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BLUE CALYPSO, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements The statements made herein for fiscal 2013 and beyond represent "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 and are subject to a number of risks and uncertainties. These include, among other risks and uncertainties, whether we will be able to generate sufficient cash flow from our operations or other sources to fund our working capital needs, maintain existing relationships with our lender, successfully introduce and attain market acceptance of any new products, attract and retain qualified personnel both in our existing markets and in new territories in an extremely competitive environment, and potential obsolescence of our technologies. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential" and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as otherwise required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this report to reflect any change in our expectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based. We qualify all of our forward-looking statements by these cautionary statements. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes thereto that are included in this Annual Report. In addition to historical information, the following discussion and analysis includes forward-looking information that involves risks, uncertainties, and assumptions. Actual results and the timing of events could differ materially from those anticipated by these forward looking statements as a result of many factors. 29 -------------------------------------------------------------------------------- Table of Contents Recent Events General On May 6, 2013, we entered into a securities purchase agreement with an accredited investor pursuant to which we issued and sold a 10% Convertible Debenture (the "May 2013 Debenture") in the principal amount of $2,400,000 and 1,200,000 shares of our common stock in consideration of gross proceeds of $2,400,000. The Debenture bears interest at a rate of 10% per annum, is due two years from the issuance date and is convertible into shares of our common stock at a conversion price of $0.25 per share. On September 13, 2013, we entered into a series of agreements with the holder of the May 2013 Debenture and certain of our outstanding warrants. Pursuant to such agreements, we agreed to provide for a temporary reduction in the conversion price of the May 2013 Debenture from $0.25 to $0.13 per share through December 31, 2013 and the holder agreed to the elimination of certain restrictive covenants in the May 2013 Debenture. In addition, we agreed to amend the terms of certain of our outstanding warrants in order to induce the holder to exercise such warrants as well as to eliminate the cashless exercise feature and certain anti-dilution protections contained in such warrants. In exchange, we agreed to provide for a temporary reduction in the exercise price of such warrants from $0.10 to $0.05 through the later of December 31, 2013 or 45 days after a registration statement covering the underlying shares is declared effective by the Securities and Exchange Commission. The registration statement covering such shares was declared effective by the Securities and Exchange Commission on November 25, 2013. As of December 31, 2013, the May 2013 Debenture together with all accrued but unpaid interest thereon was converted into an aggregate of 19,400,000 shares of our common stock. On January 9, 2014, we further extended the period during which the warrants were exercisable at the reduced exercise price until March 10, 2014. Following such date, the exercise price shall increase to $0.15 per share. On January 10, 2014, an aggregate of 11,200,000 warrants have been exercised in consideration of proceeds to the Company of $560,000. On October 7, 2013, we entered into a securities purchase agreement with an accredited investor pursuant to which we issued and sold 7,700,000 shares of our common stock at a purchase price of $0.13 per share in consideration of gross proceeds of $1,001,000. On October 15, 2013, we entered into a securities purchase agreement with an accredited investor pursuant to which we issued and sold 3,846,154 shares of our common stock at a purchase price of $0.13 per share in consideration of gross proceeds of $500,000. Litigation On July 31, 2012, the Company filed suit against Groupon, Inc. in the Eastern District of Texas in Civil Action No. 6:12-cv-00486. The Company filed additional suits against Izea, Inc. on October 17, 2012; Yelp, Inc. on October 17, 2012; and Foursqaure Labs, Inc. on October 31, 2012 in Civil Action Nos. 6:12-cv-786, 6:12-cv-788, 6:12-cv-837, respectively. Each of these cases alleges that the defendants infringe U.S. Patent Nos. 7,664,516 entitled "Method and System for Peer-to-Peer Advertising Between Mobile Communication Devices" and 8,155,679 entitled "System and Method for Peer-to-Peer Advertising Between Mobile Communication Devices." The Company subsequently added U.S. Patent Nos. 8,438,055, 8,452,646, and 8,457,670 to the cases, alleging each defendant infringed the newly added patents. Each of the defendants have answered, denying infringement and claiming that the asserted patents are invalid. Groupon, Yelp, and Foursquare filed counterclaims for declaratory judgment that the asserted patents are invalid and not infringed. Yelp filed an additional counterclaim for declaratory judgment that the asserted patens are unenforceable. The Court subsequently consolidated the actions for at least pre-trial purposes. Groupon filed a motion to transfer the case against it to the U.S. District Court for the Northern District of California, which the Court denied on September 27, 2013. Between July 19, 2013 and October 3, 2013, Groupon filed petitions with the Patent Trial & Appeals Board ("PTAB") requesting institution of Covered Business Method Review of all asserted claims. On December 19, 2013 and January 17, 2014, the PTAB issued decisions instituting review on all but four of the asserted claims. On January 14, 2014, the Company and all defendants filed a joint motion to stay the district court litigation. The Court granted the motion and stayed the case on January 16, 2014 pending a decision by the PTAB. Trial on the Covered Business Method Reviews at the PTAB is set for September 5, 2014. On February 3, 2014, Groupon filed a petition to the U.S. Court of Appeals for the Federal Circuit for mandamus on the district court's denial of its motion to transfer, which remains pending as of the date of this report. 