The year-end intrinsic values are based on a March 31, 2012 closing price of $0.10 per share.
On May 28, 2010 the Company entered into a short-term note payable of $175,000 with a former officer of the Company. The note has a 60 day maturity and 9% interest rate. As of March 31, 2012 and December 31, 2011 the Company has accrued $29,051and $25,114 interest on the note payable to Robert Bryson. The Company recorded $3,938 in interest expense for the three months ended March 31, 2012 and 2011, respectively. As of May 21, 2012 the note has not been repaid.
On February 16, 2011 an officer of the Company loaned the Company $100,000 bearing an interest rate of 12%. As of March 31, 2012 and December 31, 2011 the Company has accrued $13,414 and $10,414 interest on the note payable to the officer. The Company recorded $3,000 in interest expense for the three months ended March 31, 2012. As of May 21, 2012 the note has not been repaid.
On February 28, 2012 an officer of the Company loaned the Company $15,000 bearing an interest rate of 12%. As of March 31, 2012 the Company has accrued $162 interest on the note payable to the officer. The Company recorded $162 in interest expense for the three months ended March 31, 2012. As of May 21, 2012 the note has not been repaid.
On July 1, 2010 LYFE entered into a short-term note payable of $40,000 with Smith Consulting Services (SCS) and affiliates. The loan does not have an interest rate or due date. The Company has imputed and accrued $8,413 interest on the note as of March 31, 2012. The Company recorded $1,200 in interest expense for the three months ended March 31, 2012 and 2011, respectively. As of May 21, 2012 the note has not been repaid.
On October 1, 2010, the Company signed a $50,000 convertible promissory note with a third party. The note bears interest at 18% per annum and was due on November 5, 2010. The note has conversion rights that allow the holder of the note at any time to convert all or any part of the remaining principal balance into the Companys common stock at a price of $0.70. As of March 31, 2012 the Company has accrued $13,518 in interest on the note payable and recorded $2,250 in interest expense for the three months ending March 31, 2012 and 2011, respectively. As of May 21, 2012 the Company is currently in default as no payments have been made on the note and the note has not been converted.
On March 25, 2011 the Company entered into a short-term note payable of $7,500 with Smith Consulting Services (SCS) and affiliates. The note is due on demand with an 18% interest rate. As of March 31, 2012 the Company accrued $1,372 interest on the note payable. The Company recorded $338 and $22 in interest expense for the three months ended March 31, 2012 and 2011, respectively. As of May 21, 2012 no payments have been made on this note.
On May 31, 2011, a shareholder loaned the Company $5,000 on a short-term convertible note payable. The note is due on February 10, 2012 and has an 8% interest rate. The note provides for the conversion of principal plus interest into the Companys common stock at a price equal to 50% of the market price on date of conversion. Consequently, the liability has been recorded at $10,000 on the balance sheet. The difference between the face value has been recognized as interest expense. As of March 31, 2012, the Company had accrued interest of $334. The Company recorded $100 in interest expense for the three months ended March 31. As of May 21, 2012 no payments have been made on this note.
On July 20, 2011, the Company signed a $35,000 convertible promissory note with a third party. The note bears interest at 8% per annum and is due on April 20, 2012. The note has conversion rights that allow the holder of the note at any time to convert all or any part of the remaining principal balance into the Companys common stock at a price equal to 50% of the average of the lowest three trading prices for the Common Stock during the most recent ten day period. Consequently, the liability has been recorded at $70,000 on the balance sheet. The difference between the face value has been recognized as interest expense. During the three months ended March 31, 2012, the Company issued 1,612,219 common shares in exchange for $70,000 in debt and $1,400 in accrued interest.
