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PITOOEY!, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operation(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements The statements contained in all parts of this document that are not historical facts are, or may be deemed to be, "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, but are not limited to, those relating to the following: the Company's ability to secure necessary financing; expected growth; future operating expenses; future margins; fluctuations in interest rates; ability to continue to grow and implement growth, and regarding future growth, cash needs, operations, business plans and financial results and any other statements that are not historical facts. When used in this document, the words "anticipate," "estimate," "expect," "may," "plans," "project," and similar expressions are intended to be among the statements that identify forward-looking statements. PITOOEY!, Inc.'s results may differ significantly from the results discussed in the forward-looking statements. Such statements involve risks and uncertainties, including, but not limited to, those relating to costs, delays and difficulties related to the Company's dependence on its ability to attract and retain skilled managers and other personnel; the uncertainty of the Company's ability to manage and continue its growth and implement its business strategy; its vulnerability to general economic conditions; accuracy of accounting and other estimates; the Company's future financial and operating results, cash needs and demand for services; and the Company's ability to maintain and comply with permits and licenses; as well as other risk factors described in this Annual Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those projected. Management's Discussion and Analysis We were originally incorporated in the State of Nevada on March 29, 2006, under the name "White Dental Supply, Inc." We were authorized to issue 100,000,000 shares of our $0.001 par value common stock and 100,000,000 shares of our $0.001 par value preferred stock. On February 7, 2013, we changed our corporate name to PITOOEY!, Inc. and increased the number of shares we are authorized to issue to 400,000,000 shares of $0.001 par value common stock and 100,000,000 shares of $0.001 par value preferred stock. PITOOEY!, Inc., is a complete digital marketing agency offering an array of products and services that will enhance communication between our clients and their target audience. Through our unique service packages, we offer businesses a comprehensive set of tools that focuses on engaging with the rapidly growing number of social and mobile-centric consumers. These social and mobile marketing products and services are served up via our two wholly -owned subsidiaries: 1. Choice One Mobile, Inc., which provides mobile and social media marketing and advertising solutions. 2. PITOOEY! Mobile, Inc., which retains all intellectual property related to our PITOOEY! TM iPhone ® app, including patents, trademarks, software and trade processes. Results of Operations Due to the recent addition of new business operations and service lines, comparisons of operating results between the three and six month periods ended June 30, , 2014 and 2013 may not be materially reflective of our continuing and future operations. Revenue How we generate revenues During the current fiscal year, 2014, we generated sales from our wholly owned subsidiary, Choice One Mobile, Inc., a provider of mobile and social media marketing and advertising services. Choice One Mobile assists clients build a strategy to attract and engage with customers using social media outlets including, but not limited to, Facebook, Twitter and YouTube. In addition to social media marketing, we offer complementary services customized to meet the needs of each client, including mobile and desktop website development, search engine optimization, text message marketing, content writing and video creation. -20- Through the periods covered in this report, our PITOOEY! Mobile subsidiary has not generated any revenues. Three months ended June, 2014 compared to the three months ended June 30, 2013 Revenue was comprised, as follows: Three months ended June 30, Increase (Decrease) 2014 2013 $ % Revenue, gross $ 43,346 $ 108,788 (65,442 ) -60 % Less: Discounts and refunds (149 ) (44,723 ) 44,574 -100 % Revenue, net $ 43,197 $ 64,065 (20,868 ) -33 % Six months ended June 30, 2014 compared to the six months ended June 30, 2013 Six months ended June 30, Increase (Decrease) 2014 2013 $ % Revenue, gross $ 87,419 $ 176,723 (89,304 ) -51 % Less: Discounts and refunds (6,873 ) (60,036 ) 53,163 -89 % Revenue, net $ 80,546 $ 116,687 (36,141 ) -31 % In the normal course of our business, the bulk of our sales are paid and rendered either immediately or on a monthly basis. These sales are recognized as revenue at the time of the transaction. Periodically, we enter into longer-term arrangements with clients, whereby they pay for three to 12 months of service up-front. These sales are recorded as deferred revenue and recognized as revenue over the actual life of the arrangement. During the three and six months ended June 30, 2014, we recorded $0 and $0, respectively, in deferred revenue and recognized $0 and $0, respectively as revenue earned during the period. Costs of sales consist primarily of credit card merchant fees, commissions paid to sales staff and fees paid to contractors directly attributable to specific clients. A vast majority of our services incur few direct, unique and immediately identifiable costs per client. During the three and six months ended June 30, 