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 are a cloud-based, mobile video platform designed to help social celebrities, businesses and brands visually connect with and monetize online fans, followers and customers using mobile and online video. Our proprietary mobile video marketing platform (the “Platform”) allows social celebrities and brands to come together in an elegant manner to leverage the power of social followings to create branded video messaging with integrated native advertising that is not invasive to the consumer. We also assist companies across a wide array of industries in utilizing mobile devices and technologies to create targeted branding and advertising campaigns. Our Platform also utilizes unique keyword-activated campaigns that engage mobile users with video and automated call-to-action prompts. This dynamic, cloud-based marketing tool has both large and 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 and Treasurer, and Mr. Brian Dee as our Secretary.
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 40.4% 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 June 30, 2014 Compared with Three Months Ended June 30, 2013
Revenue:
Revenues for the three-month period ending June 30, 2014 were $76,254, compared with $55,651 for the three-month period ending June 30, 2013, reflecting an increase of 37%. The increase in revenues was primarily attributable to the realization of distributor membership fee revenue that is amortized over the contract period.
Operating Expenses:
Operating expenses for the three-month period ending June 30, 2014 were $515,482 compared with $174,403 for the three-month period ending June 30, 2013, reflecting an increase of 196%. The increase in operating expenses was primarily attributable to an increase in professional fees due to our need for experts specializing in advertising, promotion, and creating brand awareness.
Loss from Operations:
We incurred losses from operations totaling $439,228 for the three-month period ending June 30, 2014, compared to losses from operations totaling $118,752 for the three-month period ending June 30, 2013, reflecting an increase of 270% The increase in losses from operations was primarily attributable to professional fees.
Other Expense:
The Company had other expenses for the three-month period ending June 30, 2014 in the amount of $437,311. This is comprised of a loss on the change in the market value of a derivative liability of $83,058, compared with $270,977 for the three-month period ending June 30, 2013, reflecting a decrease of 69% and interest expense of $354,253, compared with $12,339 of interest expense for the three-month period ending June 30, 2013, reflecting an increase of 2771%. The company has derivative losses in the second quarter of 2014 associated with the fair market value on the company's financial derivatives. The increase in interest expense is primarily associated with the increased cost of borrowing associated with the company’s convertible debt and the payment of prepayment penalties.
Net loss:
We incurred a net loss of $876,539 or 1149% of revenues, for the three-month period ending June 30, 2014, compared to a net loss of $402,068 or 722% of revenues, for the three-month period ending June 30, 2013. The increase in loss is attributable to professional fees and interest expense.
Six Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013
Revenue:
Revenues for the six-month period ending June 30, 2014 were $140,477, compared with $108,334 for the six-month period ending June 30, 2013, reflecting an increase of 30%. The increase in revenues was primarily attributable to the realization of distributor membership fee revenue that is amortized over the contract period.
Operating Expenses:
Operating expenses for the six-month period ending June 30, 2014 were $1,850,187 compared with $300,227 for the six-month period ending June 30, 2013, reflecting an increase of 516%. The increase in operating expenses was primarily attributable to an increase in professional fees due to our need for experts specializing in advertising, promotion, and creating brand awareness and the issuance of common stock to the board of directors for services.
Loss from Operations:
We incurred losses from operations totaling $1,709,710 for the six-month period ending June 30, 2014, compared to losses from operations totaling $191,893 for the six-month period ending June 30, 2013, reflecting an increase of 791% The increase in losses from operations was primarily attributable to professional fees and the issuance of common stock to the board of directors for services.
Other Expense:
The Company had other expenses for the six-month period ending June 30, 2014 in the amount of $675,204. This is comprised of a loss on the change in the market value of a derivative liability of $158,160, compared with $270,977 for the six-month period ending June 30, 2013, reflecting a decrease of 42% and interest expense of $517,044, compared with $19,897 of interest expense for the six-month period ending June 30, 2013, reflecting an increase of 2499%. The company has derivative losses in the six-month period ending June 30, 2014 associated with the fair market value on the
company's financial derivatives. The increase in interest expense is primarily associated with the increased cost of borrowing associated with the company’s convertible debt and the payment of prepayment penalties.