On August 10, 2011, the Company signed a $100,000 convertible promissory note with a third party. The note bears interest at 8% per annum and is due on February 10, 2012. The note has conversion rights that allow the holder of the note at any time to convert all or any part of the remaining principal balance into the Companys common stock at a price of $0.02. The Company calculated the value of the BCF using the intrinsic method as stipulated in ASC 470. The value of the beneficial conversion feature (BCF) of the note has been calculated at $20,000. For the three months ended March 31, 2012, the Company recorded approximately, $5,000 in amortization and $142 in interest expense. During the three months ended March 31, 2012, the Company issued 5,201,643 common shares in exchange for $100,000 in debt and $4,038 in accrued interest.
On August 10, 2011, the Company signed a $65,000 convertible promissory note with a third party. The note bears interest at 8% per annum and is due on February 10, 2012. The note has conversion rights that allow the holder of the note at any time to convert all or any part of the remaining principal balance into the Companys common stock at a price of $0.02. The Company calculated the value of the BCF using the intrinsic method as stipulated in ASC 470. The value of the BCF of the note has been calculated at $13,000. For the three months ended March 31, 2012, the Company recorded approximately, $3,250 in amortization. As of March 31, 2012 the Company has accrued $3,327 in interest on the note payable and recorded $1,300 in interest expense for the three months ending March 31, 2012. As of May 21, 2012 no payments have been made on this note.
10. Subsequent Events
The Company received proceeds of $90,000 from the issuing of notes payable to the relative of an officer of the Company to fund continuing operations. The note bears an interest rate of 10% and is due on October 3, 2012.
The Company issued 300,000 common shares in exchange for $33,000 in principal on a note payable.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
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.
We are developing, deploying and operating, we believe, the next generation media and communications network based services to single-family, multi-family, high-rise, resort and hospitality properties. LYFE Communications has commenced providing video, Internet and telephone services to consumers and businesses and is planning on transitioning those services to our next generation platform. We function as a network and service provider and rely on our underlying facilities based network partners to provide the basic telecommunications network connections to our end customers. We are an application services provider (ASP) of Internet protocol television (IPTV), Internet services (ISP) and voice over Internet protocol (VOIP) telephone services. We launched services with a fiber to the home (FTTH) network provider along the Wasatch front in Utah and are seeking to expand our reach through partnerships with other networks. To provide services along the Wasatch front in Utah, we have entered into two agreements with Utah Telecommunications Open Infrastructure Agency ( UTOPIA) to: (1) become a non-exclusive service provider over its network and (2) to acquire its video systems and provide video services over its system and make such video services available to other providers.
Our primary products are IPTV, Broadband Internet Access and VOIP Telephony. The markets currently planned to be served are along the Wasatch front in Utah. We are planning to expand our markets by building data connections to multi-dwelling units (MDUs) and are actively seeking partnerships with other last mile network providers. The last mile network refers to connections to the actual home, business or apartment.
IPTV: Our planned television service will include local and basic cable network channels, a premium or extended channel package and individual add on channel packages. The channel packages are typical of IPTV packages provided by other telecommunications companies and negotiated by industry intermediaries or directly with channel providers. We will differ from other cable and satellite providers by our ability to have an interactive feel as we roll out our software packages and set top boxes. Additionally, we will focus on the mobility of our offering so our programming is not just tethered to the traditional television but can be viewed over multiple media devices such as smart phones, laptops and tablets.
Broadband Internet Access: The Internet product will come in varying speeds depending on the location of the customer and the type of network connecting that particular customer to our backbone network.
Current operational subscribers will be connected via fiber and have a choice of regular broadband or higher speed broadband access.
VOIP Telephony: The telephone product will provide a dial tone in the home or business from which the customer can place local or long distance calls. Rates will vary based on the call destination and type of service provided.
We are developing, deploying and operating the networked platform for the next generation of communications and entertainment services. By leveraging our IP (Internet Protocol) technologies, we can provide, we believe, an innovative and compelling media and communication services to consumers and businesses who increasingly want access to their television, Internet and voice services on their terms from any device, at home, in the office, or on the go.
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 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. The Company believes there have been no significant changes during the three month period ended March 31, 2012, to the items disclosed as significant accounting policies in management's Notes to the Financial Statements in the Company's Form 10-K, filed on April 16, 2012, for the year ended December 31, 2011.
