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COMHEAR, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Cautionary Statement The following discussion and analysis should be read in conjunction with our unaudited financial statements and the related notes thereto contained elsewhere in this report. The information contained in this quarterly report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other filings with the Securities and Exchange Commission, or SEC, including our Annual Report on Form 10-K filed with the SEC on March 31, 2014 and our subsequently filed periodic reports, which discuss our business in greater detail. See in particular our reports on Forms 10-K, 10-Q, and 8-K subsequently filed from time to time with the SEC. In this report we make, and from time to time we otherwise make, written and oral statements regarding our business and prospects, such as projections of future performance, statements of management's plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimates," "projects," "believes," "expects," "anticipates," "intends," "target," "goal," "plans," "objective," "should" or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the SEC, news releases, written or oral presentations made by officers or other representatives made by us to analysts, stockholders, investors, news organizations and others, and discussions with management and other of our representatives. Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties, including those risks set forth in the section "Risk Factors" appearing in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013, in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 and in Part II, Item 1A of this report. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement speaks only as of the date on which such statement is made. Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. Except as required by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement. Introduction ComHear, Inc. ("we" or "us" or "the company" or "ComHear") was formed on October 12, 2012 under the laws of the State of Delaware under the name Playbutton Acquisition Corp. We were formed for the purpose of acquiring Playbutton, LLC, a Delaware limited liability company engaged in the business of marketing its core product, the Playbutton, a customizable music player housed in a branded, wearable button. We acquired Playbutton, LLC on December 18, 2013, at which time Playbutton, LLC became our wholly-owned operating subsidiary. On February 21, 2013, we changed our corporate name to Playbutton Corporation. On January 17, 2014, we acquired Taida Company, LLC, or Taida, a Delaware limited liability company founded by Randy Granovetter, our current president and chief executive officer. Taida is the owner of the audio technology relating to the EarPuffs, EarTOPs, KAP software and MyBeam technology. On January 28, 2014, we changed our corporate name to ComHear, Inc. For a more complete summary of these transactions and other material transactions concerning our corporate formation and development, please see Part I, Item 1 "Business - Our Company" to our Annual Report on Form 10-K filed with the SEC on March 31, 2014. Our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q reflect our financial condition and results of operations as consolidated with Taida and Playbutton, LLC. The historical financial information presented prior to January 17, 2014 is that of Taida. The equity sections of Taida for all prior periods presented have been recasted to reflect the recapitalization effectuated by the merger. We are an audio and wearables technology products, software and services company. Our wearables technology category is defined as "In the Service of Sound" and we produce "Audio that feels good, sounds great, and is good for you." We have four primary areas of focus, as follows: · We have developed comfortable, extended wear earbud, eartips and ear headset products, which we market under the trademarks EarPuff and EarTOPs, respectively. Our EarPuff and EarTOPs are based on a proprietary and eco-friendly product known as BioFoam, a biodegradable and disposable material and process for comfortable, extended wear earbud, eartips and on/over the ear headset products. We intend to market and sell our BioFoam based EarPuff and EarTOPs to the in the ear and the on/over the ear headset OEMs and industrial verticals segments. We believe these products provide a consistent and superior comfortable fit for active, extended personal daily use. 26 · We have developed kinetic audio processing (KAP) software which we intend to market as a stand-alone software application to headset OEMs and bundle with our EarPuff and EarTOPs products. Our KAP software produces a psychoacoustic effect that provides a richer and louder sound without increasing the overall sound pressure level, or volume. We believe this technology opens a new world of immersive and high quality audio for both in ear and over the ear headsets without needing to use high volume settings to obtain the same result. We intend to bundle with our EarPuff and EarTOPs products and license to chipset