Net loss:
We incurred a net loss of $2,379,299 attributable to common stockholders or 1694% of revenues, for the six-month period ending June 30, 2014, compared to a net loss of $482,767 or 446% of revenues, for the six-month period ending June 30, 2013. The increase in loss is attributable to professional fees, the issuance of common stock to the board of directors, and interest expense.
Plan of Operations
VizConnect is a cloud-based, mobile video platform designed to help social celebrities, businesses and brands visually connect with and monetize online fans, followers and customers using mobile and online video. Our proprietary mobile video marketing platform (the “Platform”) allows social celebrities and brands to come together in an elegant manner to leverage the power of social followings to create branded video messaging with integrated native advertising that is not invasive to the consumer. We also assist companies across a wide array of industries in utilizing mobile devices and technologies to create targeted branding and advertising campaigns. Our Platform also utilizes unique keyword-activated campaigns that engage mobile users with video and automated call-to-action prompts. This dynamic, cloud-based marketing tool has both large and small business applications, enterprise solutions for large companies, and white-label opportunities for marketing and communications firms.
By the end of this fiscal year with the expansion into the social media markets, management is optimistic of expanding growth potential and subsequent increases in revenue.
Critical Accounting Policies and Estimates
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.
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 $35,696 and $10,614 for the six months ended June 30, 2014 and 2013, respectively.
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.
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 $797, and we have a working capital deficit of $1,245,832, as of June 30, 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.
During 2013, the Company received various unsecured convertible loans totaling $215,250 and converted loans payable in the amount of $310,000 to convertible notes payable. During 2013, the Company repaid one convertible note payable in the amount of $42,500. During the first quarter of 2014, the Company repaid loans of $42,500, $59,000 and $32,750. During the second quarter of 2014, the Company repaid a loan of $42,500 and converted $129,940 to common stock. The long-term convertible loans have interest rates of 8% and 12% per year and mature on February 6, 2018 and March 1, 2018. The current convertible loans have interest rates of 8% and 22% per year and were repaid in July, 2014.
During 2011, The Company entered into a note payable for $15,000. The Note has an interest rate of 2% monthly, is unsecured, and due on demand. As of June 30, 2014 and December 31, 2013, the total amount outstanding is $13,000.
On February 4, 2014, the Company received $35,000 in exchange for accounts receivable of $47,915. The amount is repayable on a daily basis whereby the Company pays $300 per day. As of June 30, 2014, $10,443 was owed under this agreement.
In January and February, 2014, the Company entered into notes payable for $30,000. The Notes have an interest rate of 15% per year, are unsecured, and due in January and February, 2015.
In March, 2014, the Company entered into a note payable for $60,000. The Note has a lump sum interest payment due of $4,000, is unsecured, and due September 21, 2014
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In March, 2014, the Company entered into a note payable for $100,000. The Note has an interest rate of 10% with a lump sum of $10,000 due upon repayment, is unsecured, and due September 21, 2014
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On May 15, 2014, the Company entered into a note payable for $100,000. The Note has an interest rate of 10% with a lump sum of $20,000 due upon repayment, is unsecured, and due September 21, 2014
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On June 4, 2014, the Company entered into a note payable for $20,000. The Note has a lump sum interest payment due of $3,000, is unsecured, and was repaid July 22, 2014.
On July 2, 2014, the Company entered into a $335,000 Convertible Note of which $50,000 was received with the balance to be received in the future upon mutual agreement. The note has an interest rate of 0% if paid within three months, at which time the note will terminate, otherwise 12% for a term of two years.
On July 3, 2014, the Company entered into a $78,750 Convertible Note with an interest rate of 8% per year for a term of one year with an option for a second Convertible Note of $78,750 with the same terms.
On July 17, 2014, the Company entered into two $50,000 Convertible Notes of which $50,000 was received with the second note funds to be received in the future upon mutual agreement. The note has an interest rate of 12% per year for a term of six months.
On July 17, 2014, the Company entered into a $68,000 Convertible Note with an interest rate of 8% per year for a term of nine months.
On July 17, 2014, the Company entered into a $75,000 Note with an interest rate of 15% for a term of three months.
Going Concern
The Company had a net loss of $2,379,299 attributable to common stockholders for the six months ended June 30, 2014, a Stockholders’ deficit of $1,291,810 and a working capital deficit of $1,245,832 as of June 30, 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 expanding their mobile video platform designed to help social celebrities, businesses and brands 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, marketing strategy and sales incentives to expand operations 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.
