The aggregate intrinsic values in the table above represent the total pretax intrinsic value (the difference between the closing market price of our common stock on June 28, 2013 of $0.04 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 31, 2013.
During the six months ended June 30, 2013 and 2012, we paid no amounts for income taxes.
During the six months ended June 30, 2013 and 2012, we paid interest of $0 and $5,000, respectively.
During the six months ended June 30, 2013, we had the following non-cash investing and financing activities:
Issued common stock in payment of notes payable of $30,000, decrease in debt discount of $6,600 and decrease in derivative liability of $22,152.
During the six months ended June 30, 2012, we had the following non-cash investing and financing activities:
On July 9, 2013, the institutional investor elected to convert $15,000 principal of the October 2012 convertible note payable to 646,552 shares of our common stock.
On July 26, 2013, the institutional investor elected to convert the remaining $8,000 principal of the October 2012 convertible note payable to 562,222 shares of our common stock.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements
Statements made in this Quarterly Report which are not purely historical are forward-looking statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and our business, including, without limitation, (i) our ability to raise capital, and (ii) statements preceded by, followed by or that include the words may, would, could, should, expects, projects, anticipates, believes, estimates, plans, intends, targets or similar expressions.
Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following, general economic or industry conditions, nationally and/or in the communities in which we may conduct business, changes in the interest rate environment, international gold prices, legislation or regulatory requirements, conditions of the securities markets, our ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting our current or potential business and related matters.
Accordingly, results actually achieved may differ materially from expected results in these statements. Forward-looking statements speak only as of the date they are made. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
Overview
LYFE Communications, Inc. is developing a technology base for next generation entertainment and communications. Through our wholly owned subsidiary, Connected Lyfe, Inc., our primary customer acquisition, operations and services division, LYFE Communications is truly integrating television, ultra high-speed Internet and enhanced voice services for delivery via Internet using IP (Internet Protocol).
Our technology innovations take traditional digital television delivery and convert it to an adaptive IP-based service. The result is dramatically lower cost of operation, new interactive capabilities and delivery to any device, in any location, at any time.
We provide high-speed data and voice services to consumers in six cities and will deploy next generation television services, with voice and data access, into each of these markets, offering the most innovative and compelling media and communications services to residential customers. Beyond these markets, we will deploy our innovative platform through acquisitions, partnerships, and technology licensing to major existing service providers.
Our technologies are the foundation for many exciting, customer-valued IP services for a rapidly growing market segment that lives always on and connected, accessing all the people, information and entertainment in their lives, on their terms any time, any place, on any device.
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We expect to significantly increase our subscriber base in 2013. We are currently under contract to provide our Data and Telephony services to 28 MDU properties spanning 6 cities in 2 states. These properties present a total market opportunity of over 12,000 units. These contracts can be characterized in one of two ways: bulk, or subscription. A bulk contract allows us to provide services to each and every tenant at the complex. We currently have 3 bulk contracts with a total customer base of 600. The remaining 25 contracts are subscription, meaning we have either an exclusive or non-exclusive marketing contract and/or Right of Entry (ROE) at the property. Our average penetration rate at the subscription properties is 10%, which represents a tremendous growth opportunity for us. Further, all of these contracts provide us with the opportunity to extend more services in the future. We are currently negotiating with some of the countrys largest REITs and property management groups to provide services to the properties they own and manage.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. During the period ended June 30, 2013, we believe there have been no significant changes to the items disclosed as significant accounting policies in management's notes to the consolidated financial statements in our annual report on Form 10-K for the year ended December 31, 2012, filed on April 15, 2013.
Nevertheless, our financial statements contained in this report have been prepared assuming that the Company will continue as a going concern. As discussed in the notes to the condensed consolidated financial statements and elsewhere in this report, the Company has not established any significant source of revenue to sustain operations, has had negative cash flows from operations and has not received sufficient capital to sustain operations. These factors raise substantial doubt that the Company will be able to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Share-Based Compensation
We account for share-based compensation under the provisions of FASB Accounting Standards Codification (ASC) 718-10-55. This statement requires us to record an expense associated with the fair value of share-based compensation. We use the Black-Scholes option pricing model to calculate share-based compensation at the date of grant. Option pricing models require the input of highly subjective assumptions, including the expected price volatility. Market approach analysis for pricing stock with infrequent trades and transactions require highly subjective assumptions, including restriction discount and blockage discounts. Changes in these assumptions can materially affect the fair value estimate.