30 -------------------------------------------------------------------------------- Table of Contents The court dockets for each case, including the parties' briefs are publicly available on the Public Access to Court Electronic Records website, or PACER, www.pacer.gov, which is operated by the Administrative Office of the U.S. Courts. Other than as noted above, the Company is not a party to any pending legal proceeding nor is its property the subject of any pending legal proceeding that is not in the ordinary course of business or otherwise material to the financial condition of its business. Further, to the knowledge of management, no director or executive officer is party to any action in which any has an interest adverse to us. The court dockets for each case, including the parties' briefs are publicly available on the Public Access to Court Electronic Records website, or PACER, www.pacer.gov, which is operated by the Administrative Office of the U.S. Courts. Other than as noted above, the Company is not a party to any pending legal proceeding nor is its property the subject of any pending legal proceeding that is not in the ordinary course of business or otherwise material to the financial condition of its business. Further, to the knowledge of management, no director or executive officer is party to any action in which any has an interest adverse to us. Critical Accounting Policies Development Stage Company We are a development stage company as defined by Accounting Standards Codification ("ASC") 915, "Development Stage Entities" and are still devoting substantial efforts to establishing our business. Our principal operations have commenced but there has been no significant revenue thus far. All losses accumulated since inception have been considered part of our development stage activities. Principles of Consolidation and Basis of Presentation The consolidated financial statements are stated in U.S. dollars and include the accounts of Blue Calypso, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the recoverability and useful lives of long-lived assets, the fair value of the Company's stock, stock-based compensation, fair values relating to warrant and other derivative liabilities, debt discounts and the valuation allowance related to deferred tax assets. Actual results may differ from these estimates. Revenue Recognition Revenue is recognized when persuasive evidence of an arrangement exists, delivery of the product or service has occurred, all obligations have been performed pursuant to the terms of the agreement, the sales price is fixed or determinable, and collectability is reasonably assured. Revenue includes fees received from customers for advertising and marketing services. In each case Revenue is recognized when services are performed or licenses are granted to customers. Revenue from the licensing of the Company's intellectual property and settlements reached from legal enforcement of the Company's patent rights is recognized when the arrangement with the licensee has been signed and the license has been delivered and made effective, provided license fees are fixed or determinable and collectability is reasonably assured. The fair value of licenses achieved by ordinary business negotiations is recognized as revenue. 31 -------------------------------------------------------------------------------- Table of Contents The amount of consideration received upon any settlement or judgment is allocated to each element of the settlement based on the fair value of each element. Elements related to licensing agreements, royalty revenues, net of contingent legal fees, are recognized as revenue in the consolidated statement of operations. Elements that are not related to license agreements and royalty revenue in nature will be reflected as a separate line item within the other income section of the consolidated statements of operations. Elements provided in either settlement agreements or judgments include: the value of a license, legal release, and interest. When settlements or judgments are achieved at discounts to the fair value of a license, the Company allocates the full settlement or judgment, excluding specifically named elements as mentioned above, to the value of the license agreement or royalty revenue under the residual method. Legal release as part of a settlement agreement is recognized as a separate line item in the consolidated statements of operations when value can be allocated to the legal release. When the Company reaches a settlement with a defendant, no value is allocated to the legal release since the existence of a settlement removes legal standing to bring a claim of infringement and without a legal claim, the legal release has no economic value. The element that is applicable to interest income will be recorded as a separate line item in other income. The Company does not assume future performance obligations in its license arrangements. The Company also has revenue from information technology consulting services. Revenue is recognized in the periods that satisfactory performance of services is delivered to customers. Revenue is recognized when persuasive evidence of an arrangement exists, delivery of the service has occurred, all obligations have been performed pursuant to the terms of the agreement, the sales price is fixed or determinable, and collectability is reasonably assured. Cost of Revenue Cost of revenue includes technical service costs directly associated with initiating and supporting a customer social media program, technical service costs directly associated with providing IT consulting and legal fees directly related to the settlement of intellectual property claims that result in licensing and royalty revenue. 