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LFAP > SEC Filings for LFAP > Form 10-K on 14-Apr-2014All Recent SEC Filings

Show all filings for LIFEAPPS DIGITAL MEDIA INC.

Form 10-K for LIFEAPPS DIGITAL MEDIA INC.


14-Apr-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. References in this Management's Discussion and Analysis of Financial Condition and Results of Operations 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. See "Note Regarding Forward-Looking Statements." Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors discussed in "Risk Factors" and elsewhere in this Annual Report. 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.


Recent Developments and Trends

Merger

On September 20, 2012, we entered into the Merger Agreement and completed the Merger with LifeApps. As a result of the Merger, we acquired the business of LifeApps and will continue the existing business operations of LifeApps as our wholly owned subsidiary.

Financing Transaction

Concurrently with the closing of the Merger and in contemplation of the Merger, we completed an initial closing of a private placement offering of 5,700,000 units of our securities, at a price of $0.20 per Unit. Each Unit consists of one share of our common stock and a redeemable warrant to purchase one share of our common stock. The Investor Warrants are exercisable for a period of five years at a purchase price of $1.00 per share of our common stock.

On the Closing Date, the investors in the Offering collectively purchased 5,700,000 Units for total cash consideration of $1,140,000. The proceeds from the Offering will be used to fund (1) the legal and accounting costs of the Merger as well as recurring legal and accounting expenses as a result of being a public company and (2) our existing operating deficits and working capital. We do not currently anticipate any material capital expenditures.

On October 12, 2012, we conducted a second closing of the Offering in which we sold 300,000 units for an aggregate additional amount of $60,000.

The total aggregate consideration from these transactions was $1,200,000. We incurred expenses of $14,748. The net proceeds were $1,185,252.

Acquisition of the Sports One Group Assets

On April 1, 2013, we closed the acquisition by LifeApps of substantially all of the assets of Sports One Group, an internet based wholesale supplier of fitness apparel and related items to the promotional products industry, for a purchase price of $99,500.

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 and Estimates

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP"), which contemplates our continuation as a going concern. We have incurred losses to date of $1,238,893. 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.

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.

Fair Value Measurement
ASC Topic 820, Fair Value Measurements and Disclosures ("ASC 820"), provides a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy as follows:

Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange.


Level 2 - Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts or priced with models using highly observable inputs.

Level 3 - Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value of financial transmission rights.

Our financial instruments consist of accounts receivable, accounts payable, accrued expenses and amounts due to shareholder. The carrying value of accounts receivable, accounts payable, accrued expenses and amounts due to shareholder approximates its fair value due to their short maturity.

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
Intangibles, which include websites and databases acquired, internet domain name costs, and customer lists, are being amortized over the expected useful lives which we estimate to be three to five years. In accordance with ASC Topic 350 Intangibles - Goodwill and Other ("ASC 350"), the costs to obtain and register internet domain were capitalized.

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.

Cost of Revenue
Cost of revenue includes the cost of amounts paid for articles, photography, editorial and production cost of the magazine and ongoing web hosting costs. Cost of revenue related to product sales includes the direct cost of those products sold.

Equity Based Payments
Equity based payments are accounted for in accordance with ASC Topic 718, Compensation - Stock Compensation. The compensation cost is based upon fair value of the equity instrument at the date grant. The fair value has been estimated using the Black-Sholes option pricing model.


Results of Operations

Year ended December 31, 2013 Compared to the Year ended December 31, 2012 (References to 2013 and 2012 are to the years ended December 31, 2013 and 2012 respectively, unless otherwise specified.)

Revenues for 2013 and 2012 were $233,425 and $1,870, respectively. Revenues for 2013 are primarily from the sale of sports apparel and health and fitness products. Revenue for 2012 were from our digital application ("apps") and our "YouWorkout" digital magazine. During 2013, we continued to publish our YouWorkout digital magazine. The magazine may be purchased on-line as a single issue or as a subscription.

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, 2013 was $177,802 (76.17%). This resulted in a gross profit of $55,623 (23.83%). Costs were primarily the cost of products sold. Cost of revenue incurred for 2012 was $33,892 which included the cost of articles, photography, editorial and production cost of the magazine.

The following is a breakdown of our selling, general and administrative expenses for 2013 and 2012:

                                           Years Ended December 31,
                                             2013              2012         Difference
  Personnel costs                        $     257,913       $  43,522     $    214,391
  Professional fees                            166,449         105,633           60,816
  Equity based payments                        152,681          39,206          113,475
  Marketing, and promotion advertising          60,471          39,002           21,469
  Research and development                      30,397         112,248          (81,851 )
  Travel and entertainment                      24,807          15,839            8,968
  Rent expense                                  17,630          11,185            6,445
  Other expenses                                67,771          35,893           31,878
                                         $     778,119       $ 402,528     $    375,591

Personnel cost increase $214,391 (493%) because we did not have any employees until October 1, 2012, during 2013, we had between 3 and 6 employees, 1 of which was part time.

Professional fees increased $60,816 (57.57%) from $105,633 for 2012 to $166,449 for 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.

During 2012, the Board of Directors authorized the issuance of 1,400,000 options to purchase shares of our common stock to employees and directors, and 900,000 options to purchase our common stock to non-employees of the Company who provide consulting services. During 2013, one employee and two contracts with non-employees were terminated.


The fair value of the options granted during 2012, $111,208, 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                        0.36 %
               Dividend yield (on common stock)                  -

During 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 granted during 2013, $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 granted to employees and non-employees was $152,681 and $39,206, for, 2013 and 2012, respectively.

Marketing expenses increased $21,469 (55.05%) from $39,002 for 2012 to $60,471 for 2013, as we expanded our operations and developed 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 $81,851 (72.92%) from $112,248 for 2012 to $30,397 for 2013 as a result of the timing of updating of our websites and applications during late 2012. 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 operating costs increased as result our implementation of our business plan and increased business.

We had net losses of $753,513 and $441,921 for 2013 and 2012, respectively.

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 December 31, 2013, we had working capital of $97,783 as compared to $781,891 at December 31, 2012.


During the year ended December 31, 2013, operations used cash of $639,063 as compared to cash of $387,463 for the year ended December 31, 2012.

During the year ended December 31, 2013 investing activities used cash of $114,779, 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 was minimal investing activity during the year ended December 31, 2012.

During the year ended December 31, 2013 financing activates used cash of $347 and during the year ended December 31, 2012, financing activities provided cash of $1,181,302, primarily from the sale of our securities.

Subsequent to December 31, 2013, we received proceeds of $75,000 from a third party lender. We executed a promissory note which provided for an original issue discount of $8,437 and additional interest at the rate of 12% per annum. In the event that we repay the note within 90 days of execution the 12 % face interest is waived by the lender. The term of the note is 2 years. At the option of the lender the note is convertible into shares of our common stock. The Conversion Price is the lesser of $0.0485 or 60% of the lowest trade price in the 25 trading days previous to the conversion. Under the terms of the note and at the option of the lender, we may borrow up to $445,000.

We will continue to seek out additional capital in the form of debt or equity under the most favorable terms we can find.

Off-Balance Sheet Arrangements

None.

Contractual Obligations

Not applicable.

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