Principles of Consolidation
The consolidated financial statements include the accounts of LYFE Communications, Inc. and its wholly-owned subsidiary, Connected Lyfe, Inc. All inter-company balances and transactions have been eliminated.
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Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition, (SAB 104). The criteria to meet this guideline are: (i) persuasive evidence of a sales arrangement exists, (ii) the sales terms are fixed and determinable, (iii) title and risk of loss have transferred, and (iv) collectability is reasonably assured. We derive our revenue primarily from the sale of Video, Data and Voice over Internet Protocol services and recognize revenues in the period the related services are provided and the amount of revenue is determinable and collection is reasonably assured.
Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
Level one - Quoted market prices in active markets for identical assets or liabilities;
Level two - Inputs other than level one inputs that are either directly or indirectly observable; and
Level three - Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.
All cash, accounts payable and accrued liabilities are carried at fair value. Additionally, we measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at June 30, 2013.
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Total
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Level 1
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Level 2
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Level 3
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Assets
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Total Assets Measured at Fair Value
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$
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-
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$
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-
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$
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-
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$
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-
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Liabilities
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Derivative Liability
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$
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101,670
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$
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-
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|
$
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-
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|
$
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101,670
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Total Liabilities Measured at Fair Value
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|
|
$
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101,670
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|
$
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-
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$
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-
|
|
$
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101,670
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Accounts Receivable
Accounts receivable are reflected at estimated net realizable value, do not bear interest and do not generally require collateral. We provide an allowance for doubtful accounts equal to the estimated collection losses based on historical experience coupled with a review of the current status of existing receivables. Customer accounts are reviewed and written off as they are determined to be uncollectible.
Results of Operations
Revenue
- During the three months ended June 30, 2013 and 2012, we recorded revenues of $58,726 and $159,241, respectively. During the six months ended June 30, 2013 and 2012, we recorded
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revenues of $110,258 and $325,547, respectively. The decline in revenue in the current year is both a result of the transition in the subscriber base on the properties acquired in June 2011, which initially resulted in a decline of customers, as well as the sale of the UTOPIA customer base in October of 2012.
Direct Costs -
Direct costs are comprised of programming costs, monthly recurring Internet broadband connections and VOIP costs. During the three months ended June 30, 2013 and 2012, direct costs were $33,939 and $113,219, respectively. During the six months ended June 30, 2013 and 2012, direct costs were $84,643 and $232,679, respectively. The decrease in direct costs in the current year is a result of the sale of the UTOPIA customer base in October of 2012, as well as a decrease in the subscriber base on the properties acquired in June 2011.
Selling, General and Administrative
Selling, general and administrative expenses increased $69,179 to $501,760 for the three months ended June 30, 2013 from $432,581 for the three months ended June 30, 2013. Selling, general and administrative expenses increased $458,270 to $1,129,860 for the six months ended June 30, 2013 from $671,590 for the six months ended June 30, 2013. The increase in the current year is primarily the result of a growth in contractor and employee head count, due to an increase in operating costs related to the upgrade of services to the properties acquired in June 2011.
Depreciation and Amortization
Depreciation and amortization expense is currently not material to the results of our operations. Depreciation and amortization expense was $30,858 and $51,278 for the three months ended June 30, 2013 and 2012, and $68,091 and $102,557 for the six months ended June 30, 2013 and 2012, respectively.
Other Income (Expense)
During the three months and six months ended June 30, 2013, we reported a gain on derivative liability of $54,264 and $59,194, respectively. We estimate the fair value of the derivative for the conversion feature of certain convertible notes payable at the inception of notes and at each reporting date, using the Black-Scholes pricing model. As changes in the derivative liability are recorded at each reporting date, a gain or loss on derivative liability is recorded. We had no gain or loss on derivative liability for the three months and the six months ended June 30, 2012.
We reported a loss on extinguishment of debt of $2,832 for the three months and six months ended June 30, 2013. We had no loss on extinguishment of debt for the corresponding periods in the prior year.
Our interest expense was $66,691 and $53,658 for the three months ended June 30, 2013 and 2012, and $132,549 and $76,186 for the six months ended June 30, 2013 and 2012, respectively. The increase in interest expense in the current year is due primarily to the amortization of debt discount recorded in connection with our convertible notes payable.
Net Loss
We had a net loss of $523,090 and $491,495 for the three months ended June 30, 2013 and 2012, and $1,248,523 and $757,465 for the six months ended June 30, 2013 and 2012, respectively. We have has ramped up operations and increased services to the properties acquired in June 2011. As a result, expenditures and operating costs have increased and we expect a growth in revenue to occur in the second half of 2013.
