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LFAP > SEC Filings for LFAP > Form 10-Q on 19-Nov-2013All Recent SEC Filings

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Form 10-Q for LIFEAPPS DIGITAL MEDIA INC.


19-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial information included elsewhere in this Quarterly Report on Form 10-Q (this "Quarterly Report"), including our unaudited condensed consolidated financial statements as of September 30, 2013 and December 31, 2012 and for the nine and three months ended September 30, 2013 and 2012 and the related notes. References in this Management's Discussion and Analysis of Financial Condition and Results of Operations section to "us," "we," "our," and similar terms refer to LifeApps Digital Media Inc., a Delaware corporation. This discussion includes forward-looking statements, as that term is defined in the federal securities laws, based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. Words such as "anticipate," "estimate," "plan," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions are used to identify forward-looking statements.

We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Factors that may affect our results include, but are not limited to, the risk factors in Item 2.01 in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on April 12, 2013. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.

Overview

We are an emerging growth company and developer and designer of applications, fitness products, new media, digital magazines, publications, and next-generation social networks for sports, health, fitness and entertainment enthusiasts. We have a multimarket revenue strategy that incorporates mobile apps, digital magazines, publications, fitness training devices, web, social media and internet TV to engage consumers in multiple areas of sports, health, fitness and entertainment interests including medical, yoga, golf, tennis, running, soccer, cycling, and other health, fitness and sports topics.

We are building health, fitness and sports communities across multiple digital platforms including mobile apps, digital sports and fitness publications, sports and fitness products, sporting events, gateway platforms, online websites and social media. We believe that we will drive revenues by targeting sports, health and fitness specific communities and developing a relationship with its participants, delivering lifestyle content, social networking, skills and drills training, consumer fitness devices and nutritional content across multiple platforms including, but not limited to, Apple iOS and Google Android systems. LifeApps will invest in these sports, health and fitness communities to build customer loyalty and increase brand awareness by delivering digital content of interest and digitally enhanced physical consumer products that enrich and improve the user's sports, health and fitness lifestyle.

We were in the development stage from July 15, 2009 through March 31, 2013. Our fiscal year ending December 31, 2013 is the first year during which we are considered an operating company and is no longer in the development stage.

Our financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"), which contemplates our continuation as a going concern. We have incurred losses to date of $1,100,329. To date we have funded our operations through advances from a related party, issuance of convertible debt, and the sale of our common stock. We intend to raise additional funding through third party equity or debt financing. There is no certainty that funding will be available as needed. These factors raise substantial doubt about our ability to continue operating as a going concern. Our ability to continue our operations as a going concern, realize the carrying value of our assets, and discharge our liabilities in the normal course of business is dependent upon our ability to raise capital sufficient to fund our commitments and ongoing losses, and ultimately generate profitable operations.


Recent Developments

On April 1, 2013, we entered into an Asset Purchase Agreement with Sports One Group and Performance Gear ("Sports One Group"), a sole proprietorship, to purchase certain assets related to a gateway platform which matches sports apparel manufacturers with distributors and purchasers. The purchase price of the Sports One Group assets was $99,500. In accordance with the guidance of ASC Topic 805, Business Combinations ("ASC 8058"), we determined that the assets acquired constitute a business and we acquired 100% of the business. We acquired the Sports One Group business to expand our electronic and mobile commerce (e-commerce and m-commerce) businesses to include health fitness and sports apparel.

Plan of Operations

We are a licensed developer and publisher of apps for the Apple App Store for iPhone, iPod touch, iPad and iPad mini. LifeApps is also a licensed developer on both Google Play and Amazon Appstore for Android. We have distributed apps/publications on all three platforms. Moving forward we are developing new apps, and exploring new opportunities pairing apps with physical retail and e-commerce/mobile-commerce products.

Our plan is to expand our digital product offerings to include a digital magazine the contents of which are centered on sports and fitness as well as to continue the development and expansion of our mobile platform applications. Our "YouWorkout" digital magazine is currently available for individual purchase or subscription.

