Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto contained elsewhere in this Report. The following discussion and analysis contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ significantly from the results, expectations and plans discussed in these forward-looking statements.
Overview
The Company was incorporated in the State of Nevada on October 15, 2010.
We assist companies across a wide array of industries in utilizing mobile devices and technologies to create targeted branding and advertising campaigns. Our proprietary video marketing platform (the “Platform”) allows companies to integrate traditional print media with mobile Text-to-Video messages, activate and optimize their web portals, and build mobile marketing databases. Our Platform utilizes unique keyword-activated campaigns that engage mobile users with video and automated call-to-action prompts. This dynamic, cloud-based marketing tool has small business applications, enterprise solutions for large companies, and white-label opportunities for marketing and communications firms.
On February 13, 2013 (the “Closing Date”), we entered into a Share Exchange Agreement (the “Exchange Agreement”) with (i) VizConnect LLC (“VizConnect”), (ii) all of the members of VizConnect (the “Members”) and (iv) our former principal shareholder pursuant to which we acquired all of the outstanding units of VizConnect in exchange for the issuance of 25,000,000 shares of our common stock to the Members (the “Share Exchange”). The shares issued to the Members in the Share Exchange constituted approximately 61.46% of our issued and outstanding shares of common stock as of and immediately after the consummation of the Share Exchange. In connection with the closing, 40,000,000 shares of our common stock held by our former principal shareholder have been cancelled. As a result of the Share Exchange, VizConnect became our wholly owned subsidiary.
The acquisition is being accounted for as a “reverse merger,” and VizConnect is deemed to be the accounting acquirer in the reverse merger. Consequently, the assets and liabilities and the historical operations that will be reflected in the financial statements prior to the acquisition will be those of VizConnect and will be recorded at the historical cost, and the consolidated financial statements after completion of the acquisition will include the assets, liabilities and operation of the Company and VizConnect from the closing date of the acquisition. As a result of the issuance of the shares of common stock pursuant to the Exchange Agreement, a change in control of occurred as a result of the acquisition.
In connection with the closing of the Exchange Agreement, Mr. Anthony Pasquale, the Company’s principal shareholder, agreed to cancel his 10,000,000 pre-split (or 40,000,000 post-split) shares of common stock that he owned in the Company and we issued 6,250,000 pre-split (or 25,000,000 post-split) shares to members of VizConnect. Additionally, the existing officers and directors from the Company resigned from its board of directors and all officer positions effective immediately after the closing of the reverse merger. Accordingly, our Board of Directors appointed Mr. Paul Cooleen as our President, Mr. Brian Dee as our Secretary, and Mr. James Henderson as our Treasurer, effective upon the closing of the Share Exchange.
The Company’s directors approved the Exchange Agreement and the transactions contemplated thereby. Simultaneously, the Members of VizConnect also approved the Exchange Agreement and the transactions contemplated thereby.
As a result of the Exchange Agreement, the Company ceased its prior business and acquired 100% of the mobile marketing operations of VizConnect, the business and operations of which now constitutes its primary business and operations. Specifically, as a result of the Exchange Agreement on February 13, 2013:
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The Company acquired and now owns 100% of the issued and outstanding units of VizConnect LLC, a Massachusetts limited liability company and their mobile marketing business; and
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The Company issued 25,000,000 shares of common stock to the Members of VizConnect, constituting approximately 61.46% of the issued and outstanding common stock.
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As a result of the Company’s reverse acquisition of VizConnect, the Company has assumed the business and operations of VizConnect with its principal activities engaged in the mobile marketing platform business.
We effected a 4-for-1 forward stock split, which became effective as of February 25, 2013.
On or about April 13, 2013, the Company received written consents in lieu of a meeting of Stockholders from stockholders holding 50.86% of the outstanding shares of the Company’s common stock. This written consent authorized the Company to amend its Articles of Incorporation to change the name of the Company from “VB Clothing, Inc.” to “VizConnect, Inc.” and to increase the number of authorized shares of common stock, par value $0.001, from 70,000,000 to 250,000,000. The Certificate of Amendment, referencing these amendments, was recorded with the State of Nevada on May 10, 2013.
Three Months Ended March 31, 2014 Compared with Three Months Ended March 31, 2013
Revenue:
Revenues for the three-month period ending March 31, 2014 were $64,223, compared with $ 52,683 for the three month period ending March 31, 2013, reflecting an increase of 22%. The increase in revenues during the periods was primarily attributable to
the growth of the network marketing sales model.
Operating Expenses:
Operating expenses for the three-month period ending March 31, 2014 were $1,340,803 compared with $125,824 for the three month period ending March 31, 2013, reflecting an increase of 965%. The increase in operating expenses was primarily attributable to building our infrastructure /sales model, large professional fees, stock issuance of common restricted stock to the board directors and the payment to vendors.
Loss from Operations:
We incurred losses from operations totaling $1,276,580 for the three-month period ending March 31, 2014, compared to losses from operations totaling $ 73,141 for the three -month period ending March 31, 2013, reflecting an increase of 1,645% The increase in losses from operations was primarily attributable to professional fees and sales expenses, stock issuance of common restricted stock to directors.
Other Expense (Income):
The Company had other expenses for the three-month period ending March 31, 2014 in the amount of $231,795. This is comprised of a loss on the change in the market value of a derivative liability of $75,102 and interest expense $156,693, compared with $7,558 of interest expense for the three-month period ending March 31, 2013, reflecting an increase of 2,967%. The company has derivative losses in the first quarter of 2014 associated with the fair market value on the company's stock. The increase in interest expense is primarily associated with the increased cost of borrowing associated with the company’s convertible debt.
Net loss:
We incurred a net loss of $1,508,375 or 2,089% of revenues, for the three-month period ending March 31, 2014, compared to a net loss of $80,699 or 153% of revenues, for the three-month period ending March 31, 2013. The increase in loss is attributable to the stock issuance of common restricted stock to directors, interest on notes, professional fees and the increased cost of borrowing.
Plan of Operations
VizConnect is a cloud-based, video marketing services provider that assists companies across a wide array of industries in utilizing mobile devices and technologies to create targeted branding and advertising campaigns. Our proprietary video marketing platform (the “Platform”) allows companies to integrate traditional print media with mobile Text-to-Video messages, activate and optimize their web portals, and build mobile marketing databases. Our Platform utilizes unique keyword-activated campaigns that engage mobile users with video and automated call-to-action prompts. This dynamic, cloud-based marketing tool has small business applications, enterprise solutions for large companies, and white-label opportunities for marketing and communications firms.
By the end of fiscal year 2014, we plan to begin expanding our customer reach internationally.
Critical Accounting Policies and Estimates
Organization
The Company was incorporated in the State of Nevada on October 15, 2010. The Company provides cloud based marketing services using a combination of mobile video marketing, video storage, and cloud computing in one easy to access system for a monthly fee. The Company’s year-end is December 31.
Use of Estimates
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents. At March 31, 2014 and December 31, 2013 the company had no cash equivalents.
Income Taxes
The Company accounts for income taxes under FASB Accounting Standards Codification Topic 740, Income Taxes. Under FASB Accounting Standards Codification Topic 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under FASB Accounting Standards Codification No. 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Advertising Costs
Advertising Costs are expensed in the period when the advertisements have reached their intended users. Advertising expense during the three months ended March 31, 2014 and 2013 were $0 and $0, respectively.
Software Development Costs
We expense software development costs to be marketed to external users, before technological feasibility of such products is reached. We have determined that technological feasibility is reached shortly before the release of those products and as a result, the development costs incurred after the establishment of technological feasibility and before the release of those products were not material, and accordingly, were expensed as incurred. Software development costs totaled $22,037 and $14,833, for the three months ended March 31, 2014 and 2013, respectively.
Business Segments
The Company operates in one segment and therefore segment information is not presented.
Revenue Recognition
The Company will recognize revenue on arrangements in accordance with FASB ASC Topic 605, “Revenue Recognition”. In all cases, revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured. The Company recognizes revenue from monthly subscriptions fees in the month in which services are used. Because a portion of the fees are earned over a month period, any fees collect in which the services are not provided are recorded as deferred revenue. The Company recognizes revenue from set up fees at the time the initial set up is complete and the fees are earned. The Company recognizes revenue from distributor membership fees monthly over the one year membership period. Any fees collected in which the services are not provided are recorded as deferred revenue.
Concentrations
As of March 31, 2014, the Company has no customers whose sales account for more than 10% of total sales.
Fair Value of Financial Instruments
The carrying amount reported in the balance sheet for accounts payable approximate fair value based on the short-term maturity of these instruments.
Recent Accounting Pronouncements
Recent accounting pronouncements issued by the Financial Accounting Standards Board (FASB) (including its Emerging Issues Task Force), the AICPA, and the SEC, did not, or are not believed by management, to have a material impact on the Company’s present or future financial statements.
Liquidity and Capital Resources
Our cash and cash equivalents is $76,678, and we have a working capital deficit of $940,100, as of March 31, 2014. Despite capital contributions and sales, and both related party and third party loan commitments, we may experience cash flow shortages that can slow our expected growth. We have primarily financed our activities from loans from related and third parties. A significant portion of the funds raised from loans from related and third parties have been and will be used to cover working capital needs such as office expenses, software development expenses and various professional fees.
Our cash flow requirements during this period have been met by contributions of capital and debt financing, plus receipts from sales of the Company’s services and from membership fees from the Company’s distributors. We anticipate that financing will be required until such time as we are able to generate adequate cash flow from operations to support both our cash needs for normal operations, and to support the cash needs for our investment into additional resources and assets to support our growth. Currently we cannot determine when either will occur and as such we will need to obtain financing to cover our costs for the foreseeable future. We continue to seek financing sources, such as those described herein below, as well as others, in order to continue funding normal operations. However, no assurance can be given that these sources of financing will continue to be available. If we are unable to generate profits, or unable to obtain additional funds for its working capital needs, we may have to curtail normal operations, or cease operations completely.
Between March 2013 and May 2013, a shareholder contributed $20,000 in capital to the Company for the purpose of paying certain professional fees.
On May 6, 2013, the Company made available to certain investors a private placement memorandum, pursuant to which the Company offered convertible promissory notes, at a purchase price of $10,000 per note. In response to such offer, the Company closed on sales of single notes to five (5) individuals, on May 23, May 30, June 24 and June 30, 2013, resulting in total net proceeds to the Company of $50,000. The notes bear interest at the rate of 12% per annum. All interest and principal must be repaid on March 1, 2018. Each note may be converted, in whole or in part, into common stock of the Company at any time beginning on March 1, 2014 and ending on March 1, 2018. At the time an investor elects to convert a note, such note is convertible into shares of the Company’s common stock at a conversion price of $0.14 per share. The Company used the proceeds therefore for working capital purposes, including software development associated with the Company’s compensation system and new short code texting service.
On June 26, 2013 and September 2013, the Company entered into two Securities Purchase Agreements with Asher Enterprises, Inc. ("Asher"), for the sale of two 8% convertible notes in the principal amounts of $42,500 and $42,500, respectively. The financings closed on July 11, 2013 and September 2013, respectively. The notes bear interest at the rate of 8% per annum. All interest and principal must be repaid on May 28, 2014 and June 2014, respectively. The notes are convertible into common stock, at Asher’s option, at a 42% discount to the average of the three lowest closing bid prices of the common stock during the 10 trading day period prior to conversion.
In September 2013, the Company entered into a Securities Purchase Agreement with Auctus Private Equity Fund, LLC (“Auctus”), for the sale of an 8% convertible note in the principal amount of $32,750. The note bears interest at the rate of 8% per annum. All interest and principal must be repaid by June 24, 2014. The note is convertible into common stock, at Auctus’ option, at a 42% discount to the average of the two lowest closing bid prices of the common stock during the 20 trading day period prior to conversion.
Going Concern
The Company had a net loss of $1,508,375 for the three months ended March 31, 2014, a Stockholders’ deficit of $993,900 and a working capital deficit of $940,100 as of March 31, 2014. This raises substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional capital through member contributions and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Management believes that actions presently being taken to obtain additional funding through implementing its strategic plans, multilevel marketing strategy and sales incentives to expand operations and will provide the opportunity for the Company to continue as a going concern.
Off-balance Sheet Commitments and 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.
