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EX-32.1 - EXHIBIT 32.1 - Bitzio, Inc.ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - Bitzio, Inc.ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - Bitzio, Inc.ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - Bitzio, Inc.ex32-2.htm
EXCEL - IDEA: XBRL DOCUMENT - Bitzio, Inc.Financial_Report.xls

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: September 30, 2014

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from:

 

Commission file number: 000-51688

 

BITZIO, INC.
(Exact name of registrant as specified in its charter)

 

Nevada   16-1734022
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     

9625 Cozycroft Avenue, Suite A

Chatsworth, CA

 

 

91311

(Address of principal executive offices)   (Zip Code)

 

Issuer’s telephone number (866) 824-7881

 

 
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period than the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filed,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]   Accelerated filer [  ]
         
Non-accelerated filer [  ]   Smaller reporting company [X]
(Do not check if a smaller reporting company)        

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 19, 2014 the number of shares of the registrant’s classes of common stock outstanding was 1,397,110,507.

 

 

 

 
 

 

TABLE OF CONTENTS

 

      Page
Numbers
Part I – Financial Information    
  Proviso Regarding Forward-Looking Statements   3
Item 1. Financial Statements (Unaudited)   F-1
  Condensed Consolidated Balance Sheets   F-1
  Condensed Consolidated Statements of Operations   F-2
  Condensed Consolidated Statements of Cash Flows   F-3
  Notes to Condensed Consolidated Financial Statements   F-4
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   4
Item 3. Quantitative and Qualitative Disclosures About Market Risk   6
Item 4. Controls and Procedures   6
     
Part II – Other Information    
     
Item 1. Legal Proceedings   7
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   7
Item 3. Defaults Upon Senior Securities   7
Item 4. Mine Safety Disclosures   7
Item 5. Other Information   7
Item 6. Exhibits   7
     
  Signatures   8

 

2
 

 

PART I – FINANCIAL INFORMATION

 

 Proviso Regarding Forward-Looking Statements

 

This Quarterly Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on management’s beliefs and assumptions, and on information currently available to management. Forward-looking statements include the information concerning our possible or assumed future results of operations set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements also include statements in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “consider” or similar expressions are used.

 

Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. Our future results and shareholder values may differ materially from those expressed in these forward-looking statements. Readers are cautioned not to put undue reliance on any forward-looking statements.

 

The results for the period ended September 30, 2014 are not necessarily indicative of the results of operations for the full year. These financial statements and related footnotes should be read in conjunction with the financial statements and footnotes thereto included in the Company’s Form 10-K filed with the Securities and Exchange Commission on April 10, 2014.

 

3
 

 

ITEM 1. FINANCIAL STATEMENTS

 

BITZIO, INC

Condensed Consolidated Balance Sheets

 

   September 30, 2014   December 31, 2013 
  (Unaudited)       
Assets         
Current Assets          
Cash and cash equivalents  $2,524   $3,877 
Accounts receivable, net   36,136    2,234 
Prepaid expenses and other current assets   78,796    - 
Inventory   228,032    - 
Total Current Assets   345,488    6,111 
           
Other Assets          
Intangible assets, net   -    292,931 
Fixed assets, net   2,724    - 
Other receivable   1,192    - 
Note receivable   25,979    75,000 
Goodwill   1,037,864    - 
Total Other Assets   1,067,759    367,931 
           
Total Assets  $1,413,247   $374,042 
           
Liabilities and Stockholders’ Deficit          
Current Liabilities:          
Accounts payable and accrued liabilities   1,273,101    652,006 
Related party payable   154,479    138,000 
Notes payable, net of discount   275,784    367,513 
Convertible notes, net of discount   813,282    1,037,684 
Related party convertible notes, net of discount   150,000    150,000 
Contingent liabilities   135,000    - 
Derivative liability   912,940    827,158 
Total Current Liabilities   3,714,586    3,172,361 
           
Long term notes payable, net of discount   -    225,000 
Redeemable preferred stock series C, $0.001 par value; 999 shares authorized; 999 shares issued and outstanding   -    - 
Total Liabilities   3,714,586    3,397,361 
           
Stockholders’ Deficit:          
Preferred stock series A, $0.001 par value; 2,500,000 shares authorized; 2,043,120 shares issued and outstanding   2,043    2,043 
Preferred stock series B, $0.001 par value; 1,000,000 shares authorized; 1,000,000 and 500,000 shares issued and outstanding, respectively   1,000    500 
Preferred Stock series D, $0.001 par value 35,750 authorized, No shares issued and outstanding   -    - 
Common stock, $0.001 par value; 4,200,000,000 shares authorized; 1,397,110,507 and 175,916,617 shares issued and outstanding, respectively   1,397,111    175,917 
Additional paid in capital   19,974,027    19,603,216 
Stock subscriptions payable   288,637    181,074 
Accumulated deficit   (23,944,263)   (22,986,069)
Total Bitzio, Inc. stockholders’ deficit   (2,281,445)   (3,023,319)
Non-controlling interest   (19,894)   - 
Total stockholders’ deficit   (2,301,339)   (3,023,319)
Total Liabilities and Stockholders’ Deficit  $1,413,247   $374,042 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-1
 

 

BITZIO, INC

Condensed Consolidated Statements of Operations

(Unaudited)

 

   Three Months Ended Sept 30,   Nine Months Ended Sept 30, 
   2014   2013   2014   2013 
Revenues  $207,804   $9,990   $295,058   $9,990 
                     
Cost of Good Sold   48,696    -    48,696    - 
                     
Operating Expenses                    
Professional fees   94,842    47,917    456,421    1,066,650 
General and administrative   186,843    12,576    407,249    129,587 
Total operating expenses   281,685    60,493    863,670    1,196,237 
                     
Loss from Operations   (122,577)   (50,503)   (617,308)   (1,186,247)
                     
Other Income (Expense)                    
Interest expense   (270,660)   (185,122)   (613,610)   (640,019)
Change in derivative liability   440,137    4,025    278,879    138,457 
Foreign currency transaction gain   15,611    -    16,729    - 
Loss on extinguishment of debt   (39,928)   -    (42,778)   - 
Loss on default   -    (38,667)   -    (38,667)
Total other income (expense)   145,160    (219,764)   (360,780)   (540,229)
              -      
Income (Loss) Before Income Taxes   22,583    (270,267)   (978,088)   (1,726,476)
Provision For Income Taxes   -    -    -    - 
                     
Net Income (Loss) From Continuing Operations   22,583    (270,267)   (978,088)   (1,726,476)
Gain on disposal of discontinued operations   -    -    -    278,937 
Income from discontinued operations   -    -    -    48,359 
Net Income (Loss) before Non-controlling Interest   22,583    (270,267)   (978,088)   (1,399,180)
                     
Net Loss Attributable to Non-controlling Interest   (14,700)   -    (19,894)   - 
                     
Net Income (Loss) Attributable to Bitzio, Inc  $37,283   $(396,110)  $(958,194)  $(1,399,180)
                     
Earnings (Loss) Per Share from Continuing Operations                    
Basic  $0.00   $(0.01)  $(0.00)  $(0.02)
Diluted  $0.00   $(0.01)  $(0.00)  $(0.02)
Earnings (Loss) Per Share from Discontinued Operations                    
Basic  $0.00   $0.00   $(0.00)  $0.00 
Diluted  $0.00   $0.00   $(0.00)  $0.00 
Earnings (Loss) Per Share attributable to Bitzio shareholders                    
Basic  $0.00   $(0.01)  $(0.00)  $(0.02)
Diluted  $0.00   $(0.01)  $(0.00)  $(0.02)
Weighted Average Common Shares                    
Basic   888,365,195    96,841,520    472,611,362    84,671,670 
Diluted   2,119,294,695    96,841,520    1,703,504,862    84,671,670 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-2
 

