UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:March 31, 2014
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from:
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.) |
| | | |
20152 S. Gilmore Street Winnetka, CA | | 91306 |
| (Address of principal executive offices) | | (Zip Code) |
Issuer’s telephone number(866) 824-7881
| |
| (Former name, former address and former fiscal year, if changed since last report) |
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 [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 than the registrant was required to submit and post such files). Yes [X] No [ ]
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 the definitions of “large accelerated filed,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | [ ] | | Accelerated filer | [ ] |
| | | | | |
| Non-accelerated filer | [ ] | | Smaller reporting company | [X] |
| (Do not check if a smaller reporting company) | | | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 15, 2014 the number of shares of the registrant’s classes of common stock outstanding was 276,316,617.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Proviso Regarding Forward-Looking Statements
This Quarterly 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 our possible or assumed future results of operations set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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. Our 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.
The results for the period ended March 31, 2014 are not necessarily indicative of the results of operations for the full year. These financial statements and related footnotes should be read in conjunction with the financial statements and footnotes thereto included in the Company’s Form 10-K filed with the Securities and Exchange Commission on April 10, 2014.
BITZIO, INC
Condensed Consolidated Balance Sheets
| | | March 31, 2014 | | | December 31, 2013 | |
| | | (Unaudited) | | | | |
| Assets | | | | | | | | |
| Current Assets | | | | | | | | |
| Cash and cash equivalents | | $ | 1,368 | | | $ | 3,877 | |
| Accounts receivable, net | | | 21,209 | | | | 2,234 | |
| Prepaid expenses and other current assets | | | 43,750 | | | | - | |
| Total Current Assets | | | 66,327 | | | | 6,111 | |
| | | | | | | | | |
| Other Assets | | | | | | | | |
| Intangible assets, net | | | 277,931 | | | | 292,931 | |
| Note receivable | | | 128,079 | | | | 75,000 | |
| Total Other Assets | | | 406,010 | | | | 367,931 | |
| | | | | | | | | |
| Total Assets | | $ | 472,337 | | | $ | 374,042 | |
| | | | | | | | | |
| Liabilities and Stockholders’ Deficit | | | | | | | | |
| Current Liabilities: | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 820,629 | | | $ | 652,006 | |
| Related party payable | | | 141,699 | | | | 138,000 | |
| Notes payable, net of discount | | | 292,556 | | | | 367,512 | |
| Convertible notes, net of discount | | | 987,401 | | | | 1,037,684 | |
| Related party convertible notes, net of discount | | | 150,000 | | | | 150,000 | |
| Derivative liability | | | 1,818,783 | | | | 827,158 | |
| Total Current Liabilities | | | 4,211,068 | | | | 3,172,361 | |
| | | | | | | | | |
| Notes payable | | | 341,722 | | | | 225,000 | |
| Redeemable preferred stock series C, $0.001 par value; 999 shares authorized; 999 and nil shares issued and outstanding, respectively | | | - | | | | - | |
| Total Liabilities | | | 4,552,790 | | | | 3,397,361 | |
| | | | | | | | | |
| Stockholders’ Deficit: | | | | | | | | |
| Preferred stock series A, $0.001 par value; 25,000,000 shares authorized; 2,043,120 shares issued and outstanding | | | 2,043 | | | | 2,043 | |
| Preferred stock series B, $0.001 par value; 1,000,000 shares authorized; 700,000 and 500,000 shares issued and outstanding, respectively | | | 700 | | | | 500 | |
| Common stock, $0.001 par value; 2,000,000,000 shares authorized; 276,316,617 and 175,916,617 shares issued and outstanding, respectively | | | 276,317 | | | | 175,917 | |
| Additional paid in capital | | | 19,792,186 | | | | 19,603,216 | |
| Stock subscriptions payable | | | 181,074 | | | | 181,074 | |
| Accumulated deficit | | | (24,327,579 | ) | | | (22,986,069 | ) |
| Total Bitzio, Inc. stockholders’ deficit | | | (4,075,259 | ) | | | (3,023,319 | ) |
| Non-controlling interest | | | (5,194 | ) | | | - | |
| Total stockholders’ deficit | | | (4,080,453 | ) | | | (3,023,319 | ) |
| Total Liabilities and Stockholders’ Deficit | | $ | 472,337 | | | $ | 374,042 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
BITZIO, INC
Condensed Consolidated Statements of Operations
(Unaudited)
| | | Three Month Ended March 31, | |
| | | 2014 | | | 2013 | |
| Revenues | | $ | 26,703 | | | $ | - | |
| | | | | | | | | |
| Operating Expenses | | | | | | | | |
| Professional fees | | | 161,705 | | | | 628,563 | |
| General and administrative | | | 132,698 | | | | 52,378 | |
| Total operating expenses | | | 294,403 | | | | 680,941 | |
| | | | | | | | | |
| Loss from Operations | | | (267,700 | ) | | | (680,941 | ) |
