UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

Form 10-Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________.

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.)
     
548 Market Street, Suite 18224 San Francisco, CA
 
94104
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code    (213) 400-0770

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 No o

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 that the registrant was required to submit and post such files).  Yes o    No x.
  
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 filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer    o Accelerated filer  o
Non-accelerated filer    o 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 Exchange Act).Yes o    No x.

Applicable only to issuers involved in bankruptcy proceedings during the preceding five years:

        Indicate by check mark whether the registrant filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   Yes o No x

Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of May 9, 2012, there were 54,463,071 shares of common stock, $0.001 par value, issued and outstanding.
 


 
 

BITZIO, INC.

TABLE OF CONTENTS
 
PART I – FINANCIAL INFORMATION      
         
ITEM 1
Financial Statements
    3  
           
ITEM 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    16  
           
ITEM 3
Quantitative and Qualitative Disclosures About Market Risk
    24  
           
ITEM 4
Controls and Procedures
    24  
           
PART II – OTHER INFORMATION        
           
ITEM 1
Legal Proceedings
    27  
           
ITEM 1A
Risk Factors
    27  
           
ITEM 2
Unregistered Sales of Equity Securities and Use of Proceeds
    27  
           
ITEM 3
Defaults Upon Senior Securities
    28  
           
ITEM 4
Mine Safety Disclosures
    28  
           
ITEM 5
Other Information
    28  
           
ITEM 6
Exhibits
    29  
 
 
2

 
 
PART I – FINANCIAL INFORMATION

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.
 
ITEM 1     Financial Statements
 
BITZIO, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
             
             
 
March 31,
 
December 31,
 
 
2012
 
2011
 
 
(Unaudited)
       
ASSETS
 
             
CURRENT ASSETS
           
Cash
 
$
21,777
   
$
181,725
 
Accounts receivable, net
   
34,522
     
92,232
 
Prepaid expenses and other current assets
   
417,823
     
337,508
 
Due from related parties
   
170,345
     
228,980
 
Prepaid acquisition costs
   
-
     
713,150
 
                 
    Total current assets
   
644,467
     
1,553,595
 
                 
OTHER ASSETS
               
Intangible assets, net
   
1,797,886
     
582,424
 
Goodwill
   
549,435
     
627,134
 
                 
    TOTAL ASSETS
 
$
2,991,788
   
$
2,763,153
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
                 
CURRENT LIABILITIES
               
Accounts payable and accrued expenses
 
$
955,969
   
$
253,976
 
Deferred revenue
   
29,208
     
77,433
 
Notes payable, related parties
   
351,870
     
426,870
 
Notes payable
   
144,210
     
-
 
Convertible notes, related parties, net of discount
   
-
     
5,068
 
Convertible notes, net of discount
   
80,500
     
65,677
 
                 
    TOTAL CURRENT LIABILITIES
   
1,561,757
     
829,024
 
                 
STOCKHOLDERS' EQUITY
               
Preferred stock, $0.001 par value; 10,000,000 shares
               
   authorized; 2,043,120 and -0- shares issued
               
   and outstanding, respectively
   
2,043
     
-
 
Common stock, $0.001 par value; 100,000,000 shares
               
   authorized; 52,893,571 and 50,018,625 shares issued
               
   and outstanding, respectively
   
52,894
     
50,019
 
Stock subscriptions payable
   
200,000
     
186,000
 
Additional paid-in capital
   
13,291,900
     
11,800,050
 
Accumulated deficit
   
(12,116,806
)
   
(10,101,940
)
                 
    Total stockholders’ equity
   
1,430,031
     
1,934,129
 
                 
        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
2,991,788
   
$
2,763,153
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
3

 
 
BITZIO, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
             
   
For the Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
             
REVENUES
           
Developer tools revenue
  $ 428,928     $ -  
Mobile application revenue
    110,485       -  
    Total Revenue
    539,413       -  
                 
OPERATING EXPENSES
               
Professional fees
    1,944,648       5,240  
Executive compensation
    127,500       -  
General and administrative
    383,608       3,694  
    Total Operating Expenses
    2,455,756       8,934  
                 
        LOSS FROM OPERATIONS
    (1,916,343 )     (8,934 )
                 
OTHER EXPENSES
               
Interest expense
    (98,523 )     -  
                 
    Total Other Expenses
    (98,523 )     -  
                 
LOSS BEFORE INCOME TAXES
    (2,014,866 )     (8,934 )
PROVISION FOR INCOME TAXES
    -       -  
                 
NET LOSS
  $ (2,014,866 )   $ (8,934 )
                 
BASIC AND DILUTED LOSS PER SHARE
  $ (0.04 )   $ (0.00 )
                 
BASIC AND DILUTED WEIGHTED AVERAGE
               
   NUMBER OF SHARES OUTSTANDING
    51,015,345       33,000,000  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
4

 
 
BITZIO, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
             
   
For the Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
   
 
 
Net Loss
  $ (2,014,866 )   $ (8,934 )
Adjustments to reconcile net loss to net cash used by
               
operating activities:
               
    Services contributed by officers and shareholders
    -       500  
    Depreciation and amortization
    166,083       171  
    Amortization of debt discounts on convertible notes
    109,754       -  
    Common shares issued for services
    231,395       -  
    Stock options issued for services
    893,928       -  
Changes in operating assets and liabilities:
               