 

BITZIO, INC

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   Nine Months Ended September 30, 
   2014   2013 
Cash Flows from Operating Activities          
Net loss   (958,194)   (1,399,180)
Adjustments to reconcile net loss to net cash used in operating activities          
Net loss attributable to non-controlling interest   (19,894)   - 
Depreciation and amortization   32,500    7,477 
Expenses paid on behalf of the company   -    207,797 
Loss on extinguishment of debt   42,778    38,667 
Gain on Foreign currency transaction   (16,729)   - 
Stock based compensation   25,063    370,531 
Amortization of debt discounts on convertible notes   65,741    515,487 
Origination interest on convertible notes payable   466,605    5,347 
Change in derivative liabilities   (278,879)   (138,457)
Changes in operating assets and liabilities:          
Accounts receivable   (33,107)   14,807 
Prepaid expenses and other current assets   (5,435)   56,523 
Interest receivable   -    (2,545)
Inventory   2,658    - 
Accounts payable and accrued expenses   384,896    387,675 
Related party payables   806    71,187 
Net cash provided by continuing operating activities   (291,191)   135,316
Net cash provided by discontinued operating activities   -    (278,987)
Net cash provided by operating activities   (291,191)   (143,671)
           
Cash Flows from Investing Activities          
Proceeds from disposal of discontinued operations   -    109,940 
Cash invested in note receivable   (116,382)   -
Net cash provided by continuing investing activities   (116,382)   109,940 
Net cash provided by discontinued investing activities   -    (90,000)
Net cash provided by investing activities   (116,382)   19,940 
           
Cash Flows from Financing Activities          
Repayments on notes payable   (94,500)   (110,000)
Repayments on convertible debenture   (52,500)   (83,500)
Proceeds from notes payable   70,000    110,000 
Proceeds from convertible notes payable   233,000    173,500 
Proceeds from sale of preferred stock   250,050    - 
Net cash provided by continuing financing activities   406,050    90,000 
Net Cash Provided by Discontinued Financing Activities   -    - 
Net cash provided by financing activities  406,050   90,000 
           
Net increase in cash   (1,523)   (33,731)
Cash acquired in acquisition   170    - 
Cash, beginning of period   3,877    39,868 
           
Cash and Cash Equivalents, end of period  $2,524   $6,137 
           
Cash Paid For:          
Interest  $-   $44,856 
Income taxes  $-   $- 
           
Non-cash Financing and Investing Activities          
Debt discounts on convertible notes payable  $107,500   $193,500 
Common stock issued for debt  $291,801   $422,643 
Account receivable acquired in acquisition  $794   $- 
Prepaid expense acquired in acquisition  $22,761   $- 
Inventory acquired in acquisition  $230,690   $- 
PPE acquired in acquisition  $3,324   $- 
Other receivable acquired in acquisition  $1,192   $- 
Account payable and accrued liabilities acquired in acquisition  $453,122  $- 
Related party payable acquired in acquisition  $15,673  $- 
Goodwill acquired in acquisition  $1,037,864   $- 
Contingent liabilities acquired in acquisition  $135,000  $- 
Common stock issued for acquisition  $693,000  $- 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-3
 

 

BITZIO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

(Unaudited)

 

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Bitzio, Inc. (“the Company”, “we”, “Bitzio”) was originally formed as Rocky Mountain Fudge Company, Inc. on January 4, 1990 as a Utah corporation. On July 28, 1998, the Company converted from a Utah corporation to a Nevada corporation. Effective June 10, 2011, the Company changed its name from Rocky Mountain Fudge Company, Inc. to Bitzio, Inc. Pursuant to this transaction, shares of the Company’s common stock are now trading under the Company’s new trading symbol, BTZO.

 

On July 27, 2011, Bitzio, Inc. and Bitzio, LLC entered into a share exchange agreement wherein Bitzio, Inc. issued 5,000,000 shares of the Company’s common stock in exchange for 100% of the members’ equity of Bitzio, LLC. Through this transaction Bitzio, LLC became a wholly owned subsidiary of Bitzio, Inc.

 

On February 22, 2014 the Company entered into a Memorandum of Understanding with Angie Daza d/b/a Cleo VII (the “MOU”). The MOU provides that

 

  The Company will organize a subsidiary, which has subsequently been organized in Nevada as Cleo VII, Inc., and which is owned 51% by the Company and 49% by Angie Daza. Angie Daza has contributed the product designs owned by Cleo VII to the subsidiary and agreed to provide production financing for orders up to 2,500 units per month. The Company has committed to deposit $12,000 into the bank account of Cleo VII, Inc. to be used for production and to share equally with Angie Daza the obligation to provide production financing for orders in excess of 2,500 units per month.
     
  Angie Daza will serve as President of Cleo VII, Inc., and will provide warehousing and fulfillment services at a location in Miami, Florida. The Company will develop marketing campaigns for the Cleo brand and provide administrative services.
     
  The Company shall immediately issue to Angie Daza 50,000,000 shares of its common stock, which shall vest quarterly over a two-year period. If Cleo-branded products achieve $1 million in annual gross revenue, the Company will issue to Angie Daza common shares with a market value of $100,000. If Cleo-branded products achieve $2 million in annual gross revenue, the Company will issue to Angie Daza additional common shares with a market value of $100,000.

 

On February 18, 2014 the Company executed a non-binding letter of intent to acquire ownership of Sahaja, LLC. . Sahaja is currently engaged in the design, production and sale of apparel. The Company also agreed to provide loans to Sahaja, LLC totaling up to $100,000 as mutually agreed. As of September 30, 2014, $22,979 has been loaned to Sahaja but the acquisition had not yet been completed.

 

On March 24, 2014 the Company executed a non-binding letter of intent to acquire ownership of ZMJ Denim, Inc. ZMJ Denim, Inc is currently engaged in the design, production and sale of apparel. The Company also agreed to provide loans to ZMJ Denim, Inc. totaling up to $100,000 as mutually agreed. As of September 30, 2014, the acquisition had not yet been completed.

 

On July 15, 2014 Gordon McDougall submitted his resignation from his positions as a member of the Registrant's Board of Directors and as the Registrant's Chief Executive Officer, effective on July 16, 2014. On July 16, 2014 the Board of Directors appointed Hubert J. Blanchette, who is a member of the Board of Directors, to serve as the Registrant's Chief Executive Officer.

 

On July 16, 2014 the Registrant entered into a Share Exchange Agreement with Hubert Blanchette, Paul Koros, Stella Koros, Michael John Koros, Gordon McDougall and Laura Fewrtell. Hubert Blanchette was, on that date, a member of the Registrant’s board of directors. Gordon McDougall was, on that date, a member of the Registrant’s board of directors and the Registrant’s Chief Executive Officer. Laura Fewtrell is Mr. McDougall’s spouse.