| | | | | | | | | |
| Other Income (Expense) | | | | | | | | |
| Interest expense | | | (257,331 | ) | | | (208,078 | ) |
| Change in derivative liability | | | (818,778 | ) | | | 150,127 | |
| Foreign currency transaction loss | | | (43 | ) | | | - | |
| Loss on extinguishment of debt | | | (2,850 | ) | | | - | |
| Total other income (expense) | | | (1,079,002 | ) | | | (57,951 | ) |
| | | | | | | | | |
| Loss Before Income Taxes | | | (1,346,702 | ) | | | (738,892 | ) |
| Provision For Income Taxes | | | - | | | | | |
| | | | | | | | | |
| Net Loss From Continuing Operations | | | (1,346,702 | ) | | | (738,892 | ) |
| Income (loss) from discontinued operations | | | - | | | | 6,089 | |
| Net Loss before non-controlling interest | | | (1,346,702 | ) | | | (732,803 | ) |
| | | | | | | | | |
| Net loss attributable to non-controlling interest | | | (5,194 | ) | | | - | |
| | | | | | | | | |
| Net loss attributable to Bitzio, Inc | | $ | (1,341,508 | ) | | $ | (732,803 | ) |
| | | | | | | | | |
| Basic and Diluted Loss Per Share from Continuing Operations | | $ | (0.01 | ) | | $ | (0.01 | ) |
| Basic and Diluted Loss Per Share from Discontinued Operations | | $ | (0.00 | ) | | $ | 0.00 | |
| Basic and Diluted Loss Per Share attributable to Bitzio shareholders | | $ | (0.01 | ) | | $ | (0.01 | ) |
| Basic and Diluted Weighted Average Common Shares | | | 229,180,506 | | | | 76,695,796 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
BITZIO, INC
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | Three Months Ended March 31, | |
| | | 2014 | | | 2013 | |
| Cash Flows from Operating Activities | | | | | | | | |
| Net loss | | | (1,341,508 | ) | | | (732,803 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities | | | | | | | | |
| Net loss attributable to non-controlling interest | | | (5,194 | ) | | | - | |
| Depreciation and amortization | | | 15,000 | | | | 7,792 | |
| Loss on extinguishment of debt | | | 2,850 | | | | - | |
| Foreign currency transaction loss | | | 43 | | | | - | |
| Amortization of debt discounts on convertible notes | | | 15,504 | | | | 187,483 | |
| Origination interest on convertible notes payable | | | 215,802 | | | | 5,347 | |
| Change in derivative liabilities | | | 818,778 | | | | (150,442 | ) |
| Common shares issued for services | | | - | | | | 370,530 | |
| Notes payable repaid by a related party | | | - | | | | 193,214 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (18,975 | ) | | | (1,976 | ) |
| Prepaid expenses and other current assets | | | (6,250 | ) | | | - | |
| Accounts payable and accrued expenses | | | 168,621 | | | | 94,391 | |
| Related party payables | | | 3,699 | | | | 20,129 | |
| Net cash provided by continuing operating activities | | | (119,130 | ) | | | (6,335 | ) |
| Net cash provided by discontinued operating activities | | | - | | | | - | |
| Net cash provided by operating activities | | | (119,130 | ) | | | (6,335 | ) |
| | | | | | | | | |
| Cash Flows from Investing Activities | | | | | | | | |
| Cash invested in note receivable | | | (53,079 | ) | | | - | |
| Net cash provided by continuing investing activities | | | (53,079 | ) | | | - | |
| Net cash provided by discontinued investing activities | | | - | | | | - | |
| Net cash provided by investing activities | | | (53,079 | ) | | | - | |
| | | | | | | | | |
| Cash Flows from Financing Activities | | | | | | | | |
| Proceeds from convertible. notes payable | | | 37,500 | | | | - | |
| Repayments on notes payable | | | (37,800 | ) | | | - | |
| Proceeds from notes payable | | | 70,000 | | | | - | |
| Proceeds from sale of preferred stock | | | 100,000 | | | | - | |
| Net cash provided by continuing financing activities | | | 169,700 | | | | - | |
| Net Cash Provided by Discontinued Financing Activities | | | - | | | | - | |
| Net cash provided by financing activities | | $ | 169,700 | | | $ | - | |
| | | | | | | | | |
| Effects of exchange rates on cash | | | - | | | | - | |
| | | | | | | | | |
| Net increase in cash | | | (2,509 | ) | | | (6,335 | ) |
| Cash, beginning of period | | | 3,877 | | | | 39,868 | |
| | | | | | | | | |
| Cash and Cash Equivalents, end of period | | $ | 1,368 | | | $ | 33,533 | |
| | | | | | | | | |
| Cash Paid For: | | | | | | | | |
| Interest | | $ | - | | | $ | 44,856 | |
| Income taxes | | $ | - | | | $ | - | |
| | | | | | | | | |
| Non-cash Financing and Investing Activities | | | | | | | | |
| Debt discounts on convertible notes payable | | $ | 37,500 | | | $ | 193,500 | |
| Common stock issued for debt | | $ | 137,069 | | | $ | 422,643 | |
| Common stock issued for prepaid services | | $ | 50,000 | | | | | |
| Common stock issued for debt issuance costs | | $ | 2,500 | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
BITZIO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
(Unaudited)
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Bitzio, Inc. (“the Company”, “we”, “Bitzio”) was originally formed as Rocky Mountain Fudge Company, Inc. 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.