32 -------------------------------------------------------------------------------- Table of Contents Intangible Assets The Company capitalizes certain software development costs as well as purchased software upon achieving technological feasibility of the related products. Software development costs incurred and software purchased prior to achieving technological feasibility are charged to engineering and product development expense as incurred. Commencing upon initial product release, capitalized costs are amortized to cost of software licenses using the straight-line method over the estimated life of the product (which approximates the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product), which is generally up to five years. Impairment of Long-Lived Assets The Company reviews the carrying value of intangibles and other long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparing the carrying amount of the asset or asset group to the undiscounted cash flows that the asset or asset group is expected to generate. If the undiscounted cash flows of such assets are less than the carrying amount, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value. No impairment was deemed to exist as of December 31, 2013 and 2012. The Company re-evaluates the carrying amounts of its amortizable intangibles at least quarterly to identify any triggering events. As described above, if triggering events require us to undertake an impairment review, it is not possible at this time to determine whether it would be necessary to record a charge or if such charge would be material. Fair Value Measurements We have adopted ASC Topic 820, "Fair Value Measurements and Disclosures," which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Stock-Based Compensation The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Stock-based compensation expense is recorded by the Company in the same expense classifications in the consolidated statements of operations, as if such amounts were paid in cash. Restatement of Previously Issued Financial Statements This annual report contains the restated consolidated balance sheet as of December 31, 2012 and the effects of the restated consolidated statements of operations for the years ended December 31, 2013 and 2012 and from September 11, 2009 (date of inception) through December 31, 2013. On August 26, 2013, after consulting with the Company's Audit Committee and with the Company's newly appointed Independent Registered Public Accounting Firm, Marcum LLP, management changed its accounting for certain of the Company's warrants previously issued in connection with preferred stock and common stock and conversion features related to previously issued convertible notes which were recorded in periods prior to the engagement of Marcum LLP in order to comply with US GAAP. Such warrants and the embedded conversion options should have been reflected as liabilities on the consolidated balance sheets included in the original 10-K, rather than as a component of equity. 33 -------------------------------------------------------------------------------- Table of Contents Specifically, the change in treatment of the warrants and the conversion feature embedded in certain convertible notes resulted in a change to the equity, and liability portions of the consolidated balance sheets as of December 31, 2013 and resulted in a loss on the fair value of the derivative liabilities which impacted our results of operations and earnings (loss) per share as reported in our original 10-K. Results of Operations Comparison of Year Ended December 31, 2013 and 2012 Net Loss. For the year ended December 31, 2013, we had a net loss of $6,823,789 compared to a net loss of $5,075,659 for the year ended December 31, 2012. The increase in loss was primarily due an increase in other income and (expense) from a gain in 2012 of $479,300 to a loss of $1,195,693 in 2013. Other income and (expense) was impacted by an unfavorable loss on a settlement or modification of debt of $6,810,982. Additionally, interest expense increased from $1,188,782 in 2012 to $2,015,145 in 2013. These negative impacts were partially offset by a favorable change in the fair value of derivative liabilities of $7,630,434 in 2013 in comparison to a favorable impact of $1,668,082 in 2012. Operating expenses were $5,827,313 in 2013 versus $5,474,521 in 2012. Sales and marketing increased by $261,908 as sales staffing was expanded in 2013. Depreciation and amortization increased by $33,232 in comparison to 2012. Revenue. Revenue for the year ended December 31, 2013 increased to $341,972 as compared to $74,584 for the same period in 2012. We are a development stage company and have modest revenue to date. Sales increased as the Company broadened its revenue streams to include social media licensing, settlement and fees of $245,981 and consulting fees of $95,991. The increase was the result of two settlements of intellectual property claims that resulted in licensing fees in 2013. Without these two settlements, sales would have increased by 55%. Cost of Revenue. Cost of revenue for the year ended December 31, 2013 was $142,755. This amount included charges directly related at generating social media, licensing fee and consulting fee revenue. In the year 2012, cost of revenue was $155,022. The prior year amount was primarily comprised of payments to endorsers as the Company focused on building a captive endorser base. Sales and Marketing. For the year ended December 31, 2013, sales and marketing expenses increased by $261,908 to $682,600 during the same period in 2012. The increase was due primarily to increased staffing and advertising expenses. General and Administrative. For the year ended December 31, 2013, general and administrative expenses increased $57,652 to $4,843,804, as compared to $4,786,152, for the year ended December 31, 2012. Stock compensation expenses declined by $698,896 to $ 2,530,061 in 2013 as overall stock option and restricted stock grant expense declined in 2013. This was offset by increased professional fees associated with the continued fund raising activities, restatement of prior year's results and increased investor relations and public relations as the Company sought to increase awareness of the Company in the financial community as well as our prospective customer base. Depreciation and Amortization. Depreciation and amortization expenses, increased from $267,677 for the year ended December 31, 2012 to $300,909 for the year ended December 31, 2013 as the Company invested $355,515 in capitalized software, which includes a common stock grant valued at $150,000 to acquire software during 2013. 