manufacturers. · We have an audio wearable line called Playbutton that is a patent protected MP3 digital music player in the form of a fully customizable, brandable button. We intend to further develop the Playbutton to include advanced audio, communication and sensing technologies to create a wearable technology platform for delivering audio content and services. · We have acquired an exclusive license to audio beamforming technology that is intended to deliver personal audio communications without a headset for personal audio, conferencing, automotive, home theater, and other applications. We intend to develop commercial applications of the audio beamforming technology under the trademark, "MyBeam." We commenced the sales of our Playbutton product in 2012 and to date most of our revenue from operations has been derived from our sale of the Playbuttons. We have completed the development of our EarPuff and EarTOPs products and KAP software, and we are currently pursuing licensing and distribution agreements with OEM and other industry participants. As of the date of this report, we have entered into a sales representation agreement with Wolfson Microelectronics PLC, however we have not entered into any agreements with OEMs or others or recognized revenue from the distribution and sale of our EarPuff, EarTOPs or KAP software. Results of Operations For the Three Months Ended June 30, 2014 and 2013 Three Months Three Months Ended Ended June 30, June 30, 2014 2013 Net sales $ 36,976 $ - Gross margin $ 8,328 $ - Operating expenses $ 1,796,046 $ 244,407 Loss from operations $ (1,787,718 ) $ (244,407 ) Other income (expense), net $ (94,862 ) $ (3,944 ) Net loss $ (1,882,580 ) $ (248,351 )Loss per common share - basic and diluted $ (0.11 ) $ (0.03 ) Revenue We had net sales for the three months ended June 30, 2014 and 2013 of $36,976 and $0, respectively. Net sales were driven by the sale of 1,759 Playbutton units and $18,000 in Non-Recurring Engineering (NRE) Services Revenue during the second quarter of 2014. Net sales increased during the first quarter of 2014 compared to the prior year period as a result of the merger with Playbutton and increased activity in the OEM segment. Our net sales to date have been driven by purchases orders from music publishers and brands that are looking to purchase customized Playbuttons for a specific marketing project. These purchases orders require significant marketing, negotiating and pre-planning and involve a timeline of several months. During the reporting period we changed our sales activities for our Playbutton product line from a retail and arts and entertainment (A&E) sales focus to Business-to-Business (B2B) in order to cut operational costs and focus on higher margin and larger unit transactions that require less customization. Gross Margin Gross margin for the three months ended June 30, 2014 and 2013 was $8,328 and $0, respectively. The increase in gross margin was largely the result of increased revenue during the period as a result of the merger with Playbutton and increased activity in the OEM segment. 27 Operating Expenses Operating expenses for the three months ended June 30, 2014 were $1,796,046, as compared to $244,407 for the three months ended June 30, 2013, an increase of $1,551,639. The increase in operating expenses is primarily the result of: · An increase in payroll and payroll related expenses of approximately $630,000 due to the hiring of new employees during 2014, employee benefits and the merger with Playbutton; · An increase in legal and professional fees in the amount of approximately $260,000 as a result of the merger with Playbutton, our financing activities, patent and trademark fees, public reporting requirements and business development consulting; · An increase in total selling, general and administrative expenses of approximately $185,000 as a result of the merger with Playbutton, increased travel and related expenses, increased advertising and related expenses, increased computer software and maintenance expenses, increased rent and recruiting expenses; · An increase in research and development expense of approximately $430,000 as a result of our ongoing development of our EarPuff, Playbutton, and KAP technologies and commercialization of our MyBeam technology; and · An increase in stock based compensation expense of $46,500. The increase was primarily due to stock awards issued in prior periods to consultants vesting in the current period. Loss from Operations Loss from operations for the three months ended June 30, 2014 was $(1,787,718), as compared to $(244,407) for the three months ended June 30, 2013. The increase in loss from operations was primarily attributable to the increase in operating expenses as detailed above. Other Income (Expenses) Other income (expenses)for the three months ended June 30, 2014 was $(94,862), as compared to $(3,944) for the three months ended June 30, 2013. Other income during the six months ended June 30, 2014 consisted of interest income of $430. Other expenses during the three months ended June 30, 2014 consisted primarily of liquidated damages of $(72,617) due to our