    Accounts receivable
    154,513       -  
    Prepaid expenses
    23       (410 )
    Due from related parties
    (38,168 )     -  
    Accounts payable and accrued expenses
    298,118       1,154  
    Deferred revenue
    (83,748 )     -  
        Net Cash Used in Operating Activities
    (282,968 )     (7,519 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Cash acquired in acquisition of subsidiary
    12,830       -  
    Net Cash Provided by Investing Activities
    12,830       -  
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Repayments on notes payable - related parties
    (75,000 )     -  
Repayments on notes payable
    (19,918 )     -  
Proceeds from sale of preferred stock
    5,108       -  
Proceeds from stock subscriptions payable
    200,000       -  
    Net Cash Provided by Financing Activities
    110,190       -  
                 
NET DECREASE IN CASH
    (159,948 )     (7,519 )
CASH AT BEGINNING OF YEAR
    181,725       18,068  
                 
CASH AT END OF YEAR
  $ 21,777     $ 10,549  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
                 
CASH PAID FOR:
               
    Interest
  $ 5,338     $ -  
    Income taxes
  $ -     $ -  
                 
NON-CASH FINANCING AND INVESTING ACTIVITIES
               
    Notes payable and warrants issued for acquisition of subsidiary
  $ 713,150     $ -  
    Common stock issued for prepaid services
  $ 80,338     $ -  
    Issuance of common stock on debenture conversion
  $ 100,000     $ -  
    Common stock issued for stock subscriptions payable
  $ 186,000     $ -  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
5

 
 
BITZIO, INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2012
(Unaudited)
 
NOTE 1 – ORGANIZATION

Bitzio, Inc. was originally formed as Rocky Mountain Fudge Company, Inc. (“the Company,” “we”) 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.  Bitzio, Inc. is focused on smartphone applications, social media and marketing optimization.  We work directly with developers of mobile applications to improve their consumer reach, conversion rates, and profitability.

On July 27, 2011 Bitzio, Inc. and Bitzio, LLC., entered into 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 November 9, 2011 Bitzio, Inc. and Thinking Drone, Inc., entered into a share exchange agreement wherein Bitzio, Inc. acquired all of the issued and outstanding stock of Thinking Drone, Inc.  Bitzio, Inc. received all of the outstanding shares of Thinking Drone in exchange for a $500,000 promissory note and 5,000,000 shares of Bitzio, Inc. common stock.  Through this transaction Thinking Drone, Inc. became a wholly-owned subsidiary of Bitzio, Inc.

On January 10, 2012, Bitzio, Inc. and DigiSpace Solutions, LLC entered into a share exchange agreement wherein Bitzio, Inc. acquired all of the issued and outstanding member’s equity in exchange for $200,000 cash and 1,000,000 restricted stock options at an exercise price of $0.28 per share valued at $513,150.  Through this transaction DigiSpace Solutions, LLC became a wholly-owned subsidiary of Bitzio, Inc.

NOTE 2 - CONDENSED FINANCIAL STATEMENTS

The accompanying financial statements have been prepared by the Company without audit.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at March 31, 2012 and for all periods presented have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2011 audited financial statements.  The results of operations for the periods ended March 31, 2012 and 2011 are not necessarily indicative of the operating results for the full years.
 
 
6

 
 
BITZIO, INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2012
(Unaudited)

NOTE 3 – GOING CONCERN

The Company's financial statements are prepared using generally accepted accounting principles 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.  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 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries.  Intercompany balances and transactions have been eliminated upon consolidation.

In June 2011, we effected a four-for-one forward-split of the shares of our common stock.  All references to common stock activity in these financial statements have been retroactively restated so as to incorporate the effects of this stock-split.

Use of Estimates

The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  The more significant estimates include, but are not limited to, the recognition of certain, 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

We derive our revenues from the sale of mobile applications through various platforms and through the sale of developer tools related to the mobile application industry.  We recognize revenue when all of the following conditions are 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.
 
 
7

 
 
BITZIO, INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2012
(Unaudited)

Mobile Phone Applications

Mobile phone applications are sold using multiple platforms.  Each platform handles the sale, distribution or download, as well as the collection and remittance of payment for the company.  We recognize mobile application revenue net of the amounts retained by the platform companies.  There is no warranty or money-back guarantee related to the sale of mobile phone applications, therefore no deferred revenue or allowance for sales returns has been recorded.

Developer Tools

Developer tools revenue represents the Company’s revenue derived from the sale of educational videos, webinars, e-books and other materials developed by the Company and sold to customers seeking to develop and sell mobile phone applications to end users.  Most of these products are sold with a 30-day money back guarantee.  Therefore, we recognize revenue from the sale of developer tools ratably over the term of the contract, usually six weeks. Cash receipts in advance of revenue recognized are recorded within deferred revenue.

Cash and Cash Equivalents

We consider all highly liquid investments with remaining maturities of three 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 three 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 consolidated 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 which incorporate historical write-offs and current economic conditions.

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 consolidated financial statements from the date of acquisition.
 
 
8

 
 
BITZIO, INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2012
(Unaudited)
 
Net Loss per Share Attributable to Common Stockholders

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 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 anti-dilutive.  Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share.  There were 7,954,842 such potentially dilutive shares excluded as of March 31, 2012.

Fair Value of Financial Instruments

As of March 31, 2012 and December 31, 2011, cash equivalents were comprised of money market funds totaling $21,777 and $181,725, respectively.  In addition, the carrying amount of certain financial instruments, including accounts receivable, accounts payable and accrued expenses approximates fair value due to their short maturities.

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.

At March 31, 2012, two customers comprised more than 85 percent of accounts receivable.  At December 31, 2011, one customer comprised 85 percent of accounts receivable.

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 5 – ACQUISITION OF SUBSIDIARIES

DigiSpace Solutions, LLC Acquisition

On January 10, 2012, Bitzio Inc. and DigiSpace Solutions, LLC entered into a share exchange agreement wherein Bitzio, Inc. acquired 100 percent of the issued and outstanding members’ equity in exchange for $200,000 in cash and 1,000,000 restricted stock options at an exercise price of $0.28 per share valued at $513,150.  Through this transaction DigiSpace Solutions, LLC became a wholly owned subsidiary of Bitzio, Inc.
 
 
9

 
 
BITZIO, INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2012
(Unaudited)

The assets and liabilities of DigiSpace Solutions, LLC as of the acquisition date will be recorded at their estimated fair value. A preliminary allocation of the purchase price is as follows:

Cash and cash equivalents
  $ 12,830  
Customer List
    1,381,545  
    Total assets acquired
    1,394,375  
         
Accounts payable
    501,706  
Deferred revenue
    35,523  
Notes payable
    143,996  
    Total liabilities acquired
    681,225  
     Net assets acquired
  $ 713,150  

NOTE 6 –INTANGIBLE ASSETS

Intangible Assets

Intangible assets include assets capitalized as a result of our acquisitions and represent the valuation of the mobile application portfolio and customer list acquired based on net cash flows from the portfolio.  The components of intangible assets were as follows:

   
March 31,
   
December 31,
 
 
  
2012
   
2011
 
Mobile App Portfolio (useful life – 3 years)
  
$
611,461
  
 
$
611,461
  
Customer List (useful life – 3 years)
  
 
1,381,545
     
-
 
Less: Accumulated depreciation
  
 
(195,120
)
   
(29,037
                 
Intangible assets, net
  
$
1,797,886
  
 
$
582,424
  

Amortization or intangible assets is computed using the straight-line method and is recognized over the estimated useful lives of the intangible assets.  Amortization expense was $166,083 and $171 for the three months ended March 31, 2012 and 2011, respectively

NOTE 7 – RELATED PARTY TRANSACTIONS

Related party receivables

At March 31, 2012, the Company had an outstanding receivable balance of $170,345 (December 31, 2011 - $228,980) from related parties.

Related party payables

During the three months ended March 31, 2012 the Company repaid $75,000 of related party notes payable, leaving an ending balance in related party payables of $351,870.
 
 
10

 
 
BITZIO, INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2012
(Unaudited)
 
During the fiscal year ended December 31, 2011 the Company borrowed $27,000 in cash from related parties, and $5,000 in operating expenses were paid on behalf of the Company by a related party.  The Company also executed $500,000 in additional notes payable to finance the business acquisitions.  The Company also repaid $105,380 of notes payable and transferred $142 to accrued liabilities leaving $426,870 in related party payables and accrued interest of $3,740 at December 31, 2011.  The components of related party payables are summarized in the table below:

 
March 31,
 
December 31,
 
 
2012
 
2011
 
Note payable to related parties, bearing interest at 5.25%, secured by the common stock of the Company, due on October 31, 2012
    351,870       426,870  
                 
Total
  $ 351,870     $ 426,870  

NOTE 8 – CONVERTIBLE NOTES PAYABLE

On November 24, 2011, the Company completed a non-brokered private placement unit offering that raised $180,000 in gross proceeds, $50,000 of which were received from related parties.  Each $1,000 unit consisted of one 8.5% unsecured convertible note and 2,000 shares of the Company’s common stock.  The notes have a 12-month term and are convertible into common shares of the Company at a price of $0.10 per share at any time prior to the maturity date, which is November 23, 2012.  The notes require interest only payments on a quarterly basis.  On March 31, 2012, $100,000 of the convertible notes was converted into 1,000,000 common shares of the Company.

The convertible notes contain provisions that will allow the Company to force conversion, if the lowest daily closing bid price of the Company’s Common Shares for each of the sixty-five (65) trading days immediately preceding the redemption notice is not less than $1.50 per such Common Share; or the Company completes one or more offerings of its Common Shares or securities convertible into Common Shares at a price or conversion price, as the case may be, of not less than $1.50 per such Common Share and the gross proceeds from such offering(s) total not less than $5,000,000.  At December 31, 2011, the lenders had advanced $180,000 under this financing agreement, $50,000 of which were received from related parties.

The intrinsic value of the beneficial conversion feature and the debt discount associated with the equity issued in connection with the convertible debts were recorded based on the relative fair value of the equity in relation to the debt in accordance with ASC 470.  The total initial beneficial conversion feature recorded for the convertible notes and on the equity equaled $125,874 and $54,126, respectively.  As of March 31, 2012, the Company has amortized $28,000 of the total outstanding debt discount leaving an amortized debt discount of $52,000.

On December 8, 2011, the Company executed a convertible promissory note in the amount of $52,500.  The note bears interest at a rate of 8.0% per annum and has a maturity date of September 12, 2012.  Any amount of principal or interest not paid in full at maturity will bear an interest rate of 22 percent.  The convertible promissory note may be converted in whole or in part, at the option of the holder, to shares of common stock at any time following 180 days after the issuance date of the note.  The conversion price under the note is 59 percent multiplied by the market price (representing a 41 percent discount rate).
 
 
11

 
 
BITZIO, INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2012
(Unaudited)

The components of convertible notes payable are summarized in the table below:

   
March 31,
   
December 31,
 
   
2012
   
2011
 
Notes payable to a unrelated parties, bearing interest at 8.5%, unsecured, convertible into shares of common stock, due on November 23, 2012
  $ 80,000     $ 130,000  
Note payable to a  related party, bearing interest at 8.5%, unsecured, convertible into shares of common stock, due on November 23, 2012
    -       50,000  
Note payable to an unrelated party, bearing interest at 8%, secured by the common stock of the Company, convertible into shares of common stock, due on September 12, 2012
    52,500       52,500  
Unamortized beneficial conversion feature on issuance of convertible debt
    (52,000 )     (161,755 )
                 
Total
  $ 80,500     $ 70,745  

NOTE 9 – PREFERRED STOCK

The Company is authorized to issue 10,000,000 shares of preferred stock, of which 2,500,000 shares are designated as series A convertible redeemable preferred stock with a par value of $0.001.  As of March 31, 2012 and December 31, 2011, there were 2,043,120 and -0- shares of series A convertible redeemable preferred stock issued and outstanding, respectively.  The shares have the following provisions:

Dividends
Series A convertible redeemable shares have no dividend rights.

Liquidation Preferences
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) plus all declared and unpaid dividends.  

Voting Rights
Series A convertible redeemable shares have no voting rights.

Conversion
Each share of series A convertible redeemable preferred stock is convertible, at the option of the holder, at any time after January 1, 2012 but before January 2, 2017,and upon payment of $0.40 per share, into two fully paid and nonassessable shares of the Company’s common.
 
 
12

 
 
BITZIO, INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2012
(Unaudited)

Redemption
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).

Preferred Stock Activity for the Three Month Period Ended March 31, 2012

On January 2, 2012, the Company issued 2,043,120 Series A Convertible Redeemable Preferred Stock at purchase price of $0.0025 per share for $5,108.

NOTE 10 – COMMON STOCK

The Company has authorized 100,000,000 shares of $0.001 par value per share Common Stock, of which 52,893,571 and 50,018,625 shares were issued outstanding as of March 31, 2012 and December 31, 2011.  The activity surrounding the issuances of the Common Stock is as follows: 

Three Months Ended March 31, 2012

During the three months ended March 31, 2012, the Company issued 1,000,000 shares of common stock upon the conversion of $100,000 of outstanding convertible debentures.  The Company issued 82,500 shares of common stock for services rendered to the Company valued at $33,000, based on the market price of the stock on the date of issuance.  The Company issued 744,000 shares of common stock and warrants to satisfy stock subscriptions obligations outstanding at December 31, 2011.

During the three months ended March 31, 2012, the Company issued 1,048,446 shares of common stock issued in advance of services.  The value of $278,733 was based on the market price on the date of issuance.  The value of these shares has been capitalized and will be recognized in expenses over the life of the agreements under which they were issued.  The Company also received $200,000 in cash for stock subscriptions payable.  As of the date of this report, the Company has satisfied its obligations relating to the stock subscriptions payable through the issuance of 800,000 shares of common stock and warrants at $0.25 per share.

Fiscal Year Ended December 31, 2011

During the fiscal year ended December 31, 2011, the Company issued 2,500,000 shares of common stock for net cash proceeds of $250,000 at $0.10 per share and 360,000 shares of common stock for cash and convertible notes payable of $180,000, of which $50,000 was received from related parties.  The Company issued 1,761,000 shares of common stock for services rendered to the Company valued at $513,731, based on the market price of the stock on the date of issuance.  The Company issued a total of 10,000,000 shares of common stock valued at $3,100,000 based on the market price of the stock on the date of issuance, and options to purchase 1,000,000 shares of common stock valued at $513,150 to acquire three wholly-owned subsidiaries, one of which was completed on January 10, 2012.

During the fiscal year ended December 31, 2011, the Company issued 2,397,625 shares of common stock issued in advance of services.  The value being based on the market price on the date of issuance valued at $431,573.  The value of these shares has been capitalized and will be recognized in expenses over the life of the agreements under which they were issued.  The Company also received $186,000 in cash for stock subscriptions payable.  As of the date of this report, the Company has satisfied its obligations relating to the stock subscriptions payable through the issuance of 744,000 shares of common stock and warrants at $0.25 per share.
 
 
13

 
 
BITZIO, INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2012
(Unaudited)

 
NOTE 11 – STOCK OPTIONS AND WARRANTS

The following table summarizes all stock option activity for the three months ended March 31, 2012:
 
   
March 31,
 
   
2012
 
   
Shares
   
Weighted-
Average
Exercise Price
Per Share
 
Outstanding, December 31, 2011
    19,648,462     $ 0.34  
Granted
    2,744,000       0.37  
Exercised
    -       -  
Forfeited
    -       -  
Expired
    -       -  
                 
Outstanding, March 31, 2012
    22,392,462     $ 0.34  
                 
Exercisable at March 31, 2012
    22,392,462     $ 0.34  

The following table summarizes information regarding our outstanding and exercisable options at March 31, 2012:
 
   
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 – $0.25
  
 
4,000,000
  
  
$
0.22
  
  
 
4.5
  
  
 
4,000,000
  
  
$
0.22
$0.26 – $0.30
  
 
1,000,000
  
  
 
0.28
  
  
 
4.5
  
  
 
1,000,000
  
  
 
0.28
$0.31 – $0.35
  
 
2,578,462
  
  
 
0.33
  
  
 
4.8
  
  
 
2,578,462
  
  
 
0.33
$0.36 – $0.40
  
 
14,814,000
  
  
 
0.38
  
  
 
4.7
  
  
 
14,814,000
  
  
 
0.38
 
  
 
22,392,462
  
  
$
0.34
  
  
 
4.5
  
  
 
22,392,462
  
  
$
0.34
 
 
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BITZIO, INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2012
(Unaudited)

In determining the compensation cost of the stock options granted, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used in these calculations are summarized as follows:

   
Year Ended
December 31,
2011
 
Expected term of options granted
 
5 years
 
Expected volatility range
    211 – 229 %
Range of risk-free interest rates
    0.81 – 1.80 %
Expected dividend yield
    0 %

Stock-based compensation expense associated with stock options issued during the three months ended March 31, 2012, and 2011 was $893,928 and $-0-, respectively.