On July 27, 2011, Bitzio, Inc. and Bitzio, LLC entered into a 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 May 23, 2012, Bitzio, Inc. and Motion Pixel Corporation Holdings (“MPC”) 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. Pursuant to a Termination Agreement executed on February 14, 2013, Bitzio agreed to return 100% ownership of MPC 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 MPC 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.
On June 4, 2012, Bitzio, Inc. and ACT entered into a share purchase agreement wherein Bitzio 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 ($194,447 USD) to ACT.
On April 4, 2013 the Company completed the sale of its wholly owned subsidiary, Thinking Drone LLC to a third party. The transferred business and assets of Thinking Drone LLC have been presented as discontinued operations in these financial statements, with a gain shown on disposal of discontinued operations.After the sale of this subsidiary, the Company shifted its business strategy toward a fashion incubation model. This strategy was led and has been maintained by Gord McDougall, our CEO, and by Hubert Blanchette, a member of our board and the company’s previous CEO.
Effective on November 18, 2013 Bitzio, Inc. entered into a Distribution Agreement with E-motion Apparel, Inc., which designs women’s apparel and accessories. The agreement grants Bitzio the exclusive worldwide right to distribute E-motion Apparel’s products using the E-motion Apparel trademarks, copyrights and trade dress. The agreement also provides that Bitzio will make a five year non-interest-bearing $75,000 working capital loan to E-motion Apparel, and will pay a license fee of $300,000 to E-motion Apparel, payable in four semi-annual installments of $75,000 each commencing on December 31, 2014. The agreement has a term of five years, but the license will continue for any period during which E-motion Apparel owns any capital stock issued by Bitzio.
On February 3, 2014 the Company executed a non-binding letter of intent to acquire the stock of E-motion Apparel, Inc. The letter of intent contemplates that the Company will purchase 100% of the shares of E-motion Apparel. E-motion Apparel is currently engaged in the design, production and sale of apparel. As of March 31, 2014 the acquisition had not yet been completed.
On February 22, 2014 the Company entered into a Memorandum of Understanding with Angie Daza d/b/a Cleovii(the “MOU”). The MOU provides that
| | ● | The Company will organize a subsidiary, which has subsequently been organized in Nevada as Cleo VII, Inc., and which is owned 51% by the Company and 49% by Angie Daza. Angie Daza has contributed the product designs owned by Cleo VII to the subsidiary and agreed to provide production financing for orders up to 2,500 units per month. The Company has committed to deposit $12,000 into the bank account of Cleo VII, Inc. to be used for production and to share equally with Angie Daza the obligation to provide production financing for orders in excess of 2,500 units per month. |
| | | |
| | ● | Angie Daza will serve as President of Cleo VII, Inc., and will provide warehousing and fulfillment services at a location in Miami, Florida. The Company will develop marketing campaigns for the Cleo brand and provide administrative services. |
| | | |
| | ● | The Company shall immediately issue to Angie Daza 50,000,000 shares of its common stock, which shall vest quarterly over a two-year period. If Cleo-branded products achieve $1 million in annual gross revenue, the Company will issue to Angie Daza common shares with a market value of $100,000. If Cleo-branded products achieve $2 million in annual gross revenue, the Company will issue to Angie Daza additional common shares with a market value of $100,000. |
On February 18, 2014 the Company executed a non-binding letter of intent to acquire ownership of Sahaja, LLC. Sahaja is currently engaged in the design, production and sale of apparel. The Company also agreed to provide loans to Sahaja, LLC totaling up to $100,000 as mutually agreed. As of March 31, 2014, $17,000 has been loaned to Sahajabut the acquisition had not yet been completed.
On March 24, 2014 the Company executed a non-binding letter of intent to acquire ownership of ZMJ Denim, Inc. ZMJ Denim, Inc is currently engaged in the design, production and sale of apparel. The Company also agreed to provide loans to ZMJ Denim, Inc. totaling up to $100,000 as mutually agreed. As of March 31, 2014, the acquisition had not yet been completed.