2014, costs of sales totaled ($140) and $38,371, respectively as compared to $20,496 and $26,231 for the same periods ended June 30, 2013. Cost of sales declined in the second quarter due to cessation of development costs for our software. After accounting for costs of sales, we realized a gross profit of $43,485 and $49,047 during the three and six months ended June 30, 2014 as compared to $43,569 and $90,456 for the same periods ended June 30, 2013. Factors Affecting Future Growth We are continuously refining our services to maximize revenue, while providing a rate of return to business customers greater than they would be able to obtain advertising or marketing through traditional media outlets. Blending the two disparate objectives is an art form that we are attempting to master and slight dips in revenue may occur in future periods, as a result. We are actively pursuing the following operational objectives: -21- 1. Choice One Mobile recently launched the C1M affiliate program to allow credit card processing companies to provide its agents an additional revenue stream by selling C1M's mobile and social media services to existing merchant clientele. The benefits for Choice One Mobile include greater market penetration, with lower overhead and customer acquisition costs. We began negotiations with several large credit card processing companies and independent sales organizations. As of the date of this quarterly report, we have not entered into any contractual relationships. 2. The PITOOEY!TM iPhone ® app is a preference based, searchable ad network. The PITOOEY! app provides businesses with a unique engagement tool while serving consumers deals, valuable content, and location-based information. Our third party development team has been engaged in refining the consumer experience, as well as the back-end mechanics, to ensure adoption of Version 2 of the app. We have experienced delays in the release of our app and are currently working internally to assure a timely launch of the best software product we can possibly construct. As a result, we are currently unable to disclose a specific time frame the release of Version 2. 3. RAADR. The Company considers the completion of the development of this app and the subsequent launch a key strategic initiative in 2014. As such, Company management is working to develop and refine RAADR functionality and focus on revenue generation for RAADR through strategic alliances, revenue-share opportunities, and stand-alone mobile app subscription agreements. 4. Legal 420. The Company is currently evaluating the appropriate market positions of this app in its strategic plan. Company management expects to make further investments in app development, with a focus on primary revenue generation from advertising sources and subsequent user subscriptions as early as Q1 2015. Costs and Operating Expenses Three months ended June 30, 2014 compared to the three months ended June 30, 2013 For the three months ended June 31, 2014 and 2013, the components of our operating expenses were, as follows: Three months ended June 30, Increase (Decrease) Operating Expenses: 2014 2013 $ % Advertising and marketing $ 12,315 $ 153,911 $ (141,596 ) N/A Depreciation 3,510 4,276 (766 ) N/A Executive compensation 23,458 108,168 (84,710 ) 78 % General and administrative 47,671 115,152 (67,481 ) 59 % Management fees - related party - 24,840 (24,840 ) N/A Professional fees 56,466 137,945 (81,479 ) 59 % Salaries and wages 46,656 193,320 (146,664 ) N/A Total operating expenses 190,076 737,612 (547,536 ) 74 % Operating loss (136,590 ) (694,043 ) 557,453 80 % Other expenses: Interest expense (95,575 ) (5,301 ) (90,274 ) -1703 % Interest income - - N/A Foregivenss of debt 14,392 - 14,392 N/A Other income 0 - 0 N/A Total other expenses (81,183 ) (5,301 ) (75,882 ) -1431 % Provision for income taxes - - - N/A Net Loss $ (217,774 ) $ (699,344 ) $ 481,570 -69 % -22- Advertising and Marketing. We are a young company attempting to establish brand recognition and have engaged third parties to assist us. Our advertising and marketing activities cost was $12,315 during the three months ended June 30, 2014. In the comparable period ended June 30, 2013, we incurred $153,911 in advertising and marketing expenses. We expect to increase our advertising and marketing budget to coincide with the launch of Version 2 of the PITOOEY! app, although the timing of such increase cannot yet be determined. Depreciation. Depreciation expense related to our computers, furniture and office equipment was $3,510 during the quarter ended June 30, 2014. In the comparable period ended June 30, 2013, it was $4,276. Executive Compensation. Executive compensation paid to our corporate officers and directors was $23,458 during the three months ended June 30, 2014 and $108,168 in the comparable period ended June 30, 2013. General and Administrative. In the course of our operations, we incur operating expenses composed primarily of computer and internet expenses, professional fees, payroll, and other general and administrative costs. General and administrative expenses are essentially the cost of doing business, and encompass, without limitation, the following: business and operating licenses; taxes; general office expenses, such as postage, supplies and printing; utilities; bank charges; website costs; and other miscellaneous expenditures not otherwise classified. During the three month ended June 30, 2014, general and administrative expenses were $47,671. Comparatively, general and administrative expenses were $115,152 in the period ended June 30, 2013. Management Fees Paid to a Related Party. On December 27, 2012, we entered into a professional