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BTZO > SEC Filings for BTZO > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for BITZIO, INC.

Form 10-Q for BITZIO, INC.


14-Aug-2014

Quarterly Report


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.

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 six months of 2014 the Company completed its first acquisition, taking control of the Cleo VII brand, and signed letters of intent to make three other brand acquisitions. The financial statements included in this Report, however, reflect only the results of distributing for E-motion Apparel, Inc., as well as results from our now-discontinued mobile app operations. Subsequent to June 30, 2014, the Company acquired all of the capital stock of E-Motion Apparel, Inc. and Lexi-Luu Designs, Inc., a designer and distributor of childrens clothing.

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 of Operations

Revenues

For the three and six months ended June 30, 2014, we had revenues of $60,551 and $87,254, respectively, from continuing operations, compared to $0 for the three and six months ended June 30, 2013. Sales grew in the second quarter, as 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. Sales remain far below the level necessary for profitable operations, however, as we lack adequate financial resources to support our marketing program.

Operating Expenses

The primary component of our operating expenses for the three and six months ended June 30, 2014 consisted of professional fees of $199,874 and $361,579, respectively. The primary components of professional fees during the six months ended June 30, 2014, were consulting fees of $172,833, and legal fees of $35,461, all of which was generally related to our efforts to gain access to potential sources of financing. During the three and six months ended June 30, 2013, our professional fees totaled $390,170 and $1,018,733, respectively. Professional fees fell year-to-year due to the change in our business plan and management practices.

The remainder of our operating expenses for the three and six months ended June 30, 2014 consisted of general and administrative expenses of $87,708 and $220,406, respectively. In both periods, G&A expenses exceeded those recorded during the three and six months ended June 30, 2013. The primary reason for the increase is that we have reduced reliance on professionals for management services, resulting in an increase in management salaries but a reduction in professional fees.

Loss from Operations

Due to our significant reduction in operating expenses, our loss from operations fell from $454,803 for the three months ended June 30, 2013 to $227,031 for the three months ended June 30, 2014, and from $1,135,744 for the six months ended June 30, 2013 to $494,731 for the six months ended June 30, 2014

Other Expense

During the three months ended June 30, 2013 we incurred above-normal interest charges of $246,819 as a result of financing transactions in that quarter. Because of that situation, our interest expense for the three and six months ended June 30, 2014 was less than our interest expense for the comparable periods of 2013, although our overall debt is considerably greater than it was one year ago.

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. During the quarter ended June 30, 2014, we recorded a gain of $657,520, as the value of our derivative liabilities fell by that amount. In the first quarter of this year, however, we recorded a loss of $818,778 as the value of our derivative liabilities increased, with the result that for the six months ended June 30, 2014 the overall result was a loss of $161,258.

We acquired a 51% ownership interest in Cleo VII, Inc. The net loss attributable to non-controlling interest of $0 reflects no operations in Cleo VII, Inc. attributable to the minority shareholder for the three months ended June 30, 2014.

Net Income (Loss)

Although our operations were not profitable, we nevertheless recorded net income of $346,031 for the quarter ended June 30, 2014 due to the $657,520 gain we recorded on the change in value of our derivative liability. For the six months ended June 30, 2014, during which we recorded a loss from operations as well as a loss on the value of our derivative liabilities, we recorded a net loss of $995,478.

Liquidity and Capital Resources

Our principal needs for liquidity have been to fund operating losses, working capital requirements, acquisitions, and debt service. Unfortunately, at June 30, 2014 we had low liquidity, with current assets consisting of $0 in cash, $40,400 in prepaid expenses and $59,512 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. As described in Note 13 ("Subsequent Events") to our financial statements, subsequent to the end of the second quarter we secured an additional investment from our principal creditor.

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 $220,545 for the six months ended June 30, 2014, compared to $98,123 for the six months ended June 30, 2013.

Our cash used in operations was far less than our net loss of $995,478 because our net loss included significant non-cash expenses: amortization of debt discounts on convertible notes of $30,000, change in derivative liability of $161,258, origination interest of $230,356, loss on extinguishment of debt of $2,850 and changes in operating assets and liabilities that totaled $297,262.

Cash Used in Investing Activities

Our net cash used by continuing investing activities was $116,382 for the six months ended June 30, 2014, related to our purchase of a note receivable for $116,382.

Cash Provided by Financing Activities

Our net cash provided by financing activities was $333,050 for the six months ended June 30, 2014, compared to $90,000 for the six months ended June 30, 2013. For the six months ended June 30, 2014, our cash provided by financing activities consisted primarily of proceeds from sale of preferred stock of $250,050, and proceeds, net of repayments, from notes payable of $83,000.

Contractual obligations and other commitments

The following table summarized our contractual obligations as of June 30, 2014, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

                                                                  Payments due by period
                              Total         Less than 1 Year      1-2 Years        3-4 Years         5+ Years
Related party debts        $   295,439     $          295,439              -                 -                -
Notes payable                  591,395                291,395     $  300,000                 -                -
Convertible notes              977,138                977,138              -                 -                -
Total                      $ 2,155,367     $        1,855,367     $  300,000                 -                -

Off-balance sheet arrangements

As of June 30, 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.

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