile phone application in place for the business – or plan to in the next 12 months. The telephone survey involved 1,400 CIOs from companies across the United States with 100 or more employees. So what’s the result of this? Robert Half has found that salaries for mobile app developers are up 9 percent from 2011.
A mobile app developer can command a salary between $89,505 and $128,992 in Minneapolis, slightly higher than the $85,000 to $122,500 range nationwide. The salary range around St. Paul, at $84,575 to $121,888, and St. Cloud, at $65,875 to $94,938, is lower than the national average. (Robert Half has an online technology job salary calculator.)
Kathy Northamer, district president of Robert Half Technology in Minneapolis, has found the interest in mobile apps is also kicking up salaries for the security professionals needed to make sure the apps don’t compromise corporate database. There’s also a greater need for help desk professionals who understand apps. Northamer thinks it might make more sense for a business to hire a mobile app developer as a contractor to get apps in place for the business, and then train existing technical staff on how to maintain the apps.
The apps are a great way to give customers speedy access to information about products and services. They also help improve internal business functions. Salespeople, for example, can use apps to quickly call up information while they’re on the road.
In a study conducted by the "Microsoft Tag" community, mobile device usage was estimated to overtake desktop Internet users by 2014, based on a rate of growth tracked since 2007. Mobile Application production studio Epic Digital recently conducted a survey of clientele, to study how the unprecedented growth of applications on the iPhone, iPad, and Android affects different markets.
A study conducted by the National Literacy Trust shows that children ages 7-16 are more likely to own a mobile device than a book. With the January announcement of Apple's new iBooks 2 textbooks for iPad, more educational publishers are trying to provide innovative learning tools on mobile devices.
As traditional media consumption trends change to a more mobile design, new gateways are opened for how media can be communicated to users.
The Business Opportunity
Our mission is to help mobile app developers get the full potential of their mobile apps by increasing consumer reach, conversion rates and bottom line profitability. Our strategic arsenal of methodologies and technologies allows mobile app developers to quickly develop, market and monetize their apps:
Recently, we made money via the 3 channels set forth below. However, with the sale of DigiSpace, our sources of revenue will no doubt change going forward.
1.Education Services: We used affiliate-marketing channels to fill the top of our marketing funnel with developers and consumers desiring to create mobile apps. We then used product launch methodologies and webinars / seminars to provide educational content to consumers and developers showing them how to build mobile apps, or how to build a mobile app business, often showing them by using our proprietary suite of developer tools. The average cost to participate in one of our educational programs has been $1,000 – $2,000, often with a monthly, recurring element. In addition, we have sold access to “mastermind” groups, giving direct access to other like developers, consumers and experts for advice and support at an average cost of $10,000 – 25,000. The vast majority of the content in these courses was delivered via internet download and webinars.
2.Developer Tools: We aggregated the best tools to help developers deploy and optimize their apps in the future and allowed consumers to become creators. With our educational series and these tools, our goal is to become the one-stop shop for developers to maximize their revenue – and use Bitzio as their strategic weapon. Depending on the tool, we charged an up-front fee, a recurring monthly fee for access and use, or both.
3.Apps: We continue to seek out the best app developers for acquisition. In addition, we continue to build out our own apps, using our tools, to both drive revenue and reach. We derived significant revenue from advertising within our apps and share similar revenue from developers who elected to use our optimization tools to drive advertising within their apps. To date, our applications have been downloaded over 40 million times.
Our strengths
Our core strength and competitive differentiator comes from our team. We’ve assembled a very seasoned, tested and true team of executives, leaders and domain experts to drive Bitzio forward. We subscribe to a team first approach where we focus on getting the very best players onto the team, aligning their incentives and focusing each of them on what they are best and can deliver the most value from. Our team is ‘built to scale’; meaning many of them have been part of enterprises that scale into the billion-dollar value range, and up. This is a team that one would usually recruit later in the lifecycle of a business – but we believe this market is moving so fast, that the right team is necessary from day one to lay the foundation for scale and then execute on the plans. That has been a core focus in the first year of operations and we believe we have exceeded expectations with the team we’ve assembled.
Team diversity: another key strength is the incredible diversity found within the team. We have young entrepreneurs who built some of the fastest growing companies in their space before the age of 30 and senior financial advisors who have been on and led public company boards and worked at “Big 4” tax or accounting firms for over 40 years. Some of our leaders have driven advertising, marketing, technology and consulting firms while others have built very successful app companies – some before they were 25 years old. We have business brokers who focus on finding us the next great acquisition(s) and operators who know how to buy and integrate them and other operators who spent over 25 years managing highly complex technology projects. Many of our leaders have been a part of publicly traded companies with market caps in excess of 1 billion dollars and some were there from the start, through the IPO and into successful execution, including legal counsel who has done so multiple times in the tech sector. These diverse experiences and points of view give the team an unparalleled ability to work problems from vastly different angles and arrive at great solutions.
We have diversified our revenue streams to both increase our velocity, but also to smooth out our revenue trajectory as different types of products and services take hold at different paces. This also allows us to narrow the focus of our resources at a given time, depending on market conditions.
The 3 market segments we provide services and products for (education, tools and apps) are highly profitable on their own, and work together as a multiplier. The segments act as a sales funnel – we market to developers and entrepreneurs and offer to teach them ‘how to’. Much of the acquisition cost is in getting folks into the top of the funnel. Once they come through the educational course – which is written once and distributed to many – we upsell access to the tools we have and use in the course and then share revenue from the apps they built. This gives us a very significant lifetime value for each customer with a recurring revenue component through the tools and apps. In addition, we continue to focus on building our own apps that are able to scale very quickly with pre-built distribution models via Apple and Google at very low cost once development is completed.
Our growth strategy
Gain additional scale, technology and access to new markets through acquisitions
We have historically acquired various businesses and technologies to grow our revenue and service capabilities. We expect to continue targeting acquisition candidates that have revenue expansion opportunities or complementary technology and solutions. We also expect to evaluate acquisition candidates that will enable us to expand our business and to enter markets adjacent to our core business or into new geographic markets.
Advance into new market segments
We intend to leverage our core competencies, technologies and existing market position to broaden our offerings and customer base and advance into new market segments. We intend to leverage our team, revenue base and reach to expand our presence into new markets.
Enhance smartphone solutions
We intend to extend further our support for new versions of smartphones and extend our support for data-rich applications which have higher rates of data consumption on these mobile devices. In addition, we will continue to leverage our subscriber behavior insights and user interface expertise to offer more personalized and richer experiences to smartphones. We expect to fully capitalize on the extensive capabilities of smartphones and their significant market adoption.
We’ll continue to refine, enhance and expand our educational offerings to bring more consumers into our world and help them learn to be creators. This will expand our customer list to upsell tools to.
We’ll continue to refine, enhance and expand the tools we use to build apps and offer those tools to developers and consumers driving both up front and recurring revenue streams – and downstream driving more apps to market within the Bitzio community.
We plan to continue aggressively building our own apps and deploying them in the Apple and Google app stores, seeking revenue from downloads, in app purchases for premium content and in app advertising.
We’ll continue to expand our reach through apps and the insights and information we’ll collect while those apps are being used will give us valuable targeted cross selling information to increase our sales and marketing conversion through advertising.
Competition
The market for mobile apps and development tools is extremely competitive and is becoming more so. The barriers to entry are low, and the life of any app is limited. The following is a list of our current primary competitors focusing on mobile app development tools:
Legislation is continually being introduced that may affect both the content of our products and their distribution. For example, data and consumer protection laws in the United States and Europe impose various restrictions, which will be increasingly important to our business as we continue to market our products directly to end users and we collect information, including personal identifiable information, about our end user customers. Those rules vary by territory although the Internet recognizes no geographical boundaries. In the United States, for example, numerous federal and state laws have been introduced which attempt to restrict the content or distribution of games. Legislation has been adopted in several states, and proposed at the federal level, that prohibits the sale of certain games to minors. The Federal Trade Commission has also recently indicated that it intends to review issues related to in-app purchases, particularly with respect to games that are marketed primarily to minors. In addition, two self-regulatory bodies in the United States (the Entertainment Software Rating Board) and the European Union (Pan European Game Information) provide consumers with rating information on various products such as entertainment software similar to our products based on the content (e.g., violence, sexually explicit content, language). Furthermore, the Chinese government has adopted measures designed to eliminate violent or obscene content in games. In response to these measures, some Chinese telecommunications operators have suspended billing their customers for certain mobile gaming platform services, including those services that do not contain offensive or unauthorized content, which could negatively impact our revenues in China. China has also adopted measures that prohibit the use of virtual currency to purchase any real world good or service.
We are subject to federal and state laws and government regulations concerning employee safety and health and environmental matters. The Department of Labor, Occupational Safety and Health Administration, the Environmental Protection Agency, and other federal and state agencies have the authority to establish regulations that may have an impact on our operations. In 2012, we did not incur any material costs in complying with such regulations.
Employees
As of the date of this Annual Report, we have eleven employees and/or contractors working for the Bitzio consolidated group, four of which are our officers and two of which are directors. None of our employees are represented by a labor union or is covered by a collective bargaining agreement. We have never experienced any employment-related work stoppages and consider relations with our employees to be good.
ITEM 1A – RISK FACTORS
As a smaller reporting company we are not required to provide a statement of risk factors. Nonetheless, because this is our first Annual Report after completing several major acquisitions, we are voluntarily providing risk factors herein.
Any investment in our common stock involves a high degree of risk. You should consider carefully the following information, together with the other information contained in this annual report, before you decide to buy our common stock. If one or more of the following events actually occurs, our business will suffer, and as a result our financial condition or results of operations will be adversely affected. In this case, the market price, if any, of our common stock could decline, and you could lose all or part of your investment in our common stock.
We help mobile app developers get the full potential of their mobile apps by increasing consumer reach, conversion rates and bottom line profitability. Our strategic arsenal of methodologies and technologies allows mobile app developers to quickly develop, market and monetize their apps. We face risks in developing our products and services and eventually bringing them to market. We also face risks that our business model becomes obsolete. The following risks are material risks that we face. If any of these risks occur, our business, our ability to achieve revenues, our operating results and our financial condition could be seriously harmed.
Risk Factors Related to the Business of the Company
We have a limited operating history and limited historical financial information upon which you may evaluate our performance.
You should consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, are in their early stages of development. We may not successfully address these risks and uncertainties or successfully implement our existing and new products and services. If we fail to do so, it could materially harm our business and impair the value of our common stock. Even if we accomplish these objectives, we may not generate the positive cash flows or profits we anticipate in the future. We were incorporated in 2005, but only acquired the first of our current operating subsidiaries in July 2011. Unanticipated problems, expenses and delays are frequently encountered in establishing a new business and developing new products and services. These include, but are not limited to, inadequate funding, lack of consumer acceptance, competition, product development, and inadequate sales and marketing. Our failure to meet any of these conditions would have a materially adverse effect upon us and may force us to reduce or curtail operations. No assurance can be given that we can or will ever operate profitably.
If we are unable to meet our future capital needs, we may be required to reduce or curtail operations.
To date we have relied on cash flow from operations, funding from our founders, waivers of significant amounts of compensation by our executive team, and debt financing to fund operations. We have extremely limited cash liquidity and capital resources. Our cash on hand as of December 31, 2012 was approximately $39,868, and our revenue for the year ended December 31, 2012 was $421,506. Based on our recurring expenses, estimated revenue from our product pipeline, and not including assumed liabilities from acquisitions and outstanding loans, our estimated monthly burn rate is approximately $25,000.
Our future capital requirements will depend on many factors, including our ability to market our products successfully, cash flow from operations, and competing market developments. Based on our current financial situation we may have difficulty continuing our operations at their current level, or at all, if we do not receive additional financing in the near future. Consequently, although we currently have no specific plans or arrangements for financing, we intend to raise funds through private placements, public offerings or other financings. Any equity financings would result in dilution to our then-existing stockholders.
Sources of debt financing may result in higher interest expense. Any financing, if available, may be on unfavorable terms. If adequate funds are not obtained, we may be required to reduce or curtail operations. We anticipate that our existing capital resources will not be adequate to satisfy our operating expenses and capital requirements for any length of time. However, this estimate of expenses and capital requirements may prove to be inaccurate.
Our independent registered public accounting firm has expressed doubts about our ability to continue as a going concern.
As a result of our financial condition, we have received a report from our independent registered public accounting firm for our financial statements for the years ended December 31, 2012 and 2011 that includes an explanatory paragraph describing the uncertainty as to our ability to continue as a going concern. In order to continue as a going concern we must effectively balance many factors and increase our revenues to a point where we can fund our operations from our sales and revenues. If we are not able to do this we may not be able to continue as an operating company.
In recent years, we have recognized significant impairment losses related to our goodwill, intangible assets and property and equipment. Additional impairment losses may be recognized which would adversely affect our financial results.
We are required under GAAP to test goodwill for impairment and to assess our amortizable intangible assets, including capitalized software costs, and long-lived assets, as well as goodwill, for impairment when events or changes in circumstance indicate the carrying value may not be recoverable. In 2012, we incurred an impairment loss of $3.2 million. Factors that could lead to impairment include changes in business strategy, restructuring of the business in connection with acquisitions, actual performance of acquired businesses below our expectations and expiration of customer contracts. Unanticipated events or changes in circumstances could impact our ability to recover the carrying value of some or all of these assets. In addition, we expect to make additional acquisitions in the future that would increase the amount of such assets on our books that would be subject to potential future impairment. In the event any of our current or future assets became impaired, the associated impairment charge could adversely impact our results of operations.
If we fail to maintain proper and effective internal controls or are unable to remediate the deficiencies in our internal controls, our ability to produce accurate and timely financial statements could be impaired and investors’ views of us could be harmed.
Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. We are in the process of documenting and reviewing our internal controls and procedures in order to comply with Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, which requires annual management assessment of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm addressing this assessment. Our compliance with Section 404 will require that we incur additional expense and expend management time on compliance-related issues. If we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market’s confidence in our financial statements could decline and the market price of our common stock could be adversely impacted.
Because we face intense competition, we may not be able to operate profitably in our markets.
The market for mobile apps and development tools is highly competitive and is becoming more so, which could hinder our ability to successfully market our products. We may not have the resources, expertise or other competitive factors to compete successfully in the future. We expect to face additional competition from existing competitors and new market entrants in the future. Many of our competitors have greater name recognition and more established relationships in the industry than we do. As a result, these competitors may be able to:
| develop and expand their product offerings more rapidly; |
| adapt to new or emerging changes in customer requirements more quickly; |
| take advantage of acquisition and other opportunities more readily; and |
| devote greater resources to the marketing and sale of their products and adopt more aggressive pricing policies than we can. See “The Company – Competition.” |
If we are unable to maintain brand image or product quality, our business may suffer.
Our success depends on our ability to maintain and build brand image for our existing products, new products and brand extensions. We have no assurance that our advertising, marketing and promotional programs will have the desired impact on our products’ brand image and on consumer preferences.
If we are unable to attract and retain key personnel, we may not be able to compete effectively in our market.
Our success will depend, in part, on our ability to attract and retain key management, technical experts, and sales and marketing personnel. We attempt to enhance our management and technical expertise by recruiting qualified individuals who possess desired skills and experience in certain targeted areas. Our inability to retain employees and attract and retain sufficient additional employees, and information technology, engineering and technical support resources, could have a material adverse effect on our business, financial condition, results of operations and cash flows. The loss of key personnel could limit our ability to develop and market our products.
Because our officers and directors control a nearly one-third of our common stock, they have the ability to influence matters affecting our shareholders.
Our officers and directors beneficially own approximately 42% of our outstanding common stock. As a result, they have the ability to influence matters affecting our shareholders, including the election of our directors, the acquisition or disposition of our assets, and the future issuance of our shares. Because they control such shares, investors may find it difficult to replace our management if they disagree with the way our business is being operated. Because the influence by these insiders could result in management making decisions that are in the best interest of those insiders and not in the best interest of the investors, you may lose some or all of the value of your investment in our common stock. See “Principal Shareholders.”
Our business may be negatively impacted by a slowing economy or by unfavorable economic conditions or developments in the United States and/or in other countries in which we operate.
A general slowdown in the economy in the United States or unfavorable economic conditions or other developments may result in decreased consumer demand, business disruption, supply constraints, foreign currency devaluation, inflation or deflation. A slowdown in the economy or unstable economic conditions in the United States or in the countries in which we operate could have an adverse impact on our business results or financial condition.
We may not be able to effectively manage our growth and operations, which could materially and adversely affect our business.
We may experience rapid growth and development in a relatively short period of time by aggressively marketing our mobile apps and development tools. In addition, we have completed three acquisitions recently, and may complete more in the future. The management of this growth will require, among other things, continued development of our financial and management controls and management information systems, stringent control of costs, increased marketing activities, the ability to attract and retain qualified management personnel and the training of new personnel. We intend to hire additional personnel in order to manage our expected growth and expansion. Failure to successfully manage our possible growth and development could have a material adverse effect on our business and the value of our common stock.
If we fail to develop and introduce new mobile apps and other applications that achieve market acceptance, our sales could suffer.
Our business depends on providing mobile apps and development tools that consumers want to buy. We must invest significant resources in research and development to enhance our offering of apps and tools and other applications and introduce new apps and other applications. Our operating results would suffer if our apps and other applications are not responsive to the preferences of our customers or are not effectively brought to market.
The planned timing or introduction of new mobile apps and development tools is subject to risks and uncertainties. Unexpected technical, operational, deployment, distribution or other problems could delay or prevent the introduction of new apps, which could result in a loss of, or delay in, revenues or damage to our reputation and brand. If any of our applications is introduced with defects, errors or failures, we could experience decreased sales, loss of customers and damage to our reputation and brand. In addition, new applications may not achieve sufficient market acceptance to offset the costs of development. Our success depends, in part, on unpredictable and volatile factors beyond our control, including customer preferences, competing applications and the availability of other entertainment activities. A shift in Internet or mobile device usage or the entertainment preferences of our customers could cause a decline in our applications' popularity that could materially reduce our revenues and harm our business.