NOTE 12 – SUBSEQUENT EVENTS

On April 5, 2012, 230,500 common shares of the Company that were received in settlement of a terminated consulting agreement were returned to the treasury and cancelled.

On April 10, 2012, we announced a Letter of Intent to acquire 100% of the outstanding and issued shares of Motion Pixel Corporation Holdings, Inc.  The terms of the purchase have not been finalized but the acquisition is expected to be completed using only restricted common shares and no cash from the Company. Upon closing, the MPC management team has agreed to invest over $1.25M to purchase common shares of the Company and reserves the right to invest up to an additional $1M by May 30, 2012. A block of options will be reserved for key MPC staff members.

On April 25 2012, the Company completed a 1,800,000 Unit offering for gross proceeds of $450,000.  The Units were priced at $0.25 each and included one common share and one warrant entitling the holder to purchase one common share for $0.50 at any time prior to April 26, 2013.  $200,000 of the offering was received as stock subscriptions payable during the quarter ended March 31, 2012.

On May 8, 2012, we announced a Letter of Intent to acquire Knuckle Face, Inc., a U.K. based mobile game developer.  The terms of the purchase have not been finalized but the acquisition is expected to be completed using only restricted common shares and no cash from the Company.
 
 
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ITEM 2   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).  Forward-looking statements are, by their very nature, uncertain and risky.  These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.

Although the forward-looking statements in this Quarterly Statement reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them.  Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements.  You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

The following discussion and analysis of financial condition and results of operations of the Company is based upon, and should be read in conjunction with, its unaudited financial statements and related notes elsewhere in this Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States.

Summary Overview

Our mission is to help mobile app developers get the full potential of their mobile apps by increasing consumer reach, conversion rates and bottom line profitability. Our strategic arsenal of methodologies and technologies allows mobile app developers to quickly develop, market and monetize their apps. We see ourselves as enablers and are focusing on turning app consumers into app creators. We aim to be responsible for the download of 1 Billion apps by 2014.

Our strategy is to acquire smartphone application companies in order to increase our customer base and marketing reach thus allowing us to maximize cross-promotional sales opportunities and increase sales. For the next year, the focus is to acquire businesses that have multiple applications in market, are generating revenue and have unique user demographics. We believe that the combination of those tangible assets with our experienced management team increases our likelihood of execution.

Acquisitions

On July 27, 2011, we acquired Bitzio Corp., a developer of mobile applications for smartphones, which is now operated as Bitzio Mobile Apps, Inc. Bitzio Mobile Apps has developed over 140 mobile applications with over 650,000 downloads in total and is in the process of developing 4,000 additional mobile applications. The company was founded by Amish Shah in November 2010 and generated application download revenue in its first month of operation.
 
 
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On November 9, 2011, we acquired Thinking Drone, Inc., a developer of iPhone and Android apps under the “Free the Apps” brand. Founded in 2009, Free the Apps has created many highly successful apps, including "Top 10" overall apps featured in iTunes App Store. Their success is not only creating top revenue generating apps but also using that acumen to help other developers get the visibility their apps need in the crowded mobile apps space. Using proven strategies, Free the Apps provides developers with social and online solutions to get their apps in a “top” list and extend their reach to extensive customer base. With almost 40 million downloads and counting, some of Free the Apps highly successful free apps includes Convert Units for Free and Crop for Free.

On January 10, 2012, we acquired DigiSpace Solutions, LLC, an online performance-based advertising company offering a variety of services to assist in the development of a company’s online presence, marketing, tracking and customer management.  It provides proprietary web technologies to power online strategies and solutions.

Going Concern

As a result of our financial condition, our auditors have indicated in a footnote to our financial statements of March 31, 2012 describing the 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.  At our current revenue and burn rate, our cash on hand will last approximately seven months.  However, there is no assurance that our existing cash flow will be adequate to satisfy our existing operating expenses and capital requirements.

Three months ended March 31, 2012 and 2011

Results of Operations

Introduction

Our revenues for the three months ended March 31, 2012 were $539,413, compared to zero for the three months ended March 31, 2011.  We had very little operations in the first nine months of fiscal 2011, and thus comparisons between 2012 and 2011 are dramatic.  In the three months ended December 31, 2011, our revenues were $579,386.
 
 
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Revenues and Net Operating Income (Loss)

Our revenues, operating expenses, and net loss for the three months ended March 31, 2012 and 2011 were as follows:

   
Three months
ended
   
Three months ended
       
   
March 31,
   
March 31,
   
Increase /
 
   
2012
   
2011
   
(Decrease)
 
                   
Revenue
  $ 539,413     $ -     $ N/A  
                         
Operating expenses:
                       
  Professional fees
    1,944,648       5,240       N/A  
  Executive compensation
    127,500       -       N/A  
  General and administrative
    383,608       3,694       4,194 %
Total operating expenses
    2,455,756       8,934       27,388 %
                         
Loss from operations
    (1,916,343 )     (8,934 )     21,350 %
  Other expense
    (98,523 )     -       N/A  
                         
Net loss
  $ (2,014,866 )   $ (8,934 )     22,453 %

Revenues

For the three months ended March 31, 2012, we had revenues of $539,413, compared to zero for the three months ended March 31, 2011.  The increase in revenues is a result of the three corporate acquisitions of Bitzio Corp., Thinking Drone, Inc. and DigiSpace Solutions, LLC during fiscal 2011 and early January 2012.  Our revenues are segmented into developer tools revenue of $428,928 and mobile application revenue of $110,485.

Operating Expenses

Our operating expenses consisted of professional fees of $1,944,648, executive compensation of $127,500, and general and administrative expenses of $383,608.