We are also expanding our revenue generating power through the creation of new gateway digital platforms that combine e-commerce with mobile-commerce solutions for sports, health and fitness communities, to act as conduits or meeting places for users to engage in the commerce of sports, health and fitness products and services. These gateway platforms can also be utilized and distributed across the broader base of tour suite of products.

We have begun developing physical sporting goods and fitness products that are partnered with related mobile apps and we launched the first of these efforts, the Golf Core Grip Workout System, in April 2013. The Golf Core Grip Workout System combines a tutorial app built on the LifeApps iOS Tutorial App Platform with a gym-quality fitness product that is being sold through e-commerce, mobile-commerce and retail channels. The Golf Core Grip app delivers the tutorial content for the fitness device and replaces the DVD tutorials traditionally found with such products. The Golf Core Grip was originally developed by a physician and was successfully sold in a limited run through the Titleist Performance Institute. LifeApps acquired the Core Grip and rebranded and repackaged the device for retail. We converted the original instructional DVD and added enhanced digital recording and social sharing functions into the Golf Core Grip Workout System app for iOS.

We continue to seek out innovative fitness consumer products where we can replace a traditional DVD tutorial with a mobile application. To that end, we are pursuing a strategy of building our own products combined with seeking agreements with companies with whom we can partner to bring such companies' products to market with our enhanced formats.

We have begun operating Sports One Inc., a wholly owned subsidiary of the Company after the acquisition of certain assets related to a gateway platform which matches sports apparel manufacturers with distributors and purchasers. Our current customer base are primarily companies in the promotional advertising business that represent small and large companies. We expect to expand these operations by the addition of new product lines and the inclusion of our own products discussed above as well as expanding our customer base.

Critical Accounting Policies

Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates.


Inventory
Inventory consists of finished goods, sports and fitness products, and is stated at the lower of cost or net realizable value, with cost being determined on a first-in first-out basis.

Intangibles
Internet domain name costs are being amortized over the expected useful life of the domain name which we estimate to be is three years from the date of registering the domain name. In accordance with ASC Topic 350 Intangibles - Goodwill and Other ("ASC 350"), the costs to obtain and register an internet domain shall be capitalized. Website and customer and supplier lists are being amortized over three and five years, respectively, which are their estimated useful lives.

Goodwill
Goodwill is initially recorded at fair value and not amortized, but is reviewed for impairment at least annually or more frequently if impairment indicators arise. Our goodwill is allocated by reporting unit and is evaluated for impairment by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. If it is determined, based on qualitative factors, the fair value of the reporting unit may be more likely than not less than carrying amount, or if significant changes to economic factors related to the reporting unit have occurred that could materially impact fair value, a quantitative goodwill impairment test would be required. Additionally, we can elect to forgo the qualitative assessment and perform the quantitative test.

Revenue Recognition
Revenue is derived primarily from the sale of sports and fitness apparel and equipment, and software applications designed for use on mobile devices such as smart phones and tablets. Revenue is recognized only when persuasive evidence of an arrangement exists, the fee is fixed or determinable, the product or service has been delivered, and collectability is probable.

We sell our software directly via Internet download through third party agents. We recognize revenue when payment is received from the agent. Payment is received net of commission paid to the agent, usually 70% to us and 30% to the agent. We record the net amount received as revenue.

We also publish and sell digital magazines through the internet. Magazines can be purchased as individual volumes or as a subscription. To date we have not had any subscription sales.

Research and development, Website Development Costs, and Software Development Costs
All research and development costs are expensed as incurred. Software development costs eligible for capitalization under ASC 350-50, Website Development Cost , and ASC 985-20, Software-Costs of Software to be Sold, Leased or Marketed , were not material to our financial statements for the nine and three months ended September 30, 2013 and 2012. Research and development expenses amounted to $30,286 and $57,003 for nine months ended September 30, 2013 and 2012, respectively, and $3,554 and $12,598 for the three months ended September 30, 2013 and 2012, respectively. Research and development expenses were included in general and administrative expenses.

Advertising Costs
We recognize advertising expense when incurred. Advertising expense was $55,250 and $20,257 for the nine months ended September 30, 2013 and 2012, respectively, and $12,210 and $8,708 for the three months ended September 30, 2013 and 2012, respectively.

Rent Expense
We recognizes rent expense on a straight-line basis over the reasonably assured lease term as defined in ASC Topic 840, Leases ("ASC 840"). Our lease is short term and will be renewed on a month to month basis. Rent expense for the nine months ended September 30, 2013 and 2012, was $15,499 and $7,495, respectively. Rent expense for the three months ended September 30, 2013 and 2012, was $6,160 and $3,835, respectively.

Results of Operations

Nine months ended September 30, 2013, compared with the respective period ended September 30, 2012

We were in the development stage from July 15, 2009 through March 31, 2013. Our fiscal year ending December 31, 2013 is the first year during which we are considered an operating company and is no longer in the development stage. As a result of a business combination, Sports One Inc., our wholly owned subsidiary, is a fully operational entity generating revenue and profits.

Revenues for nine months ended September 30, 2013 and 2012 were $168,617 and $1,706, respectively. Revenues for the nine months ended September 30, 2013 are primarily from the sale of sports apparel and health and fitness products. Revenue for the nine months ended September 30, 2012 were from our digital application ("apps") and our "YouWorkout" digital magazine.

Cost of revenue normally includes our cost of products sold and amounts paid for articles, photography, editorial and production cost of the magazine. In the future we will incur direct cost related to revenue such as webhosting and direct cost for our customer support. For the foreseeable future we anticipate outsourcing such costs.


Cost of revenue for nine months ended September 30, 2013 was $117,324 (69.6%). This resulted in a gross profit of $51,293 (30.4%). Costs were primarily the cost of products sold. Cost of revenue incurred for the nine months ended September 30, 2012 was $21,970 which included the cost of articles, photography, editorial and production cost of the magazine.

We had net losses of $614,949 and $173,180 for the nine months ended September 30, 2013 and 2012, respectively.

The following is a breakdown of our selling, general and administrative expenses for the nine months ended September 30, 2013 and 2012:

                                                 Nine Months Ended September 30,
                                              2013            2012         Difference
    Personnel costs                        $   210,125      $       -     $    210,125
    Equity based payments                      118,329              -          118,329
    Professional fees                          151,232         51,512           99,720
    Marketing, promotion and advertising        55,250         20,257           34,993
    Research and development                    30,286         57,003          (26,717 )
    Travel and entertainment                    19,671          3,304           16,367
    Rent expense                                15,499          7,495            8,004
    Other expenses                              48,089          6,889           41,200
                                           $   648,481      $ 146,460     $    502,021

We had no employees in the nine months ended September 30, 2012. We had a total of 4 employees, 3 of whom were full time employees during the nine months ended September 30, 2013.

During the nine months ended September 30, 2013, the Board of Directors authorized the issuance of 3,600,000 options to purchase shares of our common stock to employees and directors, and 375,000 options to purchase our common stock to non-employees of the Company who provide consulting services.

The fair value of the options, $104,420, was estimated at the date of grant using the Black-Scholes option pricing model, with the following assumptions:

               Expected life (in years)                          3
               Volatility (based on a comparable company)      117 %
               Risk Free interest rate                        0.48 %
               Dividend yield (on common stock)                  -

Amounts charged to expense for the options paid to employees and non-employees was $118,329 for the nine months ended September 30, 2013. There were no expenses the same periods in 2012.

Professional fees increased $99,720 (194%) from $51,512 for the nine months ended September 30, 2012 to $151,232 for the nine months ended September 30, 2013, as a result of being a public company and the cost associated with our merger with Lifeapps Inc. We incurred costs of securities law counsel as well as auditing costs.

Marketing expenses increased $34,993 (173%) from $20,257 for the nine months ended September 30, 2012 to $55,250 for the nine months ended September 30, 2013, as we began to expand our operations and to develop an awareness of our products. We attended a number of trade shows to introduce our Core Grip Workout System. We began selling the Core Grip in April 2013.