34 -------------------------------------------------------------------------------- Table of Contents Interest Expense. Interest expense was $2,015,145 for the year ended December 31, 2013 as compared to $1,188,782 for the year ended December 31, 2012. Interest expense was incurred related to the Company's long-term debt obligations at various interest rates ranging from 8% to 10% and the amortization of debt discount aggregating $751,126. Also, there was interest in 2013 related to the warrant modification for reset provision of $1,027,381. Cash Flows Comparison of Year Ended December 31, 2013 and 2012 Cash used in operating activities during the year ended December 31, 2013 was $2,756,901, as compared to $1,930,737 for the year ended December 31, 2012. The change was due to an increase in net loss of $1,748,130. Cash used was impacted favorably by a non-cash loss on the settlement of notes payable of $6,810,982. This was offset by the net change in non-cash gain associated with the fair market value adjustment in derivative liabilities of $7,630,434. Cash used in investing activities during the year ended December 31, 2013 was $205,515, as compared to $331,689 for the year ended December 31, 2012. The decrease in cash used in investing activities resulted primarily from a decrease in cash paid for software development expenses. We expect that cash used in investing activities to remain at the current level for the foreseeable future as we continue to expand our website service offerings. During the year ended December 31, 2013, cash provided by financing was $4,038,500 as compared to $2,109,831 for the same period in 2012. In the current year, the Company secured an aggregate of $2.6 million in notes payable and $1.5 million from the sale of common stock associated with two private transactions. These monies were secured to address the cash requirements during the continued development stage of the business. Going Concern Our independent registered public accounting firm, in their report accompanying our consolidated financial statements for the year ended December 31, 2013, expressed substantial doubt about our ability to continue as a going concern due to our recurring losses from operations, negative cash flows from operating activities and our accumulated deficit. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies, reduce expenditures, dispose of selective assets, and ultimately, generate additional revenue. The going concern opinion may also limit our ability to access certain types of financing, prevent us from obtaining financing on acceptable terms, and limit our ability to obtain new business due to potential customers' concern about our ability to deliver products or services. We must raise capital to implement our project and stay in business. Liquidity and Capital Resources We are a development stage company and have incurred cumulative losses of $24,431,770 since beginning operations on September 11, 2009. At December 31, 2013, we had a cash balance of $1,294,882 and favorable working capital of $1,006,009. On May 6, 2013, we entered into a securities purchase agreement with an accredited investor pursuant to which we issued and sold a 10% Convertible Debenture (the "May 2013 Debenture") in the principal amount of $2,400,000 and 1,200,000 shares of our common stock in consideration of gross proceeds of $2,400,000. The Debenture bears interest at a rate of 10% per annum, is due two years from the issuance date and is convertible into shares of our common stock at a conversion price of $0.25 per share. On September 13, 2013, we entered into a series of agreements with the holder of the May 2013 Debenture and certain of our outstanding warrants. Pursuant to such agreements, we agreed to provide for a temporary reduction in the conversion price of the May 2013 Debenture from $0.25 to $0.13 per share through December 31, 2013 and the holder agreed to the elimination of certain restrictive covenants in the May 2013 Debenture. In addition, we agreed to amend the terms of certain of our outstanding warrants in order to induce the holder to exercise such warrants as well as to eliminate the cashless exercise feature and certain anti-dilution protections contained in such warrants. In exchange, we agreed to provide for a temporary reduction in the exercise price of such warrants from $0.10 to $0.05 through the later of December 31, 2013 or 45 days after a registration statement covering the underlying shares is declared effective by the Securities and Exchange Commission. The registration statement covering such shares was declared effective by the SEC on November 25, 2013. 35 -------------------------------------------------------------------------------- Table of Contents On October 7, 2013, we entered into a securities purchase agreement with an accredited investor pursuant to which we issued and sold 7,700,000 shares of our common stock at a purchase price of $0.13 per share in consideration of gross proceeds of $1,001,000. On October 15, 2013, we entered into a securities purchase agreement with an accredited investor pursuant to which we issued and sold 3,846,154 shares of our common stock at a purchase price of $0.13 per share in consideration of gross proceeds of $500,000. As of December 31, 2013, the May 2013 Debenture together with all accrued but unpaid interest thereon was converted into an aggregate of 19,400,000 shares of our common stock. On January 9, 2014, an aggregate of 11,200,000 warrants have been exercised in consideration of proceeds to the Company of $560,000. On January 9, 2014, we further extended the period during which the warrants were exercisable at the reduced exercise price until March 10, 2014. Following such date, the exercise price shall increase to $0.15 per share. Off-Balance Sheet Arrangements We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations. |