In order to manage our cash flow, the Company uses its common stock as consideration in certain transactions.  Professional fees include $893,928 of non-cash stock option compensation.  In order to attract and retain highly skilled staff for a start-up company in the highly competitive mobile applications industry, we offered stock options at a level necessary to ensure that key skilled resources were retained to meet early development milestones.  As we achieve milestones and profitability, it is expected that use of equity incentives will decrease significantly.  Certain professional fees totaling $231,395 were paid through the issuance of common stock of the Company.

Loss from Operations

Our loss from operations was $1,916,343 for the three months ended March 31, 2012, compared to $8,934 for the three months ended March 31, 2011.
 
 
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Other Expense

We had other expense of $98,523 for the three months ended March 31, 2012, consisting of interest expense, compared to $nil for the three months ended March 31, 2011.

Net Loss

Our net loss for the three months ended March 31, 2012 was $2,014,866, compared to $8,934 for the three months ended March 31, 2011.  The increase in net loss was primarily a function of 2012 non-cash charges for stock option compensation expense of $893,928 depreciation and amortization expense of $166,083, convertible debenture accounting charges of $109,754 and professional fees paid with stock of $231,395.  Excluding these significant non-cash items, our net loss for the three months ended March 31, 2012 was $613,706.

Non-GAAP Financial Measures

We monitor our performance as a business using adjusted EBITDA, a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss) before interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense, stock-based service payments, restructuring expenses and asset impairments, interest income and other income (expense), net. Adjusted EBITDA is not a measure of liquidity calculated in accordance with U.S. GAAP, and should be viewed as a supplement to, not a substitute for, our results of operations presented on the basis of U.S. GAAP. Adjusted EBITDA do not purport to represent cash flow provided by, or used in, operating activities as defined by U. S. GAAP. Our statement of cash flows presents our cash flow activity in accordance with U.S. GAAP. Furthermore, Adjusted EBITDA is not necessarily comparable to similarly-titled measures reported by other companies.

A reconciliation of Adjusted EBITDA to net income (loss) from continuing operations for the year ending December 31, 2011 follows:

Net loss
  $ (2,014,866 )
Stock-based compensation expense
    893,928  
Stock-based service payment
    231,395  
Interest and other income (expense), net
    98,523  
Provision for income taxes
    -  
Depreciation and amortization
    166,083  
         
Adjusted EBITDA
  $ (624,937 )

We believe Adjusted EBITDA is used by and is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods. We believe that:

·  
EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest expense, taxes, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired; and
 
 
19

 
 
·  
investors commonly use Adjusted EBITDA to eliminate the effect of restructuring and stock-based compensation expenses, which vary widely from company to company and impair comparability.

We use Adjusted EBITDA:

·  
as a measure of operating performance to assist in comparing performance from period to period on a consistent basis;
·  
as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations; and
·  
in communications with the board of directors, stockholders, analysts and investors concerning our financial performance.

Liquidity and Capital Resources

Introduction

Our principal needs for liquidity have been to fund operating losses, working capital requirements, acquisitions, and debt service. Our principal source of liquidity as of March 31, 2012 consisted of cash of $21,777.  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.

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 obtain such resources from management and significant shareholders sufficient to meet our minimal operating expenses and to seek equity and/or debt financing.  However management cannot provide any assurances that we will be successful in accomplishing any of our plans.

Our cash, current assets, total assets, current liabilities, and total liabilities as of March 31, 2012 and December 31, 2011, respectively, are as follows:

   
March 31,
   
December 31,
       
   
2012
   
2011
   
Change
 
                   
Cash
  $ 21,777     $ 181,725     $ (159,948 )
Total Current Assets
    644,467       1,553,595       (909,128 )
Total Assets
    2,991,788       2,763,153       228,635  
Total Current Liabilities
    1,561,757       829,024       732,733  
Total Liabilities
    1,561,757       829,024       732,733  

Our cash decreased from $181,725 as of December 31, 2011 to $21,777 as of March 31, 2012 as a result of our operating loss.  Total current assets decreased as prepaid acquisition costs at December 31, 2011 were re-classified to intangible assets upon the successful completion of the acquisition of Digispace Solutions, LLC on January 10, 2012.  The DigiSpace acquisition also increased our liabilities as we assumed up to $575,000 of Digispace’s outstanding liabilities.  Certain members of management have deferred their fees resulting in an increase to liabilities of $262,500.
 
 
20

 

Cash Requirements

We had cash available as of March 31, 2012 of $21,777.  Based on our current revenues, cash on hand, and our current net monthly burn rate of around $25,000, we will need to continue to raise money from the sales of our securities to fund operations.

Sources and Uses of Cash

Operations

Our net cash used in operating activities was $282,968 for the three months ended March 31, 2012, compared to $7,519 for the three months ended March 31, 2011.  The increase is a result of operations from our two acquisitions.

For the three months ended March 31, 2012, our net cash used in operating activities consisted of our net loss of $2,014,866, offset primarily by stock options issued for services of $893,928, depreciation and amortization of $166,083, convertible debenture accounting charges of $109,754, and common shares issued for services of $231,395.

Investments

Our net cash provided by investing activities was $12,830 for the three months ended March 31, 2012, compared to $nil for the three months ended March 31, 2011.  The increase is a result of operations from the DigiSpace acquisition.

Financing

Our net cash provided by financing activities was $110,190 for the three months ended March 31, 2012, compared to $nil for the three months ended March 31, 2011.

For the three months ended March 31, 2012, our net cash provided by financing activities consisted primarily of proceeds from stock subscriptions payable of $200,000 and the proceeds from the sale of preferred stock of $5,108, offset by repayments on notes payable to related parties of $75,000 and repayments on notes payable of $19,918.