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Liquidity and Capital Resources
Liquidity is a measure of a companys ability to meet potential cash requirements. Since inception, we have financed our cash flow requirements through issuance of common stock and notes payable. As we expand our activities, we may, and most likely will, continue to experience net negative cash flows from operations, pending additional revenues. Additionally, we anticipate obtaining additional financing to fund operations through common stock offerings to the extent available or to obtain additional debt financing to the extent necessary to augment our working capital. In the future we need to generate sufficient revenues from product and software sales in order to eliminate or reduce the need to sell additional stock or obtain additional debt. There can be no assurance we will be successful in raising the necessary funds to execute our business plan.
As of June 30, 2013, our total current assets were $162,698 and our current liabilities were $3,687,392, resulting in a working capital deficit of $3,524,694. As discussed in the notes to our condensed consolidated financial statements, we are currently in default on several notes payable. We also had an accumulated deficit of $17,062,280 and a total stockholders deficit of $2,521,975 at June 30, 2013
During the six months ended June 30, 2013, we used net cash of $488,992 in operating activities as a result of our net loss of $1,248,523, gain on derivative liability of $59,194, increase in prepaid expenses of $2,000, and decreases in accounts payable of $6,492, payroll and sales tax payable of $4,740 and deferred revenue of $976, partially offset by non-cash expenses(excluding gain on derivative liability)totaling $436,627, decrease in accounts receivable, net of $4,583, and increases in accrued liabilities of $356,251 and accrued interest of $35,472.
By comparison, during the six months ended June 30, 2012, we used net cash of $403,704 in operating activities as a result of our net loss of $757,465, increase in accounts receivable of $3,689, and decreases in accounts payable of $79,790 and payroll and sales tax payable of $97,763, partially offset by non-cash expenses totaling $343,779, decrease in other assets of $1,075 and increases in deferred revenue of $5,239 and accrued expenses of $184,910.
During the six months ended June 30, 2013 and 2012, we used $17,858 and $247, respectively, comprised of purchases of property and equipment.
During the six months ended June 30, 2013, we had net cash provided by financing activities of $653,529, comprised of proceeds from notes payable of $47,500 and proceeds from the issuance of common stock of $617,529, partially offset by the payment of debt issuance costs of $2,500 and payment of notes payable of $9,000.
During the six months ended June 30, 2012, we had net cash provided by financing activities of $503,000, comprised of proceeds from notes payable of $400,000 and proceeds from the issuance of common of $198,000, partially offset by payment of notes payable of $95,000.
We anticipate that we are likely to incur operating losses during the next twelve months. Our current cash is not sufficient to fund our operations during this period. Our lack of operating history makes predictions of future operating results difficult to ascertain. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in early operations, particularly companies in new and rapidly evolving markets. Such risks include, but are not limited to, an evolving
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and unpredictable business model and the management of growth. These factors raise substantial doubt about our ability to continue as agoing concern. To address these risks, we must, among other things, increase our customer base, implement and successfully execute our business and marketing strategy, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations.
If new sources of financing are insufficient or unavailable, we will modify our growth and operating plans to the extent of available funding, if any. Any decision to modify our business plans would harm our ability to pursue our growth plans. If we cease or stop operations, our shares could become valueless. Historically, we have funded operating, administrative and development costs through the sale of equity capital and short term related party and other shareholder loans. If our plans and/or assumptions change or prove inaccurate, and we are unable to obtain further financing, or such financing and other capital resources, in addition to projected cash flow, if any, prove to be insufficient to fund operations, our continued viability could be at risk. To the extent that any such financing involves the sale of our equity, our current stockholders could be substantially diluted. There is no assurance that we will be successful in achieving any or all of these objectives in 2013 and 2014.
Management is currently seeking sources of equity and debt financing from current and potential investors. We have signed agreements with AT&T to upgrade services to all the existing Ygnition properties acquired in the June 2011 acquisition. We consider the upgrades to potentially increase revenue by offering improved services. The potential for increased revenue does not include a large capital investment. We will improve services without increasing but reducing the direct costs of providing services to each of the properties. There can however be no assurance that improving services will lead to increased revenue. To address the risks involved, we have to increase the customer base at each of the properties. Additionally, we have to receive more funding to provide sales and marketing, and increase the revenues in the properties.