 

The transactions contemplated by the Share Exchange Agreement were completed on July 17, 2014. On that date, Mr. Blanchette and the Koros’s transferred to the Registrant all of the capital stock of Lexi Luu Design, Inc. and released Lexi Luu Design, Inc. from all accrued liabilities. In exchange, the Registrant issued to them a total of 300,000,000 shares of its common stock. At the same time, Ms. Fewtrell and entities affiliated with Ms. Fewtrell and Mr. McDougall released Lexi Luu Design, Inc. from all liabilities, including liabilities for money loaned, and the Registrant issued to Ms. Fewtrell and to an affiliate of Mr. McDougall a total of 200,000,000 shares of its common stock. The Share Exchange Agreement provides that additional shares of common stock will be issued to all parties if the annual revenue for any of the current or next two years exceeds the following threshholds: 2014 - $420,000; 2015 - $660,000; 2016 - $780,000. The Share Exchange Agreement also provides that additional shares will be issued to all parties if, during the next 24 months, the Registrant completes a sale of equity securities at a per share price of less than $.0015 for aggregate gross proceeds of $750,000 or more.

 

F-4
 

 

On July 17, 2014, pursuant to the Share Exchange Agreement, the Registrant entered into an Employment Agreement with Hubert Blanchette. The agreement provides that Mr. Blanchette will serve as Chief Executive Officer of Lexi Luu Design, Inc. for a term of five years. As compensation for these services, the Registrant agreed to pay Mr. Blanchette a salary of $150,000 per year, except that for the period through May 31, 2015 sixty percent of the salary will be satisfied by issuance of common stock at a per share value of $.0015. The Registrant agreed to issue 50,000,000 common shares to Mr. Blanchette upon his execution of the agreement, which will vest quarterly over two years. The agreement also provides that Lexi Luu Design, Inc. will pay Mr. Blanchette 5% of the contribution margin realized during the past half year.

 

On July 18, 2014 the Registrant entered into a Share Exchange Agreement with Marilu Brassington, Elaine Cunningham and Leticia Brito. Ms. Brassington is the Registrant’s Chief Financial Officer and a member of the Registrant’s board of directors.

 

The transactions contemplated by the Share Exchange Agreement were completed on July 18, 2014. On that date, the three counterparties transferred to the Registrant all of the capital stock of E-motion Apparel, Inc. In exchange, the Registrant issued to them a total of 350,000,000 shares of its common stock. The Share Exchange Agreement provides that additional shares of common stock will be issued to all parties if the annual revenue of E-Motion Apparel for any of the current or next two years exceeds the following threshholds: 2014 - $270,000; 2015 - $390,000; 2016 - $540,000. The Share Exchange Agreement also provides that additional shares will be issued to all parties if, during the next 24 months, the Registrant completes a sale of equity securities at a per share price of less than $.0015 for aggregate gross proceeds of $750,000 or more.

 

On July 18, 2014, pursuant to the Share Exchange Agreement, the Registrant entered into an Employment Agreement with Marilu Brassington. The agreement provides that Ms. Brassington will serve as the Registrant’s Chief Financial Officer and as Chief Executive Officer of E-motion Apparel, Inc. for a term of five years. As compensation for these services, the Registrant agreed to pay Ms. Brassington a salary of $150,000 per year, except that for the period through May 31, 2015 68% of the salary will be satisfied by issuance of common stock at a per share value of $.0015. The Registrant agreed to issue 50,000,000 common shares to Ms. Brassington upon her execution of the agreement, which will vest quarterly over two years. The agreement also provides that the Registrant will pay Ms. Brassington 5% of the contribution margin realized on sales to current customers of E-motion Apparel.

 

NOTE 2 – GOING CONCERN

 

The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern, has recurring net loss, an accumulated deficit of $23,944,263 and a net working capital deficit of $3,369,098. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.

 

In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plan is to obtain such resources for the Company by seeking equity and/or debt financing. However management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The interim consolidated financial statements of Bitzio, Inc. (“Bitzio,” “we” or “us”) for the three and nine months ended September 30, 2014 and 2013 are not audited. Our consolidated financial statements are prepared in accordance with the requirements for unaudited interim periods, and consequently, do not include all disclosures required to be made in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of September 30, 2014 and our results of operations and cash flows for the three-month and nine-month periods ended September 30, 2014 and 2013. The results of operations for the three-month and nine-month periods ended September 30, 2014 are not necessarily indicative of the results for a full-year period. These interim consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission (the “SEC”).

 

F-5
 

 

Consolidation Policy 

 

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the Company and its 100% owned subsidiaries, Cleo, Lexi Luu, and E-motion. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with the generally accepted accounting principles in the United States (“U.S. GAAP”) requires management to make estimates and assumptions in certain circumstances that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates include, but are not limited to, valuation of intangible assets, goodwill and long-lived asset impairment charges, stock based compensation, loss contingencies and the allowance for doubtful accounts receivable. Actual results could differ from those estimates.

 

Revenue Recognition

 

Following the execution of the July 16th, 2014 Sales Purchase Agreement between Bitzio and Lexi as well as the Sales Purchase Agreement on July 18th, 2014 between Bitzio and Emotion Apparel, revenues are derived from the sale of products under the Lexi Luu Designs and Emotion Apparel brands as stated in the Sales Purchase Agreement. We recognize revenue when the following conditions are satisfied: (i) delivery of the product has occurred and (ii) collection is reasonably assured.

 

Prior to November 18, 2013, we derived our revenues from the sale of software and mobile applications through various platforms. We recognized revenue when all of the following conditions were satisfied: (i) there is persuasive evidence of an arrangement; (ii) delivery of the product or provision of the service has occurred; (iii) the fee is fixed or determinable; and (iv) collectability of the fee is reasonably assured.

 

Cash and Cash Equivalents

 

We consider all highly liquid investments with remaining maturities of nine months or less at the date of purchase to be cash and cash equivalents. Cash and cash equivalents consist primarily of money market funds and other short-term investments with original maturities of not more than nine months stated at cost, which approximates market value.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are presented at their face amount, less an allowance for doubtful accounts, on the balance sheets. Accounts receivable consist of revenue earned and currently due from customers. We evaluate the collectability of accounts receivable based on a combination of factors. We recognize reserves for bad debts based on estimates developed using standard quantitative measures that incorporate historical write-offs and current economic conditions.

 

Inventory

 

The Company’s inventory is stated at the lower of cost or estimated realizable value, with cost primarily determined on a weighted-average cost basis on the first-in, first-out (“FIFO”) method.  The Company continuously evaluates the composition of its inventory, assessing slow-turning product.  Estimated realizable value of inventory is determined based on an analysis of historical sales trends of our individual products and a forecast of future demand, giving consideration to the value of current orders in-house relating to the future sales of inventory.  Estimates may differ from actual results due to quantity, quality, and mix of products in inventory, customer demand, and market conditions.  The Company’s historical estimates of these costs and any provisions have not differed materially from actual results.  As of September 30, 2014, an inventory reserve had not been deemed necessary, and therefore, not recorded. As of September 30, 2014 all inventory amounts consist of finished goods.

 

Long-lived Assets

 

Long-lived assets include equipment and intangible assets other than those with indefinite lives. We assess the carrying value of our long-lived asset groups when indicators of impairment exist and recognize an impairment loss when the carrying amount of a long-lived asset is not recoverable from the undiscounted cash flows expected to result from the use and eventual disposition of the asset.

 

Indicators of impairment include significant underperformance relative to historical or projected future operating results, significant changes in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability of the carrying value of the asset (or asset group) based on an undiscounted cash flow analysis. If carrying value exceeds projected, net, undiscounted cash flows, an additional analysis is performed to determine the fair value of the asset (or asset group), typically a discounted cash flow analysis, and an impairment charge is recorded for the excess of carrying value over fair value.

 

Property and equipment

 

Property and equipment are recorded at historical cost less accumulated depreciation, unless impaired. Depreciation is charged to operations over the estimated useful lives of the assets using the straight-line.

 

Upon retirement or sale, the historical cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized.

 

Expenditures for repairs and maintenance are charged to expense as incurred.

 

F-6
 

 

Goodwill and intangible assets

 

Goodwill represents the excess of the purchase price of an acquired enterprise or assets over the fair value of the identifiable net assets acquired. We test goodwill for impairment annually and whenever events or changes in circumstances arise during the year that indicate the carrying amount of goodwill may not be recoverable. In evaluating whether an impairment of goodwill exists, we first compare the estimated fair value of a reporting unit against its carrying value. If the estimated fair value is lower than the carrying value, then a more detailed assessment is performed comparing the fair value of the reporting unit to the fair value of the assets and liabilities plus the goodwill carrying value of the reporting unit. If the fair value of the reporting unit is less than the fair value of its assets and liabilities plus goodwill, then an impairment charge is recognized to reduce the carrying value of goodwill by the difference.

 

We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. Intangible assets are amortized on a straight-line basis over its useful life.

 

Business Acquisitions

 

Business acquisitions are accounted for under the purchase method of accounting. Under that method, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of the acquisition, with any excess of the cost of the acquisition over the estimated fair value of the net tangible and intangible assets acquired recorded as goodwill. We make significant judgments and assumptions in determining the fair value of acquired assets and assumed liabilities, especially with respect to acquired intangibles. Using different assumptions in determining fair value could materially impact the purchase price allocation and our financial position and results of operations. Results of operations for acquired businesses are included in the financial statements from the date of acquisition.

 

Accumulated Other Comprehensive Income

 

Comprehensive loss includes net loss as currently reported under U.S. GAAP and other comprehensive loss. Other comprehensive loss considers the effects of additional economic events, such as foreign currency translation adjustments, that are not required to be recorded in determining net loss, but rather are reported as a separate component of stockholders’ equity (deficit). Currently the Company has no other comprehensive income.

 

Stock Based Compensation

 

We measure and recognize stock based compensation expense using a fair value based method for all share based awards made to employees and nonemployee directors, including grants of stock options and other stock based awards. The application of this standard requires significant judgment and the use of estimates, particularly with regard to Black Scholes assumptions such as stock price volatility and expected option lives to value equity based compensation. We recognize stock compensation expense using a straight-line method over the vesting period of the individual grants.

 

Income Taxes

 

We utilize the balance sheet method of accounting for income taxes. Accordingly, we are required to estimate our income taxes in each of the jurisdictions in which we operate as part of the process of preparing our financial statements. This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Due to the evolving nature and complexity of tax rules, it is possible that our estimates of our tax liability could change in the future, which may result in additional tax liabilities and adversely affect our results of operations, financial condition and cash flows.

 

Basic and Diluted Net Loss per Common Share

 

Basic and diluted net loss per share attributable to common stockholders is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Our potentially dilutive shares, which include outstanding common stock options, common stock warrants, convertible preferred stock and convertible debentures, have not been included in the computation of diluted net loss per share attributable to common stockholders for all periods presented, as the results would be antidilutive. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share. There were 1,230,929,500 such potentially dilutive shares excluded for the nine month period ended September 30, 2014.

 

F-7
 

 

Concentration of Credit Risk

 

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, to the extent balances exceed limits that are insured by the Federal Deposit Insurance Corporation, and accounts receivable.

 

Fair Value Measurements

 

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:

 

  Level 1: Quoted market prices in active markets for identical assets or liabilities.
     
  Level 2: Observable market-based inputs or inputs that are corroborated by market data.
     
  Level 3: Unobservable inputs that are not corroborated by market data.

 

Recent Accounting Pronouncements

 

The Company has evaluated recent pronouncements and does not expect their adoption to have a material impact on the Company’s financial position, or statements.

 

NOTE 4 – ACQUISITIONS

 

On July 16, 2014, we entered into a sales purchase agreement in 100% acquisition of all outstanding shares of Lexi Luu. Designs. Bitzio paid 500,000,000 restricted common shares for this acquisition. Lexi Luu shareholders are able to earn an additional $300,000 in restricted common shares over the course of two years in an earn out upon hitting certain revenue benchmarks. We accounted for the transaction as an equity purchase. The purchase price paid as of July 16, 2014 was allocated among the assets and liabilities and difference was taken to goodwill.

 

On July 18, 2014, we entered into a sales purchase agreement in 100% acquisition of all outstanding shares of E-motion Apparel Designs. Bitzio paid 350,000,000 restricted common shares for this acquisition. E-motion Apparel shareholders are able to earn an additional $300,000 in restricted common shares over the course of two years in an earn out upon hitting certain revenue benchmarks. We accounted for the transaction as an equity purchase. The purchase price paid as of July 18, 2014 was allocated among the assets and liabilities and difference was taken to goodwill. The License Agreement between Bitzio and E-motion Apparel was cancelled on July 18, 2014 and was replaced by the sales purchase agreement. See Note 5.

 

For both acquisitions the accounting for the business combination is based on provisional amounts and the allocation of the excess purchase price is not final, the amounts allocated to intangibles and goodwill, are subject to change pending the completion of final valuations of certain assets and liabilities. The statements of operations reflect the results of Lexi Luu Designs and E-motion Apparel, Inc as of the date of acquisition.

 

The total provisional purchase price for the Lexi-Luu acquisition was allocated as follows:

 

Assets     
Cash  $170 
Accounts receivable   794 
Inventories   64,883 
Property and equipment   2.724 
Other assets   19,503 
Goodwill   690,629 
Liabilities     
Accounts payable and accrued expenses   (256,030)
Due to shareholder   (15,673)
Earn-out contingent liability   (87,000)
Net assets acquired  $420,000 

 

The total provisional purchase price for the E-motion acquisition was allocated as follows:

 

Assets     
Inventories   165,807 
Other assets   5,050 
Goodwill   347,235 
Liabilities     
Accounts payable and accrued expenses   (197,092)
Earn-out contingent liability   (48,000)
Net assets acquired  $273,000 

 

NOTE 5 – INTANGIBLE ASSETS

 

Intangible Assets

 

In November 2013, the Company entered into a Distribution Agreement with E-motion Apparel, Inc., which designs women’s apparel and accessories. The agreement grants Bitzio the exclusive worldwide right to distribute E-motion Apparel’s products using the E-motion Apparel trademarks, copyrights and trade dress. The agreement also provides that Bitzio will make a five year non-interest-bearing $75,000 working capital loan to E-motion Apparel, and will pay a license fee of $300,000 to E-motion Apparel. The Distribution Agreement was replaced by the acquisition agreement on July 18, 2014. See Note 4.

 

Amortization of intangible assets is computed using the straight-line method and is recognized over the estimated useful lives of the intangible assets. Amortization expense was $32,500 and $7,477 for the nine months ended September 30, 2014 and 2013, respectively.

 

NOTE 6 – RELATED PARTY TRANSACTIONS

 

Related party payables

 

At September 30, 2014, $26,200 was due to related parties for accrued interest, $123,000 for services rendered by a company owned by Bitzio’s former chief executive officer, and $5,279 for services rendered by a company owned by Lexi Luu’s chief executive officer.

 

F-8
 

 

NOTE 7 – CONVERTIBLE NOTES PAYABLE

 

Exchange of Convertible Debentures

 

Immediately subsequent to its purchase of 500,000 shares of Series B Preferred Stock on November 18, 2013 (see note 9), 112359 Factor Fund, LLC (“Factor Fund”) entered into assignment agreements with seven holders of eight convertible promissory notes issued by the Registrant in 2012 and 2013. The aggregate of the principal balance and accrued interest on the notes was $779,591, and all of the notes were past due and otherwise in default. The assignment agreements provided that Factor Fund transferred the 500,000 shares of Series B Preferred Stock to the note holders, and the note holders assigned the eight notes to Factor Fund.

 

Immediately thereafter, Factor Fund entered into eight Exchange Agreements with the Registrant. The Exchange Agreements provided that Factor Fund would surrender the eight convertible promissory notes and receive in exchange eight Amended and Restated Convertible Debentures (“A&R Debentures”). The principal amount of each A&R Debenture equalled approximately 128.3% of aggregate principal and accrued interest surrendered in exchange for the A&R Debenture. The primary terms of the A&R Debentures are:

 

  Interest will accrue on the principal balance at the lesser of 8% per annum or the applicable federal rate.
     
  Principal and interest are due on December 31, 2015.
     
  The Company may prepay the A&R Debentures at any time, but must issue, as a prepayment penalty, common stock with a market value equal to 5% of the principal amount prepaid.
     
  The holder may convert the principal and interest accrued on the A&R Debentures into common stock at a conversion price equal to 100% of the average of the five (5) lowest closing market prices for the common stock for the thirty trading days preceding conversion, but may not convert into a number of shares that would result in the holder owning beneficially more than 4.99% of the Registrant’s outstanding shares.
     
  The holder may not sell the shares issued on conversion at a rate that exceeds 20% of the average monthly trading volume for the Company’s Common Stock.

 

The Company determined per ASC 470-50-40-10a, that the fair value of the embedded conversion option in the reissued convertible notes as a result of the change in conversion price and term, increased by more than 10% from the original notes. Therefore, debt extinguishment accounting rules apply. Accordingly, the reissued convertible notes payable were initially recorded at fair value, with a loss on extinguishment of debt of $220,408 for the difference in the fair value of the new notes compared to the carrying value of the old notes.

 

During the nine months ended September 30, 2014 $285,162 of principal was converted into 318,693,890 shares of the Company’s common stock. The balance of the note as of September 30, 2014 is $702,522 with accrued interest of $54,045.

 

On March 4, 2014, the Company issued an 8% convertible promissory note in the aggregate principal amount of $37,500 to an accredited investor. The note has a maturity date of December 10, 2014. The note is convertible into shares of our common stock at a conversion price of 59% of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date. During the nine months ended September 30, 2014, the Company recorded an interest expense of $1,225. As of September 30, 2014, the note and accrued interest was fully repaid.

 

On April 14, 2014, the Company issued an 8% convertible promissory note in the aggregate principal amount of $37,500 to an accredited investor. The note has a maturity date of January 18, 2015. The note is convertible into shares of our common stock at a conversion price of 59% of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date. During the nine months ended September 30, 2014, the Company recorded an interest expense of $1,398. The Company accounted for the conversion feature as a derivative valued at $48,244, of which $37,500 was recorded as a debt discount to be amortized over the life of the note. The remaining $10,744 was expensed immediately to interest expense. The balance of the note as of September 30, 2014 is $37,500 with accrued interest of $1,398.

 

On May 5, 2014, the Company issued an 8% convertible promissory note in the aggregate principal amount of $32,500 to an accredited investor. The note has a maturity date of February 9, 2015. The note is convertible into shares of our common stock at a conversion price of 59% of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date. During the nine months ended September 30, 2014, the Company recorded an interest expense of $1,059. The Company accounted for the conversion feature as a derivative valued at $36,411, of which $32,500 was recorded as a debt discount to be amortized over the life of the note. The remaining $3,911 was expensed immediately to interest expense. The balance of the note as of September 30, 2014 is $32,500 with accrued interest of $1,059.

 

F-9
 

 

On August 5, 2014 the Registrant entered into a Securities Purchase Agreement with 112359 Factor Fund, LLC (“Factor Fund”), pursuant to which the Registrant sold to Factor Fund a Secured Convertible Debenture. The Securities Purchase Agreement provides that Factor Fund will make ten payments, commencing with a payment of $80,000 on August 5, 2014, followed monthly by eight payments of $25,000 each and one $20,000 payment (i.e. total payments of $300,000). In exchange for each payment, an obligation in the principal amount equal to twice the payment will accrue and be represented by the Debenture. In addition, a premium of $50,000 will be added to the initial obligation, resulting in a total principal obligation accruing over the next nine months of $650,000. The primary terms of the Debentures are:

 

  Interest will accrue on the principal balance at the lesser of 8% per annum or the applicable federal rate.
     
  Principal and interest on each tranche will be due on the second anniversary of the payment date for that tranche.
     
  The Registrant may prepay the principal amount of the Debenture, in whole or in part, at any time without penalty, and interest that has accrued on the prepaid amount will be waived.
     
  The holder may convert the principal and interest accrued on the Debenture into common stock at a conversion price equal to 100% of the average of the five (5) lowest closing market prices for the common stock for the sixty trading days preceding conversion, but may not convert into a number of shares that would result in the holder owning beneficially more than 9.99% of the Registrant’s outstanding shares.

 

The Registrant’s obligations under the Debenture are secured by a pledge of all of the Registrant’s assets. In addition, Hubert Blanchette and Marilu Brassington, who are officers and directors of the Registrant, have pledged a total of 666 shares of Series C Preferred Stock and 35,750 shares of Series D Preferred Stock to secure the Registrant’s obligations under the Debenture. The Company accounted for the conversion features as a derivatives valued at $226,088, of which $210,000 was recorded as a debt discount to be amortized over the life of the note, and $23,636 of which $20,500 was recorded as a debt discount to be amortized over the life of the note The remaining $16,088 and $3,136 were expensed immediately to interest expense. The balance of the note as of September 30, 2014 is $260,000 with accrued interest of $2,841.

 

On August 5, 2014 the Registrant entered into a letter agreement with Factor Fund that modified the terms of the Secured Amended & Restated Convertible Debentures issued by the Registrant to Factor Fund on November 18, 2013 (the “A&R Debentures”). The modifications:

 

  increased the maximum number of shares that Factor Fund can hold upon conversion of the A&R Debentures from 4.99% of the outstanding to 9.99%.
     
  changed the period over which the conversion price will be measured from the 30 trading days preceding conversion to the 60 trading days preceding conversion.
     
  eliminated the restriction on the number of shares of common stock that Factor Fund can sell in a month.

 

On August 20, 2014, the Company issued an 8% convertible promissory note in the aggregate principal amount of $20,500 to an accredited investor. The note has a maturity date of May 15, 2015. The note is convertible into shares of our common stock at a conversion price of 59% of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date. During the nine months ended September 30, 2014, the Company recorded an interest expense of $184. The Company accounted for the conversion feature as a derivative valued at $59,529, of which $20,500 was recorded as a debt discount to be amortized over the life of the note. The remaining $29,029 was expensed immediately to interest expense. The balance of the note as of September 30, 2014 is $20,500 with accrued interest of $184.

 

NOTE 8 – DERIVATIVE LIABILITY

 

Effective July 31, 2009, the Company adopted ASC 815 which defines determining whether an instrument (or embedded feature) is solely indexed to an entity’s own stock. The conversion price of our outstanding convertible notes are subject to “reset” provisions in the event the Company subsequently issues common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion price lower than conversion price of these notes. If these provisions are triggered, the conversion price of the note will be reduced. As a result, the Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with ASC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability.

 

F-10
 

 

ASC 815 requires Company management to assess the fair market value of certain derivatives at each reporting period and recognize any change in the fair market value as another income or expense item. The Company’s only asset or liability measured at fair value on a recurring basis is its derivative liability associated with convertible notes payable.

 

At origination, the Company valued the conversion features using the following assumptions: dividend yield of zero, years to maturity of between 1.00 and 2.02 years, risk free rates of between 0.18 and 0.27 percent, and annualized volatility of between 149% and 172%. At September 30, 2014, the Company revalued the conversion features using the following assumptions: dividend yield of zero, years to maturity of between 0.3 and 1.85 years, risk free rates of 0.13 percent, and annualized volatility of between 208 and 232 percent and determined that, during the three and nine months ended September 30, 2014, the Company’s derivative liability decreased by $440,137 and $278,879, respectively to $912,940. The Company recognized a corresponding gain during the three month period and loss during the six month periodon derivative liability in conjunction with this revaluation.

 

NOTE 9 – NOTES PAYABLE

 

On November 18, 2013, the Company entered into a Distribution Agreement with E-motion Apparel, Inc. The agreement provides that the Company will issue a promissory note to E-motion in an amount equal to 100% of the License Fee of $300,000. The Promissory Note shall have a maturity date of September 30, 2016 and be payable in 4 installments of $75,000 on December 31, 2014, September 30, 2015, December 31, 2105 and September 30, 2016. The Promissory Note shall bear no interest and be unsecured. As of September 30, 2014, the note was cancelled and replaced with the merger agreement. See Note 4.

 

During 2012, the Company borrowed $55,000 through an unsecured promissory note bearing interest at 10% with a maturity date of March 10, 2014. During 2013, the Company borrowed additional $43,214, and converted $8,062 into 8,062,000 shares of common stock. As of September 30, 2014, the Company had principal outstanding in the promissory note of $90,152, and accrued interest of $18,530.

 

On June 4, 2012, Bitzio, Inc. and ACT entered into a share purchase agreement wherein Bitzio acquired all of the issued and outstanding member’s equity in exchange for 3,300,000 Series A Convertible Redeemable Preferred shares of the Company. On February 22, 2013, the two parties agreed to unwind the transaction by Bitzio returning the ACT shares acquired and ACT returning the Bitzio preferred share consideration for cancellation. In addition, Bitzio agreed to pay an aggregate of 147,000 Euros ($194,447 USD) to ACT. The Company re-measured the amount due in U.S. dollars as of September 30, 2014 and recorded a gain on foreign currency transaction of $15,611. The amount due as of September 30, 2014 is $185,632.

 

On January 29, 2014 the Company sold a Promissory Note to The Victor Vinco Family Trust (the “Trust”). The purchase price was $70,000. The principal amount of the Note is $94,500, which is payable in installments of $18,900 on the 15th day of each month during the term of the Note. The Note does not bear interest, except in the event of a default, at which time interest shall accrue at 18% per annum. As of September 30, 2014, the note and accrued interest was fully repaid.

 

NOTE 10 – PREFERRED STOCK

 

The Company is authorized to issue 25,000,000 shares of preferred stock, of which 2,500,000 shares are designated as Series A Convertible Redeemable Preferred Stock, 1,000,000 shares are designated as Series B Convertible Preferred Stock, 999 shares are designated as Series C Preferred Stock, par value of $0.001, and 35,750 are designated as Series D Preferred Stock, par value of $0.001.

 

Series A Preferred Stock

 

As of December 31, 2013 and September 30, 2014, there were 2,043,120 shares of Series A Convertible Redeemable Preferred Stock issued and outstanding. The shares have the following provisions:

 

  Series A Convertible Redeemable Shares have no dividend rights.
     
  In the event of liquidation, following the sale or disposition of all or substantially all of the Company’s assets, the holders of the Series A Convertible Redeemable Preferred Stock shall be entitled to receive an amount equal to the per share price of the stock ($0.0025 per share).
     
  Series A Convertible Redeemable shares have no voting rights.
     
  Each share of Series A Convertible Redeemable Preferred Stock is convertible, at the option of the holder, at any time prior to January 2, 2017, and upon payment of $0.40 per share, into two fully paid and non-assessable shares of the Company’s common.
     
  At any time after January 2, 2017, the Company may redeem, at the discretion of the Board of Directors, any or all of the series A convertible redeemable preferred stock for the per share price of the stock ($0.0025 per share).

 

F-11
 

 

Designation and Sale of Series B Preferred Stock

 

On November 18, 2013 the Company filed with the Nevada Secretary of State a Certificate of Designation of 1,000,000 shares of Series B Convertible Preferred Stock, which had been designated by the Company’s Board of Directors as authorized by the Registrant’s Articles of Incorporation. The holders of shares of Series B Preferred Stock will have the following rights:

 

  The holder may convert the Series B Preferred Stock into common stock. All 1,000,000 shares of Series B Preferred Stock are convertible into 19.8% of the common stock outstanding after the conversion, measured on the date of each conversion.
     
  The holder will have voting rights equivalent to the number of shares of common stock into which the holders Series B Preferred Stock is convertible.
     
  In the event of a liquidation of the Registrant, the holder of each share of Series B Preferred Stock will be entitled to a liquidation preference of $1.50.
     
  The holder will participate in any dividend payable to the holders of the common stock on an as-converted basis.

 

The Company will have the right to redeem the Series B Preferred Stock for a payment of $1.50 per share

 

On November 18, 2013 the Company sold 500,000 shares of Series B Preferred Stock to 112359 Factor Fund, LLC (“Factor Fund”) for a total of $250,000. The Company and Factor Fund also agreed that in each of the five months commencing February 2014 Factor Fund will purchase an additional 100,000 shares of Series B Preferred Stock for $50,000 - i.e. a total of 500,000 shares sold during those five months for a total of $250,000. During the six month period ended September 30, 2014, Factor Fund purchased 500,000 additional shares of Series B Preferred Stock for $250,000.

 

Designation and Sale of Series C Preferred Stock

 

On December 3, 2013 the Company filed with the Nevada Secretary of State a Certificate of Designation of 999 shares of Series C Preferred Stock, which had been designated by the Company’s Board of Directors as authorized by the Registrant’s Articles of Incorporation. The holders of shares of Series C Preferred Stock will have the following rights:

 

  The holder of each share will have the right to cast the number of votes that equals the product obtained by dividing (a) the number of votes that the holders of all voting securities other than Series C Preferred Stock outstanding on the record date for the stockholder action are entitled to cast by (b) nine hundred ninety-eight (998), with the result that all 999 shares of Series C Preferred Stock together will have 50.1% of the voting power of the Registrant.
     
  In the event of a liquidation of the Registrant, the holder of each share of Series B Preferred Stock will be entitled to a liquidation preference of $.01.
     
  The holder will not participate in any dividend payable to the holders of the common stock on an as-converted basis.
     
  On November 29, 2015, each outstanding share of Series C Preferred Stock shall be deemed to have been automatically redeemed by the Corporation. No redemption price shall be payable.

 

On December 3, 2013 the Board of Directors sold 333 shares of Series C Preferred Stock to each of Gordon McDougall, Marilu Brassington and Hubert Blanchette for a price of $.01 per share. The three shareholders were the members of the Registrant’s Board of Directors at that time. The Company valued the shares at $99, but immediately revalued the shares to the amount to be paid at settlement or $0.

 

Designation and Sale of Series D Preferred Stock

 

On August 5, 2014 the Registrant filed with the Nevada Secretary of State a Certificate of Designation of 35,750 shares of Series D Preferred Stock, which had been designated by the Registrant’s Board of Directors as authorized by the Registrant’s Articles of Incorporation. The holders of shares of Series D Preferred Stock will have the following rights:

 

  The holder of each share will have the right to cast the number of votes that equals the votes that could be cast by the holder of 10,000 shares of common stock.
     
  In the event of a liquidation of the Registrant, the holder of each share of Series D Preferred Stock will be entitled to a liquidation preference of $.01.
     
  The holder will not participate in any dividend payable to the holders of the common stock.

 

There are no shares of Series D Preferred Stock outstanding.

 

F-12
 

 

NOTE 11 – COMMON STOCK

 

On January 13, 2014 the Company filed with the Nevada Secretary of State a Certificate of Amendment to Articles of Incorporation. The Certificate of Amendment increased the number of authorized shares of common stock from 250 million to 2 billion. On September 12, 2014 the Company filed with the Nevada Secretary of State a Certificate of Amendment to Articles of Incorporation. The Certificate of Amendment increased the number of authorized shares of common stock from 2 billion to 4.2 billion.There were 1,397,110,507 shares issued and outstanding as of September 30, 2014. The activity surrounding the issuances of the Common Stock is as follows:

 

During the nine months ended September 30, 2014 the Company issued 318,693,890 shares in conversion of notes payable of $285,162, 2,500,000 shares for debt issuance costs of $2,500, 50,000,000 shares of its common stock to Angie Daza under the MOU (see Note 1), and 850,000,000 shares of its common stock pursuant to the Share Exchange Agreements (see Note1).

 

NOTE 12 – STOCK OPTIONS AND WARRANTS

 

The following table summarizes all stock option and warrant activity for the nine months ended September 30, 2014:

 

   Number of
Warrants
   Weighted Average
Exercise Price
 
Balance outstanding, December 31, 2013   22,561,948   $0.33 
Granted   -    - 
Exercised   -    - 
Forfeited   -    - 
Expired   (7,973,332)   - 
Balance outstanding, September 30, 2014   14,588,616   $0.33 
Exercisable, September 30, 2014   14,588,616   $0.33 

 

The following table discloses information regarding outstanding and exercisable options and warrants at September 30, 2014:

 

   Outstanding   Exercisable 
Range of Exercise Prices  Number of
Option
Shares
   Weighted
Average
Exercise
Price
   Remaining
Weighted
Average
Contractual
Term (Years)
   Number of
Option
Shares
   Weighted
Average
Exercise
Price
 
$0.20 - $0.29   2,000,000    0.20    2.17    2,000,000    0.20 
$0.30 - $0.39   11,774,616    0.57    1.97    11,774,616    0.34 
$0.40 - $0.49   814,000    0.40    0.51    814,000    0.40 
    14,588,616    0.33     1.91    14,588,616    0.33 

 

F-13
 

 

NOTE 13 – FAIR VALUE MEASUREMENTS

 

Our financial assets and (liabilities) carried at fair value measured on a recurring basis as of September 30, 2014 and December 31, 2013, consisted of the following:

 

       Fair Value Measurements Using 
   Total Fair   Quoted prices in  Significant other  Significant 
   Value at   active markets  observable inputs  Unobservable inputs 
Description  September 30, 2014   (Level 1)  (Level 2)  (Level 3) 
                     
Derivative liability (1)  $(912,940)  $   $ (912,940)  $ 

 

       Fair Value Measurements Using 
   Total Fair   Quoted prices in  Significant other  Significant 
   Value at   active markets  observable inputs  Unobservable inputs 
Description  December 31, 2013   (Level 1)  (Level 2)  (Level 3) 
                     
Derivative liability (1)  $(827,158)  $  $ (827,158)  $ 

 

(1) The derivative is calculated using the Black Scholes Pricing Model

 

NOTE 14 – SUBSEQUENT EVENTS

 

None.

 

F-14
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Change In Business Plan

 

On April 4, 2013 the Company completed the sale of its wholly owned subsidiary, Thinking Drone LLC to a third party. The transferred business and assets of Thinking Drone LLC have been presented as discontinued operations in these financial statements, with a gain shown on disposal of discontinued operations. After the sale of this subsidiary, the Company shifted its business strategy toward a fashion incubation model.

 

Effective on November 18, 2013 Bitzio, Inc. entered into a Distribution Agreement with E-motion Apparel, Inc., which designs women’s apparel and accessories. The agreement grants Bitzio the exclusive worldwide right to distribute E-motion Apparel’s products using the E-motion Apparel trademarks, copyrights and trade dress. The agreement also provides that Bitzio will make a five year non-interest-bearing $75,000 working capital loan to E-motion Apparel, and will pay a license fee of $300,000 to E-motion Apparel, payable in four semi-annual installments of $75,000 each commencing on December 31, 2014. The agreement has a term of five years, but the license will continue for any period during which E-motion Apparel owns any capital stock issued by Bitzio.

 

During February 2014 the Company completed its first acquisition, taking control of the Cleo VII brand.

 

On July 16, 2014, we entered into a sales purchase agreement in 100% acquisition of all outstanding shares of Lexi Luu. Designs. Bitzio paid 500,000,000 restricted commons shares for this acquisition. Lexi Luu shareholders are able to earn an additional $300,000 in restricted common shares over the course of years in an earn out upon hitting certain revenue benchmarks.  We accounted for the transaction as an equity purchase. Of the purchase price paid as of July 16, 2014 was allocated among the assets and liabilities and difference was taken to goodwill.

 

On July 18, 2014, we entered into a sales purchase agreement in 100%  acquisition of all outstanding shares of E-motion Apparel. Designs. Bitzio paid 350,000,000 restricted commons shares for this acquisition. E-motion Apparel shareholders are able to earn an additional $300,000 in restricted common shares over the course of years in an earn out upon hitting certain revenue benchmarks.  We accounted for the transaction as an equity purchase. Of the purchase price paid as of July 18, 2014 was allocated among the assets and liabilities and difference was taken to goodwill. This License Agreement between Bitzio and E-motion Apparel was cancelled on July 18, 2014 and was replaced on the sales purchase agreement.

 

The financial statements included in this report reflect the results of Lexi Luu Designs and E-motion Apparel, Inc post acquisition., as well as results from our now-discontinued mobile app operations.

 

Going Concern

 

As a result of our financial condition, our independent auditor has expressed in its opinion on our financial statements of December 31, 2013 uncertainty as to our ability to continue as a going concern. In order to continue as a going concern we must effectively balance many factors and begin to generate revenue so that we can fund our operations from our sales and revenues. If we are not able to do this we may not be able to continue as an operating company.

 

Results of Operations

 

Revenues

 

For the three and nine months ended September 30, 2014, we had revenues of $207,804 and $295,058, respectively, from continuing operations, compared to $9,990 for the three and nine months ended September 30, 2013. Sales grew in the third quarter, as a result of the acquisitions of Lexi Luu and E-motion.

 

Operating Expenses

 

The primary component of our operating expenses for the three and nine months ended September 30, 2014 consisted of professional fees of $94,842 and $456,421, respectively. The primary components of professional fees during the nine months ended September 30, 2014, were consulting fees of $173,336, and legal fees of $28,500, all of which was generally related to our efforts to gain access to potential sources of financing. During the three and nine months ended September 30, 2013, our professional fees totaled $47,917 and $1,066,650, respectively. Professional fees fell year-to-year due to the change in our business plan and management practices.

 

The remainder of our operating expenses for the three and nine months ended September 30, 2014 consisted of general and administrative expenses of $186,843 and $407,249, respectively. In both periods, general and administrative expenses exceeded those recorded during the three and nine months ended September 30, 2013. The primary reason for the increase is that we have reduced reliance on professionals for management services, resulting in an increase in management salaries but a reduction in professional fees.

 

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Loss from Operations

 

Due to our significant reduction in operating expenses, our loss from operations fell from $50,503 for the three months ended September 30, 2013 to $122,577 for the three months ended September 30, 2014, and from $1,186,247 for the nine months ended September 30, 2013 to $617,308 for the nine months ended September 30, 2014.

 

Other Expense

 

During the three months ended September 30, 2014 we incurred interest charges of $270,660 as a result of financing transactions during the quarter. Our interest expense for the nine months ended September 30, 2014 was less than our interest expense for the comparable period of 2013, although our overall debt is considerably greater than it was one year ago.

 

We accounted for our convertible debt in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the convertible debentures could result in the note principal and related accrued interest being converted to a variable number of our common shares. The conversion feature on these debentures is variable and based on trailing market prices. It therefore contains an embedded derivative. The fair value of the conversion feature was calculated when the debentures were issued, and we recorded a derivative liability for the calculated value. The conversion liability is valued at the end of each reporting period and results in a gain or loss for the change in fair value. Due to the volatile nature of our stock, the change in the derivative liability and the resulting gain or loss will usually be material to our results. During the quarter ended September 30, 2014, we recorded a gain of $440,137, as the value of our derivative liabilities fell by that amount. In the second quarter of this year, however, we recorded a gain of $657,520 as the value of our derivative liabilities increased, with the result for the nine months ended September 30, 2014 being an overall gain of $278,879.

 

We acquired a 51% ownership interest in Cleo VII, Inc. The net loss attributable to non-controlling interest of $14,700 reflects operations in Cleo VII, Inc. attributable to the minority shareholder for the three months ended September 30, 2014.

 

Net Income (Loss)

 

Although our operations were not profitable, we nevertheless recorded net income of $22,583 for the quarter ended September 30, 2014 due to the $440,137 gain we recorded on the change in value of our derivative liability. For the nine months ended September 30, 2014, during which we recorded a loss from operations offset by a gain on the value of our derivative liabilities, we recorded a net loss of $978,088.

 

Liquidity and Capital Resources

 

Our principal needs for liquidity have been to fund operating losses, working capital requirements, acquisitions, and debt service. Unfortunately, at September 30, 2014 we had low liquidity, with current assets consisting of $2,524 in cash, $78,796 in prepaid expenses and $36,136 in accounts receivable. We expect that working capital requirements and acquisitions will continue to be our principal needs for liquidity over the near term. Working capital requirements are expected to increase as a result of our anticipated growth, both organically and through future acquisitions. Accordingly, we will be working aggressively to secure sources of financing.

 

We have not yet established an ongoing source of revenues sufficient to cover our operating costs and allow us to continue as a going concern. Our ability to continue as a going concern is dependent on obtaining adequate capital to fund operating losses until we become profitable. If we are unable to obtain adequate capital, we could be forced to cease operations. Management’s plan is to seek equity and/or debt financing. However management cannot provide any assurances that we will be successful in accomplishing any of our plans.

 

Cash Used in Operations

 

Our net cash used in continuing operating activities was $291,191 for the nine months ended September 30, 2014, compared to $143,671 for the nine months ended September 30, 2013.

  

Cash Used in Investing Activities

 

Our net cash used by continuing investing activities was $116,382 for the nine months ended September 30, 2014, related to our purchase of a note receivable for $116,382.

 

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Cash Provided by Financing Activities

 

Our net cash provided by financing activities was $406,050 for the nine months ended September 30, 2014, compared to $90,000 for the nine months ended September 30, 2013. For the nine months ended September 30, 2014, our cash provided by financing activities consisted primarily of proceeds from sale of preferred stock of $250,050, and proceeds, net of repayments, from notes payable of $156,000.

 

Contractual obligations and other commitments

 

The following table summarized our contractual obligations as of September 30, 2014, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

 

       Payments due by period 
   Total   Less than 1 Year   1-2 Years   3-4 Years   5+ Years 
Related party debts  $304,479   $304,479             
Notes payable   275,784    275,784             
Convertible notes   813,282    813,282             
Total  $1,393,545   $1,393,545             

 

Off-balance sheet arrangements

 

As of September 30, 2014, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, or capital resources.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of September 30, 2014, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms. The evaluation disclosed the following material weaknesses in our disclosure controls and procedures:

 

1. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act as of the year ending December 31, 2013. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

2. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

3. We outsource the bookeeping operations of our company. Because we have no bookkeeping staff, we outsource most of the basic accounting functions of our Company to an independent consultant. This consultant is self-directed, and is not directly answerable to the Company’s management. This is a material weakness because it could result in a disjunction between the accounting policies adopted by our Board of Directors and the accounting practices applied by the consultant.

 

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2014, our disclosure controls and procedures were not effective.

 

Changes in Internal Control over Financial Reporting

 

No change in our system of internal control over financial reporting occurred during the period covered by this report, the three months ended September 30, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 1 – LEGAL PROCEEDINGS

 

There are presently no pending legal proceedings to which the Company or any of its subsidiaries is a party or to which any of their property is subject.

 

ITEM 1A – RISK FACTORS.

 

There have been no material changes from the risk factors included in the Annual Report on Form 10-K for the year ended December 31, 2013.

 

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Unless otherwise noted, the issuances noted below are all considered exempt from registration by reason of Section 4(a)(2) of the Securities Act of 1933, as amended.

 

During the three months ended September 30, 2014 the Company issued 245,293,890 shares in conversion of notes payable of $225,614, and 850,000,000 shares of its common stock pursuant to the Share Exchange Agreements (see Note1).

 

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4 – MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5 – OTHER INFORMATION

 

None.

 

ITEM 6 – EXHIBITS

 

The following exhibits are filed as part of this quarterly report on Form 10-Q:

 

Exhibit No.   Description
     
31.1   Rule 13a-14(a) Certification - CEO*
     
31.2   Rule 13a-14(a) Certification - CFO*
     
32.1   Rule 13a-14(b) Certification - CEO*
     
32.2    Rule 13a-14(b) Certification - CFO*
     
101.INS   XBRL Instance Document**
     
101.SCH   XBRL Taxonomy Extension Schema Document**
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document**
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document**
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document**
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document**

 

*Filed Herewith

** In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed”.

 

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SIGNATURES

 

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.

 

  Bitzio, Inc.
     
Dated: November 19, 2014 By: /s/ Hubert Blanchette
  Name: Hubert Blanchette
  Its: Chief Executive Officer

 

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