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BEES > SEC Filings for BEES > Form 10-K on 15-Apr-2014All Recent SEC Filings

Show all filings for BEESFREE, INC.

Form 10-K for BEESFREE, INC.


15-Apr-2014

Annual Report


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

Overview

We are a company focused on developing innovative solutions for the global beekeeping community. We have developed BeesVita PlusTM, a patent-pending composite nutritional food supplement for honey bees that improves the bee's general health and wellbeing. The benefits from using BeesVita PlusTM include promoting improved brood rearing, increasing the adult bee population, helping to control Varroa infestation, helping to control Nosema infestation, and helping to prevent CCD. CCD is a phenomenon in which worker bees from a beehive or colony abruptly disappear effectively killing the colony. We have also developed the BeespenserTM, a patent-pending automated external honey bee feeding system used to deliver BeesVita PlusTM.

Since our inception, we have had no revenue from product sales and have funded our operations principally through equity and debt financings. Our operations to date have been primarily limited to organizing and staffing our company, developing our product candidates, establishing manufacturing for our product candidates, filing our patents and raising capital. We have generated significant losses to date and we expect to continue to generate losses as we progress towards the commercialization of our product candidates. As of December 31, 2013, we had a deficit accumulated during the development stage of $4,424,630. Because we have not generated any revenue from any of our product candidates, our losses will continue as we advance our product candidates towards regulatory approval and eventual commercialization. As a result, our operating losses are likely to increase during the current fiscal year. We are unable to predict the extent of any future losses or when we will become profitable, if at all.

We believe that our existing cash may not be sufficient to fund our projected operating requirements beyond the first quarter of 2014. Until we can generate a sufficient amount of product revenue, if ever, we expect to finance future cash needs through public or private equity offerings, debt financings or corporate collaborations and licensing arrangements. There can be no assurance that any additional financing will be available to the Company on acceptable terms, or at all. See "Liquidity, Capital Resources and Going Concern Matters" section for additional discussion.

Critical Accounting Policies

Use of Estimates. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires us to make estimates and assumptions 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 financial statements include estimates based on currently available information and our judgment as to the outcome of future conditions and circumstances. Changes in the status of certain facts or circumstances could result in material changes to the estimates used in the preparation of the financial statements and actual results could differ from the estimates and assumptions. The Company's significant estimates and assumptions include the fair value of the Company's stock, stock-based compensation, derivative liabilities and the valuation allowance relating to the Company's deferred tax assets.

Fair Value of Financial Instruments. The carrying amounts of cash, accounts payable, and accrued liabilities approximate fair value due to the short-term nature of these instruments.

We measure the fair value of financial assets and liabilities based on the guidance of Accounting Standards Codification ("ASC") 820, "Fair Value Measurements and Disclosures," which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

Level 1 - quoted prices in active markets for identical assets or liabilities

Level 2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 - inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)

As of December 31, 2013, the Company did not have any Level 1 or Level 2 assets or liabilities. As of December 31, 2013, the Company's derivative liabilities were classified within Level 3 of the Valuation Hierarchy.

Stock-Based Compensation

We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is measured on the commitment date and generally remeasured on interim financial reporting dates until the service period is complete. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Stock-based compensation expense is recorded in the same expense classifications in the consolidated statements of operations as if such amounts were paid in cash.

Results of Operations

Comparison of the Years ended December 31, 2013 and 2012

Revenues

For the period from our inception on August 4, 2011 to December 31, 2013, we did not generate any revenues from operations.

Cost of Revenues

For the period from our inception on August 4, 2011 to December 31, 2013, we did not generate any cost of revenues from operations.

Net loss

Net loss for the year ended December 31, 2012 was $1,699,466 and our net loss for the year ended December 31, 2013 was $1,220,202. The decrease in net loss was primarily the result of cost reductions in shareholder services, payroll expense, marketing expenses and financial services expenses.

Research and development expenses

Research and development expenses consist primarily of fees paid to our Chief Scientist and other consultants for the continuing development of our pending patent applications , product dispenser and chemical compound. Research and development expenses are expensed as they are incurred. For the year ended December 31, 2013 research and development expenses decreased by approximately $54,000 as compared to prior period to $158,352. The decrease resulted primarily from reduction of outside consultant fees and a reduction in purchase of product testing materials. We do not incur any significant costs or experience any significant effects as a result of compliance with federal, state and local environmental laws.

General and administrative expenses

General and administrative expenses consist primarily of corporate support expenses such as legal and professional fees, investor relations and marketing expenses. For the year ended December 31, 2013, general and administrative expenses decreased by approximately $658,000 as compared to prior period to $762,180. The decrease resulted primarily from decrease in (i) payroll of approximately $55,000 due to reduction in staff, (ii) $119,000 due to the resignation of an executive officer and related severance expenses and the reduction of other consultants, (iii) travel expenses of approximately $23,000 due to decreased travel activity, (iv) marketing consulting expenses of approximately $62,000 due to non renewal of marketing services and reduction in trade shows, (v) approximately $297,000 due to reduction in investor relations services, (vi) approximately $15,000 of financial and legal expenses due to the reduction in license agreement services, and (vii) approximately $78,000 of share based compensation expenses due to the reduction in recording of vesting options expense. We expect that our general and administrative expenses to increase as we incur additional costs to support the growth in our business.

Plan of Operations

We expect to generate revenues within the next 12 months which reflects our goal to launch our product in 2014. Our plan of operations is to continue the development of our products for commercialization. Our primary source of operating funds since inception has been cash proceeds from the issuance of common shares to our founders, proceeds from the issuance of convertible debentures, and the sale of preferred stock and warrants in private placements. We intend to raise additional capital through private debt and equity investors, but there can be no assurance that these funds will be available on terms acceptable to us, or will be sufficient to enable us to fully complete our development activities or sustain operations.

