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BTZO > SEC Filings for BTZO > Form 10-Q on 19-Nov-2012All Recent SEC Filings

Show all filings for BITZIO, INC.

Form 10-Q for BITZIO, INC.


19-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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, Inc. ("Bitzio" or the "Company") 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 and we aim to be responsible for the download of 1 billion apps by 2014.

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 4,000 additional mobile applications. The company was founded by Amish Shah in November 2010 and generated application download revenue in its first month of operation.

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, the Company and Motion Pixel Corporation Holdings entered into a share purchase agreement pursuant to which the Company 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, the Company and ACT Smartware GmbH entered into a share purchase agreement pursuant to which the Company 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 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 $558,287 (see Note 6).

Recent Events

Compromise and Settlement Agreement

On August 15, 2012, the Company entered into a Compromise and Settlement Agreement and General Release (the "Settlement Agreement"), by and among the Company, Amish Shah ("Shah") and Dvaraka Marketing, LLC, a California limited liability company ("Dvaraka", and together with Shah, the "Shah Parties") pursuant to which the Company and the Shah Parties agreed to settle all past, present and future claims against each other related to certain disputes (the "Disputes") which had arisen in connection with the terms, conditions, and performance of that certain Consulting Agreement, dated December 1, 2011, by and between Dvaraka and the Company (the "Consulting Agreement") and the acquisition (the "Digispace Acquisition") of all of the issued and outstanding equity interests of Digispace Solutions, LLC ("Digispace") by the Company. As set forth in the Settlement Agreement, the Company and the Shah Parties agreed to release and discharge each other from all claims, actions, suits, obligations, indemnitees and liabilities of any kind or nature, except with respect to the representations, warranties and obligations under the Settlement Agreement (the "Release").

In addition to the Release, the Company and the Shah Parties also agreed to (1) terminate the Consulting Agreement; (2) terminate that certain Option Agreement, dated September 30, 2011, by and between the Company and Shah, executed in connection with the Digispace Acquisition pursuant to which Shah was granted an option to purchase 500,000 shares of common stock of the Company; (3) consummate the transactions contemplated by that certain (i) Agreement, dated August 31, 2012, by and among the Company and the Shah Parties (the "Shah Agreement"); (ii) Asset Purchase Agreement, dated August 31, 2012, between the Company and Dvaraka (the "TAC Purchase Agreement"), pursuant to which the Company agreed to sell and Dvaraka agreed to acquire certain assets of the Company related to the informational product identified as "The App Code" and a platform that allows users to create mobile applications (the "TAC Business"); and (iii) Asset Purchase Agreement, dated August 31, 2012, among Digital Solutions, Inc., a California corporation ("Digital Solutions"), the Company and Dvaraka (the "Digital Solutions Purchase Agreement") pursuant to which the Company agreed to sell and Dvaraka agreed to acquire all of the Company's right, title and interest in certain assets, including but not limited to, the intellectual property rights, trade names, marks, domain names, websites and related goodwill owned and used by the Company in connection with the operation of Digispace (the "Digispace Business"), and assume certain liabilities of the Company. The Shah Agreement, TAC Purchase Agreement and Digital Solutions Purchase Agreement are each specifically described below. Pursuant to the terms of the Settlement Agreement, Shah resigned as an officer and director of the Company and any subsidiary of the Company.

Shah Agreement

In connection with the terms and conditions of the Shah Agreement, (1) Shah (or a designee) acquired certain assets and liabilities of the Company associated with the Digispace Business, pursuant to the terms and conditions of the Digital Solutions Purchase Agreement; (2) Shah (or a designee) acquired certain assets related to the TAC Business pursuant to the terms and conditions of the TAC Purchase Agreement; (3) the Company and the Shah Parties waived any legal actions each may have against the other in connection with representations as to the liabilities of the Company under the purchase agreement related to the Digispace Acquisition and the Option Agreement; (4) the Company granted Shah a perpetual, non-resellable, non-transferrable, non-sublicensable, royalty free-license to use the Company's Apwall and Adwall; and (5) the Consulting Agreement was terminated.


TAC Purchase Agreement

In consideration for the consummation of the transactions set forth in the Shah Agreement and the Settlement Agreement, and pursuant to the terms and conditions of the TAC Purchase Agreement, Dvaraka acquired all of the Company's right, title and interest in the intellectual property rights, trade names, marks, domain names, websites and related goodwill owned and used by the Company in connection with the TAC Business (the "TAC Business Assets"). The TAC Business Assets were acquired free and clear of all liabilities and any collections, payments or reimbursements received by Dvaraka after the closing of the sale of the TAC Business Assets in connection with sales or orders placed prior to the closing of the transactions set forth in the TAC Purchase Agreement and related to the TAC Business are required to be delivered to the Company, promptly following receipt by Dvaraka. Any collections, payments or reimbursements received by Dvaraka after the closing of the sale of the TAC Business Assets in connection with sales or orders placed following the closing of the sale of the TAC Business Assets and related to the TAC Business shall be retained by Dvaraka.

Digital Solutions Purchase Agreement

As additional consideration for the consummation of the transactions set forth in the Shah Agreement and the Settlement Agreement and pursuant to the terms and conditions of the Digital Solutions Purchase Agreement, Dvaraka acquired the Company's right, title and interest in certain intellectual property rights, trade names, marks, domain names, websites and related goodwill owned and used by the Company and certain existing contracts and relationships of the Company with vendors, dealers, buyers and customers in connection with the Digispace Business and assumed certain specified liabilities related to the Digispace Business.

Going Concern

As a result of our financial condition, our auditors have indicated in a footnote to our financial statements of September 30, 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.

Nine months ended September 30, 2012 and 2011

Results of Continuing Operations

Introduction

Our revenues from continuing operations for the nine months ended September 30, 2012 were $519,591, compared to 3,104 for the nine months ended September 30, 2011. We had very little operations in the first nine months of fiscal 2011, and thus comparisons between 2012 and 2011 are dramatic. In the three months ended December 31, 2011, our revenues were $154,579.


Revenues and Net Operating Income (Loss)

Our revenues, operating expenses, and net loss from continuing operations for
the nine months ended September 30, 2012 and 2011 were as follows:

                                                      Nine months       Nine months
                                                         ended             ended
                                                     September 30,     September 30,      Increase /
                                                         2012              2011           (Decrease)

Revenue                                              $     519,591     $       3,104     $      16,639 %

Operating expenses:
Professional fees                                        3,329,505            62,422             5,234 %
Executive compensation                                     127,500         1,141,576               (89 )%
General and administrative                                 418,151         4,591,474               (91 )%
Impairment of goodwill                                  (3,981,508 )      (2,350,800 )              69 %

Total operating expenses                                 7,856,664         8,146,272               (33 )%

Loss from continuing operations                         (7,337,073 )      (8,143,168 )             (42 )%
Other expense                                             (293,719 )            (746 )          39,273 %
Taxes                                                            -                 -               N/A

Net loss from continuing operations                     (7,630,792 )      (8,143,914 )              (6 )%
Loss on disposal of subsidiary                            (558,287 )               -               N/A
Discontinued operations                                   (591,236 )               -               N/A

Net loss                                             $  (8,780,315 )   $  (8,143,914 )               8 %

Revenues

For the nine months ended September 30, 2012, we had revenues of $519,591 from continuing operations, compared to $3,104 for the nine months ended September 30, 2011. The increase in revenues is a result of the four completed corporate acquisitions starting in July 2011. Our revenues are derived from the sale of software and mobile applications.


Operating Expenses

Our operating expenses from continuing operations consisted of professional fees of $3,329,505, executive compensation of $127,500, and general and administrative expenses of $418,151. At the end of June 2012, certain executives agreed to waive $540,000 of earned and unpaid compensation for the nine months ended September 30, 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 cashflow, the Company uses its common stock as consideration in certain transactions. Professional fees include $925,685 (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. Certain professional fees totaling $1,442,768 were paid through the issuance of common stock of the Company.

Impairment of Goodwill

During the nine months ended September 30, 2012, our goodwill impairment test indicated write-downs would be required for our two latest acquisitions. 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.

ACT Smartware is a European company with a stable profitable history in the software and mobile apps sector. In addition, their talented principals bring a high-level of innovation and talent to Bitzio. However, despite the international expansion, added talent, stable earnings history, and early mobile app portfolio, we applied a conservative approach of the goodwill impairment test focused on historic operating performance. Accordingly, we recorded a goodwill impairment charge of $1,836,508 against the purchased goodwill of $2,061,120.

During the nine months ended September, 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 that 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, the Company was required to record a goodwill impairment charge of $2,350,800.

Loss from Operations

Our loss from continuing operations was $7,630,792 for the nine months ended September 30, 2012, compared to a loss from operations of $8,143,168 for the nine months ended September 30, 2011.

Other Expense

We had interest expense, debt discount amortization and other financing costs of $478,837 for the nine months ended September 30, 2012, compared to $746 for the nine months ended September 30, 2011. Offsetting the financing costs was a gain on derivative liability revaluation of $185,118.

On August 31, 2012, we disposed of the net assets of the information productions divisions resulting in an accounting loss of $558,287. For the eight months ending August 31, 2012, the division incurred a $591,236 loss.


Net Loss

Our net loss for the nine months ended September 30, 2012 was $8,780,315, compared to a net loss of $8,143,914 for the nine months ended September 30, 2011. The net loss in both periods included several significant unusual and non-cash charges for goodwill impairment, stock option compensation expense of, depreciation, convertible debenture accounting charges, discontinued operations, and professional fees paid with stock. Excluding these unusual and non-cash items, our net loss for the nine months ended September 30, 2012 was $823,749 as compare to a net loss of $298,584.

Subsequent events

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. 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 nine months ended September 30, 2012 follows:

                                                                Nine months       Nine months
                                                                   ended             ended
                                                                 Sept. 30,         Sept. 30,
                                                                   2012              2011

Net loss                                                       $  (8,780,315 )   $  (8,143,914 )
Impairment of goodwill                                             3,981,508         2,350,800
Stock-based compensation expense                                     925,685         5,298,046
Stock-based service payment                                        1,442,768           195,228
Financing costs and debt discount amortization, net                  293,719               746
Depreciation and amortization                                        163,363               510
Loss on disposal of division                                         558,287                 -
Discontinued operations loss                                         591,236                 -

Adjusted EBITDA                                                $    (823,749 )   $    (298,584 )


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 September 30, 2012 consisted of cash of $199,759. 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 September 30, 2012 and December 31, 2011, respectively, are as follows:

                                  September 30,       December 31,
                                      2012                2011             Change

     Cash                        $       199,759     $      181,725     $     18,034
     Total Current Assets                476,833          1,553,595       (1,076,762 )
     Total Assets                      1,928,623          2,763,153         (834,530 )
     Total Current Liabilities         1,219,408            829,024          390,384
     Total Liabilities                 1,219,408            829,024          390,384


Our cash increased from $181,725 as of December 31, 2011 to $199,759 as of September 30, 2012 as a result of our financing 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 successfully issued $694,922 of convertible notes.

Cash Requirements

We had cash available as of September 30, 2012 of $199,759. Based on our current revenues, cash on hand, and our current net monthly burn rate of around $94,000, 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 operating activities was $1,034,394 for the nine months ended September 30, 2012, compared to $210,933 for the nine months ended September 30, 2011. The increased use is a result of the activities to develop our mobile applications and obtain media license rights.

For the nine months ended September 30, 2012, our net cash used in operating activities consisted of our net loss of $8,780,315, offset primarily by goodwill impairment of $3,981,508, stock options issued for services of $925,685, depreciation of $163,363, net convertible debenture accounting charges of $252,226, accounting loss on division disposal of $558,287 and common shares issued for services of $1,442,768.

Investments

Our net cash provided by investing activities was $7,088 for the nine months ended September 30, 2012, compared to $nil for the nine months ended September 30, 2011.

Financing

Our net cash provided by financing activities was $1,048,780 for the nine months ended September 30, 2012, compared to $197,427 for the nine months ended September 30, 2011.

For the nine months ended September 30, 2012, our net cash provided by financing . . .

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