Contractual obligations and other commitments

We have no commitments under operating leases or rental agreements.

Off-balance sheet arrangements

As of March 31, 2012, 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 resources that are material to investors.
 
 
21

 

Critical accounting policies and estimates

        Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions.

        The following critical accounting policies are those accounting policies that, in our view, are most important in the portrayal of our financial condition and results of operations. Our critical accounting policies and estimates include those involved in recognition of revenue, business combinations, valuation of goodwill, valuation of long-lived and intangible assets, provision for income taxes, and accounting for stock-based compensation. Note 3 to our financial statements included elsewhere in this quarterly report on Form 10-Q provides additional information about these critical accounting policies, as well as our other significant accounting policies.

Revenue Recognition

We derive our revenues from the sale of mobile applications through various platforms and through the sale of developer tools related to the mobile application industry. We recognize revenue when all of the following conditions are 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.

        Mobile phone applications are sold using multiple platforms. Each platform handles the sale, distribution or download, as well as the collection and remittance of payment for the company. We recognize mobile application revenue net of the amounts retained by the platform companies. There is no warranty or money-back guarantee related to the sale of mobile phone applications, therefore no deferred revenue or allowance for sales returns has been recorded. Developer tools revenue represents the Company’s revenue derived from the sale of educational videos, webinars, e-books and other materials developed by the Company and sold to customers seeking to develop and sell mobile phone applications to end users. Most of these products are sold with a 30-day money back guarantee. Therefore, we recognize revenue from the sale of developer tools ratably over the term of the contract, usually six weeks. Cash receipts in advance of revenue recognized are recorded within deferred revenue.

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 consolidated financial statements from the date of acquisition.
 
 
22

 

Goodwill

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 in each quarter of the year, 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. The gross amount of goodwill at March 31, 2012 was $2,900,235 (December 31, 2011 - $2,977,934) with accumulated impairments of $2,350,800.  The net amount of goodwill at March 31, 2012 was $549,435 (December 31, 2011 - $627,134).

During the year ended December 31, 2011, we recorded an impairment charge totaling $2,350,800 million related to purchased goodwill that could not be sufficiently supported under required accounting valuation methodology.  At March 31, 2012, our review of goodwill valuation indicated that no further impairment charge was necessary.

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 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.
 
 
23

 

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 consolidated 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.

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.

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.

ITEM 3   Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are not required to provide the information required by this Item.

ITEM 4    Controls and Procedures

(a)           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, or the Exchange Act, as of March 31, 2012, 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, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2012, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described in Item 4(b).
 
 
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Our principal executive officers do not expect that our disclosure controls or internal controls will prevent all error and all fraud.  Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive officers have determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented if there exists in an individual a desire to do so.  There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

(b)           Management Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, as amended, as a process designed by, or under the supervision of, our principal executive and principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States and includes those policies and procedures that:

·  
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and any disposition of our assets;
·  
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
·  
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.  Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2012.  In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.  Based on this assessment, Management identified the following two material weaknesses that have caused management to conclude that, as of March 31, 2012, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:
 
 
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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 March 31, 2012.  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.

To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.  Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
 
(c)           Remediation of Material Weaknesses
 
To remediate the material weakness in our documentation, evaluation and testing of internal controls we plan to engage a third-party firm to assist us in remedying this material weakness once resources become available.

We intend to remedy our material weakness with regard to insufficient segregation of duties by hiring additional employees in order to segregate duties in a manner that establishes effective internal controls once resources become available.

(d)           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 quarter March 31, 2012, 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

We are not a party to or otherwise involved in any legal proceedings.

In the ordinary course of business, we are from time to time involved in various pending or threatened legal actions.  The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations.  However, in the opinion of our management, other than as set forth herein, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.

ITEM 1A   Risk Factors

As a smaller reporting company, we are not required to provide the information required by this Item.

ITEM 2   Unregistered Sales of Equity Securities and Use of Proceeds

On March 30, 2012, we issued 1,000,000 shares of our common stock, restricted in accordance with Rule 144, to a shareholder upon conversion of part of an outstanding promissory note.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, the individuals were either accredited or sophisticated and familiar with our operations, and there was no solicitation.

During the months of January, February, and March 2012, we issued an aggregate of 1,130.946 shares of our common stock, restricted in accordance with Rule 144, to four individuals or entities for services rendered.  The issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, the individuals or entities were either accredited or sophisticated and familiar with our operations, and there was no solicitation.

On February 7, 2012, we issued 744,000 units at a price of $0.25 per unit for cash proceeds totaling $186,000.  Each unit consisted of one share of common stock, restricted in accordance with Rule 144, and a warrant to purchase an additional restricted share of common stock at a price of $0.40 per such share until February 6, 2015.  The issuance was exempt from registration pursuant to Regulation S promulgated under the Securities Act of 1933.

In connection with our acquisition of DigiSpace Solutions, LLC, on January 6, 2012 we issued options to two individuals, one of which was Amish Shah, a member of our Board of Directors, to each acquire Five Hundred Thousand (500,000) shares of our common stock at $0.28 per share.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, the individuals were either accredited or sophisticated and familiar with our operations, and there was no solicitation.
 