Nevertheless, the Companys financial statements contained in this report have been prepared assuming that the Company will continue as a going concern. As discussed in the footnotes to the 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.
The Company has accounted for stock-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 stock-based compensation. We use the Black-Scholes option valuation model to calculate stock 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.
The Company recognizes 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. The Company derives its revenue primarily from the sale of Video, Data and Voice over Internet Protocol services and recognizes revenues in the period the related services are provided and the amount of revenue is determinable and collection is reasonably assured.
Results of Operations
Revenue - During the quarterly period ended March 31, 2012, we received $166,306 compared to $115,708 in revenues for the quarterly period ended March 31, 2011. The increase in revenues was due to the acquisition of properties from a regional provider in June 2011 which contributed approximately $69,000 in revenues. The additional revenue was offset by a decline in subscriber base of our customers on the UTOPIA network.
Direct Costs - Direct costs are comprised of programming costs, monthly recurring Internet broadband connections and VOIP costs. During the three months ended March 31, 2012 direct costs were $119,460 compared to $51,124 for the three months ended March 31, 2011. The increase in direct costs was due to the acquisition of properties from a regional provider in June 2011 which contributed approximately $52,000 in direct costs. The additional cost was offset by a decline in subscriber base of our customers on the UTOPIA network.
Sales and Marketing Sales and marketing costs are comprised of sales commissions and salaries, marketing relationships and materials. Sales costs in total decreased for the three month period ended March 31, 2012 to $2,075 from $62,580 for the same period in 2011. The decrease was a result of a cut in headcount of the sales and marketing employees which occurred in 2011 and the lack of funding to sell and market. This decrease in sales and marketing expenditures has resulted in a decrease in customer base.
Customer Service and Operating Expenses Customer Service and Operating costs are comprised of the Companys call center, technical support, project management and general operations. Customer Service costs decreased in total to $32,532 for the three months ended March 31, 2011 from $71,270 for the same period in 2011 as a result of decreases in head count in customer service. The Company uses a provider to manage customer service and operations for the properties acquired. Additionally, due to the decrease in sales and marketing expenditures, the customer base on the UTOPIA network has decreased which has decreased the customer service and operating costs.
General and Administrative General and Administrative costs decreased $427,321 for the three months ended March 31, 2012 from the three months ended March 31, 2011 due to a decrease in employee head count. Due to a lack of liquidity and funding resources, the Company has reduced all non-essential costs.
Research and Development Research and development costs are comprised of the costs to develop our next generation media and communications network. The costs decreased $51,475 for the three months ended March 31, 2012 from the three months ended March 31, 2011 due to a decrease in headcount as a result of a lack of liquidity and funding resources.
Net Loss - We had a net loss for the three months ended March 31, 2012 and 2011, of $265,970 and $820,547, respectively. This represents a loss per share of $0.01, respectively. The Company has reduced expenditures due to a lack of liquidity and funding. As a result of decreased expenditures, revenue growth has slowed. The Company is actively seeking additional funding which will be used to further the development of the IPTV technology the Company has been developing, search for strategic alliances, and grow current customer bases.
Liquidity and Capital Resources
Liquidity is a measure of a companys ability to meet potential cash requirements. We have historically met our capital requirements through the issuance of stock and by borrowings.
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 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 loans. There can be no assurance we will be successful in raising the necessary funds to execute our business plan.
During the three months ended March 31, 2012, the current assets increased by $20,348 when compared to December 31, 2011 due to an increase in accounts receivable and cash.
During the three months ended March 31, 2012, the current liabilities decreased by $233,603 when compared to December 31, 2011. The decrease was due to the payment of tax liabilities with cash raised through stock and note issuances and liabilities that were paid with the issuance of common shares.
We anticipate that we may incur operating losses during the next twelve months. The Companys 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 and unpredictable business model and the management of growth. These factors raise substantial doubt about our ability to continue as a going 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 2012.