We intend to continuously develop and introduce new apps, development tools, and other applications for use on next-generation Internet and mobile devices. We must make product development decisions and commit significant resources well in advance of the anticipated introduction of new mobile devices. New mobile devices for which we will develop applications may be delayed, may not be commercially successful, may have a shorter life cycle than anticipated or may not be adequately promoted by wireless carriers or the manufacturer. If the mobile devices for which we are developing games and other applications are not released when expected or do not achieve broad market penetration, our potential revenues will be limited and our business will suffer.
Mobile platform providers have broad discretion to change their terms of services which could adversely impact our business.
We are subject to the standard terms and conditions for application developers, which govern the promotion, distribution and operation of games and other applications on the respective platforms of the providers. The providers have broad discretion to change their terms of service and other policies with respect to us and other developers, and those changes may be unfavorable to us. The providers may also change their fee structure, add fees associated with access to and use their platform, change how the personal information of its users is made available to application developers or restrict how users can share information with friends on their platform.
Our use of open source software could limit our ability to commercialize our services.
We have incorporated open source software into our services. Although we closely monitor our use of open source software, the terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our services. In that event, we could be required to seek licenses from third parties in order to continue offering our services, to re-engineer our products or to discontinue sales of our services, any of which could materially adversely affect our business.
Our industry is experiencing consolidation that may cause us to lose key relationships and intensify competition.
The Internet and mobile apps industries are undergoing substantial change, which has resulted in increasing consolidation and formation of strategic relationships. We expect this consolidation and strategic partnering to continue. Acquisitions or other consolidating transactions could harm us in a number of ways, including:
| we could lose strategic relationships if our strategic partners are acquired by or enter into relationships with a competitor (which could cause us to lose access to distribution, content, technology and other resources); |
| we could lose customers if competitors or users of competing technologies consolidate with our current or potential customers; and |
| our current competitors could become stronger, or new competitors could form, from consolidations. |
Any of these events could put us at a competitive disadvantage, which could cause us to lose customers, revenue and market share. Consolidation could also force us to expend greater resources to meet new or additional competitive threats, which could also harm our operating results.
We rely on the continued reliable operation of third parties’ systems and networks and, if these systems and networks fail to operate or operate poorly, our business and operating results will be harmed.
Our operations are in part dependent upon the continued reliable operation of the information systems and networks of third parties. If these third parties do not provide reliable operation, our ability to service our customers will be impaired and our business, reputation and operating results could be harmed.
The Internet and our network are subject to security risks that could harm our business and reputation and expose us to litigation or liability.
Online commerce and communications depend on the ability to transmit confidential information and licensed intellectual property securely over private and public networks. Any compromise of our ability to transmit and store such information and data securely, and any costs associated with preventing or eliminating such problems, could damage our business, hurt our ability to distribute products and services and collect revenue, threaten the proprietary or confidential nature of our technology, harm our reputation, and expose us to litigation or liability. We also may be required to expend significant capital or other resources to protect against the threat of security breaches or hacker attacks or to alleviate problems caused by such breaches or attacks. Any successful attack or breach of our security could hurt consumer demand for our products and services, expose us to consumer class action lawsuits and harm our business.
Actual or perceived security vulnerabilities in mobile devices could negatively affect our business.
The security of mobile is critical to our business. Individuals or groups may develop and deploy viruses, worms and other malicious software programs that attack mobile devices. Security experts have identified computer worms targeted specifically at mobile devices. Security threats could lead some mobile subscribers to reduce or delay their purchases of mobile content and applications in an attempt to reduce the security threat posed by viruses, worms and other malicious software. Actual or perceived security threats, and reactions to such threats, could reduce our revenue or require unplanned expenditures on new security initiatives.
We may be unable to adequately protect our proprietary rights.
Our ability to compete partly depends on the superiority, uniqueness and value of our intellectual property and technology, including both internally developed technology and technology licensed from third parties. To the extent we are able to do so, in order to protect our proprietary rights, we will rely on a combination of trademark, copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions and licensing agreement. Despite these efforts, any of the following occurrences may reduce the value of our intellectual property:
| Our applications for trademarks and copyrights relating to our business may not be granted and, if granted, may be challenged or invalidated; |
| Issued trademarks and registered copyrights may not provide us with any competitive advantages; |
| Our efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology; |
| Our efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those we develop; or |
| Another party may obtain a blocking patent and we would need to either obtain a license or design around the patent in order to continue to offer the contested feature or service in our products. |
We may be forced to litigate to defend our intellectual property rights, or to defend against claims by third parties against us relating to intellectual property rights.
We may be forced to litigate to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of other parties’ proprietary rights. Any such litigation could be very costly and could distract our management from focusing on operating our business. The existence and/or outcome of any such litigation could harm our business.
Interpretation of existing laws that did not originally contemplate the Internet could harm our business and operating results.
The application of existing laws governing issues such as property ownership, copyright and other intellectual property issues to the Internet is not clear. Many of these laws were adopted before the advent of the Internet and do not address the unique issues associated with the Internet and related technologies. In many cases, the relationship of these laws to the Internet has not yet been interpreted. New interpretations of existing laws may increase our costs, require us to change business practices or otherwise harm our business.
It is not yet clear how laws designed to protect children that use the Internet may be interpreted, and such laws may apply to our business in ways that may harm our business.
The Child Online Protection Act and the Child Online Privacy Protection Act impose civil and criminal penalties on persons distributing material harmful to minors (e.g., obscene material) over the Internet to persons under the age of 17, or collecting personal information from children under the age of 13. We do not knowingly distribute harmful materials to minors or collect personal information from children under the age of 13. The manner in which these Acts may be interpreted and enforced cannot be fully determined, and future legislation similar to these Acts could subject us to potential liability if we were deemed to be non-compliant with such rules and regulations, which in turn could harm our business.
We may be subject to market risk and legal liability in connection with the data collection capabilities of our products and services.
Many of our products are interactive Internet applications that by their very nature require communication between a client and server to operate. To provide better consumer experiences and to operate effectively, our products send information to our servers. Many of the services we provide also require that a user provide certain information to us. We post an extensive privacy policy concerning the collection, use and disclosure of user data involved in interactions between our client and server products.
Risks Related To Our Common Stock
We expect that our revenue will fluctuate, which could cause our stock price to decline.
Our revenue is subject to fluctuations due to the timing of sales of high-dollar professional services projects. Because these projects occur at irregular intervals and the dollar values vary based on customer needs, we may experience quarter-to-quarter fluctuations in revenue. In addition, any significant delays in the deployment of our services, or unfavorable sales trends in our existing service categories could adversely affect our revenue growth. If our revenue fluctuates or does not meet the expectations of securities analysts and investors, our stock price would likely decline.
If we are unable to pay the costs associated with being a public, reporting company, we may not be able to continue trading on the OTC Bulletin Board and/or we may be forced to discontinue operations.
Our common stock is traded on the OTC Bulletin Board. We expect to have significant costs associated with being a public, reporting company, which may raise substantial doubt about our ability to commence and/or continue trading on the OTC Bulletin Board and/or continue as a going concern. These costs include compliance with the Sarbanes-Oxley Act of 2002, which will be difficult given the limited size of our management, and we will have to rely on outside consultants. Accounting controls, in particular, are difficult and can be expensive to comply with.
Our ability to continue trading on the OTC Bulletin Board and/or continue as a going concern will depend on positive cash flow, if any, from future operations and on our ability to raise additional funds through equity or debt financing. If we are unable to achieve the necessary product sales or raise or obtain needed funding to cover the costs of operating as a public, reporting company, our common stock may be deleted from the OTC Bulletin Board and/or we may be forced to discontinue operations.
We do not intend to pay dividends in the foreseeable future.
We do not intend to pay any dividends in the foreseeable future. We do not plan on making any cash distributions in the manner of a dividend or otherwise. Our Board presently intends to follow a policy of retaining earnings, if any.
We have the right to issue additional common stock and preferred stock without consent of our stockholders. This would have the effect of diluting investors’ ownership and could decrease the value of their investment.
We have additional authorized, but unissued shares of our common stock that may be issued by us for any purpose without the consent or vote of our stockholders that would dilute our stockholders’ percentage ownership.
In addition, our certificate of incorporation authorizes the issuance of shares of preferred stock, the rights, preferences, designations and limitations of which may be set by the Board of Directors. Our certificate of incorporation has authorized issuance of up to 25,000,000 shares of preferred stock in the discretion of our Board. The shares of authorized but undesignated preferred stock may be issued upon filing of an amended certificate of incorporation and the payment of required fees; no further stockholder action is required. If issued, the rights, preferences, designations and limitations of such preferred stock would be set by our Board and could operate to the disadvantage of the outstanding common stock. Such terms could include, among others, preferences as to dividends and distributions on liquidation.
Our common stock is governed under The Securities Enforcement and Penny Stock Reform Act of 1990.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Such exceptions include any equity security listed on NASDAQ and any equity security issued by an issuer that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for three years, (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three years, or (iii) average annual revenue of at least $6,000,000, if such issuer has been in continuous operation for less than three years. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.
The forward looking statements contained in this annual report may prove incorrect.
This annual report contains certain forward-looking statements, including among others: (i) anticipated trends in our financial condition and results of operations; (ii) our business strategy for expanding distribution; and (iii) our ability to distinguish ourselves from our current and future competitors. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. In addition to the other risks described elsewhere in this “Risk Factors” discussion, important factors to consider in evaluating such forward-looking statements include: (i) changes to external competitive market factors or in our internal budgeting process which might impact trends in our results of operations; (ii) anticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the biotechnology industry; and (iv) various competitive factors that may prevent us from competing successfully in the marketplace. In light of these risks and uncertainties, many of which are described in greater detail elsewhere in this “Risk Factors” discussion, there can be no assurance that the events predicted in forward-looking statements contained in this annual report will, in fact, transpire.
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this annual report, including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation, and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or similar expressions. These statements are only predictions and involve known and unknown risks and uncertainties, including the risks outlined under “Risk Factors” and elsewhere in this annual report.
Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievement. We are not under any duty to update any of the forward-looking statements after the date of this annual report to conform these statements to actual results, unless required by law.
ITEM 1B – UNRESOLVED STAFF COMMENTS
This Item is not applicable to us as we are not an accelerated filer, a large accelerated filer, or a well-seasoned issuer; however, we have not received written comments from the Commission staff regarding our periodic or current reports under the Securities Exchange Act of 1934 within the last 180 days before the end of our last fiscal year.
ITEM 2 – PROPERTIES
We do not have any office space, nor are we a party to any leases. We, along with each of our subsidiaries, operate essentially virtually and rent meeting or conference facilities as needed.
ITEM 3 – LEGAL PROCEEDINGS
We are not a party to or otherwise involved in any legal proceedings.
In the ordinary course of business, we are from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of our management, other than as set forth herein, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is currently traded on the OTC Bulletin Board under the symbol “BTZO.” Our stock has traded on the OTC Bulletin Board since June 2010. Our common stock trades on a limited or sporadic basis and should not be deemed to constitute an established public trading market. There is no assurance that there will be liquidity in the common stock.
The following table sets forth the high and low bid information for each quarter within the fiscal years ended December 31, 2012 and 2011, as provided by the Nasdaq Stock Markets, Inc. The information reflects prices between dealers, and does not include retail markup, markdown, or commission, and may not represent actual transactions.
| Fiscal Year Ended | | | Bid Prices | |
| December 31, | Period | | High | | | Low | |
| | | | | | | | |
| 2011 | First Quarter | | $ | 1.01 | | | $ | 0.00 | |
| | Second Quarter | | $ | 1.16 | | | $ | 0.00 | |
| | Third Quarter | | $ | 0.62 | | | $ | 0.00 | |
| | Fourth Quarter | | $ | 0.45 | | | $ | 0.02 | |
| 2012 | First Quarter | | $ | 0.44 | | | $ | 0.18 | |
| | Second Quarter | | $ | 0.51 | | | $ | 0.18 | |
| | Third Quarter | | $ | 0.28 | | | $ | 0.11 | |
| | Fourth Quarter | | $ | 0.34 | | | $ | 0.06 | |
| 2013 | | First Quarter (through March 15, 2013) | | $ | 0.16 | | | $ | 0.05 | |
The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to a few exceptions which we do not meet. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.
Description of Securities
Our authorized capital stock consists of 250,000,000 shares of common stock, par value $0.001, and 25,000,000 shares of preferred stock, par value $0.001. As of April 8, 2013, there are 80,018,621 shares of our common stock issued and outstanding, and 2,043,120 shares of our Series A Convertible Redeemable Preferred Stock issued and outstanding.
Common Stock. Each shareholder of our common stock is entitled to a pro rata share of cash distributions made to shareholders, including dividend payments. The holders of our common stock are entitled to one vote for each share of record on all matters to be voted on by shareholders. There is no cumulative voting with respect to the election of our directors or any other matter. Therefore, the holders of more than 50% of the shares voted for the election of those directors can elect all of the directors. The holders of our common stock are entitled to receive dividends when and if declared by our Board of Directors from funds legally available therefore. Cash dividends are at the sole discretion of our Board of Directors. In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining available for distribution to them after payment of our liabilities and after provision has been made for each class of stock, if any, having any preference in relation to our common stock. Holders of shares of our common stock have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to our common stock.
Preferred Stock. We are authorized to issue 25,000,000 shares of preferred stock, of which 2,500,000 shares are designated as Series A convertible redeemable preferred stock with a par value of $0.001. The rights, privileges, and preferences of our preferred stock can be set by our Board of Directors without further shareholder approval. The availability or issuance of these shares could delay, defer, discourage or prevent a change in control.
Each share of Series A Preferred Stock gives the holder the right, but not the obligation, after January 1, 2013 but before January 2, 2017, to purchase two (2) shares of our common stock at a purchase price of Forty Cents ($0.40) per share. Further, the Corporation can redeem the Series A Preferred Stock at $0.0025 per share after January 2, 2017. The Series A Preferred Stock does not have any voting rights.
Dividend Policy. We have not declared or paid a cash dividend on our capital stock in our last two fiscal years and we do not expect to pay cash dividends on our common stock in the foreseeable future. We currently intend to retain our earnings, if any, for use in our business. Any dividends declared in the future will be at the discretion of our Board of Directors and subject to any restrictions that may be imposed by our lenders.
Outstanding Options, Warrants, and Convertible Instruments
There are options and warrants outstanding to acquire an aggregate of 24,361,948 shares of our common stock at exercise prices ranging from $0.20 to $0.50 per share. The weighted-average exercise price of all outstanding options and warrants is $0.34 per share.
There are 2,043,120 shares of our Series A Convertible Redeemable Preferred Stock issued and outstanding. Each share of Series A Convertible Redeemable Preferred Stock gives the holder the right, but not the obligation, after January 1, 2013 but before January 2, 2017, to purchase two (2) shares of our common stock at a purchase price of $0.40 per share. Further, we can redeem the Series A Preferred Stock at $0.0025 per share after January 2, 2017. The Series A Convertible Redeemable Preferred Stock has no voting rights.
Of the 80,018,621 shares of our common stock issued and outstanding as of April 8, 2013, 39,368,571 are restricted securities in accordance with Rule 144 of the Securities Act of 1934. Of the 39,368,571 shares of restricted securities, 562,500 are eligible for resale pursuant to Rule 144 (not including shares held by affiliates).
Securities Authorized for Issuance Under Equity Compensation Plans
We do not currently have a stock option or grant plan.
Holders
As of April 8, 2013, there were 80,018,621 shares of our common stock issued and outstanding and held by 73 holders of record.
Recent Sales of Unregistered Securities
2013
On March 18, 2013, we issued 177,500 shares of common stock to Source Capital Group, Inc. pursuant to a Convertible Promissory Note. The shares of common stock issued upon conversion of the Convertible Promissory Note were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On February 28, 2013, we issued 205,532 shares of common stock to Black Mountain Equities, Inc. in connection with the conversion of outstanding principal and interest due pursuant to the terms of a Convertible Promissory Note. The Convertible Promissory Note was issued on September 7, 2012 to The Lebrecht Group, APLC and assigned to Black Mountain Equities, Inc. on December 13, 2012. The Convertible Promissory Note was converted at a conversion price of $0.05 per share. The shares of common stock issued upon conversion of the Convertible Promissory Note were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On January 31, 2013, we issued 204,082 shares of common stock to ROAR, LLC pursuant to an Engagement Letter, dated July 25, 2012, as compensation for strategic management services rendered. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On January 31, 2013, we issued 3,507,200 shares of common stock to F.A. Ventures, Inc. in connection with the conversion of debt due pursuant to the terms of an Agreement to Convert Debt into Equity, dated January 31, 2013, as compensation for marketing and development services rendered. The debt was converted to equity at a conversion price $0.05 per share. The shares of common stock issued upon conversion were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On January 31, 2013 we issued 363,622 shares of common stock to Steve Moulton in connection with the conversion of debt due under the terms and conditions of an Agreement to Convert Debt into Equity, dated January 31, 2013. The debt was converted to equity at a conversion price of $0.05 per share. The shares of common stock issued upon conversion were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On January 30, 2013, we issued 561,200 shares of common stock to David Lewis. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On January 30, 2013, we issued 841,700 shares of common stock to Bruce Weatherell. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On January 30, 2013, we issued 26,934 shares of common stock to Source Capital. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On January 30, 2013, we issued 768,000 shares of common stock to David Lewis. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On January 30, 2013, we issued 1,152,999 shares of common stock to Bruce Weatherell. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On January 30, 2013, we issued 2,880,000 shares of common stock to Tezi Advisory. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On January 23, 2013, we issued 500,000 shares of common stock to Liolios Group. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On January 23, 2013, we issued 108,762 shares of common stock to Stefan Grauer. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On January 23, 2013, we issued 200,000 shares of common stock to Uptick Capital LLC pursuant to a Consulting Agreement, as compensation for services rendered. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
2012
On December 24, 2012, we issued 153,846 shares of common stock to ROAR, LLC pursuant to an Engagement Letter, dated July 25, 2012, as compensation for strategic management services rendered. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On December 12, 2012, we issued 1,000,000 shares of common stock to Motion Pixel Corporation Holdings, Inc. pursuant to a Consulting Agreement, dated May 23, 2012, in connection with the acquisition of a licensing agreement. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On December 10, 2012, we issued 695,701 shares of common stock to Richardson & Patel, LLP as compensation for legal services rendered. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On November 24, 2012, we issued 112,360 shares of common stock to ROAR, LLC pursuant to an Engagement Letter, dated July 25, 2012, as compensation for strategic management services rendered. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On November 23, 2012, we issued 300,000 shares of common stock, restricted in accordance with Rule 144, to shareholders upon conversion of outstanding promissory notes. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, the individuals were either accredited or sophisticated and familiar with our operations, and there was no solicitation.