failure to meet the filing deadline of our registration statement, $(21,026) of interest expense on convertible promissory notes and a loss on disposition of equipment of $(1,349). Other expenses during the three months ended June 30, 2013 consisted of $(3,944) of interest expense on convertible promissory notes. Net Loss Net loss for the three months ended June 30, 2014 was $(1,882,580) or loss per share of ($0.11), as compared to a net loss of $(248,351) or loss per share of ($0.03), for the three months ended June 30, 2013. The increase in net loss was primarily attributable to the significant increase in operating expenses and other income (expenses) as detailed above. Inflation did not have a material impact on the Company's operations for the period. For the Six Months Ended June 30, 2014 and 2013 Six Months Six Months Ended Ended June 30, June 30, 2014 2013 Net sales $ 90,498 $ 5,000 Gross margin $ 30,906 $ 5,000 Operating expenses $ 3,324,674 $ 457,509 Loss from operations $ (3,293,768 ) $ (452,509 ) Other income (expense), net $ (184,423 ) $ (4,685 ) Net loss $ (3,478,191 ) $ (457,194 )Loss per common share - basic and diluted $ (0.23 ) $ (0.06 ) 28 Revenue We had net sales for the six months ended June 30, 2014 and 2013 of $90,498 and $5,000, respectively. Net sales were driven by the sale of 4,129 Playbutton units during the first two quarters of 2014 and professional services revenue in 2013. Net sales increased during the first quarter of 2014 compared to the prior year period as a result of the merger with Playbutton and increased activity in the OEM segment. Our net sales to date have been driven by purchases orders from music publishers and brands that are looking to purchase customized Playbuttons for a specific marketing project. These purchases orders require significant marketing, negotiating and pre-planning and involve a timeline of several months. During the reporting period we changed our sales activities for our Playbutton product line from a retail and A&E sales focus to Business-to-Business (B2B) in order to cut operational costs and focus on higher margin and larger unit transactions that require less customization. Gross Margin Gross margin for the six months ended June 30, 2014 and 2013 was $30,906 and $5,000, respectively. The increase in gross margin was largely the result of increased revenue during the period as a result of the merger with Playbutton and an increase in activity in the OEM segment. Operating Expenses Operating expenses for the six months ended June 30, 2014 were $3,324,674, as compared to $457,509 for the six months ended June 30, 2013, an increase of $2,867,165. The increase in operating expenses is primarily the result of: · An increase in payroll and payroll related expenses of approximately $1,107,000 due to the hiring of new employees during 2014, employee benefits and the merger with Playbutton; · An increase in legal and professional fees in the amount of approximately $500,000 as a result of the merger with Playbutton, our financing activities, patent and trade mark fees, public reporting requirements and business development consulting; · An increase in total selling, general and administrative expenses of approximately $457,000 as a result of the merger with Playbutton, increased travel and related expenses, increased advertising and related expenses, increased computer software and maintenance expenses, increased rent and recruiting expenses; · An increase in research and development expense of approximately $750,000 as a result of our ongoing development of our EarPuff, Playbutton, and KAP technologies and commercialization of our MyBeam technology; and · An increase in stock based compensation expense of approximately $53,000. The increase was primarily due to stock awards issued in prior periods to consultants vesting in the current period. Loss from Operations Loss from operations for the six months ended June 30, 2014 was $(3,478,191), as compared to $(457,194) for the six months ended June 30, 2013. The increase in loss from operations was primarily attributable to the increase in operating expenses as detailed above. Other Income (Expenses) Other income (expenses)for the six months ended June 30, 2014 was $(184,423), as compared to $(4,685) for the six months ended June 30, 2013. Other income during the six months ended June 30, 2014 consisted of interest income of $1,006. Other expenses during the six months ended June 30, 2014 consisted primarily of liquidated damages of $(72,617) due to our failure to meet the filing deadline of our registration statement, $(111,163) of interest expense on convertible promissory notes and a loss on disposition of equipment of $(1,349). Other expenses during the six months ended June 30, 2013 consisted of $(4,685) of interest expense on convertible promissory notes. Net Loss Net loss for the six months ended June 30, 2014 was $(3,478,191) or loss per share of ($0.23), as compared to a net loss of $(457,194) or loss per share of ($0.06), for the six months ended June 30, 2013. The increase in net loss was primarily attributable to the significant increase in operating expenses and other income (expenses) as detailed above. Inflation did not have a material impact on the Company's operations for the period. 