Management is currently seeking sources of equity and debt financing from current and potential investors. Additionally, the Company has halted the purchase of video customer premise equipment and sales of video services to conserve costs. Additionally, the Company has cut expenses and reduced headcount to reduce expenses. Currently the Company is in negotiations with suppliers to reduce operation costs for providing services to customers. Management believes that if further funding is not received more cuts in headcount and customer services will be made.
The Company has accumulated losses since inception and has not yet been able to generate profits from operations. Operating capital has been raised through the sale of common stock or through loans from stockholders. These factors raise substantial doubt about the Companys ability to continue as a going concern.
Management plans are to further develop new and innovative products and services that target the telecommunications industry. If management is unsuccessful in these efforts, discontinuance of operations is possible. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures
Our management, with the participation of our chief financial and executive officers evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to
apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on that evaluation, our chief accounting and chief executive officers concluded that, as of March 31, 2012, our disclosure controls and procedures were, subject to the limitations noted above, not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules, regulations and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Item 1. Legal Proceedings.
On June 15, 2011, the Company received a default judgment from the State of Michigan Judicial Court in conjunction with the default on lease payments to a landlord in conjunction with a lease agreement. The judgment was for $191,160 which was recorded as a liability. The Company entered into a settlement with the landlord for $75,000 on November 15, 2011. As of December 31, 2011 $20,000 in payment was made on the liability and $2,088 of interest was accrued on the outstanding $55,000. On March 30, 2012 the Company made a payment in the amount of $5,000 to the Michigan landlord reducing the liability to $50,000.
On December 13, 2010, Love Communications LLC filed a complaint against the Company in the Third Judicial Court of Salt Lake County in the amount of $43,671 for unpaid invoices. The Company disputed the complaint and engaged in settlement proceedings with Love Communications. On March 27, 2012 the dispute was settled in the amount of $36,000 and paid by the Company.
On October 12, 2011, a former employee residing in Michigan filed a complaint with the Michigan Department of Licensing and Regulatory Affairs against the Company for unpaid payroll in the amount of $10,000. On March 19, 2012 the claim was settled and paid by the Company.
On January 20, 2012, a former employee residing in Utah filed a complaint with the State of Utah Labor Commission against the Company for unpaid payroll in the amount of $1,725. The Company is currently complying with the requests from the Labor Commission to settle the dispute.
On July 19, 2011, the Company was notified by the Internal Revenue Service of intent to lien in the amount of $258,668 for unpaid taxes. Since that time the Company has made payments to the IRS in the amount of $163,464 to reduce the tax liability, and the Company has had $25,302 in liability abated by the IRS. As of April 1, 2012 the Company owes $69,901 to the IRS and continues to make monthly payments.
On March 2, 2011, the Company received from UTOPIA a notice of termination in conjunction with the agreement between Connected Lyfe and UTOPIA entitled Non-Exclusive Network Access and Use Agreement. According to the notice, Connected Lyfe had until May 2, 2011 to transition its customers to another service provider on the UTOPIA network or cure the breach by working out an arrangement with UTOPIA that is acceptable. The notice of termination is due to non-payment of network access fees. UTOPIA and the Company have agreed that as long as the Company pays the monthly network fees moving forward that UTOPIA will not pursue its rights under the notice of termination. If the Company is unable to maintain its payments under the new agreement, UTOPIA may pursue its right to transition its customers on the UTOPIA network to another service provider.
On March 3, 2011, the Company received a notice of exercise of video system reversionary rights from UTOPIA. Currently, there is a dispute between UTOPIA and Connected Lyfe as to who has not performed under the existing contract. As stated in the notice, UTOPIA is working with Connected Lyfe on a resolution. However, if a resolution, satisfactory to both companies, cannot be found the situation could escalate to additional legal action.
Item 1A. Risk Factors.
For a discussion of the Companys risk factors, please refer to Part 1, Item 1A. Risk Factors in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed on April 16, 2012. There have been no material changes in the Companys assessment of its risk factors during the quarter ended March 31, 2012.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized