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[November 19, 2012]
5BARZ INTERNATIONAL, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(Edgar Glimpses Via Acquire Media NewsEdge) Forward Looking Statements Certain statements in the Management's Discussion and Analysis ("MD&A"), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "forecast," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.
As used in this Form 10-Q, unless the context requires otherwise, "we" or "us" or the "Company" or "5BARz" means 5BARz International Inc..
Plan of Operations 5BARz International Inc.("5BARz" or the "Company") is in the business of the development, sales and marketing of a line of cellular network infrastructure devices for use in the small office, home and mobile market places. This next generation cellular network extender, branded as 5BARz™ incorporates a patented technology to create a highly engineered, single-piece, plug 'n play unit that strengthens weak cellular signals to deliver higher quality signals for voice, data and video reception on cell phones, and other cellular devices.
The Company's initial product, the Road Warrior, won the prestigious 2010 innovation of the year award at CES (the largest consumer electronics show in the world) for achievements in product design and engineering. The Road Warrior, has passed FCC Certification, and has been produced in limited quantities to date by a contract manufacturer in the Philippines.
The market opportunity for the 5Barz technology represents some 5.4 billion cell phone subscribers worldwide serviced by 900 cellular network operators. These cellular network operators represent the Company's primary point of entry to the Global marketplace.
The 5BARz business opportunity to bring this state of the art technology to market represents a significant step forward in the deployment of micro-cell technology, referred to as a 'cellular network infrastructure device" in the industry. A step that management believes will significantly improve the functionality of cellular networks by managing cellular signal within the vicinity of the user. This technology facilitates cellular usage in areas where structures, create "cellular shadows" or weak spots within metropolitan areas, and highly congested areas such as freeways, and also serves to amplify cellular signal as users move away from cellular towers in urban areas. The market potential of the technology is far reaching.
22 Company History 5BARz was incorporated on November 17, 2008 and is a Nevada Corporation. On December 30, 2010 the Company acquired the "Master Global Marketing and Distribution Agreement" for the marketing and distribution of 5BARz products throughout the world. In addition to the acquisition of the marketing and distribution rights, the Company entered into an agreement, as amended, for the acquisition of a 60% interest in the underlying intellectual property comprising the 5BARz products, and holds a security interest over the balance of those assets.
On March 27, 2012, 5BARz acquired a 60% controlling interest in Cellynx Group, Inc. the entity which originally developed the 5BARz technology. This represents a significant step forward in bringing the originators of the technology together and under common control with the Company, to facilitate a more synergistic and clearly defined development platform for the globalization of the 5BARz technology.
On November 7, 2011, the Company commenced the incorporation of a subsidiary Company in Zurich Switzerland called 5BARz AG. At December 31, 2011 the Company held a 99.5% equity interest in that entity. 5Barz Ag has been granted the exclusive rights by way of a sub-license for the Sales and Marketing of the 5BARz products in the region, commonly referred to as the "DACH" in Europe, comprised of Germany, Austria and Switzerland.
Prior to December 30, 2010 the Registrant was a designated shell Company pursuant to Section 12B-2 of the Exchange Act of 1934, and operated under the name Bio-Stuff Inc. The business of Bio-Stuff was comprised of the development of bio-degradable products. That business has been abandoned by the Company.
Milestones 2007: A 5BARz working prototype was developed of an affordable consumer friendly single piece plug 'n play booster with a minimum of 45dB of gain in both up and down paths.
July 22, 2008: Dollardex Group entered into an exclusive "Master Global Marketing and Distribution Agreement" (the "Distribution Agreement") for the 5BARz products.
July 2009: First production run and FCC Certification of 5BARz Road Warrior August 2009: Field testing and final modification of 5BARz Road Warrior January 2010: 5BARz Road Warrior Selected as CES Innovations 2010 Design and Engineering Award. Marketing commenced in the US.
January 2011: 5BARz International Inc. acquires the "Master Global Marketing and Distribution Agreement" for the marketing and distribution of 5BARz products throughout the world, and enters into agreement for the acquisition of a 50% interest in the underlying intellectual property from Dollardex.
23 2011 - 5BARz International Inc. engages sales agents in Latin America, to present prototype products to R&D departments at major wireless carriers in the region, with positive results.
July 2011 - The Company received initial purchase order for the balance of limited production in the 5BARz Road Warrior units comprised of 16,000 units or $3.2 million dollar purchase order.
November 2011 - Incorporated a subsidiary Company, 5BARz Ag (completed in March 2012), and sub-licensed that entity for the Sales and Marketing Rights for the region commonly referred to as the "DACH", Germany, Austria and Switzerland. The Company engaged the services of BDC Investment Ag, of Zurich, Switzerland to finance that entity and develop within the German speaking European marketplace.
February/March 2012 - The Company formed an Advisory Board comprised of leading executives within the technology sector to assist in the integration of the 5BARz technology and products into global markets. See bios in news - www.5barz.com Dr. Gil Amelio - Director ATT, Former CEO -Apple Computer Mr. Marcelo Caputo - CEO Telefonica USA Mr. Finis Connor - Founder of Seagate Technology and Connor Peripherals Mr. George Lauro - Co-founder of Alteon Capital Partners with Dr. Amelio March 2012 - 5BARz International Inc. completed the acquisition of a 60% interest in Cellynx Group, Inc. (the originator of the 5BARz technology), developing a fully integrated subsidiary for the global deployment of the 5BARz business opportunity.
July/ August 2012 - Company secures investment banking support to finance commercialization operations.
August 2012 - Internal Engineering achieve initial presentation stage units of the revised cradle-less 5BARz cellular network extender with several new and improved features over the Road Warrior unit.
The Market Opportunity The market opportunity for the 5BARz technology represents some 4.8 billion cell phone subscribers worldwide and is growing as a result of the following factors; · Dead zones, weak signals, and dropped calls are the biggest problems in the industry. Now, by adding internet and video, the quality issue is increasing exponentially.
· 76% of cellular subscribers use their mobile phone as the primary phone · More consumers are using mobile phones for web browsing, up and down- loading photos, videos and music · More mobile phones are operating at higher frequencies which have less ability to penetrate buildings · Weak signals make internet applications inaccessible and slow and increase the drain on cell phone batteries.
· Forty percent of all mobile phone users report inadequate service in their homes or office and we estimate that 60% of the 4.8 billion mobile phone users worldwide consider continuous connectivity to be very important.
24 Why Poor Signals Exist A variety of factors may cause dropped calls and dead zones, including congestion, radio signal interference, tower hand-off, and lack of coverage.
Despite continued infrastructure investment by operators, and antenna technology improvements by base station providers and mobile phone makers, these problems will continue for the foreseeable future. This is because many of the contributing factors can't be controlled by the operators and manufacturers. To understand how innovative 5BARz products are in improving phone signals, it's first important to understand the causes of poor signal quality.
Congestion In 1999, sales of mobile phones surpassed combined sales of personal computers and automobiles. By 2010, mobile phones had replaced land-line phones in 30% of U.S. households. Smart phones, led by iPhones and Android phones, have become indispensible personal assistants. Laptop computer sales outnumber desktop computer sales, and most laptops are equipped with cellular data chipsets or USB modems. Apple's iPad has sparked the connected tablet market too. Vending machines, automobiles, mobile sensors, and many other devices include "machine to machine" cellular data modules. As a result, the number of cellular voice and data devices will soon exceed the number of people on Earth.
If sheer numbers weren't enough, new uses for mobile devices are causing even faster growth in bandwidth usage. Obvious uses include video entertainment, videoconferencing, downloaded and streaming music, MMS, email, and application downloads. Facebook, Twitter, Foursquare, and many other social networking applications put further load on operator networks. Also, surprising sources of traffic have emerged, such as deliberate "miscalls". A miscall is when one subscriber calls another, but hangs up before the receiving party answers. Since operators don't charge for these uncompleted calls, subscribers are using miscalls as a free way to communicate. In India, orders for milk are made this way. In Syria, five miscalls in a row signals the recipient to "go online" to the Internet and chat. In Bangladesh, it's estimated that up to 70% of traffic at peak times is due to miscalls. This practice isn't limited to countries with low per-capita income, and yet it places a high load on operator networks.
There are sources of congestion based on location and time, too. Transportation clusters like airports, major highway intersections, bridges, and toll road gates all bring many people together at peak times. Also, because of home land-line replacement, many residential neighborhoods have many mobile phones in simultaneous use in mornings and evenings. Lastly, local population growth and immigration can result in too many phones for existing infrastructure. Due to long planning times, investment requirements, local government permits, and construction time, it's difficult for infrastructure to keep up with the pace of change in many developing areas, especially in growth countries.
25 Radio Signal Interference Interference comes from both obvious and subtle causes. Certain materials aren't transparent to radio signals, especially durable materials used in buildings, large structures, and even automobiles. As a result there are radio shadows in which a mobile phone can't sense the signal from a base station. In addition, radio signals from adjacent channels or reflected signals can interfere with each other due to wave cancellation effects. In some cases these forms of interference primarily attenuate the signal (make it weaker). However, interference can also add noise, so that the ratio of signal to noise becomes too low for the mobile phone and the base station to understand each other.
Tower Hand-Off Mobile phone networks are called "cellular" networks because they are made up of overlapping areas of coverage that are provided by base stations in fixed locations. As a mobile subscriber travels by automobile or train, he will eventually reach the limit of a base station's coverage. At that point, his mobile phone will "hand off" to a base station for the next coverage area. If signal quality is poor due to interference, or if the new base station is congested with too many mobile phones, the subscriber's connection may be lost.
Lack of Coverage· Some rural or developing areas don't have enough people or population density for operators to justify the cost of installing base stations except at wide intervals. In these areas the signal strength from the base station or the mobile phone may be too low to create or maintain a connection. This results in "dead zones" or dropped calls.
Solutions to Poor Signal Quality Operators know that dead zones, dropped calls, and poor voice quality are big problems, and that re-dialing while driving can be unsafe. Operators also are concerned about subscribers' ability to make emergency calls. They understand that people rely on mobile phones for business and connecting with family. As mobile phones replace landlines, operators are especially aware that mobile signal quality is critical. Operators also see that wireless data is increasingly important for personal and business use.
To help, operators work with phone and base station manufacturers to improve antenna performance. They invest in new base stations in growth areas. They invest in technologies that enable more connections per base station. Operators have even provided refunds for dropped calls.
However, many factors causing poor signal quality can't be controlled by operators. Therefore products have emerged to help, provided by operators or companies who sell to either operators or subscribers.
26 Femtocells Operators can provide femtocells to subscribers with poor signal quality at home. Usually the subscriber pays for hardware, installation, or a monthly fee.
Femtocells are carrier grade, and are like small base stations that communicate with operators by using the home Internet connection as a "backhaul". They often can't be moved after installation, must be installed by a skilled technician in order to work properly and to avoid causing network problems. Many femtocells provide only a voice connection, not data. Lastly, femtocells usually only work with phones from one operator, so families with phones from multiple operators may have to request multiple femtocells.
Repeaters Repeaters are usually carrier-grade equipment and are programmed for a specific operator. They extend cellular networks into buildings and small offices. As with femtocells, installation is complex and if not done properly they can cause network problems. Unlike femtocells, repeaters do not use the local Internet connections, but rather receive and re-transmit the signals between base stations and mobile phones.
Boosters Boosters are usually sold online and through retail. They vary widely in amplification power, quality of amplification, and power balance. For example, these products amplify signals at 1, 3, 5, or even 10 watts all the time. Using power over 1 watt increases the probability that a booster will interfere with surrounding mobile devices. Also, it would be more energy efficient to adapt amplification power as needed, rather than to simply use the same wattage constantly. Many boosters don't support balanced power in both directions between base station and mobile phone. This may result in only solving the signal quality problem in one direction. Since communication is bi-directional, this doesn't actually solve the problem. Varying quality of amplification also introduces noise, which can interfere with surrounding devices.
A New Class of Solution 5BARz has evaluated the causes of poor signal quality, the needs of both operators and subscribers, and the solutions in the market. Femtocells, repeaters, and boosters either don't solve all parts of the problem, or aren't optimal due to cost or other drawbacks. Using expertise from a team of engineers who designed sophisticated base station amplifiers for operators, 5BARz has developed a new class of carrier-grade technology. This is a hybrid of repeaters and boosters, and is intended for automotive, home, and office use. 5BARz has tested these products in the lab, in the real world, and with operators, and also won the Innovation of the Year award at the 2010 CES conference. These products advance the state of the art to provide the following advantages; Low Power Use 5BARz products only amplify when required. The automotive products use less than 1/2 watt, while the home product uses less than 1 watt. This not only saves energy, but also minimizes interference with other wireless devices and the network itself. In fact, new rules being proposed by the U.S. Federal Communications Commission are expected to mandate low power standards such as 5BARz now provides.
27 Simple Setup 5BARz products don't require a technician to run wires, carefully determine proper location, or optimize orientation. No use of home Internet connection is required, and there are no switches or settings.
Balanced Amplification Received and sent signals need balanced assistance in order for both directions of a communication channel to be improved. 5BARz products are not only smartabout adapting amplification levels, but also about balancing amplification for incoming signals from the base station, and return signals from the mobile phone.
Signal Stability 5BARz has done extensive design, testing, and re-design to avoid a number of problems experienced by the antenna design of alternatives. For example, booster products can experience oscillations when people, animals, or vehicles move nearby. These oscillations can weaken the booster effect or cause interference with other wireless devices. Many booster products achieve size similar to 5BARz' products by putting antennas close together in the same product package, but don't optimize radio wave interactions between those antennas. This weakens the boosters' effectiveness, and is one reason why other manufacturers compensate by using too much wattage, in turn wasting power and increasing the probability of interfering with other radio frequency devices and the network.
28 Choosing the Right 5BARz Product 5BARz has one model in production and three in development of three mobile products with a range of features and prices, as well as a home/office product: 5BARz offers three mobile products with a range of features and prices, as well as a home product: Road Warrior The Road Warrior won the 2010 CES Innovation of the Year award for product design and engineering. It [[Image Removed]] improves wireless voice and data signals in the home, office, or vehicle. It works with any wireless operator, needs no installation, and can easily be moved.
The Road Warrior features real-time radio frequency monitoring, self-adjusting radio frequency levels, and balanced power control for incoming and return signals. It is FCC compliant, and supports 3G cellular and PCS bands. There is no backhaul (Internet connection) required. The 45 dB maximum gain is limited to the small area around the phone cradle.
5BARz SC The 5BARz SC provides the benefits of the Road [[Image Removed]] Warrior in a single unit (with optional cradle) with a larger coverage area of about 2 meters. It only amplifies communication signals, not noise.
In addition to the 45 dB gain and features of the Road Warrior, the Road Warrior II provides a medium power option, and radio frequency band auto configuration.
In addition, the Road Warrior II uses a state-of-the-art, high-performance antenna by PinyonTM.
5BARz 4G The 5BARz 4G is a single unit package with a 45 dB [[Image Removed]] gain and a coverage area of about 2 meters.
It provides the features and benefits of the Road Warrior II, but additionally supports a full radio frequency range of 700Mhz to 2.6Ghz, and supports 4G.
It also supports multiple phones simultaneously. It is also programmable according to operator requirements.
5BARz 3000 5BARz 3000 product provides a 70dB maximum gain at a [[Image Removed]] maximum power of 0.6 watts, with coverage over a large area inside the home. It supports 3G and 4G, both voice and data, for multiple phones simultaneously.
@Home is a single unit package with both antennas in the base unit. It is a carrier-grade product and operator configurable (fully programmable from 700Mhz to 2.6Ghz). It includes patent-pending isolation feedback, with radio frequency isolation typically 30dB better than the Road Warrior.
@Home can optionally be configured with GPS and wireless LAN.
29 Intellectual property 5BARz technology is based on achieving unique isolation between antennas, without oscillation greatly improving signal gain for individual, home and office coverage.
Title Patent Application Patent Issued Cell Phone Signal Booster 11/625331 8005513Dual Cancellation Loop Wireless Repeater 12/106468 Wireless Repeater Management Systems 12/328076 Dual Loop Active and Passive Repeater Antenna Isolation Improvement 12/425615 5BARz Trademark 78/866260 12/235313 + Foreign Multi-Band Wireless Repeater filings 8027636 Antenna Docking Station 12/625347 Turning Weak Spots Into Sweet Spots Trademark 78-938374 30 Comparative Analysis 5BARz Femtocell Traditional Repeaters · Carrier-specific box · Bi-directional · Plug and play that connects to the amplifier and external Options for solutions that internet through the antennas Installation Consumer significantly broadband service at the of antennas required improve wireless home and acts like a with minimum spacing service short-range network tower of 35 feet or more site between the antennas · Need to determine what the two pieces of equipment, cables, and multiple power cords · Simply place are for the unit where · Complex manual … there is some or · Connect the unit to your Determine the ideal marginal wireless broadband service where location for bothEasy to service, turn on your router is located and antennas, outdoor Understand the unit and the the voice only wireless network antenna and voice and data service should be improved indoor coverage wireless service throughout the home antenna, then is improved for determine ideal everyone location for the bi-directional amplifier for proper cable routing to the antennas · · Equipment charge $250 · Equipment charge for each carrier, 2 carrier starting at $350 for · One-time house or SOHO equals $500 dual band Professional Cost equipment charge equipment charge Equipment installation starting only$299 5BARz won't work if you change at $200 Higher Road Warrior carriers Possible monthly performance antennas fee Requires use of starting at $100 broadband service · Go on roof to measure signal level; · Plug 'n play No outdoor network adjustments One · Carrier-specific set up antenna placement Setup part works for all May require ISP support based on testing for 2 carriers Currently Voice Only bars or more signal strength Antennas need to be spaced 35 feet or more apart · Designed by engineers and brought to production by Broadband vulnerable: managers trained Degraded broadband · External antennas in the Six Sigma throughput Power outage less reliableReliability quality process Depends on carrier Connectors Outdoor Self contained, down/power down on carrier mounting Oscillation fewest command Intermittent prone cables/connectors handoffs with macro network · Oscillation suppression circuitry · Needs to be collocated with broadband service GPS · ProfessionalInstallation · None; Plug 'n antenna may need to be installation play installed near a window recommended with a cable going to the femtocell 31 MARKETING STRATEGY - 2012 The Company has embarked upon a multi channel marketing strategy with significant emphasis in Latin America as a direct result of the very favorable factors and the stage of development of the cellular markets in South and Central America and Mexico, more fully addressed herein.
During 2011, that Company has had several NDA's signed by major wireless operators in that region as they are currently in the process of analyzing the 5BARz products in their labs. This is the initial step before full scale endorsement of the technology and integration into their marketing infrastructure.
Advanced levels of interest with major distributors in the Latam marketplace are expected to see substantive sales results within the current fiscal year. In fact the Company received a purchase order for the production of 16,000 Road Warrior units to be completed for delivery into Mexico in 2012.
The Company has been expanding its employee/consultant base in Latin America and USA due to significant product interest. More recently we have set a structure for the development of the German speaking market place in Europe, through a subsidiary operation 5BARz AG in Zurich Switzerland.
The LATAM Market The Company has analyzed the fundamentals of the mobile phone market in the LATAM countries and has determined that to be a key point for market penetration for the 5BARz products for the following reasons; First, the mobile phone market has just gone through a very strong decade of growth in Latin America, with mobile subscriptions having overtaken fixed lines as the preferred method of communication. As a result Latin America's mobile telephone industry has a high degree of market penetration. Mobile subscriptions totaled 88.2% of the region's population, compared to 55.2% in Asia Pacific, 90.4% in North America and 50.6% in the Middle East and Africa. Having recently invested heavily in subscription development, the cellular network operators are now focusing upon the maintenance of their substantial customer base, and the 5BARz technology can contribute substantially to achieving that customer satisfaction.
The mobile telephone industry in Latin America has benefited from generally opening up to competition. This provides a very fertile ground for the introduction of a technology such as 5BARz to secure customer retention through quality of service.
The inherent geographical difficulties in laying fixed line infrastructure have encouraged a move to mobiles, but in addition, that geography, the Andean and Rainforest regions and expanses of rural areas again benefit from the 5BARz technology whereby weak cellular signal is amplified within the vicinity of the user.
32 Further the LATAM countries are experiencing a renewed era of strong growth, reflecting reviving economic growth and improving income levels. This again is a favorable factor for the introduction of our products to meet the growing demands of consumers.
In addition, the launch of 3G and mobile broadband services has increased demand for mobile subscriptions. Mobile broadband is particularly desirable in areas with no or limited access to cable internet services. Moving to mobiles offers consumers the benefits of on-the-move communications and advantageous introductory deals. Greater access to communications also helps to narrow regional divides. All of these factors are enhanced by the 5BARz experience.
In fact internet usage is set to take off from 2010, with broadband internet subscriptions generally growing by higher rates than mobile subscriptions Initial 3G market expansion is likely to be greater in the region's wealthier markets, such as Argentina, Chile and Mexico, and these have been specifically targeted by our Company with very favorable results.
Number of subscribers • Brazil: 194 million • Mexico: 93.5 million • Argentina: 50.4 million • Colombia: 40.5 million • Venezuela: 28.1 million • Chile: 16.5 million • Other countries: 103 million • Total: 526 million In fact in 2011 the Company received a purchase order for 16,000 units of the Road Warrior for proceeds of $3.2 million, from the LATAM marketplace. That order will be filled when proceeds are available for the production and delivery of those units.
33 The DACH MARKET - 5BARz AG The DACH/D-Deutschland or Germany, A-Austria and CH-Switzerland group of countries in the European Union represents one of the most technologically advanced and progressive sectors of that economic group representing a German speaking majority population based of 90.3 million people of which Germany, 78.3 million, Austria, 7.4 million, and Switzerland, 4.6 million Formation of Subsidiary Company, 5BARz AG On October 6, 2011, the Company commenced the organization of a subsidiary Company under the laws of Switzerland, in the Canton of Zurich, called 5BARz AG.
5BARz AG issued 10,000,000 common shares of which 5,100,000 are held by the Company, 450,000 are held by officers and a consultant to the Company and 4,450,000 were held in escrow for resale, by an independent escrow agent under the control of the Company. 5BARz AG issued the shares with a stated or par value of CHF 0.01 per share for proceeds of CHF 100,000 (US - $108,752). The net proceeds received on re-sale above the stated or par value of the shares, is paid into 5Barz AG as additional paid in capital. During the nine months ended September 30, 2012, sales of those securities aggregated 71,000 shares sold for proceeds of $213,000 CHF ($223,650 USD). At September 30, 2012 the Company holds a 94.6% controlling interest in 5BArz AG represented by 9,458,000 shares.
On October 19, 2011, the registrant, 5BARz International Inc. entered into a Marketing and Distribution agreement with 5BARz AG, through which 5BARz AG holds the exclusive rights for the marketing and distribution of products produced under the 5BARz brand for markets in Switzerland, Austria and Germany. That agreement does not have a royalty payment requirement, and remains effective as long as 5BARz Ag is controlled by the Company. 5BARz Ag is a consolidated subsidiary of the Company in these financial statements.
The newly formed subsidiary has appointed two directors, one of which, Mr.
Daniel Bland is the President, CEO and a Director of the registrant. The other Director is Mr. Peter Burkhardt of Oberengstringen, Zurich, Switzerland.
Engagement of BDC Investment AG: On October 15, 2011, 5Barz AG, entered into an agreement with BDC Investment AG., an independent investment Company in Oberengstringen, Zurich, Switzerland to act as agent for the Company for the sale of the 4,900,000 shares referred to above, on a best efforts basis. In addition to acting as agent for the 5BARz AG, BDC Investment AG will provide consulting services and will be responsible for corporate communications, for 5BARz AG in the European marketplace.
Global Marketing and Distribution Agreement On October 19, 2011, 5BARz International Inc. entered into a Marketing and Distribution agreement with 5BARz AG, through which 5BARz AG holds the exclusive rights for the marketing and distribution of products produced under the 5BARz brand for markets in Switzerland, Austria and Germany. This sales and marketing program will commence upon completion of the corporate formation and funding.
34 Results of Operations Three month period ended September 30, 2012 compared to three month period ended September 30, 2011.
3 Months ended 3 Months ended September 30, 2012 September 30, 2011 Difference Amortization and depreciation 831 236 595 Bank charges & interest 2,957 3,899 (942) Sales and marketing expenses 7,871 39,284 (31,413) General and administrative 332,404 102,208 230,196 Total Operating Expenses 334,062 145,627 188,435 Other income (expenses) (225,195) 9,471 (234,666) Net Loss $ (569,258) (136,156) (433,102) The three months ended September 30, 2012 reflects an increase in the net loss of $433,102 compared to the corresponding three month period ended September 30, 2011 due in the most part to the fact that the current year figures reflect the operations of the subsidiary Companies, Cellynx Group, Inc., Cellynx Inc, and 5BARz AG, which were not consolidated subsidiaries in the prior year. The most significant part of that increased loss is "general and administrative" expenses which reflect an increase of $230,196, of which consulting fees represent $187,000. The current period reflects an increase of $234,666 of other expenses, which is, in the most part, the result of certain derivative securities in Cellynx Group, Inc, in which the change in the beneficial conversion, and debt discount during the quarter resulted in an expense of $222,153. This expense measures the carrying costs of the derivative securities with a conversion factors below the fair market value of the underlying stock and the amortization of the debt discount on the securities arising from an interest rate being below the fair market value on the convertible security.
Nine month period ended September 30, 2012 compared to Nine month period ended September 30, 2011.
9 Months ended 9 Months ended Cumulative from November September 30, September 30, 2011 14, 2008 (inception) to 2012 June 30, 2012 Amortization and depreciation 2,869 416 3,742 Bank charges & interest 140,880 14,776 184,277 Sales and marketing expenses 94,635 162,982 324,376 General and administrative 1,507,354 402,824 2,088,344 Total Operating Expenses 1,745,558 580,998 2,600,739 Other income (expenses) (170,084) 12,589 (149,280) Net Loss $ (1,915,642) (568,409) $ (2,750,019) 35 The Company has incurred losses from inception, February 17, 2008 to September 30, 2012 in the aggregate amount of $2,750,019. This loss reflects the results of operations for the Company from inception to September 30, 2012, the results of operations for 5BARz AG since incorporation, November 6, 2011 and the results of operations for Cellynx Grup Inc., and Cellynx Inc. from the date of acquisition March 29, 2012.
Our financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation.
The company will require additional capital to meet its' long term operating requirements. We expect to raise additional capital through a multi faceted strategy which may include the further sale of equity securities, debt, and factoring facilities as the Company's sales progress. In addition in November 2011 the Company engaged BDC Investment AG, from Zurich, Switzerland to raise equity capital for the Company through the sale of up to 49% of the Company's subsidiary common stock, 5BARz AG incorporated in Zurich Switzerland and engaged for the marketing and distribution of the 5BARz products in Switzerland, Germany and Austria. The Company expects that the acquisition of Cellynx Group, Inc.
will be favorably viewed by capital markets due to the synergy established between 5BARz and Cellynx in the process of commercializing the 5Barz technology globally.
Our net loss for the nine month period ended September 30, 2012 was $1,915,642 compared to a net loss of $568,409 for the corresponding period in the prior year. During the nine month period ended September 30, 2012 the Company has incurred general and administrative expenses of $1,507,354 compared to $580,998, an increase of $926,356. Of that amount, consulting fees of $885,569 has been incurred to accelerate the development of the 5BARz business opportunity and commence financing the business as well as establishing the infrastructure for the sales and marketing of 5BARz products. During the nine months ended September 30, 2012 other expenses of $170,084 have been incurred representing the high cost of derivative debt which had been taken on by the Companies subsidiary Cellyx Group, Inc.
Our net loss during the nine month period ended September 30, 2012 was $1,915,642 or $0.0188 per share compared to a loss from operations of $568,409 or $0.0064 per share during the nine months ended September 30, 2011. The weighted average number of shares outstanding was 102,081,179 for the nine month period ended September 30, 2012 compared to 88,556,147 shares for nine month period ended September 30, 2011.
36 Liquidity and Capital Resources As at September 30, 2012 As at September 30, 2012, our current assets were $72,215 and our current liabilities were $3,454,037, which resulted in a working capital deficit of $3,381,822. As at September 30, 2012, current liabilities were comprised in the most part of liabilities that were incurred by Cellynx in the aggregate amount of $2,348,328, of which $1,444,157 are liabilities incurred in the early stages of development of Cellynx. Several of these Cellynx liabilities date back many years, and the Company is intent upon a detailed review of those items and dealing with them in conjunction with financings that are in process. The parent Company 5Barz International Inc. has a working capital deficit of some $512,107.
In addition the total liability amount includes a "beneficial conversion factor" reflecting the "mark to market" liability associated with derivative securities of $491,874, an amount that does not require the use of cash resources of the Company to settle.
As at September 30, 2012, the Company's total assets were $3,673,613 comprised of intellectual property in the amount of $2,232,387 and goodwill arising on the acquisition of Cellynx Group, Inc in the amount of $1,364,038.The intellectual property represents the patent applications and trademark registrations and license related to the 5BARz technology by the combined entity. In addition the Company has made deposits and prepaid expenses of $19,122 in Switzerland related to their office and operations in 5BARz AG.
As at September 30, 2012, our total liabilities were $3,454,037 comprised of current liabilities as described above. The increase in liabilities as at September 30, 2012 from year ended December 31, 2011of $1,780,100 was again due in the most part to the acquisition of Cellynx Group, Inc on March 29, 2012 and the increasing liabilities arising as a result of the Company's challenges in raising capital.
Stockholders' equity decreased from a deficit at December 31, 2011 of $714,420 to a deficit balance of $219,576 at September 30, 2012. This decrease is attributable in the most part to equity sales of common stock during the period.
It should be noted that the stockholders deficit reflect a treasury stock balance of $1,800,000 which represents the shares issued by 5BARz International Inc. to Cellynx Group Inc for a 60% interest in the 5Barz intellectual property.
Cash Flows from Operating Activities For the nine month period ended September 30, 2012, net cash flows used in operating activities was $535,141 consisting primarily cash used for general and administrative expenses. For the nine months ended September 30, 2011, net cash flows used in operating activities was $412,806 again comprised in the most part of general and administrative expenses..
Cash Flows from Investing Activities For the nine month period ended September 30, 2012, net cash flows used in investing activities was nil, as the Company's investments during the period were paid with share capital, settlement of prepaids and conversion of notes, as provided in the supplementary information provided in the statement of cash flows. The original acquisition of IP from Cellynx for debt was replaced with the investment being completed through the issuance of shares. For the nine months ended September 30, 2011, net cash flows used in investing activities was $174,513 comprised in the most part of a $170,000 deposit on investment in Cellynx.
37 Cash Flows from Financing Activities We have financed our operations primarily from the issuance of equity and notes payable. For the nine month period ended September 30, 2012, net cash flows provided from financing activities was $536,526 comprised of proceeds from the sale of common stock in the amount of $449,476, proceeds from the issuance of notes payable of $278,500. For the nine months ended September 30, 2011 cash flows from financing activities consisted of $651,567 comprised of proceeds of $1,203,500 on the sale of common stock, net of payments of $551,933 paid to Cellynx.
We expect that working capital requirements will continue to be funded through further issuances of securities, debt and from proceeds generated by sales, or through the leverage of these payments.
Plan of Operation and Funding The Company has recently engaged the services of an investment banking group and is working with private investors to secure the financing necessary to commercialize the 5BARz business opportunity. Existing working capital, further sales of equity securities and anticipated cash flow are expected to be adequate to fund our operations over the next twelve months. We have no bank financing arrangements. Generally, we have financed operations to date through the proceeds of the private placement of equity and debt and an increase in liabilities due from individuals and businesses that work with the Company. In connection with our business plan, management anticipates additional increases in operating expenses and capital expenditures relating to: (i) development and marketing of our product; and (ii) working capital. We intend to finance these expenses with further issuances of securities. Thereafter, we expect we will need to raise additional capital and generate revenues to meet long-term operating requirements. Additional issuances of equity or convertible debt securities will result in dilution to our current shareholders. Further, such securities might have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of prospective new business endeavors or opportunities, which could significantly and materially restrict our business operations.
Material Commitments As of the date of this Quarterly Report, the Company has entered into a material commitment to Cellynx Group, Inc. to make available under the terms of a line of credit agreement $2.2 million dollars. This is a subsidiary Company, and this funding will be paid when proceeds come available.
Purchase of Significant Equipment We do not intend to purchase any significant equipment during the next twelve months.
Off-Balance Sheet Arrangements As of the date of this Quarterly Report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
38 Going Concern In our Annual Report on Form 10-K for the year ended December 31, 2010, our independent auditors included an explanatory paragraph in its report relating to our financial statements for the years ended December 31, 2011 and 2010, which states that we have incurred negative cash flows from operations since inception, and expect to incur additional losses in the future and have a substantial accumulated deficit. These conditions give rise to substantial doubt about our ability to continue as a going concern. Our ability to expand operations and generate additional revenue and our ability to obtain additional funding will determine our ability to continue as a going concern. Our condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We have prepared our financial statements assuming that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business Critical Accounting Policies and Estimates Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 1 to our financial statements, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis.
Intangible Assets Acquired patents, licensing rights and trademarks are capitalized at their acquisition cost or fair value. The legal costs, patent registration fees, and models and drawings required for filing patent applications are capitalized if they relate to commercially viable technologies. Commercially viable technologies are those technologies that are projected to generate future positive cash flows in the near term. Legal costs associated with applications that are not determined to be commercially viable are expensed as incurred. All research and development costs incurred in developing the patentable idea are expensed as incurred. Legal fees from the costs incurred in successful defense to the extent of an evident increase in the value of the patents are capitalized.
Capitalized costs for patents are amortized on a straight-line basis over the remaining legal life of each patent after the costs have been incurred. Once each patent or trademark is issued, capitalized costs are amortized on a straight-line basis over a period not to exceed 20 years and 10 years, respectively.
39 Impairment or Disposal of Long-lived Assets The Company applies the provisions of Accounting Standards Codification ("ASC") Topic 360, "Property, Plant, and Equipment," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets.
ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal. Based on its review, the Company believes that as of December 31, 2011, and March 31, 2012, there was no significant impairment of its long-lived assets.
Revenue Recognition The Company's revenue recognition policies are in compliance with ASC Topic 605, "Revenue Recognition." Revenue is recognized at the date of shipment to customers, and when the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured.
Income Taxes The Company accounts for income taxes in accordance with ASC Topic 740, "Income Taxes." ASC 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Under ASC 740, a tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. No significant penalties or interest relating to income taxes have been incurred during the three months ended December 31, 2011 and 2010.
Stock Based Compensation The Company records stock-based compensation in accordance with ASC Topic 718, "Compensation - Stock Compensation." ASC 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee's requisite service period. Under ASC 718, the Company's volatility is based on the historical volatility of the Company's stock or the expected volatility of similar companies. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
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