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, has recurring net loss an accumulated deficit of $24,327,579 and a net working capital deficit of $4,144,741. 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 interim consolidated financial statements of Bitzio, Inc. (“Bitzio,” “we” or “us”) for the three months ended March 31, 2014 and 2013 are not audited. Our consolidated financial statements are prepared in accordance with the requirements for unaudited interim periods, and consequently, do not include all disclosures required to be made in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of March 31, 2014 and our results of operations and cash flows for the three-month periods ended March 31, 2014 and 2013. The results of operations for the three-month period ended March 31, 2014 are not necessarily indicative of the results for a full-year period. These interim consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission (the “SEC”).
Use of Estimates
The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates include, but are not limited to, 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
Following the execution of the November 18, 2013 Distribution Agreement, we derive our revenues from the sale of products under the Bitzio/Emotion Distribution Agreement. We recognize revenue when the following conditions are satisfied: (i) delivery of the product has occurred and (ii) collection is reasonably assured.
Prior to November 18, 2013, we derived our revenues from the sale of software and mobile applications through various platforms. We recognize revenue when all of the following conditions were 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.
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 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.
Property and equipment
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.
Goodwill and intangible assets
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.
We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. Intangible assets are amortized on a straight-line basis over its useful life.
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 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). Currently the Company has no other comprehensive income.
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 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, convertible preferred stock 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 antidilutive. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share. There were 710,753,988 such potentially dilutive shares excluded as of March 31, 2014.
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.
Fair Value Measurements
The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:
| | Level 1: | Quoted market prices in active markets for identical assets or liabilities. |
| | | |
| | Level 2: | Observable market-based inputs or inputs that are corroborated by market data |
| | | |
| | Level 3: | Unobservable inputs that are not corroborated by market data. |
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 – INTANGIBLE ASSETS
Intangible Assets
In November 2013, the Company entered into a Distribution Agreement with E-motion Apparel, Inc., which designs women’s apparel and accessories. The agreement grants Bitzio the exclusive worldwide right to distribute E-motion Apparel’s products using the E-motion Apparel trademarks, copyrights and trade dress. The agreement also provides that Bitzio will make a five year non-interest-bearing $75,000 working capital loan to E-motion Apparel, and will pay a license fee of $300,000 to E-motion Apparel.
| | | March 31, 2014 | | | December 31, 2013 | |
| License rights | | $ | 300,000 | | | $ | 300,000 | |
| Less: Accumulated amortization | | | (22,069 | ) | | | (7,069 | ) |
| Intangible Assets, net | | $ | 277,931 | | | $ | 292,931 | |
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 $15,000 and $7,792 for the three months ended March 31, 2014 and 2013, respectively.
Estimated amortization expense for the intangible assets for the next five years consists of the following as of March 31, 2014:
| Year Ending December 31 | | | |
| Remainder of 2014 | | $ | 45,000 | |
| 2015 | | | 60,000 | |
| 2016 | | | 60,000 | |
| 2017 | | | 60,000 | |
| 2018 | | | 52,931 | |
NOTE 5 – RELATED PARTY TRANSACTIONS
Related party payables
At March 31, 2014, $18,699 was due to related parties for accrued interest, and $123,000 for services rendered by a company owned by Bitzio’s chief executive officer.
NOTE 6 – CONVERTIBLE NOTES PAYABLE
Exchange of Convertible Debentures
Immediately subsequent to its purchase of 500,000 shares of Series B Preferred Stock on November 18, 2013 (see note 9), 112359 Factor Fund, LLC (“Factor Fund”) entered into assignment agreements with seven holders of eight convertible promissory notes issued by the Registrant in 2012 and 2013. The aggregate of the principal balance and accrued interest on the notes was $779,591, and all of the notes were past due and otherwise in default. The assignment agreements provided that Factor Fund transferred the 500,000 shares of Series B Preferred Stock to the note holders, and the note holders assigned the eight notes to Factor Fund.