On November 23, 2012, we issued 300,000 shares to Merriman Capital, Inc. pursuant to an Engagement Letter, dated November 13, 2012, as compensation for capital markets advisory services rendered. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On November 8, 2012, we issued 1,000,000 shares to Michael Moon pursuant to the September 14, 2011 Agreement to Acquire Thinking Drone, Inc., dated November 8, 2012, as amended, in connection with such acquisition. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On November 8, 2012, we issued 1,000,000 shares to Quoc Bui pursuant to the September 14, 2011 Agreement to Acquire Thinking Drone, Inc., dated November 8, 2012, as amended, in connection with such acquisition. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On October 24, 2012, we issued 74,074 shares of common stock to ROAR, LLC pursuant to an Engagement Letter, dated July 25, 2012, as compensation for strategic management services rendered. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On October 22, 2012, we issued 50,000 shares of common stock to Avior Capital, LLC pursuant to an Engagement Letter, dated October 22, 2012, as compensation for placement agent services rendered. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On September 30, 2012, we issued 938,108 shares of common stock to Richardson & Patel, LLP. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On September 24, 2012, we issued 153,846 shares of common stock to ROAR, LLC. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On September 20, 2012, we issued 125,000 shares of common stock to Michael Moon. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On September 20, 2012, we issued 150,000 shares of common stock to Sean Kaye. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On September 1, 2012, we issued 300,000 shares of common stock to Team Innova. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On August 31, 2012, we issued 49,211 shares of common stock to Stefan Grauer. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On August 30, 2012, we issued 70,003 shares of common stock to Michael Lang. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On August 29, 2012, we issued 30,000 shares of common stock to Complete Advisory. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On July 25, 2012, we issued 87,000 shares of common stock to ROAR, LLC. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On June 22, 2012, we issued 100,065 shares of common stock to Asher Enterprises. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On June 18, 2012, we issued 71,685 shares of common stock to Asher Enterprises. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On June 4, 2012, we issued 500,000 shares of common stock to Richardson & Patel, LLP. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On May 23, 2012, we issued 1,000,000 shares of common stock to Motion Pixel Corporation Holdings, Inc.. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On May 23, 2012, we issued 6,500,000 shares of common stock to Motion Pixel Corporation Holdings, Inc. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On April 26, 2012, we issued 600,000 shares of common stock to Greg Blakney. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On April 26, 2012, we issued 800,000 shares of common stock to Peter Henricsson. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On April 26, 2012, we issued 400,000 shares of common stock to Axis Partners. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On April 9, 2012, we issued 250,000 shares of common stock to Andre Peschong. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On March 30, 2012, we issued 500,000 shares of common stock to Wayne Hicken. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On March 30, 2012, we issued 500,000 shares of common stock to Ron Moulton. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On February 29, 2012, we issued 108,696 shares of common stock to Wallace. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On February 3, 2012, we issued 744,000 shares of common stock to F.A. Ventures, Inc. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On February 1, 2012, we issued 566,250 shares of common stock to Marketingworks. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On February 1, 2012, we issued 373,500 shares of common stock to 100PCT. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On January 10, 2012, we issued 82,500 shares of common stock to Gordon Jones. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933
On April 16, 2012 and November 23, 2012, we issued 200,000 and 250,000 shares of common stock, respectively, to ChangeWave, Inc., dba NBT Communications, pursuant to a Professional Services Agreement, dated April 16, 2012, as compensation for research and marketing services rendered. The shares of common stock were issued in connection with the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
ITEM 6 – SELECTED FINANCIAL DATA
As a smaller reporting company we are not required to provide the information required by this Item.
ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.
Although the forward-looking statements reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.
Summary Overview
Bitzio is a leading mobile media and app development company focused on connecting fans of large entertainment and sports properties with the players, celebrities and teams they love. What makes Bitzio really different is our approach. Most app companies build first and hope the audience will come. Bitzio licenses media rights of sports and entertainment properties that already have millions of existing fans. We then leverage these rights to create mobile apps and web experiences for these existing fan bases.
The mobile applications market is growing rapidly - experts predict 100% annual growth driving revenue from $10.2 billion in 2010 to $100 billion in 2015. Bitzio is uniquely positioned to address this growth market by offering superior quality apps for existing communities of fans. By leveraging media rights to deliver relevant experiences we allow fans to deepen their engagement with their favorite clubs and star players. We allow fans to get in the game with the stars they love – while we collect powerful analytical information for targeted cross selling, which is extremely attractive to advertisers and sponsors.
We believe that the combination of those tangible assets, our approach and our experienced management team increases our likelihood of execution.
Acquisitions
On July 27, 2011, we acquired Bitzio Corp., a developer of mobile applications for smartphones, which is now operated as Bitzio Mobile Apps, Inc. Bitzio Mobile Apps has developed over 140 mobile applications with over 650,000 downloads in total and is in the process of developing additional mobile applications.
On November 9, 2011, we acquired Thinking Drone, Inc., a developer of iPhone and Android apps under the “Free the Apps” brand. Founded in 2009, Free the Apps has created many highly successful apps, including "Top 10" overall apps featured in iTunes App Store. Their success is not only creating top revenue generating apps but also using that acumen to help other developers get the visibility their apps need in the crowded mobile apps space. Using proven strategies, Free the Apps provides developers with social and online solutions to get their apps in a “top” list and extend their reach to extensive customer base. With almost 40 million downloads and counting, some of Free the Apps highly successful free apps includes Convert Units for Free and Crop for Free.
On January 10, 2012, we acquired DigiSpace Solutions, LLC, an online performance-based advertising company offering a variety of services to assist in the development of a company’s online presence, marketing, tracking and customer management. It provides proprietary web technologies to power online strategies and solutions.
On May 23, 2012, Bitzio, Inc. and Motion Pixel Corporation Holdings entered into a share purchase agreement wherein Bitzio, Inc. acquired all of the issued and outstanding member’s equity in exchange for 6,500,000 shares of the Company's common stock.
On June 4, 2012, Bitzio, Inc. and ACT Smartware GmbH entered into a share purchase agreement wherein Bitzio, Inc. acquired all of the issued and outstanding member’s equity in exchange for 3,300,000 Series A Convertible Redeemable Preferred shares of the Company. On February 22, 2013, the two parties agreed to unwind the transaction by Bitzio returning the ACT shares acquired and ACT returning the Bitzio preferred share consideration for cancellation. In addition, Bitzio agreed to pay an aggregate of 147,000 Euros (US$194,447).
On August 31, 2012, Bitzio, Inc. entered into a sale agreement wherein Bitzio, Inc. disposed of the assets and liabilities related to its information productions division. The accounting loss on disposal was $585,031.
Pursuant to a Termination Agreement executed on February 14, 2013, Bitzio agreed to return 100% ownership of Motion Pixel Corporation Holdings stock purchased on May 23, 2012. Other terms of the agreement include: neither party shall have any further obligations to the other; all stock options granted to all employees, consultants of Motion Pixel and the original vendor shall be deemed void; and in full settlement of any other claims, we agreed to allow the 6,500,000 shares of the company from the initial agreement to remain in possession of the holders subject to resale restrictions. As of December 31, 2012, the Company recorded a loss on disposal of assets of $24,730 and a gain on forgiveness of debt of $311,479 in connection with the termination agreement.
Going Concern
As a result of our financial condition, our auditors have indicated in a footnote to our financial statements of December 31, 2012 describing the uncertainty as to our ability to continue as a going concern. In order to continue as a going concern we must effectively balance many factors and begin to generate revenue so that we can fund our operations from our sales and revenues. If we are not able to do this we may not be able to continue as an operating company. At our current revenue and burn rate, our cash on hand will last approximately seven months. However, there is no assurance that our existing cash flow will be adequate to satisfy our existing operating expenses and capital requirements.
Year ended December 31, 2012 and 2011
Results of Continuing Operations
Introduction
Our revenues from continuing operations for the year ended December 31, 2012 were $421,506, compared to $154,579 for the year ended December 31, 2011. We had very little operations in the first nine months of fiscal 2011, and thus comparisons between 2012 and 2011 are dramatic.
Revenues and Net Operating Income (Loss)
Our revenues, operating expenses, and net loss from continuing operations for the year ended December 31, 2012 and 2011 were as follows:
| | | Year ended | | | Year ended | | | | |
| | | December 31, | | | December 31, | | | Increase / | |
| | | 2012 | | | 2011 | | | (Decrease) | |
| | | | | | | | | | |
| Revenue | | $ | 421,506 | | | $ | 154,579 | | | $ | 173 | % |
| | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | |
| Professional fees | | | 5,318,287 | | | | 5,731,148 | | | | (12 | )% |
| Executive compensation | | | - | | | | 1,910,568 | | | | N/A | |
| General and administrative | | | 1,174,666 | | | | 441,689 | | | | 166 | % |
| Impairment of goodwill and assets | | | 2,881,000 | | | | 2,350,800 | | | | 23 | % |
| Total operating expenses | | | 9,373,953 | | | | 10,433,405 | | | | (10 | )% |
| | | | | | | | | | | | | |
| Loss from continuing operations | | | (8,952,447 | ) | | | (10,278,826 | ) | | | (13 | )% |
| Other expense | | | (25,167 | ) | | | (25,815 | ) | | | (2.5 | )% |
| Taxes | | | - | | | | - | | | | N/A | |
| | | | | | | | | | | | | |
| Net loss from continuing operations | | | (8,977,614 | ) | | | (10,304,641 | ) | | | (13 | )% |
| Loss on disposal of assets,net | | | (585,031 | ) | | | 424,807 | | | | (314 | )% |
| Discontinued operations | | | (611,047 | ) | | | - | | | | N/A | |
| | | | | | | | | | | | | |
| Net loss | | $ | (10,173,692 | ) | | $ | (9,879,834 | ) | | | 3 | % |
Revenues
For the year ended December 31, 2012, we had revenues of $421,506 from continuing operations, compared to $154,579 for the year ended December 31, 2011. The increase in revenues is a result of comparing a full year of sales versus a partial year of sales from the acquisition date.
Operating Expenses
Our operating expenses from continuing operations consisted of professional fees of $5,318,287, and general and administrative expenses of $1,174,666. At the end of June 2012, certain executives agreed to waive $540,000 of earned and unpaid compensation for the year ended December 31, 2012. In addition, certain executives agreed to forfeit 6,553,846 stock options that were previously charged to operations at a valuation of $2,576,727.
In order to manage our cash flow, the Company uses its common stock as consideration in certain transactions. Operating expenses include $1,239,169 (2011 - $5,298,046) of non-cash stock option compensation. In order to attract and retain highly skilled staff for a start-up company in the highly competitive mobile applications industry, we offered stock options at a level necessary to ensure that key skilled resources were retained to meet early development milestones. As we achieve milestones and profitability, it is expected that use of equity incentives will decrease significantly.
Impairment of Intangible Assets
During the years ended December 31, 2011 and 2012, our goodwill impairment test indicated write-downs would be required. Goodwill impairment is calculated as the difference between the fair value of the assets and liabilities of the reporting unit, including the carrying value of its goodwill, to the reporting unit’s fair value, measured by an income approach utilizing projected discounted cash flows.
MPC was a recently incorporated company formed by executives with a variety of experience in the entertainment and technology industries. We acquired MPC for its high-end media and animation capabilities. We also plan to secure digital rights to animated versions of the world-renowned athletes and stars with which MPC has relationships. However, a key criterion of the impairment test is historic operating performance. MPC, the legal entity, had limited operating history at the time of acquisition. As such, according to GAAP, we are required to record a goodwill impairment charge of $2,145,000. During the year ended December 31, 2012, the Company issued 2,000,000 shares of common stock, valued at $295,000, to acquire certain licensing rights for MPC. Our impairment test indicated that future revenues from the acquisition of MPC would not support the carrying value of the recorded intangible assets. As such the Company recorded an impairment charge of $295,000 to reduce the carrying value of the licensing rights to zero.
During the year ended December 31, 2012, our goodwill impairment test indicated that future revenues from the acquisition of Thinking Drone, Inc. would not support the carrying value of the associated goodwill and recorded intangible assets. As such, according to GAAP, the Company was required to record a goodwill impairment charge of $416,000 and an impairment charge to recorded intangible assets of $320,000.
Loss from Operations
Our loss from continuing operations was $8,952,447 for the year ended December 31, 2012, compared to a loss from operations of $10,304,641 for the year ended December 31, 2011.
Other Expense
As of December 31, 2012, the Company recorded a loss on disposal of assets of $24,730 and a gain on forgiveness of debt of $311,479 in connection with the termination agreement.
Discontinued Operations
We had interest expense, debt discount amortization and other financing costs of $628,522 for the year ended December 31, 2012, compared to $24,791 for the year ended December 31, 2011. Offsetting the financing costs was a gain on derivative liability revaluation of $316,606.
On August 31, 2012, we disposed of the net assets of the information productions division resulting in an accounting loss of $585,031. For the eight months ending August 31, 2012, the division incurred a $611,047 loss.
Net Loss
Our net loss for the year ended December 31, 2012 was $10,173,692, compared to a net loss of $9,879,834 for the year ended December 31, 2011. The net loss in both periods included several significant unusual and non-cash charges for goodwill impairment, stock option compensation expense, depreciation, convertible debenture accounting charges, discontinued operations, and professional fees paid with stock.
Subsequent events
At December 31, 2012, the Company recorded $252,605 for stock subscriptions payable, $75,024 of whish has been satisfied subsequent to the year-end through the issuance of 276,954 shares of common stock, leaving a net stock subsciptions payable of $177,582.
During the subsequent period, the Company issued 5,164,621 shares of common stock as payment for accounts and related party payables outstanding at December 31, 2012 at an average price of $0.07 per share. The Company issued 5,163,622 shares of common stock as payment for related party payables outstanding at December 31, 2012 at a price of $0.05 per share. An aggregate of 4,270,044 shares were issued for services and 383,032 shares were issued upon the conversion of convertible debt during the subsequent period.
In accordance with ASC 855-10, the Company’s management has reviewed all material events and there are no other material subsequent events to report.
Non-GAAP Financial Measures
We monitor our performance as a business using adjusted EBITDA, a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss) before financing costs, provision for income taxes, depreciation and amortization, stock-based compensation expense, stock-based service payments, restructuring expenses and asset impairments, interest income and other income (expense), net. Adjusted EBITDA is not a measure of liquidity calculated in accordance with U.S. GAAP, and should be viewed as a supplement to, not a substitute for, our results of operations presented on the basis of U.S. GAAP. Adjusted EBITDA do not purport to represent cash flow provided by, or used in, operating activities as defined by U. S. GAAP. Our statement of cash flows presents our cash flow activity in accordance with U.S. GAAP. Furthermore, Adjusted EBITDA is not necessarily comparable to similarly titled measures reported by other companies.
A reconciliation of Adjusted EBITDA to net income (loss) from continuing operations for the year ended December 31, 2012 follows:
| | | Year ended | | | Year ended | |
| | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
| | | | | | | |
| Net loss | | $ | (10,173,692 | ) | | $ | (9,879,834 | ) |
| Impairment of intangible assets | | | 3,253,699 | | | | 2,350,800 | |
| Stock-based compensation expense | | | 1,239,169 | | | | 6,618,665 | |
| Stock-based service payment | | | 1,872,323 | | | | 945,304 | |
| Financing costs and debt discount amortization, net | | | 350,997 | | | | 18,245 | |
| Depreciation and amortization | | | 218,820 | | | | 29,720 | |
| Loss on disposal of division, net | | | 240,508 | | | | - | |
| Discontinued operations loss (gain) | | | 611,047 | | | | (424,807 | ) |
| | | | | | | | | |
| Adjusted EBITDA | | $ | (2,387,129 | ) | | $ | (341,907 | ) |
We believe Adjusted EBITDA is used by and is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods. We believe that:
| · | EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest expense, taxes, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired; and |
| · | investors commonly use Adjusted EBITDA to eliminate the effect of restructuring and stock-based compensation expenses, which vary widely from company to company and impair comparability. |
We use Adjusted EBITDA:
| · | as a measure of operating performance to assist in comparing performance from period to period on a consistent basis; |
| · | as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations; and |
| · | in communications with the board of directors, stockholders, analysts and investors concerning our financial performance. |
Liquidity and Capital Resources
Introduction
Our principal needs for liquidity have been to fund operating losses, working capital requirements, acquisitions, and debt service. Our principal source of liquidity as of December 31, 2012 consisted of cash of $39,868. We expect that working capital requirements and acquisitions will continue to be our principal needs for liquidity over the near term. Working capital requirements are expected to increase as a result of our anticipated growth, both organically and through future acquisitions.
We have not yet established an ongoing source of revenues sufficient to cover our operating costs and allow us to continue as a going concern. Our ability to continue as a going concern is dependent on obtaining adequate capital to fund operating losses until we become profitable. If we are unable to obtain adequate capital, we could be forced to cease operations. Management's plan is to obtain such resources from management and significant shareholders sufficient to meet our minimal operating expenses and to seek equity and/or debt financing. However management cannot provide any assurances that we will be successful in accomplishing any of our plans.
Our cash, current assets, total assets, current liabilities, and total liabilities as of December 31, 2012 and December 31, 2011, respectively, are as follows:
| | | December 31, | | | December 31, | | | | |
| | | 2012 | | | 2011 | | | Change | |
| | | | | | | | | | |
| Cash | | $ | 39,868 | | | $ | 181,725 | | | $ | 18,034 | |
| Total Current Assets | | | 117,514 | | | | 1,553,595 | | | | (1,076,762 | ) |
| Total Assets | | | 309,553 | | | | 2,763,153 | | | | (834,530 | ) |
| Total Current Liabilities | | | 2,024,046 | | | | 829,024 | | | | 155,388 | |
| Total Liabilities | | | 2,024,046 | | | | 829,024 | | | | 155,388 | |
Our cash decreased to $39,868 as of December 31, 2012 from $181,725 as of December 31, 2011 as a result of our operating activities. Total current assets decreased as prepaid acquisition costs at December 31, 2011 were re-classified to intangible assets upon the successful completion of the acquisition of Digispace Solutions, LLC on January 10, 2012. Our liabilities have increased as we issued $801,500 of notes payable.
Cash Requirements
We had cash available as of December 31, 2012 of $39,868. Based on our current revenues, cash on hand, and negative working capital position, we will need to continue to raise money from the sales of our securities to fund operations.
Sources and Uses of Cash
Operations
Our net cash used in continuing operating activities was $1,979,243 for the year ended December 31, 2012, compared to $95,546 for the year ended December 31, 2011. The increased use is a result of the activities to develop our mobile applications and obtain media license rights. Net cash provided by discontinued operating activities was $901,049 which resulted in net cash used in operating activities of $1,078,194.
For the year ended December 31, 2012, our net cash used in operating activities consisted of our net loss of $10,173,692, offset primarily by intangible asset impairment of $2,958,699, stock options issued for services of $1,239,169, depreciation of $218,820, net convertible debenture accounting charges of $292,558, net accounting loss on asset disposal of $240,508, common shares issued for services of $2,167,323, and cash provided by discontinued operating activities of $901,049.
Investments
Our net cash provided by investing activities was $10,370 for the year ended December 31, 2012, compared to a use of cash of $330,917 for the prior year related to corporate acquisition activity for the year ended December 31, 2011.
Financing
Our net cash provided by continuing financing activities was $1,138,480 for the year ended December 31, 2012, compared to $590,120 for the year ended December 31, 2011.
For the year ended December 31, 2012, our net cash provided by financing activities consisted primarily of proceeds from the sale of common stock of $450,000, the issuance of convertible notes and notes payable of $801,500 and the proceeds from the sale of preferred stock of $5,108, offset in part by repayments on notes payable to related parties of $91,878 and repayment of other debt of $26,250.
For the year ended December 31, 2011, our net cash provided by financing activities consisted primarily of proceeds from the sale of common stock of $250,000, the issuance of convertible notes of $232,500 and the proceeds from stock subscription of $186,000, offset in part by repayments on notes payable to related parties of $78,380.
Cash used in discontinued investing activities for the year ended December 31, 2012 was $212,513 related to the repayment of various notes payable during the year.
Contractual obligations and other commitments
We have no commitments under operating leases or rental agreements.
Off-balance sheet arrangements
As of December 31, 2012, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital resources that are material to investors.
Critical accounting policies and estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions.
The following critical accounting policies are those accounting policies that, in our view, are most important in the portrayal of our financial condition and results of operations. Our critical accounting policies and estimates include those involved in recognition of revenue, business combinations, valuation of goodwill, valuation of long-lived and intangible assets, provision for income taxes, and accounting for stock-based compensation. Note 3 to our financial statements included elsewhere in this annual report on Form 10-K provides additional information about these critical accounting policies, as well as our other significant accounting policies.
Revenue Recognition
We derive our revenues from the sale of software and mobile applications through various platforms. We recognize revenue when all of the following conditions are satisfied: (i) there is persuasive evidence of an arrangement; (ii) delivery of the product or provision of the service has occurred; (iii) the fee is fixed or determinable; and (iv) collectability of the fee is reasonably assured.
Mobile phone applications are sold using multiple platforms. Each platform handles the sale, distribution or download, as well as the collection and remittance of payment for the company. We recognize mobile application revenue net of the amounts retained by the platform companies. There is no warranty or money-back guarantee related to the sale of mobile phone applications, therefore no deferred revenue or allowance for sales returns has been recorded.
Business acquisitions
Business acquisitions are accounted for under the purchase method of accounting. Under that method, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of the acquisition, with any excess of the cost of the acquisition over the estimated fair value of the net tangible and intangible assets acquired recorded as goodwill. We make significant judgments and assumptions in determining the fair value of acquired assets and assumed liabilities, especially with respect to acquired intangibles. Using different assumptions in determining fair value could materially impact the purchase price allocation and our financial position and results of operations. Results of operations for acquired businesses are included in the consolidated financial statements from the date of acquisition.
Goodwill
Goodwill represents the excess of the purchase price of an acquired enterprise or assets over the fair value of the identifiable net assets acquired. We test goodwill for impairment in each quarter of the year, and whenever events or changes in circumstances arise during the year that indicate the carrying amount of goodwill may not be recoverable. In evaluating whether an impairment of goodwill exists, we first compare the estimated fair value of a reporting unit against its carrying value. If the estimated fair value is lower than the carrying value, then a more detailed assessment is performed comparing the fair value of the reporting unit to the fair value of the assets and liabilities plus the goodwill carrying value of the reporting unit. If the fair value of the reporting unit is less than the fair value of its assets and liabilities plus goodwill, then an impairment charge is recognized to reduce the carrying value of goodwill by the difference. The gross amount of goodwill at December 31, 2012 was $5,045,235 (December 31, 2011 - $2,977,934) with accumulated impairment of $4,911,800 (December 31, 2011 - $2,350,800). The net amount of goodwill at December 31, 2012 was $133,435 (December 31, 2011 - $627,134).
During the year ended December 31, 2012, we recorded an impairment charge totaling $2,561,000 related to purchased goodwill whose carrying amount exceeded its implied fair value (December 31, 2011 - $2,350,800).
Long-Lived Assets
Long-lived assets include equipment and intangible assets other than those with indefinite lives. We assess the carrying value of our long-lived asset groups when indicators of impairment exist and recognize an impairment loss when the carrying amount of a long-lived asset is not recoverable from the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Indicators of impairment include significant underperformance relative to historical or projected future operating results, significant changes in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability of the carrying value of the asset (or asset group) based on an undiscounted cash flow analysis. If carrying value exceeds projected, net, undiscounted cash flows, an additional analysis is performed to determine the fair value of the asset (or asset group), typically a discounted cash flow analysis, and an impairment charge is recorded for the excess of carrying value over fair value.
Property and equipment are recorded at historical cost less accumulated depreciation, unless impaired. Depreciation is charged to operations over the estimated useful lives of the assets using the straight-line. Upon retirement or sale, the historical cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized. Expenditures for repairs and maintenance are charged to expense as incurred.
Income Taxes
We utilize the balance sheet method of accounting for income taxes. Accordingly, we are required to estimate our income taxes in each of the jurisdictions in which we operate as part of the process of preparing our consolidated financial statements. This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Due to the evolving nature and complexity of tax rules, it is possible that our estimates of our tax liability could change in the future, which may result in additional tax liabilities and adversely affect our results of operations, financial condition and cash flows.
Stock-based compensation
We measure and recognize stock-based compensation expense using a fair value-based method for all share-based awards made to employees and nonemployee directors, including grants of stock options and other stock-based awards. The application of this standard requires significant judgment and the use of estimates, particularly with regard to Black-Scholes assumptions such as stock price volatility and expected option lives to value equity-based compensation. We recognize stock compensation expense using a straight-line method over the vesting period of the individual grants.
Recent accounting pronouncements
The Company has evaluated recent pronouncements and does not expect their adoption to have a material impact on the Company’s financial position, or statements.
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company we are not required to provide the information required by this Item.
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| Report of Independent Registered Public Accounting Firm | | | F-1 | |
| | | | | |
| Consolidated Balance Sheets as of December 31, 2012 and 2011 (Audited) | | | F-2 | |
| | | | | |
| Consolidated Statements of Operations for the years ended December 31, 2012 and 2011 (Audited) | | | F-3 | |
| | | | | |
| Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2012 and 2011 (Audited) | | | F-4 | |
| | | | | |
| Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011 (Audited) | | | F-5 | |
| | | | | |
| Consolidated Notes to Financial Statements | | | F-7 | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Bitzio, Inc.
We have audited the accompanying balance sheets of Bitzio, Inc. as of December 31, 2012 and the related statements of operations, stockholders’ deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bitzio, Inc. as of December 31, 2012, and the results of their operations and cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company had accumulated losses of $20,275,632 for the period from inception through December 31, 2012 which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Sadler, Gibb & Associates, LLC
Salt Lake City, UT
April 11, 2013
BITZIO, INC.
CONSOLIDATED BALANCE SHEETS
| | December 31, | | December 31, | |
| | 2012 | | 2011 | |
| | | | | | |
| ASSETS | |
| | | | | | | |
| CURRENT ASSETS | | | | | | |
| Cash | | $ | 39,868 | | | $ | 181,725 | |
| Accounts receivable, net | | | 14,807 | | | | 92,232 | |
| Prepaid expenses and other current assets | | | 62,839 | | | | 337,508 | |
| Due from related parties | | | - | | | | 228,980 | |
| Prepaid acquisition costs | | | - | | | | 713,150 | |
| | | | | | | | | |
| Total current assets | | | 117,514 | | | | 1,553,595 | |
| | | | | | | | | |
| OTHER ASSETS | | | | | | | | |
| Intangible assets, net | | | 58,604 | | | | 582,424 | |
| Goodwill | | | 133,435 | | | | 627,134 | |
| | | | | | | | | |
| Total other assets | | | 192,039 | | | | 1,209,558 | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 309,553 | | | $ | 2,763,153 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | |
| | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 561,914 | | | $ | 253,976 | |
| Related party payables | | | 376,780 | | | | - | |
| Deferred revenue | | | - | | | | 77,433 | |
| Notes payable, related parties | | | 343,244 | | | | 426,870 | |
| Notes payable | | | 249,446 | | | | | |
| Convertible notes, related parties, net of discount | | | 64,953 | | | | 5,068 | |
| Convertible notes, net of discount | | | 203,337 | | | | 65,677 | |
| Derivative liability, related party | | | 72,152 | | | | - | |
| Derivative liability | | | 152,220 | | | | - | |
| | | | | | | | | |
| TOTAL CURRENT LIABILITIES | | | 2,024,046 | | | | 829,024 | |
| | | | | | | | | |
| STOCKHOLDERS' EQUITY (DEFICIT) | | | | | | | | |
| Preferred stock, $0.001 par value; 25,000,000 shares | | | | | | | | |
| authorized; 2,043,120 and -0- shares issued | | | | | | | | |
| and outstanding, respectively | | | 2,043 | | | | - | |
| Common stock, $0.001 par value; 250,000,000 shares | | | | | | | | |
| authorized; 69,923,970 and 50,018,625 shares issued | | | | | | | | |
| and outstanding, respectively | | | 69,924 | | | | 50,019 | |
| Additional paid-in capital | | | 18,236,567 | | | | 11,800,050 | |
| Stock subscriptions payable | | | 252,605 | | | | 186,000 | |
| Accumulated deficit | | | (20,275,632 | ) | | | (10,101,940 | ) |
| | | | | | | | | |
| Total stockholders’ equity (deficit) | | | (1,714,493 | ) | | | 1,934,129 | |
| | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | $ | 309,553 | | | $ | 2,763,153 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | For the Years Ended | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
| REVENUES | | $ | 421,506 | | | $ | 154,579 | |
| | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | |
| Professional fees | | | 5,023,287 | | | | 5,731,148 | |
| Executive compensation | | | - | | | | 1,910,568 | |
| General and administrative | | | 1,174,666 | | | | 441,689 | |
| Impairment of intangible assets | | | 3,176,000 | | | | 2,350,000 | |
| Total Operating Expenses | | | 9,373,953 | | | | 10,433,405 | |
| | | | | | | | | |
| LOSS FROM OPERATIONS | | | (8,952,447 | ) | | | (10,278,826 | ) |
| | | | | | | | | |
| OTHER EXPENSES | | | | | | | | |
| Loss on disposal of assets | | | (24,730 | ) | | | (1,024 | ) |
| Gain on forgiveness of debt | | | 311,479 | | | | - | |
| Interest expense | | | (628,522 | ) | | | (24,791 | ) |
| Gain on derivative liability | | | 316,606 | | | | - | |
| | | | | | | | | |
| Total Other Expenses | | | (25,167 | ) | | | (25,815 | ) |
| | | | | | | | | |
| LOSS BEFORE INCOME TAXES | | | (8,977,614 | ) | | | (10,304,641 | ) |
| PROVISION FOR INCOME TAXES | | | - | | | | - | |
| | | | | | | | | |
| NET LOSS FROM CONTINUING OPERATIONS | | $ | (8,977,614 | ) | | $ | (10,304,641 | ) |
| Loss (gain) from discontinued operations | | | (611,047 | ) | | | 424,807 | |
Loss on disposal of discontinued operations, net | | | (585,031 | ) | | | - | |
| | | | | | | | | |
| Loss from Discontinued Operations, net of income taxes | | | (1,196,078 | ) | | | 424,807 | |
| | | | | | | | | |
| NET LOSS | | $ | (10,173,692 | ) | | $ | (9,879,834 | ) |
| | | | | | | | | |
| BASIC AND DILUTED LOSS PER SHARE | | | | | | | | |
| FROM CONTINUING OPERATIONS | | $ | (0.15 | ) | | $ | (0.28 | ) |
| | | | | | | | | |
| BASIC AND DILUTED LOSS PER SHARE | | | | | | | | |
| FROM DISCONTINUED OPERATIONS | | $ | (0.02 | ) | | $ | 0.01 | |
| | | | | | | | | |
| BASIC AND DILUTED WEIGHTED AVERAGE | | | | | | | | |
| NUMBER OF SHARES OUTSTANDING | | | 59,893,730 | | | | 37,157,546 | |
The accompanying notes are an integral part of these consolidated financial statements.
BITZIO, INC.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
| | | Preferred Stock | | | Common Stock | | | Additional | | | Stock | | | Accumulated | | | | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Payable | | | Deficit | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2010 | | | - | | | $ | - | | | | 33,000,000 | | | $ | 33,000 | | | $ | 208,450 | | | $ | - | | | $ | (222,106 | ) | | $ | 19,344 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for cash | | | - | | | | - | | | | 2,500,000 | | | | 2,500 | | | | 247,500 | | | | - | | | | - | | | | 250,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for services | | | - | | | | - | | | | 4,158,625 | | | | 4,159 | | | | 941,145 | | | | - | | | | - | | | | 945,304 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock and options issued for acquisitions | | | - | | | | - | | | | 10,000,000 | | | | 10,000 | | | | 3,603,150 | | | | - | | | | - | | | | 3,613,150 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common shares issued for convertible debt | | | - | | | | - | | | | 360,000 | | | | 360 | | | | 179,640 | | | | - | | | | - | | | | 180,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock-based compensation expense | | | - | | | | - | | | | - | | | | - | | | | 6,618,665 | | | | - | | | | - | | | | 6,618,665 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Services contributed by officers and shareholders | | | - | | | | - | | | | - | | | | - | | | | 1,500 | | | | - | | | | - | | | | 1,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock subscription payable | | | - | | | | - | | | | - | | | | - | | | | - | | | | 186,000 | | | | - | | | | 186,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss for the year ended December 31, 2011 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (9,879,834 | ) | | | (9,879,834 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2011 | | | - | | | $ | - | | | | 50,018,625 | | | $ | 50,019 | | | $ | 11,800,050 | | | $ | 186,000 | | | $ | (10,101,940 | ) | | $ | 1,934,129 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred stock issued for cash | | | 2,043,120 | | | | 2,043 | | | | - | | | | - | | | | 3,065 | | | | - | | | | - | | | | 5,108 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for cash and warrants | | | - | | | | - | | | | 1,800,000 | | | | 1,800 | | | | 448,200 | | | | - | | | | - | | | | 450,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for services | | | - | | | | - | | | | 7,389,595 | | | | 7,389 | | | | 1,524,736 | | | | 252,605 | | | | - | | | | 1,784,730 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock and options issued for acquisitions | | | - | | | | - | | | | 6,500,000 | | | | 6,500 | | | | 2,138,500 | | | | - | | | | - | | | | 2,145,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common shares issued for convertible debt | | | - | | | | - | | | | 1,471,750 | | | | 1,472 | | | | 175,050 | | | | - | | | | - | | | | 176,522 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock-based compensation expense | | | - | | | | - | | | | - | | | | - | | | | 1,239,169 | | | | - | | | | - | | | | 1,239,169 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common shares issued for acquisition of license agreement | | | - | | | | - | | | | 2,000,000 | | | | 2,000 | | | | 293,000 | | | | - | | | | - | | | | 295,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common shares issued to satisfy prior year stock subscription obligation | | | - | | | | - | | | | 744,000 | | | | 744 | | | | 185,256 | | | | (186,000 | ) | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Debt discounts on convertible notes payable | | | - | | | | - | | | | - | | | | - | | | | 429,541 | | | | - | | | | - | | | | 429,541 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss for the year ended December 31, 2012 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (10,173,692 | ) | | | (10,173,692 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2012 | | | 2,043,120 | | | $ | 2,043 | | | | 69,923,970 | | | $ | 69,924 | | | $ | 18,236,567 | | | $ | 252,605 | | | $ | (20,275,632 | ) | | $ | (1,714,493 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
BITZIO, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | For the Years Ended | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Net Loss | | $ | (10,173,692 | ) | | $ | (9,879,834 | ) |
Adjustments to reconcile net loss to net cash used in | | | | | | | | |
| operating activities: | | | | | | | | |
| Services contributed by officers and shareholders | | | - | | | | 1,500 | |
| Depreciation and amortization | | | 218,820 | | | | 29,720 | |
| Expenses paid on behalf of the Company by a related party | | | - | | | | 5,000 | |
| Gain on forgiveness of debt | | | (331,749 | ) | | | - | |
| Loss on disposal of assets, net | | | 585,031 | | | | 1,023 | |
| Origination interest recorded on convertible notes | | | 258,167 | | | | - | |
| Amortization of debt discounts on convertible notes | | | 350,997 | | | | 18,245 | |
| Gain on derivative liability | | | (316,606 | ) | | | - | |
| Common shares issued for services | | | 1,784,730 | | | | 945,304 | |
| Impairment of intangible assets | | | 3,176,000 | | | | 2,350,800 | |
| Stock options issued for services | | | 1,239,169 | | | | 6,618,665 | |
| Notes payable executed for consulting services | | | 194,446 | | | | - | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | 174,230 | | | | (179,880 | ) |
| Prepaid expenses | | | 234,669 | | | | (337,400 | ) |
| Due from related parties | | | 723,963 | | | | - | |
| Accounts payable and accrued expenses | | | (84,910 | ) | | | 253,878 | |
| Deferred revenue | | | (77,433 | ) | | | 77,433 | |
| Net Cash Used in Continuing Operating Activities | | | (2,019,170 | ) | | | (95,546 | ) |
| Net Cash Provided by Discontinued Operating Activities | | | 940,976 | | | | - | |
| Net Cash Used in Operating Activities | | | (1,078,194 | ) | | | (95,546 | ) |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| Cash acquired in acquisition of subsidiary | | | 12,830 | | | | 1,260 | |
| Cash paid in disposition of subsidiary | | | (2,460 | ) | | | - | |
| Cash paid for prepaid acquisition costs | | | - | | | | (200,000 | ) |
| Cash advances made in advance of acquisition | | | - | | | | (132,177 | ) |
| Net Cash Provided by Continuing Investing Activities | | | 10,370 | | | | (330,917 | ) |
| Net Cash Provided by Discontinued Investing Activities | | | - | | | | - | |
| Net Cash Provided by Investing Activities | | | 10,370 | | | | (330,917 | ) |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Proceeds from notes payable - related parties | | | 300,000 | | | | - | |
| Repayments on notes payable,net - related parties | | | (91,878 | ) | | | (78,380 | ) |
| Proceeds from convertible notes payable - related parties | | | - | | | | 50,000 | |
| Repayments on convertible debenture | | | (26,250 | ) | | | - | |
| Proceeds from sale of common stock and warrants | | | 450,000 | | | | 250,000 | |
| Proceeds from sale of preferred stock | | | 5,108 | | | | - | |
| Proceeds from note payable | | | 501,500 | | | | 182,500 | |
| Proceeds from stock subscription payable | | | - | | | | 186,000 | |
| Net Cash Provided by Continuing Financing Activities | | | 1,138,480 | | | | 590,120 | |
| Net Cash Provided by Discontinued Financing Activities | | | (212,513 | ) | | | - | |
| Net Cash Provided by Financing Activities | | | 925,967 | | | | 590,120 | |
| | | | | | | | | |
| NETINCREASE (DECREASE) IN CASH | | | (141,857 | ) | | | 163,657 | |
| CASH AT BEGINNING OF YEAR | | | 181,725 | | | | 18,068 | |
| | | | | | | | | |
| CASH AT END OF YEAR | | $ | 39,868 | | | $ | 181,725 | |
| | | | | | | | | |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | | | | | | |
| | | | | | | | | |
| CASH PAID FOR: | | | | | | | | |
| Interest | | $ | 3,626 | | | $ | 225 | |
| Income taxes | | $ | - | | | $ | - | |
| | | | | | | | | |
| NON-CASH FINANCING AND INVESTING ACTIVITIES | | | | | | | | |
| Acquisition of subsidiaries | | $ | 3,743,677 | | | $ | 4,113,150 | |
| Transfer of accounts payable to notes payable | | $ | 23,422 | | | $ | - | |
| Debt discounts on convertible notes payable | | $ | 429,541 | | | $ | - | |
| Issuance of common stock on debenture conversion | | $ | 176,520 | | | $ | 180,000 | |
| Common stock issued for stock subscriptions payable | | $ | 186,000 | | | $ | - | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
BITZIO, INC.Notes to Consolidated Financial Statements December 31, 2012 and 2011
NOTE 1 – ORGANIZATION
Bitzio, Inc. was originally formed as Rocky Mountain Fudge Company, Inc. (“the Company,” “we”) on January 4, 1990 as a Utah corporation. On July 28, 1998, the Company converted from a Utah corporation to a Nevada corporation. Effective June 10, 2011, the Company changed its name from Rocky Mountain Fudge Company, Inc. to Bitzio, Inc. Pursuant to this transaction, shares of the Company’s common stock are now trading under the Company’s new trading symbol, BTZO. Bitzio, Inc. is focused on smartphone applications. Bitzio licenses media rights of sports and entertainment properties to create mobile apps and web experiences for fans of these properties.
On July 27, 2011, Bitzio, Inc. and Bitzio, LLC. entered into share exchange agreement wherein Bitzio, Inc. issued 5,000,000 shares of the Company's common stock in exchange for 100% of the members' equity of Bitzio, LLC. Through this transaction Bitzio, LLC became a wholly owned subsidiary of Bitzio, Inc.
On November 9, 2011 Bitzio, Inc. and Thinking Drone, Inc., entered into a share exchange agreement wherein Bitzio, Inc. acquired all of the issued and outstanding stock of Thinking Drone, Inc. Bitzio, Inc. received all of the outstanding shares of Thinking Drone in exchange for a $500,000 promissory note and 5,000,000 shares of Bitzio, Inc. common stock. Through this transaction Thinking Drone, Inc. became a wholly-owned subsidiary of Bitzio, Inc.
On January 10, 2012, Bitzio, Inc. and DigiSpace Solutions, LLC entered into a share exchange agreement wherein Bitzio, Inc. acquired all of the issued and outstanding member’s equity in exchange for $200,000 cash and 1,000,000 restricted stock options at an exercise price of $0.28 per share valued at $513,150. Through this transaction DigiSpace Solutions, LLC became a wholly owned subsidiary of Bitzio, Inc.
On May 23, 2012, Bitzio, Inc. and Motion Pixel Corporation Holdings entered into a share purchase agreement wherein Bitzio, Inc. acquired all of the issued and outstanding member’s equity in exchange for 6,500,000 shares of the Company's common stock valued at $2,145,000.
On June 4, 2012, Bitzio, Inc. and ACT Smartware GmbH (“ACT”) entered into a share purchase agreement wherein Bitzio, Inc. acquired all of the issued and outstanding member’s equity in exchange for 3,300,000 Series A Convertible Redeemable Preferred shares of the Company valued at $2,084,231. On February 22, 2013, the two parties agreed to unwind the transaction by Bitzio returning the ACT shares acquired and ACT returning the Bitzio preferred share consideration for cancellation. In addition, Bitzio agreed to pay an aggregate of 147,000 Euros (US$194,447).
On August 31, 2012, Bitzio, Inc. entered into a sale agreement wherein Bitzio, Inc. disposed of the assets and liabilities related to its information productions division. The accounting loss on disposal was $585,031 (see Note 6).
Pursuant to a Termination Agreement executed on February 14, 2013, Bitzio agreed to return 100% ownership of Motion Pixel Corporation Holdings stock purchased on May 23, 2012. Other terms of the agreement include: neither party shall have any further obligations to the other; all stock options granted to all employees, consultants of Motion Pixel and the original vendor shall be deemed void; and in full settlement of any other claims, we agreed to allow the 6,500,000 shares of the company from the initial agreement to remain in possession of the holders subject to resale restrictions. The Company recorded a loss on disposal of assets of $24,730 and a gain on forgiveness of debt in connection with the termination agreement of $311,479.
BITZIO, INC.
Notes to Consolidated Financial Statements December 31, 2012 and 2011
NOTE 2 – GOING CONCERN
The Company's financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management's plan is to obtain such resources for the Company by seeking equity and/or debt financing. However management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. Intercompany balances and transactions have been eliminated upon consolidation.
In June 2011, we effected a four-for-one forward-split of the shares of our common stock. All references to common stock activity in these financial statements have been retroactively restated so as to incorporate the effects of this stock-split.
Use of Estimates
The preparation of consolidated financial statements in conformity with the generally accepted accounting principles in the United States (“U.S. GAAP”) requires management to make estimates and assumptions in certain circumstances that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates include, but are not limited to, the recognition of certain, valuation of intangible assets, goodwill and long-lived asset impairment charges, stock-based compensation, loss contingencies and the allowance for doubtful accounts receivable. Actual results could differ from those estimates.
Revenue Recognition
We derive our revenues from the sale of software and mobile applications through various platforms. We recognize revenue when all of the following conditions are satisfied: (i) there is persuasive evidence of an arrangement; (ii) delivery of the product or provision of the service has occurred; (iii) the fee is fixed or determinable; and (iv) collectability of the fee is reasonably assured.
BITZIO, INC.Notes to Consolidated Financial Statements December 31, 2012 and 2011
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Mobile Phone Applications
Mobile phone applications are sold using multiple platforms. Each platform handles the sale, distribution or download, as well as the collection and remittance of payment for the company. We recognize mobile application revenue net of the amounts retained by the platform companies. There is no warranty or money-back guarantee related to the sale of mobile phone applications, therefore no deferred revenue or allowance for sales returns has been recorded.
Cash and Cash Equivalents
We consider all highly liquid investments with remaining maturities of three months or less at the date of purchase to be cash and cash equivalents. Cash and cash equivalents consist primarily of money market funds and other short-term investments with original maturities of not more than three months stated at cost, which approximates market value.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are presented at their face amount, less an allowance for doubtful accounts, on the consolidated balance sheets. Accounts receivable consist of revenue earned and currently due from customers. We evaluate the collectability of accounts receivable based on a combination of factors. We recognize reserves for bad debts based on estimates developed using standard quantitative measures that incorporate historical write-offs and current economic conditions.
Long-Lived Assets
Long-lived assets include equipment and intangible assets other than those with indefinite lives. We assess the carrying value of our long-lived asset groups when indicators of impairment exist and recognize an impairment loss when the carrying amount of a long-lived asset is not recoverable from the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Indicators of impairment include significant underperformance relative to historical or projected future operating results, significant changes in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability of the carrying value of the asset (or asset group) based on an undiscounted cash flow analysis. If carrying value exceeds projected, net, undiscounted cash flows, an additional analysis is performed to determine the fair value of the asset (or asset group), typically a discounted cash flow analysis, and an impairment charge is recorded for the excess of carrying value over fair value. The Company recorded impairment expense on long-lived intangible assets of $615,000 and $-0- during the years ended December 31, 2012 and 2011, respectively.
Property and equipment are recorded at historical cost less accumulated depreciation, unless impaired. Depreciation is charged to operations over the estimated useful lives of the assets using the straight-line. Upon retirement or sale, the historical cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized. Expenditures for repairs and maintenance are charged to expense as incurred.
BITZIO, INC.Notes to Consolidated Financial Statements December 31, 2012 and 2011
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill
Goodwill represents the excess of the purchase price of an acquired enterprise or assets over the fair value of the identifiable net assets acquired. We test goodwill for impairment annually and whenever events or changes in circumstances arise during the year that indicate the carrying amount of goodwill may not be recoverable. In evaluating whether an impairment of goodwill exists, we first compare the estimated fair value of a reporting unit against its carrying value. If the estimated fair value is lower than the carrying value, then a more detailed assessment is performed comparing the fair value of the reporting unit to the fair value of the assets and liabilities plus the goodwill carrying value of the reporting unit. If the fair value of the reporting unit is less than the fair value of its assets and liabilities plus goodwill, then an impairment charge is recognized to reduce the carrying value of goodwill by the difference. The gross amount of goodwill at December 31, 2012 was $5,045,235 (December 31, 2011 - $2,977,934) with accumulated impairment of $4,911,800 (Decemer 31, 2011 - $2,350,800). The net amount of goodwill at December 31, 2012 was $133,435 (December 31, 2011 - $627,134).
During the year ended December 31, 2012, we recorded an impairment charge totaling $2,561,000 related to purchased goodwill whose carrying amount exceeded its implied fair value (December 31, 2011 - $2,350,800).
Software Development Costs
We capitalize costs incurred during the application development stage relating to the development of our mobile applications. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. We capitalized $295,000 and $-0- in software development costs for the years ended December 31, 2012 and 2011, respectively. Once placed into service, we anticipate amortizing these costs over a period of three years. At December 31, 2012, our asset impairment assessment resulted in an impairment of the full carrying value of capitalized software costs of $295,000. Prior to 2011, costs incurred during the application development stage were not material and were expensed as incurred.
Business Acquisitions
Business acquisitions are accounted for under the purchase method of accounting. Under that method, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of the acquisition, with any excess of the cost of the acquisition over the estimated fair value of the net tangible and intangible assets acquired recorded as goodwill. We make significant judgments and assumptions in determining the fair value of acquired assets and assumed liabilities, especially with respect to acquired intangibles. Using different assumptions in determining fair value could materially impact the purchase price allocation and our financial position and results of operations. Results of operations for acquired businesses are included in the consolidated financial statements from the date of acquisition.
Accumulated Other Comprehensive Income
Comprehensive loss includes net loss as currently reported under U.S. GAAP and other comprehensive loss. Other comprehensive loss considers the effects of additional economic events, such as foreign currency translation adjustments, that are not required to be recorded in determining net loss, but rather are reported as a separate component of stockholders’ equity (deficit).
BITZIO, INC.Notes to Consolidated Financial Statements December 31, 2012 and 2011
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation
We measure and recognize stock-based compensation expense using a fair value-based method for all share-based awards made to employees and nonemployee directors, including grants of stock options and other stock-based awards. The application of this standard requires significant judgment and the use of estimates, particularly with regard to Black-Scholes assumptions such as stock price volatility and expected option lives to value equity-based compensation. We recognize stock compensation expense using a straight line method over the vesting period of the individual grants.
Income Taxes
We utilize the balance sheet method of accounting for income taxes. Accordingly, we are required to estimate our income taxes in each of the jurisdictions in which we operate as part of the process of preparing our consolidated financial statements. This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Due to the evolving nature and complexity of tax rules, it is possible that our estimates of our tax liability could change in the future, which may result in additional tax liabilities and adversely affect our results of operations, financial condition and cash flows.
Basic and Diluted Net Loss per Common Share
Basic and diluted net loss per share attributable to common stockholders is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Our potentially dilutive shares, which include outstanding common stock options, common stock warrants and convertible debentures, have not been included in the computation of diluted net loss per share attributable to common stockholders for all periods presented, as the results would be anti-dilutive. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share. There were 3,426,897 such potentially dilutive shares excluded as of December 31, 2012.
Fair Value of Financial Instruments
The fair value accounting guidance defines fair value 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.” The definition is based on an exit price rather than an entry price, regardless of whether the entity plans to hold or sell the asset. This guidance also establishes a fair value hierarchy to prioritize inputs used in measuring fair value as follows:
| · | Level 1: Observable inputs such as quoted prices in active markets; |
| | |
| · | Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and |
| · | Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
The carrying value of recorded assets and liabilities are considered to approximate their fair value due to their short-term nature. Marketable securities are remeasured at each reporting period based on quoted prices in active markets.
BITZIO, INC.Notes to Consolidated Financial Statements December 31, 2012 and 2011
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments (Continued)
As of December 31, 2012 and December 31, 2011, cash and cash equivalents were comprised of cash in bank accounts and money market funds totaling $39,868 and $181,725, respectively. In addition, the carrying amount of certain financial instruments, including accounts receivable, accounts payable and accrued expenses approximates fair value due to their short maturities. Derivative liabilities are valued using level 1 inputs.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, to the extent balances exceed limits that are insured by the Federal Deposit Insurance Corporation, and accounts receivable.
At December 31, 2012, two customers comprised more than 67 percent of accounts receivable. At December 31, 2011, one customer comprised 85 percent of accounts receivable.
Recent Accounting Pronouncements
The Company has evaluated recent pronouncements and does not expect their adoption to have a material impact on the Company’s financial position, or statements.
NOTE 4 – ACQUISITION OF SUBSIDIARIES
DigiSpace Solutions, LLC Acquisition
On January 10, 2012, Bitzio Inc. and DigiSpace Solutions, LLC entered into a share exchange agreement wherein Bitzio, Inc. acquired all of the issued and outstanding members’ equity in exchange for $200,000 in cash and 1,000,000 restricted stock options at an exercise price of $0.28 per share valued, using the Black-Scholes option pricing model, at $513,150. Through this transaction DigiSpace Solutions, LLC became a wholly owned subsidiary of Bitzio, Inc.
The assets and liabilities of DigiSpace Solutions, LLC as of the acquisition date were recorded at their estimated fair value. The allocation of the purchase price was as follows:
| Cash and cash equivalents | | $ | 12,830 | |
| Customer List | | | 1,381,545 | |
| Total assets acquired | | | 1,394,375 | |
| | | | | |
| Accounts payable | | | 501,706 | |
| Deferred revenue | | | 35,523 | |
| Notes payable | | | 143,996 | |
| Total liabilities acquired | | | 681,225 | |
| Net assets acquired | | $ | 713,150 | |
BITZIO, INC.Notes to Consolidated Financial Statements December 31, 2012 and 2011
NOTE 4 – ACQUISITION OF SUBSIDIARIES (CONTINUED)
Motion Pixel Corporation Holdings Acquisition
On May 23, 2012, Bitzio, Inc. and Motion Pixel Corporation Holdings entered into a share purchase agreement wherein Bitzio, Inc. acquired all of the issued and outstanding member’s equity in exchange for 6,500,000 shares of the Company's common stock valued at $2,145,000.
The assets and liabilities of Motion Pixel Corporation Holdings as of the acquisition date will be recorded at their estimated fair value. The allocation of the purchase price was as follows:
| Equipment | | $ | 60,000 | |
| Goodwill | | | 2,145,000 | |
| Total assets acquired | | | 2,205,000 | |
| | | | | |
| Accounts payable | | | 60,000 | |
| Total liabilities acquired | | | 60,000 | |
| Net assets acquired | | $ | 2,145,000 | |
ACT Smartware GmbH Acquisition
On June 4, 2012, Bitzio, Inc. and ACT Smartware GmbH (“ACT”) entered into a share purchase agreement wherein Bitzio, Inc. acquired all of the issued and outstanding member’s equity in exchange for 3,300,000 Series A Convertible Redeemable Preferred shares of the Company valued at $2,084,231.
On February 22, 2013, the two parties agreed to unwind the transaction by Bitzio returning the ACT shares acquired and ACT returning the Bitzio preferred share consideration for cancellation. In addition, Bitzio agreed to pay an aggregate of 147,000 Euros (US$194,447) to ACT.
NOTE 5 – DISPOSAL OF DIVISION
Discontinued Operations
On August 31, 2012, Bitzio Inc. disposed of the assets and liabilities related to its information productions division as the Company focused its business strategy on the mobile applications segment.
| Cash and cash equivalents | | $ | 2,460 | |
| Customer List, nett | | | 1,049,872 | |
| Total assets disposed | | | 1,052,332 | |
| | | | | |
| Accounts payable | | | 352,658 | |
| Notes payable | | | 114,643 | |
| Total liabilities disposed | | | 467,301 | |
| Net loss on disposal of division | | $ | 585,031 | |
| Revenue | | $ | 776,521 | |
| Notes payable | | | (1,387,568 | ) |
| Loss from discontinued operations | | $ | (611,047 | ) |
BITZIO, INC.Notes to Consolidated Financial Statements December 31, 2012 and 2011
NOTE 5 – DISPOSAL OF DIVISION (CONTINUED)
Disposal of Assets
Pursuant to a termination agreement executed on February 14, 2013, Bitzio agreed to return 100% ownership of Motion Pixel Corporation Holdings (“MPC”) stock purchased on May 23, 2012. As the terms of this agreement were substantially agreed to and that all operations with MPC were terminated prior to the close of the 2012 fiscal year, the Company recorded a loss on disposal of assets of $24,730 and a gain on forgiveness of debt in connection with the termination agreement of $311,479.
NOTE 6 – INTANGIBLE ASSETS
Goodwill
During the year ended December 31, 2012, our goodwill impairment test resulted in an impairment of the carrying value of our acquired goodwill. Goodwill impairment is calculated as the difference between the fair value of the assets and liabilities of the reporting unit, including the carrying value of its goodwill, to the reporting unit’s fair value, measured by an income approach utilizing projected discounted cash flows.
MPC was a recently incorporated company formed by executives with a variety of experience in the entertainment and technology industries. We acquired MPC for its high-end media and animation capabilities. We also plan to secure digital rights to animated versions of the world-renowned athletes and stars with which MPC has relationships. However, a key criterion of the impairment test is historic operating performance. MPC, the legal entity, had limited operating history at the time of acquisition. As such, according to GAAP, we are required to record a goodwill impairment charge of $2,145,000.
In November 2011, we completed the purchase allocation related to the acquisition of Thinking Drone, Inc., which included goodwill of $627,134. Due to the rapid changes in the mobile application space, the carrying value of goodwill at December 31, 2012 was written down to a value of $133,435. (December 31, 2011 - $627,134).
During the year ended December 31, 2011, our goodwill impairment test indicated that future revenues from the acquisition of Bitzio, LLC would not support the carrying value of the associated goodwill. We acquired Bitzio, LLC for its 4,000 mobile app roadmap which the Company plans to use in the future and for its key personnel. However, a key criterion of the impairment test is historic operating performance. Bitzio, LLC, as a recent start-up, had limited operating history at the time of acquisition. As such, according to GAAP, we recorded a goodwill impairment charge of $2,350,000.
In November 2011, we completed the purchase allocation related to the acquisition of Thinking Drone, Inc., which included a $611,461 adjustment to the fair value of acquired mobile applications and goodwill of $627,134.
BITZIO, INC.Notes to Consolidated Financial Statements December 31, 2012 and 2011
NOTE 6 – INTANGIBLE ASSETS (CONTINUED)
Intangible Assets (Continued)
Intangible assets include assets capitalized as a result of our acquisitions and the cost to acquire licenses for the media rights of sports and entertainment properties to create mobile apps. The components of intangible assets were as follows:
| | | December 31, | | | December 31, | |
| | | 2012 | | | 2011 | |
| Mobile App Portfolio (useful life – 3 years) | | $ | 611,461 | | | $ | 611,461 | |
| License rights (useful life – 3 years) | | | 295,000 | | | | - | |
| Less: Accumulated amortization | | | (232,857 | ) | | | (29,037 | ) |
| Less: Impairment write-downs | | | (615,000 | ) | | | - | |
| | | | | | | | | |
| Intangible Assets, net | | $ | 58,604 | | | $ | 582,424 | |
Amortization of intangible assets is computed using the straight-line method and is recognized over the estimated useful lives of the intangible assets. Amortization expense was $203,820 and $29,037 for the years ended December 31, 2012 and 2011, respectively.
Due to delays in the launch of the mobile applications associated with the Company’s licensed media rights, a full write-down of capitalized cost has been recorded.
The Company estimates that it will recognize $30,576 of amortization in 2013 and $28,028 of amortization in 2014, leaving an ending balance of intangible assets of $-0- as of December 31, 2014.
NOTE 7 – RELATED PARTY TRANSACTIONS
Related party receivables
At December 31, 2011, the Company had an outstanding receivable balance of $228,980 from formerly related parties. During the fiscal year ended December 31, 2012, the Company loaned an additional $1,197,304 to related parties, and received payments of $885,876 against such receivables. As a result of the disposal of division discussed in Note 5, the Company forgave $484,484 of receivables due to formerly related parties leaving an ending balance of related party receivables of $-0- at December 31, 2012.
Related party payables
During the year ended December 31, 2012, the Company repaid $75,000 of the original related party notes payable, leaving a balance of $351,870 at November 8, 2012. On November 8, 2012, the unpaid balance plus accrued interest of $360,122 was amended to extend maturity to February 28, 2013. At December 31, 2012, the outstanding balance of the related party note payable was $343,244. Subsequent to the year-end, the Company did not repay the outstanding related party note payable of $343,243 in full on February 28, 2013. The Company is in discussions with the related party to arrange repayment.
At December 31, 2012, $107,967 was due to related parties for operating expenses paid on behalf of the Company, $28,813 for accrued interest, and $240,000 for services rendered by a related party. Of these amounts, $258,181 was paid subsequent to the year-end through the issuance 5,163,622 common shares of the Company.
BITZIO, INC.
Notes to Consolidated Financial Statements December 31, 2012 and 2011
NOTE 7 – RELATED PARTY TRANSACTIONS (CONTINUED)
Related party payables (Continued)
During the fiscal year ended December 31, 2011 the Company borrowed $27,000 in cash from related parties, and $5,000 in operating expenses were paid on behalf of the Company by a related party. The Company also executed $500,000 in additional notes payable to finance the business acquisitions. The Company also repaid $105,380 of notes payable and transferred $142 to accrued liabilities leaving $426,870 in related party payables and accrued interest of $3,740 at December 31, 2011.
NOTE 8 – CONVERTIBLE NOTES PAYABLE
On November 24, 2011, the Company completed a non-brokered private placement unit offering that raised $180,000 in gross proceeds, $50,000 of which was received from related parties. Each $1,000 unit consisted of one 8.5% unsecured convertible note and 2,000 shares of the Company’s common stock. The notes have a 12-month term and are convertible into common shares of the Company at a price of $0.10 per share at any time prior to the maturity date, which is November 23, 2012. The notes require interest only payments on a quarterly basis. During 2012, $130,000 of the convertible notes was converted into 1,300,000 common shares of the Company. The remaining $50,000 was not repaid at its maturity date. The Company is in discussions with the lender on repayment of the convertible note.
The convertible notes contain provisions that will allow the Company to force conversion, if the lowest daily closing bid price of the Company’s Common Shares for each of the sixty-five (65) trading days immediately preceding the redemption notice is not less than $1.50 per such Common Share; or the Company completes one or more offerings of its Common Shares or securities convertible into Common Shares at a price or conversion price, as the case may be, of not less than $1.50 per such Common Share and the gross proceeds from such offering(s) total not less than $5,000,000. At December 31, 2011, the lenders had advanced $180,000 under this financing agreement, $50,000 of which was received from related parties.
The intrinsic value of the beneficial conversion feature and the debt discount associated with the equity issued in connection with the convertible debts were recorded based on the relative fair value of the equity in relation to the debt in accordance with ASC 470. The total initial beneficial conversion feature recorded for the convertible notes and on the equity equaled $125,874 and $54,126, respectively. As of December 31, 2012 and 2011, the Company had amortized $18,245 and $180,000 of the total outstanding debt discount, respectively leaving an unamortized debt discount of $-0- and $161,755.
On December 8, 2011, the Company executed a convertible promissory note in the amount of $52,500. The note bore interest at a rate of 8.0% per annum and had a maturity date of September 12, 2012. Any amount of principal or interest not paid in full at maturity would have accrued interest at a rate of 22 percent. The convertible promissory note had a conversion feature wherein the note could be converted in whole or in part, at the option of the holder, to shares of common stock at any time following 180 days after the issuance date of the note. The conversion price under the note is 59 percent multiplied by the market price (representing a 41 percent discount rate). In June 2012, the note principal was fully repaid. One half was paid in cash along with accrued interest of $1,007 and a prepayment premium of $13,125. The other half of the note principal was repaid through the issuance of 171,750 shares of common stock of the Company.
BITZIO, INC.Notes to Consolidated Financial Statements December 31, 2012 and 2011
NOTE 8 – CONVERTIBLE NOTES PAYABLE (CONTINUED)
On June 27, 2012, the Company executed a convertible promissory note in the amount of $73,500. The note bears interest at a rate of 8.0% per annum and has a maturity date of March 29, 2013. Any amount of principal or interest not paid in full at maturity will bear an interest rate of 22 percent. The convertible promissory note may be converted in whole or in part, at the option of the holder, to shares of common stock at any time following 180 days after the issuance date of the note. The conversion price under the note is 59 percent multiplied by the market price that is the average of the lowest three trading prices for the common stock during the ten trading day period prior to the conversion date. The total initial beneficial conversion feature recorded was $44,909. As of December 31, 2012, the Company has amortized $30,326 of the total outstanding debt discount leaving an unamortized debt discount of $14,583.
On September 6, 2012, for aggregate gross proceeds of $598,000, the Company issued secured convertible promissory notes and warrants to purchase common stock of the Company. Of the gross proceeds, $300,000 was received from a related party. The convertible notes are secured by cash, intangibles, intellectual property, and future revenue from such assets. The convertible notes accrue interest at a rate of 10% per annum and have a maturity date of September 6, 2013. The notes contain a conversion feature wherein the notes may be converted to shares of the Company’s common stock at a price of $0.15 per common share. The conversion feature also contains a price protection feature wherein if the Company sells shares of common stock at a price per share that is less than the conversion price of the note, the conversion price is reduced to the lower issuance price.
The warrants are exercisable by the holder at any time prior to two years from the date of issuance at an exercise price of $0.30 per share. The Company has issued warrants to purchase an aggregate of 7,979,333 shares of common stock of the Company in connection with the convertible notes. The Company determined the notes qualified for derivative liability treatment under ASC 815. The Company recorded an initial derivative liability of $459,072 and a debt discount of $598,000 on the origination date of the notes. As of December 31, 2012, the Company has amortized $129,683 of the total outstanding debt discount leaving an unamortized debt discount of $468,317.
On September 7, 2012, as consideration for amounts owed of $23,422, the Company issued an unsecured convertible promissory note bearing interest at a rate of 10% per annum and having a maturity date of September 7, 2013. The conversion price is equal to seventy five percent (75%) of the closing bid price for the Company’s common stock on the trading day immediately preceding the conversion. The intrinsic value of the beneficial conversion feature and the debt discount associated with the equity issued in connection with the convertible debts were recorded based on the relative fair value of the equity in relation to the debt in accordance with ASC 470. The total initial beneficial conversion feature recorded was $7,807. As of December 31, 2012, the Company has amortized $2,460 of the total outstanding debt discount leaving an unamortized debt discount of $5,347. On December 13, 2012, the note was assigned to another party and amended to change the conversion price to $0.05 per share, and to increase the principal from $23,422 to $28,000. Subsequent to year end, the note holder submitted a notice of conversion to convert the entire principal and interest due on February 28, 2013.
On December 6, 2012, for aggregate gross proceeds of $75,000, the Company issued an unsecured convertible promissory note. The convertible note accrues interest at a rate of 10% per annum and has a maturity date of December 6, 2013. The note also carried an original issue discount of $8,333 which was recorded as interest expense. The conversion price is the lesser of $0.16 or 70% of the lowest trade price in the 25 trading days prior to the conversion. The Company determined the notes qualified for derivative liability treatment under ASC 815. The Company recorded an initial derivative liability of $81,906 and a debt discount of $81,906 on the origination date of the note. As of December 31, 2012, the Company has amortized $5,610 of the total outstanding debt discount leaving an unamortized debt discount of $76,296.
During 2012, the Company borrowed $55,000 through an unsecured promissory note bearing interest at 10% with a maturity date of March 10, 2014.
BITZIO, INC.Notes to Consolidated Financial Statements December 31, 2012 and 2011
NOTE 8 – CONVERTIBLE NOTES PAYABLE (CONTINUED)
Pursuant to the agreement to unwind the original acquisition of ACT, the Company agreed to pay the vendors an aggregate of 147,000 Euros or US$194,446 as follows: 45,000 Euros ($59,524 USD) on or before March 31, 2013; 55,000 Euros ($72,752 USD) on or before April 30, 2013; and 47,000 Euros ($62,170 USD) on May 15, 2013. The amounts owing are unsecured and non-interest bearing.
The components of notes payable are summarized in the table below:
| | | December 31, | | | December 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
| Note payable to related parties, bearing interest at 5.25%, secured by the common stock of the Company, due on February 28, 2013 | | $ | 343,244 | | | $ | 426,870 | |
| Notes payable to a unrelated parties, bearing interest at 8.5%, unsecured, convertible into shares of common stock, due on November 23, 2012 | | | 50,000 | | | | 130,000 | |
| Note payable to a related party, bearing interest at 8.5%, unsecured, convertible into shares of common stock, due on November 23, 2012 | | | - | | | | 50,000 | |
| Note payable to an unrelated party, bearing interest at 8%, secured by the common stock of the Company, convertible into shares of common stock, due on September 12, 2012 | | | - | | | | 52,500 | |
| Note payable to an unrelated party, bearing interest at 10%, secured, convertible into shares of common stock, due on September 6, 2013 | | | 298,000 | | | | - | |
| Note payable to a related party, bearing interest at 10%, secured, convertible into shares of common stock, due on September 6, 2013 | | | 300,000 | | | | - | |
| Note payable to an unrelated party, bearing interest at 10%, convertible into shares of common stock at $0.05 per share, principal and interest to be converted on February 28, 2013 | | | 28,000 | | | | - | |
| Note payable to an unrelated party, bearing interest at 8.5%, secured by the common stock of the Company, convertible into shares of common stock, due on March 29, 2013 | | | 73,500 | | | | - | |
| Note payable to an unrelated party, bearing interest at 10%, unsecured, convertible into shares of common stock, due on December 6, 2013 | | | 83,333 | | | | - | |
| Note payable to an unrelated party, bearing interest at 10%, unsecured, due on March 10, 2014 | | | 55,000 | | | | - | |
| Note payable to an unrelated party, non-interest bearing, unsecured, due on May 15, 2013 | | | 194,446 | | | | - | |
| Unamortized debt discounts on issuances of convertible debt | | | (564,543 | ) | | | (161,755 | ) |
| | | | | | | | | |
| Total | | $ | 860,980 | | | $ | 497,615 | |
NOTE 9 – DERIVATIVE LIABILITY
Effective July 31, 2009, the Company adopted ASC 815 which defines determining whether an instrument (or embedded feature) is solely indexed to an entity’s own stock. The conversion price of these convertible notes are subject to “reset” provisions in the event the Company subsequently issues common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion price lower than conversion price of these notes. If these provisions are triggered, the conversion price of the note will be reduced. As a result, the Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with ASC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability.
BITZIO, INC.Notes to Consolidated Financial Statements December 31, 2012 and 2011
NOTE 9 – DERIVATIVE LIABILITY (CONTINUED)
ASC 815 requires Company management to assess the fair market value of certain derivatives at each reporting period and recognize any change in the fair market value as another income or expense item. The Company’s only asset or liability measured at fair value on a recurring basis is its derivative liability associated with convertible notes payable.
At origination, the Company valued the conversion features using the following assumptions: dividend yield of zero, years to maturity of between 1.00 and 2.02 years, risk free rates of between 0.18 and 0.27 percent, and annualized volatility of between 149 and 172 percent. At December 31, 2012, the Company revalued the conversion features using the following assumptions: dividend yield of zero, years to maturity of between 0.65 and 1.70 years, risk free rates of between 0.16 and 0.31 percent, and annualized volatility of between 159 and 172 percent and determined that, during the year ended December 31, 2012, the Company’s derivative liability decreased by $316,606 to $224,372. The Company recognized a corresponding gain on derivative liability in conjunction with this revaluation
NOTE 10 – PREFERRED STOCK
The Company is authorized to issue 25,000,000 shares of preferred stock, of which 2,500,000 shares are designated as series A convertible redeemable preferred stock with a par value of $0.001. As of December 31, 2012 and 2011, there were 2,043,120 and -0- shares of series A convertible redeemable preferred stock issued and outstanding, respectively. The shares have the following provisions:
Dividends
Series A convertible redeemable shares have no dividend rights.
Liquidation Preferences
In the event of liquidation, following the sale or disposition of all or substantially all of the Company’s assets, the holders of the Series A Convertible Redeemable Preferred Stock shall be entitled to receive, an amount equal to the per share price of the stock ($0.0025 per share) plus all declared and unpaid dividends.
Voting Rights
Series A convertible redeemable shares have no voting rights.
Conversion
Each share of series A convertible redeemable preferred stock is convertible, at the option of the holder, at any time within four years of issue, and upon payment of $0.40 per share, into two fully paid and non-assessable shares of the Company’s common.
Redemption
At any time after four years of issuance, the Company may redeem, at the discretion of the Board of Directors, any or all of the series A convertible redeemable preferred stock for the per share price of the stock ($0.0025 per share).
Preferred Stock Activity for the Year Ended December 31, 2012
On January 2, 2012, the Company issued 2,043,120 Series A Convertible Redeemable Preferred Stock at purchase price of $0.0025 per share for $5,108.
BITZIO, INC.Notes to Consolidated Financial Statements December 31, 2012 and 2011
NOTE 11 – COMMON STOCK
The Company has authorized 250,000,000 shares of $0.001 par value per share Common Stock, of which 69,923,970 and 50,018,625 shares were issued outstanding as of December 31, 2012 and December 31, 2011. The activity surrounding the issuances of the Common Stock is as follows:
Fiscal Year Ended December 31, 2012
During the year ended December 31, 2012, the Company issued 1,471,750 shares of common stock upon the conversion of $176,522 of outstanding convertible debentures. The Company issued 1,800,000 shares of common stock and warrants for net cash proceeds of $450,000 at $0.25 per share. The Company has allocated $180,550 of the total $450,000 net cash proceeds to the value of the warrants. The Company issued 7,389,595 shares of common stock for services rendered to the Company valued at $1,532,128, based on the market price of the stock on the date of issuance. The Company issued 744,000 shares of common stock and warrants to satisfy stock subscriptions obligations outstanding at December 31, 2011.
On May 23, 2012, the Company agreed to issue 6,500,000 shares of common stock as consideration for the purchase of 100 percent of the outstanding shares of Motion Pixel Corporation Holdings (see Note 5).
During the year ended December 31, 2012, the Company agreed to issue 2,000,000 shares of common stock as performance consideration to certain consultants for obtaining licensing rights to agreed upon media or sports properties.
The Company also recorded $252,605 for stock subscriptions payable, $75,024 of which was satisfied subsequent to the year-end through the issuance of 276,954 shares of common stock.
Fiscal Year Ended December 31, 2011
During the fiscal year ended December 31, 2011, the Company issued 2,500,000 shares of common stock for net cash proceeds of $250,000 at $0.10 per share and 360,000 shares of common stock for cash and convertible notes payable of $180,000, of which $50,000 was received from related parties. The Company issued 4,158,625 shares of common stock for services rendered to the Company valued at $945,304, based on the market price of the stock on the date of issuance. The Company issued a total of 10,000,000 shares of common stock valued at $3,100,000 based on the market price of the stock on the date of issuance, and options to purchase 1,000,000 shares of common stock valued at $513,150 to acquire three wholly-owned subsidiaries, one of which was completed on January 10, 2012.
The Company also received $186,000 in cash for stock subscriptions payable. As of the date of this report, the Company has satisfied its obligations relating to the stock subscriptions payable through the issuance of 744,000 shares of common stock and warrants at $0.25 per share.
BITZIO, INC.Notes to Consolidated Financial Statements December 31, 2012 and 2011
NOTE 12 – STOCK OPTIONS AND WARRANTS
The following table summarizes all stock option and warrant activity for the year ended December 31, 2012 and 2011:
| | | Shares | | | Weighted- Average Exercise Price Per Share | |
| | | | | | | | | |
| Outstanding, December 31, 2010 | | | - | | | | - | |
| Granted | | | 19,648,462 | | | $ | 0.34 | |
| Exercised | | | - | | | | - | |
| Forfeited | | | - | | | | - | |
| Expired | | | - | | | | - | |
| | | | | | | | | |
| Outstanding, December 31, 2011 | | | 19,648,462 | | | $ | 0.34 | |
| | | | | | | | | |
| Exercisable at December 31, 2011 | | | 19,648,462 | | | $ | 0.34 | |
| | | | | | | | | |
| Granted | | | 15,247,333 | | | | 0.33 | |
| Exercised | | | - | | | | - | |
| Forfeited | | | (10,533,846 | ) | | | 0.31 | |
| Expired | | | - | | | | - | |
| | | | | | | | | |
| Outstanding, December 31, 2012 | | | 24,361,948 | | | $ | 0.34 | |
| | | | | | | | | |
| | | | 24,361,948 | | | $ | 0.34 | |
The following table discloses information regarding outstanding and exercisable options and warrants at December 31, 2011:
| | | | Outstanding: | | | Exercisable: | |
| | | Number of Option Shares | | | Weighted- Average Exercise Price | | | Remaining Weighted- Average Contractual Term (Years) | | | Number of Option Shares | | | Weighted-Average Exercise Price | |
| | $0.20 – $0.29 | | | | 5,000,000 | | | $ | 0.18 | | | | 4.77 | | | | 5,000,000 | | | $ | 0.18 | |
| | $0.30 – $0.39 | | | | 14,578,462 | | | | 0.37 | | | | 4.72 | | | | 14,578,462 | | | | 0.37 | |
| | $0.40 – $0.49 | | | | 70,000 | | | | 0.40 | | | | 5.00 | | | | 70,000 | | | | 0.40 | |
| | $0.50 – $0.59 | | | | - | | | | - | | | | - | | | | - | | | | 0.32 | |
| | | | | | 19,648,462 | | | $ | 0.32 | | | | 4.73 | | | | 19,648,462 | | | $ | 0.32 | |
BITZIO, INC.Notes to Consolidated Financial Statements December 31, 2012 and 2011
NOTE 12 – STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table discloses information regarding outstanding and exercisable options and warrants at December 31, 2012:
| | | | Outstanding: | | | Exercisable: | |
| | | Number of Option Shares | | | Weighted- Average Exercise Price | | | Remaining Weighted- Average Contractual Term (Years) | | | Number of Option Shares | | | Weighted-average Exercise Price | |
| | $0.20 – $0.29 | | | | 2,000,000 | | | $ | 0.20 | | | | 3.92 | | | | 2,000,000 | | | $ | 0.20 | |
| | $0.30 – $0.39 | | | | 19,747,948 | | | | 0.34 | | | | 2.90 | | | | 19,747,948 | | | | 0.34 | |
| | $0.40 – $0.49 | | | | 814,000 | | | | 0.40 | | | | 2.25 | | | | 814,000 | | | | 0.40 | |
| | $0.50 – $0.59 | | | | 1,800,000 | | | | 0.50 | | | | 0.32 | | | | 1,800,000 | | | | 0.50 | |
| | | | | | 24,361,948 | | | $ | 0.34 | | | | 2.77 | | | | 24,361,948 | | | $ | 0.34 | |
In determining the compensation cost of the stock options granted, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used in these calculations are summarized as follows:
| | | December 31, 2011 | |
| Expected term of options granted | | 5 years | |
| Expected volatility range | | | 211 – 229 | % |
| Range of risk-free interest rates | | | 0.81 – 1.80 | % |
| Expected dividend yield | | | 0 | % |
| | | December 31, 2012 | |
| Expected term of options granted | | 5 years | |
| Expected volatility range | | | 187 – 211 | % |
| Range of risk-free interest rates | | | 0.63 – 0.86 | % |
| Expected dividend yield | | | 0 | % |
Employee and executive stock-based compensation expense associated with stock options issued during the year ended December 31, 2012, and 2011 was $-0- and $6,618,665, respectively.
NOTE 13 – INCOME TAXES
The Company provides for income taxes under ASC 740, Accounting for Income Taxes. ASC 740 requires the use of an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse. The Company’s predecessor operated as entity exempt from Federal and State income taxes.
BITZIO, INC.Notes to Consolidated Financial Statements December 31, 2012 and 2011
NOTE 13 – INCOME TAXES (CONTINUED)
ASC 740 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The provision for income taxes differs from the amounts which would be provided by applying the statutory federal income tax rate of 34% to the net loss before provision for income taxes for the following reasons:
| | | For the Years Ended | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
| Book income (loss) from operations | | $ | (3,459,055 | ) | | $ | (3,359,143 | ) |
| Stock/options issued for services
| | | 1,158,207 | | | | 1,922,156 | |
| Stock/options issued in executive compensation | | | - | | | | 649,593 | |
| Contributed services | | | - | | | | 510 | |
| Impairment expense | | | 1,005,958 | | | | 799,272 | |
| Loss on sale of assets | | | 81,773 | | | | 348 | |
| Interest expense on convertible notes | | | 207,116 | | | | 6,203 | |
| Change in derivative liability | | | (107,646 | ) | | | - | |
| Change in valuation allowance | | | 1,113,648 | | | | (18,939 | ) |
| Total provision for income taxes | | $ | - | | | $ | - | |
Net deferred tax assets consist of the following components as of:
| | | December 31, 2012 | | | December 31, 2011 | |
| | | | | | | |
| Loss carry forwards (expire through 2032) | | $ | 6,893,715 | | | $ | 3,434,660 | |
| | | | | | | | | |
| Total gross deferred tax asset | | | 1,162,541 | | | | 48,893 | |
| Valuation allowance | | | (1,162,541 | ) | | | (48,893 | ) |
| Net deferred taxes | | $ | - | | | $ | - | |
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards of $6,893,715 for federal income tax reporting purposes are subject to annual limitations. When a change in ownership occurs, net operating loss carry forwards may be limited as to use in future years.
NOTE 14 – SUBSEQUENT EVENTS
During the subsequent period, the Company issued 5,164,621 shares of common stock as payment for accounts payables outstanding at December 31, 2012 at an average price of $0.08 per share. The Company issued 4,724,498 shares of common stock as payment for services at an average price of $0.08 per share. The Company also issued 205,532 shares of common stock in conversion of notes payable of $28,591 at a price of $0.14 per share.
In accordance with ASC 855-10, the Company’s management has reviewed all material events and there are no other material subsequent events to report.
ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A – CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of December 31, 2012, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission's rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2012, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described in Item 9A(b).
Our principal executive officers do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive officers have determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
(b) Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, as amended, as a process designed by, or under the supervision of, our principal executive and principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States and includes those policies and procedures that:
| · | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and any disposition of our assets; |
| Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, Management identified the following two material weaknesses that have caused management to conclude that, as of December 31, 2012, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:
1. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act as of the year ending December 31, 2012. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
2. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
3. We do not have an audit committee of our Board of Directors. Management evaluated the impact of our failure to have an audit committee on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us to provide only our management’s report in this Annual Report.
(c) Remediation of Material Weaknesses
To remediate the material weakness in our documentation, evaluation and testing of internal controls we plan to engage a third-party firm to assist us in remedying this material weakness once resources become available.
We intend to remedy our material weakness with regard to insufficient segregation of duties by hiring additional employees in order to segregate duties in a manner that establishes effective internal controls once resources become available.
We have remedied our material weakness with respect to our lack of an audit committee by creating an audit committee of our Board of Directors, consisting of Robert W. Garnett and William Schonbrun, effective as of January 1, 2013, and of just Robert W. Garnett as of April 1, 2013.
(d) Changes in Internal Control over Financial Reporting
No change in our system of internal control over financial reporting occurred during the period covered by this report, fourth quarter of the fiscal year ended December 31, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B – OTHER INFORMATION
There are no events required to be disclosed by the Item.
PART III
ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The following table sets forth the names, ages, and biographical information of each of our current directors and executive officers, and the positions with the Company held by each person, and the date such person became a director or executive officer of the Company. Our executive officers are elected annually by the Board of Directors. The directors serve one-year terms until their successors are elected. The executive officers serve terms of one year or until their death, resignation or removal by the Board of Directors. Family relationships among any of the directors and officers are described below.
| Name | | Age | | Position(s) |
| | | | | |
| Peter Henricsson | | 60 | | President, Chief Executive Officer, and Director |
| | | | | |
| Robert W. (Bob) Garnett | | 64 | | Chief Financial Officer, Director |
| | | | | |
| David Lewis | | 50 | | Secretary, Treasurer, and Director |
| | | | | |
| Bruce C. Weatherell | | 55 | | Chief Operating Officer |
| | | | | |
| Gordon C. McDougall | | 56 | | Director |
Peter Henricsson, 60, is our President and Chief Executive Officer, effective as of September 12, 2012. Mr. Henricsson has been the Chief Executive Officer and a director of Rocap Marketing Inc. from September 2, 2010 to the present. From 1996 to 2002, Mr. Henriccson served as Chairman and CEO of Cellpoint, Inc. ("Cellpoint"), an entity focuses on providing location based services in the technologies and services sector. Since 2002, Mr. Henricsson has focused his time and efforts as a venture capital investor and strategic advisor to emerging growth companies. Mr. Henricsson is a principal of Technor Services Ltd. ("Technor") and therefore has a material financial interest in certain transactions between Technor and the Company. The Company has issued Convertible Notes consisting of an aggregate principal amount of $300,000 and Warrants to purchase up to 4,000,000 shares of common stock to Technor.
Robert W. (Bob) Garnett, age 64, is a Chartered Accountant and has served as our Chief Financial Officer and as a member of our Board of Directors since August 22, 2011. Mr. Garnett is currently the President of Sagebrush Golf and Sporting Club Ltd., where he has served since 2005. Previously, Mr. Garnett was a partner with Paradigm Management Partners, an investment management company, where he served from 1998 to 2010. He has served on the boards of seven public companies most recently as the Vice Chair of the South Coast British Columbia Transit Authority (TransLink) and chaired the audit committee. Mr. Garnett is currently Chairman of the Board and audit chairman of Great Panther Silver Limited, traded on the TSX and NYSE MKT. Previously, he served as Chair and Vice Chair of Coast Capital Savings, a $12 billion financial institution. Mr. Garnett is a graduate of the Institute of Corporate Directors and The Segal Graduate School of Business as a Certified Director (ICD.D).
David Lewis, age 50, is a Canadian lawyer with broad experience advising software and technology companies. He has previously held in-house and general counsel positions with a number of public and private technology companies in Canada and the United States. From 2005 to 2009, David was Vice President and General Counsel of Certicom Corp., a developer and marketer of software encryption technology. In 2009, Certicom was acquired by Research In Motion Limited, where David continued as Commercial Counsel, Certicom with responsibilities for the continuing Certicom business.
Bruce C. Weatherell, age 55, has been our Chief Operating Office since November 21, 2011. For the last 11 years, primarily as an independent consultant, Mr. Weatherell has delivered project and program delivery services to organizations like Warner Music, Daimler Chrysler, Hewlett Packard, the Bank of Montreal, American Express and Boeing. During this time he also served as Acting VP or professional services at Delano Corporation, Product Manager at Platform Computing and Senior Director of Professional Services and Acting VP of Technology Delivery at SCI. A Chartered Accountant and Certified Management Accountant, Mr. Weatherell is a seasoned professional with over 25 years of diverse experience operating technology practices and delivering technology programs. He spent 12 years at KPMG Consulting where, skilled in operational management, he built technology practices and managed multi-disciplinary service delivery teams. Mr. Weatherell is also a graduate of the University of Waterloo with a degree in Mathematics.
Gordon C. McDougall, age 56, has been a member of our Board of Directors since April 29, 2011, and served as our President and Chief Exeutive Officer from April 29, 2011 to February 2, 2012. From 2009 to the present, Mr. McDougall is the Chief Executive Officer and Founder of Tezi Advisory, Inc, a private company that partners with entrepreneurs to grow their businesses. Prior to founding Tezi, from 2006 to 2007 Mr. McDougall was a director and Chief Executive Officer of Exterra Energy, an independent oil and gas company. From 2005 until 2006, he was the President and a Director of Wentworth Energy, Inc. Mr. McDougall has also worked as a stockbroker and is experienced in raising capital, managing start-up companies and coaching companies through their initial growth.
Family Relationships
There are no family relationships between any of our officers or directors.
Other Directorships
Other than as set forth above, none of our officers and directors is a director of any company with a class of securities registered pursuant to section 12 of the Exchange Act or subject to the requirements of section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.
Audit Committee
Our board of directors has an audit committee, consisting of Robert W. Garnett. At this time, the audit committee does not have a charter. Mr. Garnett is an audit committee financial expert.
Our Board of Directors does not have any other committees.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers and persons who own more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
To the Company’s knowledge, none of the current required parties are delinquent in their 16(a) filings.
Board Meetings
During the fiscal year ended December 31, 2012, the Board of Directors did not meet formally, but instead took action by written consent on numerous occasions. In addition, certain members of the Board met telephonically as often as daily to discuss pending matters.
Code of Ethics
We have not adopted a written code of ethics, primarily because we believe and understand that our officers and directors adhere to and follow ethical standards without the necessity of a written policy.
ITEM 11– EXECUTIVE COMPENSATION
Executive Compensation
On February 1, 2012, we entered into an Employment Agreement with William Schonbrun to act as our Chief Executive Officer. The agreement is for an indefinite term, with compensation of $15,000 per month. During the first six months of 2012, Mr. Schonbrun has agreed to forego his compensation. In the event Mr. Schonbrun is terminated without cause, he is entitled to severance equal to twelve months of compensation. The agreement replaced and superseded a prior consulting agreement we had with Mr. Schonbrun.
On November 17, 2011, we entered into a Consulting Agreement with Bruce Weatherell to act as our Chief Operating Officer. The agreement is for a term of one year, with compensation of $15,000 per month. During the first six months of 2012, Mr. Weatherell has agreed to forego his compensation.
Gordon McDougall, a member of our Board of Directors and our previous Chief Executive Officer, is engaged pursuant to a verbal agreement with compensation of $15,000 per month. During the first three months of 2012, Mr. McDougall agreed to forego one-half of his compensation, and will forego all of his compensation in June 2012.
On December 1, 2011, we entered into a Consulting Agreement with Roban Management Corp., an entity owned and controlled by Robert W. Garnett, to act as our Chief Financial Officer. The agreement is for a term of one year, with compensation of $5,000 per month. During the first six months of 2012, Mr. Garnett has agreed to forego his compensation.
Summary Compensation Table
The following table sets forth information with respect to compensation earned by our Chief Executive Officer, President, and Chief Financial Officer for the years ended December 31, 2012 and 2011.
Name and Principal Position | | Year | | Salary ($) | | | Bonus ($) | | | Stock Awards ($) | | | Option Awards ($) | | | Non-Equity Incentive Plan Compensation ($) | | | Nonqualified Deferred Compensation ($) | | | All Other Compensation ($) | | | Total ($) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Peter Henricsson(1), | | 2012 | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| President and CEO | | 2011 | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| William Schonbrun(2), | | 2012 | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| President and CEO | | 2011 | | | 127,500 | (6) | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 127,500 | (6) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gordon C. McDougall(3), | | 2012 | | | 240,000 | (7) | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 240,000 | (7) |
| President and CEO | | 2011 | | | 127,500 | (6) | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 127,500 | (6) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Steven D. Moulton(4), | | 2012 | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| President and Treasurer | | 2011 | | | 60,000 | (6) | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 60,000 | (6) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Robert W. Garnett(5), | | 2012 | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| CFO | | 2011 | | | 50,000 | (6) | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 50,000 | (6) |
| (1) | Mr. Henricsson became our President and Chief Executive Officer effective September 12, 2012. |
| (2) | Mr. Schonbrun became was our President and Chief Executive Officer from February 2, 2012 to September 12, 2012. He resigned as Chairman of the Company effective April 1, 2013. |
| (3) | Mr. McDougall was President and Chief Executive Officer from April 29, 2011 to February 2, 2012. |
| (4) | Mr. Moulton was our President and Treasurer from April 2007 to April 29, 2011. |
| (5) | Mr. Garnett became our Chief Financial Officer on August 22, 2011. |
| (6) | On January 6, 2012, each of executive officers agreed to waive all compensation due for 2011. |
| (7) | Mr. McDougall received his 2012 salary in the form common stock of the Company, valued at $0.05 per share. |
Director Compensation
For the years ended December 31, 2012 and 2011, none of the members of our Board of Directors received compensation for his or her service as a director. We do not currently have an established policy to provide compensation to members of our Board of Directors for their services in that capacity.
Outstanding Equity Awards at Fiscal Year-End
We do not currently have a stock option or grant plan.
Disclosure of Commission Position on Indemnification for Securities Act Liabilities
Article Nine of our Articles of Incorporation provides that, the personal liability of the directors of the corporation is hereby eliminated to the fullest extent permitted by the General Corporation Law of the State of Nevada, as the same may be amended and supplemented.
Article Ten of our Articles of Incorporation provides that, the corporation shall, to the fullest extent permitted by the General Corporation Law of the State of Nevada, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all expenses, liabilities, or other matters referred to in or covered by said section.
Article VIII of our bylaws provides further indemnification for each of our officers and directors except to the extent that liability arises out of their own negligence or willful misconduct.
We have separate indemnification agreements with each of our officers and directors.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Act”) may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 31, 2013, certain information with respect to the Company’s equity securities owned of record or beneficially by (i) each Officer and Director of the Company; (ii) each person who owns beneficially more than 5% of each class of the Company’s outstanding equity securities; and (iii) all Directors and Executive Officers as a group.
Name and Address (1) | | Common Stock Ownership | | | Percentage of Common Stock Ownership (2) | | | Series A Preferred Stock Ownership (3) | | | Percentage of Series A Preferred Stock Ownership (4) | |
| | | | | | | | | | | | | |
| Peter Henricsson (5) | | | 9,770,000 | (6) | | | 12.2 | % | | | -0- | | | | -0- | |
| | | | | | | | | | | | | | | | | |
| William Schonbrun | | | 7,670,000 | (7) | | | 9.6 | % | | | 588,462 | | | | 28.8 | % |
| | | | | | | | | | | | | | | | | |
| Robert W. Garnett (5) | | | 1,000,000 | (8) | | | 1.3 | % | | | 230,769 | | | | 11.3 | % |
| | | | | | | | | | | | | | | | | |
| Bruce C. Weatherell (5) | | | 3,994,699 | (9) | | | 5.0 | % | | | 201,923 | | | | 9.9 | % |
| | | | | | | | | | | | | | | | | |
| Gordon C. McDougall (5) | | | 7,550,000 | (10) | | | 9.4 | % | | | 514,904 | (10) | | | 25.2 | % |
| | | | | | | | | | | | | | | | | |
| David Lewis (5) | | | 3,329,200 | (11) | | | 4.2 | % | | | - | | | | -0- | |
| | | | | | | | | | | | | | | | | |
| Amish Shah | | | 6,500,000 | (12) | | | 8.1 | % | | | - | | | | -0- | |
| | | | | | | | | | | | | | | | | |
Manny Bains 8021 NE Bayshore Court Miami, FL 33138 | | | 4,687,500 | | | | 5.9 | % | | | - | | | | -0- | |
| | | | | | | | | | | | | | | | | |
| All Officers and Directors as a Group (6 Persons) | | 33,313,899 (footnotes 6-11) | | | | 41.7 | % | | | 1,536,058 | | | | 75.2 | % |
| (1) | Unless otherwise indicated, the address of the shareholder is c/o Bitzio, Inc. |
| (2) | Unless otherwise indicated, based on 79,901,795 shares of common stock issued and outstanding as of March 20, 2013. Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage of any other person. Does not include shares of common stock that may be acquired upon the exercise of the conversion feature of our Series A Convertible Preferred Stock because those shares cannot be converted until after January 1, 2013. |
| (3) | Each share of Series A Convertible Redeemable Preferred Stock gives the holder the right, but not the obligation, after January 1, 2013 but before January 2, 2017, to purchase two (2) shares of our common stock at a purchase price of $0.40 per share. Further, we can redeem the Series A Preferred Stock at $0.0025 per share after January 2, 2017. Ownership percentages for our common stock do not include shares of common stock that may be acquired upon the exercise of the conversion feature of our Series A Convertible Preferred Stock because those shares cannot be converted until after January 1, 2013. |
| (4) | Unless otherwise indicated, based on 2,043,120 shares of Series A Convertible Preferred Stock issued and outstanding. |
| (5) | Indicates one of our officers or directors. |
| (6) | Includes 800,000 shares of common stock that may be acquired upon the exercise of warrants at $0.50 per share prior to April 26, 2013, and 4,000,000 shares of common stock that may be acquired upon the exercise of warrants at $0.30 per share prior to September 6, 2014. |
| (7) | Includes 2,000,000 shares of common stock that may be acquired upon the exercise of options at $0.38 per share. |
| (8) | Includes 1,000,000 shares of common stock that may be acquired upon the exercise of options at $0.38 per share. |
| (9) | Includes 1,000,000 shares of common stock that may be acquired upon the exercise of options at $0.38 per share, and 1,000,000 shares of common stock that may be acquired upon the exercise of options at $0.20 per share. |
| (10) | Shares held in the name of Tezi Advisory, Inc. |
| (11) | Includes 2,000,000 shares of common stock that may be acquired upon the exercise of options at $0.25 per share. |
| (12) | Includes 1,000,000 shares held in the name of Dvaraka Marketing, LLC |
The issuer is not aware of any person who owns of record, or is known to own beneficially, ten percent or more of the outstanding securities of any class of the issuer, other than as set forth above. There are no classes of stock other than common stock issued or outstanding.
Other than as set forth above, none of these parties owns, in the aggregate and including shares of our common stock that may be acquired upon exercise of their warrants, more than five percent (5%) of our common stock.
There are no current arrangements which will result in a change in control.
ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Effective September 12, 2012, Peter Henricsson was appointed to serve as the Company’s new President and Chief Executive Officer and members of its Board of Directors (the “Board”).
On February 1, 2012, we entered into an Employment Agreement with William Schonbrun to act as our Chief Executive Officer. The agreement is for an indefinite term, with compensation of $15,000 per month. During the first six months of 2012, Mr. Schonbrun has agreed to forego his compensation. In the event Mr. Schonbrun is terminated without cause, he is entitled to severance equal to twelve months of compensation. The agreement replaced and superseded a prior consulting agreement we had with Mr. Schonbrun. Effective September 12, 2012, William Schonbrun resigned as President and Chief Executive Officer of the Company. In addition, the Board of Directors of the Company (the “Board”) appointed Mr. Schonbrun to serve as Chairman of the Board. Mr. Schonbrun’s resignation as a director of the Company was not because of any disagreement with the company on any matters relating to the Company’s operations, policies or practices. Effective April 1, 2013, Mr. Schonbrun resigned as Chairman of the Company.
On December 1, 2011, we entered into a Consulting Agreement with Dvaraka Marketing, LLC, an entity controlled by Amish Shah, to provide general consulting services and act as our Chief Product Officer. The agreement is for a term of one year, with compensation of $15,000 per month. During the first six months of 2012, Mr. Shah has agreed to forego his compensation. Effective September 6, 2012, Mr. Shah resigned as a director and officer of the Company.
On November 17, 2011, we entered into a Consulting Agreement with Bruce Weatherell to act as our Chief Operating Officer. The agreement is for a term of one year, with compensation of $15,000 per month. During the first six months of 2012, Mr. Weatherell has agreed to forego his compensation.
Gordon McDougall, a member of our Board of Directors and our previous Chief Executive Officer, is engaged pursuant to a verbal agreement with compensation of $15,000 per month. During the first three months of 2012, Mr. McDougall agreed to forego one-half of his compensation, and will forego all of his compensation in June 2012.
On December 1, 2011, we entered into a Consulting Agreement with Roban Management Corp., an entity owned and controlled by Robert W. Garnett, to act as our Chief Financial Officer. The agreement is for a term of one year, with compensation of $5,000 per month. During the first six months of 2012, Mr. Garnett has agreed to forego his compensation.
We have separate indemnification agreements with each of our officers and directors.
In connection with our acquisition of DigiSpace Solutions, LLC, on January 6, 2012 we issued options to two individuals, one of which was Amish Shah, a former member of our Board of Directors, to each acquire Five Hundred Thousand (500,000) shares of our common stock at $0.28 per share.
Series A Convertible Redeemable Preferred Stock
On January 6, 2012, we issued an aggregate of 2,043,120 shares of our Series A Convertible Redeemable Preferred Stock to six individuals, four of which are (or were) members of our Board of Directors, namely William Schonbrun, Gordon C. McDougall (Tezi Advisory), Steven D. Moulton, and R.W. (Bob) Garnett, and one of which was our Chief Operating Officer, namely Bruce Weatherell. Each share of Series A Preferred Stock gives the holder the right, but not the obligation, after January 1, 2013 but before January 2, 2017, to purchase two (2) shares of the Corporation’s common stock at a purchase price of Forty Cents ($0.40) per share, which was the closing price of our common stock on the last trading day prior to the transaction. Further, the Company can redeem the Series A Preferred Stock at $0.0025 per share after January 2, 2017.
We granted rights to subscribe for the Series A Convertible Redeemable Preferred Stock to six individuals as a result of them waiving an aggregate of $465,000 of compensation in 2011, and agreeing to defer an aggregate of $360,000 of compensation otherwise due in 2012. The rights enabled the six individuals to acquire the preferred shares at $0.0025 per share, as follows:
| Name | | No. of Shares of Series A Convertible Redeemable Preferred Stock | | | Purchase Price | | | 2011 Compensation Waived | | | 2012 Compensation Deferred | |
| Schonbrun | | | 588,462 | | | $ | 1,471.16 | | | $ | 127,500.00 | | | $ | 90,000.00 | |
| McDougall | | | 514,904 | | | $ | 1,287.26 | | | $ | 127,500.00 | | | $ | 45,000.00 | |
| Moulton | | | 276,293 | | | $ | 690.73 | | | $ | 60,000.00 | | | $ | 60,000.00 | |
| Garnett | | | 230,769 | | | $ | 576.92 | | | $ | 50,000.00 | | | $ | 30,000.00 | |
| Lewis | | | 230,769 | | | $ | 576.92 | | | $ | 50,000.00 | | | $ | 90,000.00 | |
| Weatherell | | | 201,923 | | | $ | 504.81 | | | $ | 50,000.00 | | | $ | 45,000.00 | |
| | | | | | | | | | | | | | | | | |
| Totals | | | 2,043,120 | | | $ | 5,107.80 | | | $ | 465,000.00 | | | $ | 360,000.00 | |
In connection with our acquisition of Thinking Drone, Inc., on November 15, 2011, we issued 5,000,000 shares of our common stock, restricted in accordance with Rule 144, to Quoc Bui and Michael Moon. The shares were issued at a deemed price of $0.15 per share.
On August 21, 2011, we issued stock options to Robert W. Garnett and William Schonbrun to purchase 1,000,000 shares and 2,000,000 shares, respectively, of our common stock at a price of $0.38 per such share until August 20, 2016. Mr. Garnett and Mr. Schonbrun are (or were) officers and directors of the company.
In connection with our acquisition of Bitzio Corp., on August 8, 2011 we issued 5,000,000 shares of common stock, restricted in accordance with Rule 144, to Amish Shah, who is one of our directors. These shares were valued at the market rate on the date of issuance, or $0.47.
ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
The aggregate fees billed for the years ended December 31, 2012 and 2011 for professional services rendered by the principal accountant for the audit of our annual financial statements and review of the financial statements included in our Form 10-K or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were $22,500 and $17,500, respectively.
Audit - Related Fees
The aggregate fees billed in the fiscal years ended December 31, 2012 and 2011 for professional services rendered by the principal accountant for the review of the financial statements for the quarterly periods ended March 31, June 30, and September 30 were $3,500, $4,500, and $4,500, respectively.
Tax Fees
For the fiscal years ended December 31, 2012 and 2011, our principal accountants did not render any services for tax compliance, tax advice, and tax planning work.
All Other Fees
The aggregate fees billed in the fiscal year ended December 31, 2012 for the audit of DigiSpace Solutions, LLC was $16,000.
Of the fees described above for the years ended December 31, 2012 and 2011, all were approved by the entire Board of Directors.
PART IV
ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Consolidated Financial Statements
The following consolidated financial statements are filed as part of this report:
| Report of Independent Registered Public Accounting Firm | | | F-1 | |
| | | | | |
| Consolidated Balance Sheets as of December 31, 2012 and 2011 (Audited) | | | F-2 | |
| | | | | |
| Consolidated Statement of Operations for the years ended December 31, 2012 and 2011 (Audited) | | | F-3 | |
| | | | | |
| Consolidated Statement of Stockholders’ Equity (Deficit) for the years ended December 31, 2012 and 2011 (Audited) | | | F-4 | |
| | | | | |
| Consolidated Statement of Cash Flows for the years ended December 31, 2012 and 2011 (Audited) | | | F-5 | |
| | | | | |
| Notes to Consolidated Financial Statements | | | F-7 | |
(a)(2) Consolidated Financial Statement Schedules
We do not have any consolidated financial statement schedules required to be supplied under this Item.
(a)(3) Exhibits
Refer to (b) below.
b) Exhibits
| (1) | Certificate of Incorporation |
| | |
| (1) | Bylaws |
| | |
| (2) | Certificate of Amendment to the Article of Incorporation Changing the Name of the Company from Rocky Mountain Fudge Company, Inc. to Bitzio, Inc. |
| | |
| (3) | Certificate of Amendment to the Articles of Incorporation Increasing the Total Number Authorized Shares of Common Stock and Preferred Stock |
| | |
| (4) | Certificate of Designation of the Rights, Privileges and Preferences of the Series A Convertible Redeemable Preferred Stock |
| | |
| (5) | Amendment to the Certificate of Designation of the Rights, Privileges and Preferences of the Series A Convertible Redeemable Preferred Stock |
| | |
| (3) | Share Purchase Agreement with Motion Pixel Corporation Holdings, Inc. |
| | |
| (6) | Share Sale and Share Purchase Agreement with Innoflow GmbH |
| (7) | Asset Purchase Agreement with Dvaraka Marketing, LLC, and Digital Solutions, Inc. |
| | |
| (7) | Stock Purchase Agreement with Dvaraka Marketing, LLC |
| | |
| (3) | Consulting Agreement with Latin America Futbol Corporation |
| | |
| (8) | Agreement to Terminate Contractual Relationships with Latin America Futbol Association |
| | |
| (7) | Compromise and Settlement Agreement with Dvaraka Marketing, LLC |
| | |
| (7) | Form of Convertible Promissory Note |
| | |
| (9) | Convertible Promissory Note |
| | |
| (10) | Convertible Promissory Note |
| | |
| (10) | Convertible Promissory Note |
| | |
| (7) | Note Purchase Agreement |
| 31.1 | Certification of the Company’s Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012. |
| | |
| 31.2 | Certification of the Company’s Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012. |
| | |
| 32.1 | Certification of the Company’s Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| 32.2 | Certification of the Company’s Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS ** | XBRL Instance Document |
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| 101.SCH ** | XBRL Taxonomy Extension Schema Document |
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| 101.CAL ** | XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF ** | XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB ** | XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE ** | XBRL Taxonomy Extension Presentation Linkbase Document |