29 Liquidity and Capital Resources As of June 30, 2014, we had approximately $429,000 of working capital. Subsequent to the reporting period but prior to this filing we commenced raising additional funds. We believe that our working capital on hand as of the date of this report along with increased revenue and additional funds raised will be sufficient to fund our plan of operations over the next 12 months. However, there can be no assurance that we will not require additional capital within the next 12 months. For example, in our Ear Puff line of business, we will endeavor to receive upfront payments from OEMs to cover custom tooling and early production. However, we may be unable to obtain upfront payments from the OEMs or we may want to forego upfront payment in order to obtain better commercial terms or we may encounter a situation where we need to ramp up our production faster than we are able to finance through payments from our OEM customers. In either situation, we may require additional capital for investment, operations and working capital. As another example, to date, we have been able to finance the production of our Playbutton products by way of upfront payments received from our customers at the time of their placement of a purchase order. While we believe that we will continue to be able to obtain advance deposits sufficient to fund production of non-retail purchase orders, there can be no assurance that this practice will not change as result of adverse economic conditions impacting our customers or otherwise. In the event we are no longer able to obtain advance deposits from non-retail customers or we acquire a large retail order, we may require additional capital in order to finance the production of product inventory. In the event we are no longer able to obtain advance deposits from non-retail customers or we acquire a large retail order, we will require additional capital in order to finance the production of product inventory. We would endeavor to acquire the required capital through commercial credit facilities, however there can be no assurance we would qualify for commercial debt financing on terms acceptable to us or at all. If commercial debt financing is unavailable, we would endeavor to acquire the additional capital through the sale of our debt or equity securities, the success of which there can be no assurance. Our plan of operations over the next 12 months is to lower the cost of operations and cost of goods sold on our Playbutton product and focus on high unit revenue opportunities. We are actively pursuing OEM sales with our EarPuff, EarTOP and KAP software and have a licensing agreement with Wolfson Microelectronics plc for KAP software. We are investing in research and development to commercialize our MyBeam technology and will be pursuing professional services contracts as we move towards commercial trials of our beamforming technology. We also intend to pursue strategic opportunities to grow our business both organically and through acquisition. We intend to explore alliances and possible acquisitions of complementary businesses. The following table summarizes total current assets, liabilities and working capital at June 30, 2014 and December 31, 2013. June 30, December 31, 2014 2013 Current Assets $ 1,130,655 $ 53,597 Current Liabilities (701,745 ) (1,882,350 ) Working Capital (Deficit) $ 428,910 $ (1,828,753 ) For the Six Months Ended June 30, 2014 and 2013 Net Cash Used in Operating Activities Net cash used in operating activities for the six months ended June 30, 2014 and 2013 was $3,298,800 and $308,136, respectively. The net loss for the six months ended June 30, 2014 and 2013 was $3,478,191 and $457,194, respectively. The increase in cash used in operating activities for the six months ended June 30, 2014 as compared June 30, 2013, was primarily for legal and professional fees due to the merger with Playbutton and our financing activities, payroll and payroll related expenses and research and development expenses used to develop our technologies. Net Cash Provided by Investing Activities Net cash provided by investing activities for the six months ended June 30, 2014 and 2013 was $199,617 and $0, respectively. During the six months ended June 30, 2014 this consisted of cash received of $199,617 as a result of the acquisition of Taida. Net Cash Provided by Financing Activities Net cash provided by financing activities for the six months ended June 30, 2014 and 2013 was $3,990,255 and $400,000, respectively. During the six months ended June 30, 2014 this consisted of gross proceeds of $4,772,475 as a result of our 2014 private placement partially offset by the payment of stock issuance costs of $332,220 and the repayment of convertible promissory notes in the amount of $450,000. During the six months ended June 30, 2013 the Company received proceeds of $400,000 from the issuance of convertible promissory notes. 30 Off-Balance Sheet Arrangements We do not have any off-balance sheet financing arrangements. |