 
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Series A Convertible Redeemable Preferred Stock

On January 6, 2012, we issued an aggregate of 2,043,120 shares of our Series A Convertible Redeemable Preferred Stock to six individuals, four of which are members of our Board of Directors, namely William Schonbrun, Gordon C. McDougall (Tezi Advisory), Steven D. Moulton, and R.W. (Bob) Garnett, and one of which was our Chief Operating Officer, namely Bruce Weatherell.  Each share of Series A Preferred Stock gives the holder the right, but not the obligation, after January 1, 2013 but before January 2, 2017, to purchase two (2) shares of the Corporation’s common stock at a purchase price of Forty Cents ($0.40) per share, which was the closing price of our common stock on the last trading day prior to the transaction.  Further, the Corporation can redeem the Series A Preferred Stock at $0.0025 per share after January 2, 2017.

We granted rights to subscribe for the Series A Convertible Redeemable Preferred Stock to six individuals as a result of them waiving an aggregate of $465,000 of compensation in 2011, and agreeing to defer an aggregate of $360,000 of compensation otherwise due in 2012.  The rights enabled the six individuals to acquire the preferred shares at $0.0025 per share, as follows:

Name
 
No. of Shares of Series A Convertible Redeemable Preferred Stock
   
Purchase Price
   
2011 Compensation Waived
   
2012 Compensation Deferred
 
Schonbrun
    588,462     $ 1,471.16     $ 127,500.00     $ 90,000.00  
McDougall
    514,904     $ 1,287.26     $ 127,500.00     $ 45,000.00  
Moulton
    276,293     $ 690.73     $ 60,000.00     $ 60,000.00  
Garnett
    230,769     $ 576.92     $ 50,000.00     $ 30,000.00  
Lewis
    230,769     $ 576.92     $ 50,000.00     $ 90,000.00  
Weatherell
    201,923     $ 504.81     $ 50,000.00     $ 45,000.00  
                                 
Totals
    2,043,120     $ 5,107.80     $ 465,000.00     $ 360,000.00  

The issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, the individuals were either accredited or sophisticated and familiar with our operations, and there was no solicitation.

ITEM 3    Defaults Upon Senior Securities

There have been no events which are required to be reported under this Item.

ITEM 4   Mine Safety Disclosures

Not applicable.

ITEM 5   Other Information

None.
 
 
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ITEM 6    Exhibits

(a)           Exhibits

2.1 (8)
 
Form of Company Acquisition Agreement with The Bitzio Corp.
     
2.2 (8)
 
Form of Proposed Acquisition Agreement with Digispace Holdings, Inc.
     
2.3 (9)
 
Amended Form of Proposed Acquisition Agreement with Digispace Solutions, LLC.
     
2.4 (9)
 
Second Amended Form of Proposed Acquisition Agreement with Digispace Solutions, LLC.
     
2.5 (10)
 
Third Amendment to the Acquisition Agreement with DigiSpace Solutions, LLC.
     
2.6 (9)
 
Form of Proposed Acquisition Agreement with Thinking Drone, Inc.
     
2.7 (9)
 
Amended Form of Acquisition Agreement with Thinking Drone, Inc.
     
3.1 (1)
 
Certificate of Incorporation
     
3.2 (1)
 
Bylaws
     
3.3 (2)
 
Certificate of Amendment to the Article of Incorporation Changing the Name of the Company from Rocky Mountain Fudge Company, Inc. to Bitzio, Inc.
     
3.4 (3)
 
Certificate of Designation of the Rights, Privileges and Preferences of the Series A Convertible Redeemable Preferred Stock
     
3.5
 
Amendment to Certificate of Designation of the Rights, Privileges and Preferences of the Series A Convertible Redeemable Preferred Stock
     
10.12 (5)
 
Form of Securities Purchase Agreement for Series A Convertible Preferred Stock
     
10.13 (4)
 
Option to Purchase Common Stock Issued to Amish Shah
     
10.14 (4)
 
Option to Purchase Common Stock Issued to Jose Rivera.
     
10.15 (7)
 
Employment Agreement dated February 1, 2012 with William Schonbrun
     
10.16 (6)
 
Form of Indemnification Agreement dated as of February 21, 2012
     
31.1
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
     
31.2
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
     
32.1
 
Chief Executive Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Chief Financial Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
29

 
 
101.INS**
 
XBRL Instance Document
101.SCH**
 
XBRL Schema Document
101.CAL**
 
XBRL Calculation Linkbase Document
101.DEF**
 
XBRL Definition Linkbase Document
101.LAB**
 
XBRL Labels Linkbase Document
101.PRE**
 
XBRL Presentation Linkbase Document
     

 
(1)
Incorporated by reference from our Registration Statement on Form 10-SB filed with the Commission on December 19, 2005.
 
(2)
Incorporated by reference from our Current Report on Form 8-K dated and filed with the Commission on June 14, 2011.
 
(3)
Incorporated by reference from our Current Report on Form 8-K dated and filed with the Commission on January 12, 2012.
 
(4)
Incorporated by reference from our Current Report on Form 8-K dated and filed with the Commission on January 12, 2012.
 
(5)
Incorporated by reference from our Current Report on Form 8-K dated and filed with the Commission on January 12, 2012.
 
(6)
Incorporated by reference from our Current Report on Form 8-K dated and filed with the Commission on February 21, 2012.
 
(7)
Incorporated by reference from our Annual Report on Form 10-K dated and filed with the Commission on March 29, 2012.
 
(8)
Incorporated by reference from our Quarterly Report on Form 10-Q for the Quarter ended June 30, 2011, filed with the Commission on August 16, 2011.
 
(9)
Incorporated by reference from our Quarterly Report on Form 10-Q for the Quarter ended September 30, 2011, dated and filed with the Commission on November 18, 2011.
 
(10)
Incorporated by reference from our Current Report on Form 8-K dated and filed with the Commission on December 22, 2011.
 
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 
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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:  May 14, 2012
/s/ William Schonbrun
 
By:  William Schonbrun
 
Its: President and Chief Executive Officer
   

 
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