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LYFE COMMUNICATIONS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) 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 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. 14 -------------------------------------------------------------------------------- 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 Company's 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. 15 -------------------------------------------------------------------------------- Stock-Based Compensation 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. Revenue Recognition 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 Company's 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. 16 -------------------------------------------------------------------------------- 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 company's 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 Company's 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 17 -------------------------------------------------------------------------------- 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. Going Concern 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 Company's 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. |