Immediately thereafter, Factor Fund entered into eight Exchange Agreements with the Registrant. The Exchange Agreements provided that Factor Fund would surrender the eight convertible promissory notes and receive in exchange eight Amended and Restated Convertible Debentures (“A&R Debentures”). The principal amount of each A&R Debenture equalled approximately 128.3% of aggregate principal and accrued interest surrendered in exchange for the A&R Debenture. The primary terms of the A&R Debentures are:
| | ● | Interest will accrue on the principal balance at the lesser of 8% per annum or the applicable federal rate. |
| | | |
| | ● | Principal and interest are due on December 31, 2015. |
| | | |
| | ● | The Company may prepay the A&R Debentures at any time, but must issue, as a prepayment penalty, common stock with a market value equal to 5% of the principal amount prepaid. |
| | | |
| | ● | The holder may convert the principal and interest accrued on the A&R Debentures into common stock at a conversion price equal to 100% of the average of the five (5) lowest closing market prices for the common stock for the thirty trading days preceding conversion, but may not convert into a number of shares that would result in the holder owning beneficially more than 4.99% of the Registrant’s outstanding shares. |
| | | |
| | ● | The holder may not sell the shares issued on conversion at a rate that exceeds 20% of the average monthly trading volume for the Company’s Common Stock. |
The Company determined per ASC 470-50-40-10a, that the fair value of the embedded conversion option in the reissued convertible notes as a result of the change in conversion price and term, increased by more than 10% from the original notes. Therefore, debt extinguishment accounting rules apply. Accordingly, the reissued convertible notes payable were initially recorded at fair value, with a loss on extinguishment of debt of $220,408 for the difference in the fair value of the new notes compared to the carrying value of the old notes.
During the three months ended March 31, 2014 $53,765 of principal was converted into 47,900,000 shares of the Company’s common stock. The balance of the note as of March 31, 2014 is $933,919 with accrued interest of $28,157.
On March 4, 2014, the Company issued an 8% convertible promissory note in the aggregate principal amount of $37,500 to an accredited investor. The note has a maturity date of December 10, 2014. The note is convertible into shares of our common stock at a conversion price of 59% of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date. During the three months ended March 31, 2014, the Company recorded an interest expense of $217. The Company accounted for the conversion feature as a derivative valued at $253,302, of which $37,500 was recorded as a debt discount to be amortized over the life of the note. The remaining $215,802 was expensed immediately to interest expense.
NOTE 7 – 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 our outstanding 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.
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%. At March 31, 2014, the Company revalued the conversion features using the following assumptions: dividend yield of zero, years to maturity of between 0.70 and 1.75 years, risk free rates of 0.13 percent, and annualized volatility of between 208 and 236 percent and determined that, during the three months ended March 31, 2013, the Company’s derivative liability increased by $818,778 to $1,818,783. The Company recognized a corresponding gain on derivative liability in conjunction with this revaluation.
NOTE 8 – NOTES PAYABLE
On November 18, 2013, the Company entered into a Distribution Agreement with E-motion Apparel, Inc. The agreement provides that the Company will issue a promissory note to E-motion in an amount equal to 100% of the License Fee of $300,000. The Promissory Note shall have a maturity date of June 30, 2016 and be payable in 4 installments of $75,000 on December 31, 2014, June 30, 2015, December 31, 2105 and June 30, 2016. The Promissory Note shall bear no interest and be unsecured.
During 2012, the Company borrowed $55,000 through an unsecured promissory note bearing interest at 10% with a maturity date of March 10, 2014. During 2013, the Company borrowed additional $43,214, and converted $8,062 into 8,062,000 shares of common stock. As of March 31, 2014, the Company had principal outstanding in the promissory note of $90,152, and accrued interest of $14,010.
On June 4, 2012, Bitzio, Inc. and ACT entered into a share purchase agreement wherein Bitzio 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 ($194,447 USD) to ACT. The Company re-measured the amount due in U.S. dollars as of March 31, 2014 and recorded a loss on foreign currency transaction of $43. The amount due as of March 31, 2014 is $202,404.
On January 29, 2014 the Company sold a Promissory Note to The Victor Vinco Family Trust (the “Trust”). The purchase price was $70,000. The principal amount of the Note is $94,500, which is payable in installments of $18,900 on the 15th day of each month during the term of the Note. The Note does not bear interest, except in the event of a default, at which time interest shall accrue at 18% per annum.
NOTE 9 – 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, 1,000,000 shares are designated as Series B Convertible Preferred Stock, and 999 shares are designated as Series C Preferred Stock, par value of $0.001,
Series A Preferred Stock
As of December 31, 2013 and March 31, 2014, there were 2,043,120 shares of Series A Convertible Redeemable Preferred Stock issued and outstanding. The shares have the following provisions:
| | ● | Series A Convertible Redeemable Shares have no dividend rights. |
| | | |
| | ● | 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). |
| | | |
| | ● | Series A Convertible Redeemable shares have no voting rights. |
| | | |
| | ● | Each share of Series A Convertible Redeemable Preferred Stock is convertible, at the option of the holder, at any time prior to January 2, 2017, and upon payment of $0.40 per share, into two fully paid and non-assessable shares of the Company’s common. |
| | | |
| | ● | At any time after January 2, 2017, 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). |
Designation and Sale of Series B Preferred Stock
On November 18, 2013 the Company filed with the Nevada Secretary of State a Certificate of Designation of 1,000,000 shares of Series B Convertible Preferred Stock, which had been designated by the Company’s Board of Directors as authorized by the Registrant’s Articles of Incorporation. The holders of shares of Series B Preferred Stock will have the following rights:
| | ● | The holder may convert the Series B Preferred Stock into common stock. All 1,000,000 shares of Series B Preferred Stock are convertible into 19.8% of the common stock outstanding after the conversion, measured on the date of each conversion. |
| | | |
| | ● | The holder will have voting rights equivalent to the number of shares of common stock into which the holders Series B Preferred Stock is convertible. |
| | | |
| | ● | In the event of a liquidation of the Registrant, the holder of each share of Series B Preferred Stock will be entitled to a liquidation preference of $1.50. |
| | | |
| | ● | The holder will participate in any dividend payable to the holders of the common stock on an as-converted basis. |
The Company will have the right to redeem the Series B Preferred Stock for a payment of $1.50 per share
On November 18, 2013 the Company sold 500,000 shares of Series B Preferred Stock to 112359 Factor Fund, LLC (“Factor Fund”) for a total of $250,000. The Company and Factor Fund also agreed that in each of the five months commencing February 2014 Factor Fund will purchase an additional 100,000 shares of Series B Preferred Stock for $50,000 - i.e. a total of 500,000 shares sold during those five months for a total of $250,000. During the quarter ended March 31, 2014, Factor Fund purchased 200,000 additional shares of Series B Preferred Stock for $100,000.
Designation and Sale of Series C Preferred Stock
On December 3, 2013 the Company filed with the Nevada Secretary of State a Certificate of Designation of 999 shares of Series C Preferred Stock, which had been designated by the Company’s Board of Directors as authorized by the Registrant’s Articles of Incorporation. The holders of shares of Series C Preferred Stock will have the following rights:
| | ● | The holder of each share will have the right to cast the number of votes that equals the product obtained by dividing (a) the number of votes that the holders of all voting securities other than Series C Preferred Stock outstanding on the record date for the stockholder action are entitled to cast by (b) nine hundred ninety-eight (998), with the result that all 999 shares of Series C Preferred Stock together will have 50.1% of the voting power of the Registrant. |
| | ● | In the event of a liquidation of the Registrant, the holder of each share of Series B Preferred Stock will be entitled to a liquidation preference of $.01. |
| | | |
| | ● | The holder will not participate in any dividend payable to the holders of the common stock on an as-converted basis. |
| | | |
| | ● | On November 29, 2015, each outstanding share of Series C Preferred Stock shall be deemed to have been automatically redeemed by the Corporation. No redemption price shall be payable. |
On December 3, 2013 the Board of Directors sold 333 shares of Series C Preferred Stock to each of Gordon McDougall, Marilu Brassington and Hubert Blanchette for a price of $.01 per share. The three shareholders are the members of the Registrant’s Board of Directors. The Company valued the shares at $99, but immediately revalued the shares to the amount to be paid at settlement or $0.
NOTE 10 – COMMON STOCK
On January 13, 2014 the Company filed with the Nevada Secretary of State a Certificate of Amendment to Articles of Incorporation. The Certificate of Amendment increased the number of authorized shares of common stock from 250 million to 2 billion. There were 276,316,617 shares were issued outstanding as of March 31, 2014. The activity surrounding the issuances of the Common Stock is as follows:
During the three months ended March 31, 2014 the Company issued 47,900,000 shares in conversion of notes payable of $53,765, 2,500,000 shares for debt issuance costs of $2,500 and 50,000,000 shares of its common stock to Angie Daza under the MOU (see Note 1).
NOTE 11 – STOCK OPTIONS AND WARRANTS
The following table summarizes all stock option and warrant activity for the three months ended March 31, 2014:
| | | Shares | | | Weighted Average
Exercise Price
Per Share | |
| Outstanding, December 31, 2013 | | | 22,561,948 | | | $ | 0.33 | |
| Granted | | | - | | | | - | |
| Exercised | | | - | | | | - | |
| Forfeited | | | - | | | | - | |
| Expired | | | - | | | | - | |
| Outstanding, March 31, 2014 | | | 22,561,948 | | | $ | 0.33 | |
| Exercisable at March 31, 2014 | | | 22,561,948 | | | $ | 0.33 | |
The following table discloses information regarding outstanding and exercisable options and warrants at March 31, 2014:
| | | Outstanding | | | Exercisable | |
| Range of Exercise Prices | | 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 | | | | 2.67 | | | | 2,000,000 | | | | 0.20 | |
| $0.30 - $0.39 | | | 19,747,948 | | | | 0.34 | | | | 1.65 | | | | 19,747,948 | | | | 0.34 | |
| $0.40 - $0.49 | | | 814,000 | | | | 0.40 | | | | 1.01 | | | | 814,000 | | | | 0.40 | |
| | | | 22,561,948 | | | | 0.33 | | | | 1.72 | | | | 22,561,948 | | | | 0.33 | |
NOTE 12- FAIR VALUE MEASUREMENTS
Our financial assets and (liabilities) carried at fair value measured on a recurring basis as of March 31, 2014 and December 31, 2013, consisted of the following:
| | | | | | Fair Value Measurements Using | |
| | | | | | Quoted prices in | | Significant other | | | | |
| | | Total Fair
Value at | | | active
markets | | observable
inputs | | | Significant
Unobservable inputs | |
| Description | | March 31, 2014 | | | (Level 1) | | (Level 2) | | | | (Level 3) | |
| | | | | | | | | | | | | | | | |
| Derivative liability (1) | | $ | (1,818,783 | ) | | $ | — | | $ | (1,818,783 | ) | | $ | — | |
| | | | | | Fair Value Measurements Using | |
| | | | | | Quoted prices in | | Significant other | | | |
| | | Total Fair
Value at | | | active
markets | | observable
inputs | | Significant
Unobservable inputs | |
| Description | | December 31, 2013 | | | (Level 1) | | (Level 2) | | (Level 3) | |
| | | | | | | | | | | | | |
| Derivative liability (1) | | $ | (827,158 | ) | | $ | — | | $ | (827,158) | | $ | — | |
(1) The derivative is calculated using the Black Scholes Pricing Model
NOTE 13 – SUBSEQUENT EVENTS
On April 14, 2014, the Company issued an 8% convertible promissory note in the aggregate principal amount of $37,500 to an accredited investor. The note has a maturity date of January 18, 2015. The note is convertible into shares of our common stock at a conversion price of 59% of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Change In Business Plan
On April 4, 2013 the Company completed the sale of its wholly owned subsidiary, Thinking Drone LLC to a third party. The transferred business and assets of Thinking Drone LLC have been presented as discontinued operations in these financial statements, with a gain shown on disposal of discontinued operations. After the sale of this subsidiary, the Company shifted its business strategy toward a fashion incubation model. This strategy was led and has been maintained by Gordon McDougall, our CEO.
Effective on November 18, 2013 Bitzio, Inc. entered into a Distribution Agreement with E-motion Apparel, Inc., which designs women’s apparel and accessories. The agreement grants Bitzio the exclusive worldwide right to distribute E-motion Apparel’s products using the E-motion Apparel trademarks, copyrights and trade dress. The agreement also provides that Bitzio will make a five year non-interest-bearing $75,000 working capital loan to E-motion Apparel, and will pay a license fee of $300,000 to E-motion Apparel, payable in four semi-annual installments of $75,000 each commencing on December 31, 2014. The agreement has a term of five years, but the license will continue for any period during which E-motion Apparel owns any capital stock issued by Bitzio.
During the first quarter of 2014, the Company completed its first acquisition, taking control of the Cleo VII brand. The Company has also signed letters of intent to make three other brand acquisitions. Our financial statements for the quarter ended March 31, 2014, however, reflect only the results of distributing for E-motion Apparel, Inc. and the consolidated results of operations of our 51% owned subsidiary, Cleo VII, Inc. Our financial statements for the quarter ended March 31, 2013 include the results from our now-discontinued mobile app operations.
Going Concern
As a result of our financial condition, our independent auditor has expressed in its opinion on our financial statements of December 31, 2013 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.
Results from Continuing Operations
Revenues
For the three months ended March 31, 2014, we had revenues of $26,703 from continuing operations, compared to $0 for the three months ended March 31, 2013. All of the revenue was attributable to distribution of the E-motion Apparel brand, as our Cleo VII, Inc. subsidiary has not initiated sales yet. The wholesale apparel industry typically experiences low sales in January of every year as retailers push delivery for new merchandise towards end of February so that they can manage returns from December sales. While there are purchase orders in excess of $30,000 written in February and March 2014, those orders ship in April, May and June 2014.
Operating Expenses
Our operating expenses consisted of professional fees of $161,705, and general and administrative expenses of $132,698. The primary components of professional fees during the three months ended March 31, 2014, were consulting fees of $111,333, and legal fees of $17,418. During the three months ended March 31, 2013, we incurred professional fees of $628,563, and general and administrative expenses of $52,378.
Loss from Operations
Our loss from operations was $267,700 for the three months ended March 31, 2014, compared to a loss from operations of $680,941 for the three months ended March 31, 2013.
Other Expense
We had interest expense of $257,331 for the three months ended March 31, 2014, compared to $208,078 for the three months ended March 31, 2013. We also had additional loss on extinguishment of debt of $2,850 for the three months ended March 31, 2014.
We accounted for our convertible debt in accordance with ASC 480,Distinguishing Liabilities from Equity, as the conversion feature embedded in the convertible debentures could result in the note principal and related accrued interest being converted to a variable number of our common shares. The conversion feature on these debentures is variable and based on trailing market prices. It therefore contains an embedded derivative. The fair value of the conversion feature was calculated when the debentures were issued, and we recorded a derivative liability for the calculated value. The conversion liability is valued at the end of each reporting period and results in a gain or loss for the change in fair value. Due to the volatile nature of our stock, the change in the derivative liability and the resulting gain or loss will usually be material to our results.We had loss on derivative liability of $818,778 for the three months ended March 31, 2014, compared to gain of $150,127 for the three months ended March 31, 2013.
We acquired a 51% ownership interest in Cleo VII, Inc. The net loss attributable to non-controlling interest of $5,194 reflects the portion of the net loss of Cleo VII, Inc. attributable to the minority shareholder for the three months ended March 31, 2014.
Net Loss
The net loss attributable to Bitzio, Inc. for the three months ended March 31, 2014 of $1,341,508 reflects the net loss of the consolidated operations of Bitzio, Inc. and Cleo VII, Inc. for that period after increasing the net loss by the loss attributable to the non-controlling interest described above. The net loss for three months ended March 31, 2013 was $732,803.
Liquidity and Capital Resources
Our principal needs for liquidity have been to fund operating losses, working capital requirements, acquisitions, and debt service. Unfortunately, at March 31, 2014 we had low liquidity, with current assets consisting of $1,368 in cash, $43,750 in prepaid expenses and $21,209 in accounts receivable. 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. Accordingly, we will be working aggressively in 2014 to secure sources of financing.
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 seek equity and/or debt financing. However management cannot provide any assurances that we will be successful in accomplishing any of our plans.
Cash Used in Operations
Our net cash used in continuing operating activities was $119,130 for the three months ended March 31, 2014, compared to $6,335 for the three months ended March 31, 2013.
Our cash used in operations was far less than our net loss of $1,341,508 because our net loss included significant non-cash expenses: amortization of debt discounts on convertible notes of $15,504, change in derivative liability of $818,778, origination interest of $215,802, loss on extinguishment of debt of $2,850 and changes in operating assets and liabilities that totaled $159,597.
Cash Used in Investing Activities
Our net cash used by continuing investing activities was $53,079 for the three months ended March 31, 2014, related to our issuance of a note receivable for $53,079.
Cash Provided by Financing Activities
Our net cash provided by financing activities was $169,700 for the three months ended March 31, 2014, compared to $0 for the three months ended March 31, 2013. For the three months ended March 31, 2014, our cash provided by financing activities consisted primarily of proceeds from sale of preferred stock of $100,000, and proceeds, net of repayments, from convertible notes payable of $69,700.
Contractual obligations and other commitments
As of March 31, 2014, our contractual financial commitments were the license fee due to E-motion Apparel, which will total $75,000 in each of the current and three subsequent years, and professional fees due to Tezi Advisory, which total $123,000.
Off-balance sheet arrangements
As of March 31, 2014, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, or capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of 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, as of March 31, 2014, 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. The evaluation disclosed the following material weaknesses in our disclosure controls and procedures:
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, 2013. 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 outsource the bookeeping operations of our company. Because we have no bookkeeping staff, we outsource most of the basic accounting functions of our Company to an independent consultant. This consultant is self-directed, and is not directly answerable to the Company’s management. This is a material weakness because it could result in a disjunction between the accounting policies adopted by our Board of Directors and the accounting practices applied by the consultant.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2014, our disclosure controls and procedures were not effective.
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, the three months ended March 31, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
There are presently no pending legal proceedings to which the Company or any of its subsidiaries is a party or to which any of their property is subject and no such proceedings are known to the Company to be threatened or contemplated against it.
ITEM 1A – RISK FACTORS.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the period ended March 31, 2014, the Company has issued no unregistered equity security sales.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 – OTHER INFORMATION
None.
ITEM 6 – EXHIBITS
The following exhibits are filed as part of this quarterly report on Form 10-Q:
| Exhibit No. | | Description |
| 31.1 | | Rule 13a-14(a) Certification – CEO* |
| | | |
| 31.2 | | Rule 13a-14(a) Certification - CFO* |
| | | |
| 32.1 | | Rule 13a-14(b) Certification - CEO* |
| | | |
| 32.2 | | Rule 13a-14(b) Certification - CFO* |
| | | |
| 101.INS | | XBRL Instance Document** |
| | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document** |
| | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document** |
| | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document** |
| | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document** |
| | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document** |
*Filed Herewith
** In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed”.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | Bitzio, Inc. |
| | | |
| Dated: May 15, 2014 | | /s/ Gordon McDougall |
| | By: | Gordon McDougall |
| | Its: | Chief Executive Officer |