During the next twelve months, we believe that our major expenditures will be directed towards the following activities:

sales and marketing efforts in our major markets including the creation of local offices;
the procurement of product for sale;

the implementation of an eCommerce platform;
continuation of our research and development activities, with a focus on the development and improvement of product features and increased functionalities; and
the hiring and retention of qualified personnel.

In addition, we believe it is unlikely but possible that in the next twelve months, extraordinary additional costs may arise from the following factors:

the establishment of additional local offices not otherwise planned for on account of jurisdiction-specific laws and practices in markets that we are targeting; and

the introduction of new, unforeseen competitive technologies, which could require us to expend additional resources in research and development activities in order to improve or update our existing products.

With respect to the hiring and retention of personnel, we anticipate that we will hire, or retain as consultants, an additional one to five regional sales managers in various regions throughout the world within the next twelve months, who will join our current regional sales manager in Argentina. In addition, we may hire, or retain as consultants, additional science professionals in various regions throughout the world to aid in product testing and further our understanding of CCD in such regions.

Liquidity, Capital Resources and Going Concern Matters

General. At December 31, 2013, we had cash and cash equivalents of approximately $154,000. As a development stage company, we have not generated any revenues and incurred net losses of approximately $4.0 million during the period from August 4, 2011 (Inception) through December 31, 2013. These conditions raise substantial doubt about the Company's ability to continue as a going concern.

Subsequent to December 31, 2013, the Company sold additional convertible notes and received gross cash proceeds of $200,000. The Company's primary source of operating funds since inception has been cash proceeds from the issuance of common shares to its founders, sale of convertible debentures and private placement of Series A Preferred Stock and Series B Preferred Stock. During 2013, our negative cash rate averaged approximately $65,000 per month. Our current rate of negative cash flow is approximately $95,000 per month. The increase in negative cash flow is primarily due to a one time increase, of approximately $100,000 in general administrative expenses incurred during the first quarter of 2014. Until we can generate a sufficient amount of product revenue, if ever, we expect to finance future cash needs through public or private equity offerings, debt financings or corporate collaborations and licensing arrangements.

We will seek to raise capital through equity and/or debt offerings. However, there can be no assurance that we will be able to raise equity or debt capital on terms we consider reasonable and prudent, or at all. The availability of capital to us may be subject to the volatility in the financial markets, our future financial condition and credit rating, and whether sufficient assets are available to be used as debt collateral in connection with any future debt financing, among other factors. Future financings through equity investments are likely to be dilutive to existing stockholders. Also, the terms of securities we issue in future capital transactions may be more favorable for our new investors. Newly issued securities may include preferences, superior voting rights, and the issuance of warrants or other derivative securities, which may have additional dilutive effects. Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which may adversely impact our financial condition.

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The financial statements do not include any adjustment that might result from the outcome of this uncertainty.

Until we develop a consistent source of revenue and achieve a profitable level of operations that generates sufficient cash flow, we will need additional capital resources to fund growth and operations. We will seek to raise capital through equity and/or debt offerings. However, there can be no assurance that we will be able to raise equity or debt capital on terms we consider reasonable and prudent, or at all. The availability of capital to us may be subject to the volatility in the financial markets, our future financial condition and credit rating, and whether sufficient assets are available to be used as debt collateral in connection with any future debt financing, among other factors. Future financings through equity investments are likely to be dilutive to the existing stockholders. Also, the terms of securities we issue in future capital transactions may be more favorable for our new investors. Newly issued securities may include preferences, superior voting rights, and the issuance of warrants or other derivative securities, which may have additional dilutive effects. Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which may adversely impact our financial condition.

Loss on Fair Value of Derivative Liabilities

The loss on net change in fair value of derivative liabilities of approximately $80,000 for the year ended December 31, 2013, was the result of the change in fair value of the derivative liabilities issued to investors in connection with financings during the year ended December 31, 2013 and 2012. The warrants and conversion issued in conjunction with certain financings are considered derivative liabilities and must be valued at the end of each period.

Net Cash Used in Operating Activities

We experienced negative cash flow from operating activities, for year ended December 31, 2013, in the amount of $774,406, primarily reflecting our net loss of $1,220,202, partially offset by $150,716 in amortization of deferred debt discount, by $40,953 in prepaid expenses, by $168,107 in accounts payable and accrued expenses and by $80,394 loss on change in fair value of derivative liabilities.

Net Cash Used in Investing Activities

The Company did not use any funds for investing activities.

Net Cash Provided by Financing Activities

Cash provided by financing activities, net of costs, for the year ended December 31, 2013, was $885,000 from the issuance of secured convertible notes.

Factors That May Affect Future Operations

We believe that our future operating results will continue to be subject to quarterly variations based upon the following factors:

the speed and ease with which we are able to penetrate new markets;
our ability to establish regional sales offices and hire quality regional sales managers; the efficacy of and market acceptance of our products;

our research and development focusing on the improvement of features and functionalities of our current products and the development of additional products;
our ability to capitalize on manufacturing efficiencies; the severity and changing nature of CCD in the various regions we are targeting for commercial sales;

the cyclical nature of the ordering patterns from our distributors and customers; and
the fluctuation of the Argentine peso and the Euro against the U.S. dollar and other international currencies.

We currently do not believe it is necessary for us to take any additional steps to address any of the aforementioned factors with respect to the possible impacts they could have on our future operations.

Off-Balance Sheet Arrangements

We have no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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