Research and development includes website and applications development costs. Research and development expenses decreased $26,717 (46.9%) from $57,003 for the nine months ended September 30, 2012 to $30,286 for the nine months ended September 30, 2013 as a result of updating of our websites and applications prior to the nine months ended September 30, 2013. Development is an ongoing cost and we anticipate that our development costs both for website and applications may increase in future periods.


All of our other costs increased as result our implementation of our business plan and increased business.

Three months ended September 30, 2013, compared with the respective period ended September 30, 2012

Revenues for three months ended September 30, 2013 and 2012 were $74,939 and $440, respectively. Revenues for the three months ended September 30, 2013 were derived primarily from the sale of sports apparel and health and fitness products. Revenue for the three months ended September 30, 2012 were from the sale of our digital application ("apps").

Cost of revenue normally includes our cost of products sold and amounts paid for articles, photography, editorial and production cost of the magazine. In the future we will incur direct cost related to revenue such as webhosting and direct cost for our customer support. For the foreseeable future we anticipate outsourcing such costs.

Cost of revenue for three months ended September 30, 2013 was $51,962 (69.3%). This resulted in a gross profit of $22,977 (30.7%). Costs were primarily the cost of products sold. Cost of revenue incurred for the three months ended September 30, 2012 was $21,970 which included the cost of articles, photography, editorial and production cost of the magazine.

We had net losses of $199,598 and $92,773 for the three months ended September 30, 2013 and 2012, respectively.

The following is a breakdown of our selling, general and administrative expenses for the three months ended September 30, 2013 and 2012:

                                  Three Months Ended September 30,
                                     2013                   2012            Difference
   Personnel costs             $          69,395       $             -     $     69,395
   Professional fees                      73,548                33,312           40,236
   Equity based payments                  32,465                     -           32,465
   Research and development                3,554                12,598           (9,044 )
   Marketing and advertising              12,210                 8,708            3,502
   Rent expense                            6,160                 3,835            2,325
   Travel and entertainment                4,822                 3,164            1,658
   Other expenses                         12,574                 6,050            6,524
                               $         214,728       $        67,667     $    147,061

We had no employees in the three months ended September 30, 2012. We had a total of 4 employees, 3 of whom were full time employees during the three months ended September 30, 2013.

Professional fees increased $40,236 (121%) from $33,312 for the three months ended September 30, 2012 to $73,548 for the three months ended September 30, 2013. The increase is a result of being a public company and the cost associated with our merger with Lifeapps Inc. We incurred costs of securities law counsel as well as auditing costs.

During the three month periods ended September 30, 2013 and 2012, the Board of Directors did not authorized the issuance any options to purchase shares of our common stock to employees and directors or to non-employees of the Company who provide consulting services. The expense for the three months ended September 30, 2013 relates to options previously granted.

Research and development includes website and applications development costs. Research and development expenses decreased $9,044 (71.8%) from $12,598 for the three months ended September 30, 2012 to $3,554 for the three months ended September 30, 2013. The change is not significant. Development is an ongoing cost and we anticipate that our development costs both for website and applications may increase in future periods.

All of our other costs increased as result our implementation of our business plan and increased business.


Liquidity and Capital Resources

We were financed primarily by capital contributions from members of LifeApps LLC, the predecessor to LifeApps, from short term borrowings, and through our private placement which we completed in October 2012. Our existing sources of liquidity may not be sufficient for us to implement our initial business plan. Our need for future capital will be dependent upon the speed at which we expand our product offerings. There are no assurances that we will be able raise additional capital as needed.

As of September 30, 2013, we had working capital of $188,286 as compared to $781,891 at December 31, 2012.

During the nine months ended September 30, 2013, operations used cash of $552,244 and for the nine months ended September 30, 2012 used cash of $159,520.

During the Nine months ended September 30, 2013 investing activities used cash of $114,778, primarily for acquisition of Sports One Group. Sports One Group utilizes a gateway platform which matches sports apparel manufacturers with distributors and purchasers and sells sports and fitness apparel. There were minimal investing activity during the nine months ended September 30, 2012.

During the nine months ended September 30, 2013 financing activates used cash of $347 and during the nine month period ended September 30, 2012, financing activities provided cash of $1,136,050, primarily from the sale of ur securities.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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