service agreement with a related entity for use of client services staff, human resource functions, administrative support and office space and equipment. During the three months ended June 30, 2014 and 2013, total management fees paid to the related entity was $0 and $24,840, respectively. As of December 30, 2013 we have terminated this relationship. As a result, we don't expect future expenses in this category to be incurred. Professional Fees. We expect to continue to incur professional fees in relation to maintaining our public reporting status with the Securities and Exchange Commission and significant increases in research and development expenses related to our proprietary PITOOEY! TM app, which will have an adverse effect on our operating results for the foreseeable future. During the period ended June 30, 2014, we incurred $56,466 in professional fees as compared to $137,945 for the period ended June 30, 2013. Salaries and Wages. As of June 30, 2014, we have 4 employees. Salaries and wages paid during the quarters ended June 30, 2014 and 2013 were $46,655 and $193,320, respectively. Our staffing levels tend to fluctuate substantially from month-to-month; therefore, it is difficult to forecast changes in salaries and wages from period to period. Interest Expense. During the three months ended June 30, 2014, we incurred $95,575 of interest expense related to our notes payable. In the period ended June 30, 2013, interest expense was $5,301. Six months ended June 30, 2014 compared to the six months ended June 30, 2013 -23- For the six months ended June 30, 2014 and 2013, the components of our operating expenses were, as follows: Six months ended June 30, Increase (Decrease) Operating Expenses: 2014 2013 $ % Advertising and marketing $ 18,431 $ 293,277 $ (274,846 ) N/A Depreciation 7,020 6,731 289 N/A Executive compensation 57,658 217,972 (160,314 ) 74 % General and administrative 161,492 298,695 (137,203 ) 46 % Management fees - related party - 297,127 (297,127 ) N/A Professional fees 92,199 259,509 (167,310 ) 64 % Salaries and wages 116,326 382,532 (266,206 ) N/A Total operating expenses 453,126 1,755,843 (1,302,717 ) 74 % Operating loss (394,079 ) (1,665,387 ) 1,271,308 76 % Other expenses: Interest expense (259,944 ) (5,320 ) (254,624 ) -4786 % Interest income - 1 (1 ) -100 % Foregivenss of debt 15,478 - 15,478 N/A Other income 457 - 457 N/A Total other expenses (244,008 ) (5,319 ) (238,689 ) -4487 % Provision for income taxes - (50 ) 50 N/A Net Loss $ (638,088 ) $ (1,670,756 ) $ 1,032,668 -62 % Advertising and Marketing. We are a young company attempting to establish brand recognition and have engaged third parties to assist us. Our advertising and marketing activities cost $18,431 during the six months ended June 30, 2014. In the comparable period ended June 30, 2013, we incurred $293,277 in advertising and marketing expenses. We expect to increase our advertising and marketing budget to coincide with the launch of Version 2 of the PITOOEY! app, although the timing of such increase cannot yet be determined. Depreciation. Depreciation expense related to our computers, furniture and office equipment was $7,020 during the quarter ended June 30, 2014. In the comparable period ended June 30, 2013, it was $6,731. Executive Compensation. Executive compensation paid to our corporate officers and directors was $57,658 during the six months ended June 30, 2014 and $217,972 in the comparable period ended June 30, 2013. General and Administrative. In the course of our operations, we incur operating expenses composed primarily of computer and internet expenses, professional fees, payroll, and other general and administrative costs. General and administrative expenses are essentially the cost of doing business, and encompass, without limitation, the following: business and operating licenses; taxes; general office expenses, such as postage, supplies and printing; utilities; bank charges; website costs; and other miscellaneous expenditures not otherwise classified. During the six months ended June 30, 2014, general and administrative expenses were $161,492. Comparatively, general and administrative expenses were $298,695 in the period ended June 30, 2013. Management Fees Paid to a Related Party. On December 27, 2012, we entered into a professional service agreement with a related entity for use of client services staff, human resource functions, administrative support and office space and equipment. This agreement terminated in December 2013. During the six months ended June 30, 2014 and 2013, total management fees paid to the related entity was $0 and $297,127, respectively. Professional Fees. We expect to continue to incur professional fees in relation to maintaining our public reporting status with the Securities and Exchange Commission and significant increases in research and development expenses related to our proprietary PITOOEY! TM app, which will have an adverse effect on our operating results for the foreseeable future. During the period ended June 30, 2014, we incurred $92,199 in professional fees as compared to $259,509 for the period ended June 30, 2013. -24- Salaries and Wages. As of June 30, 2014, we have 4 employees. Salaries and wages paid during the quarters ended June 30, 2014 and 2013 were $116,326 and $382,532, respectively. Our staffing levels tend to fluctuate substantially from month-to-month; therefore, it is difficult to forecast changes in salaries and wages from period to period. Interest Expense. During the six months ended June 30, 2014, we incurred $259,944 of interest expense related to our notes payable. In the period ended June 30, 2013, interest expense was $5,320. Net Loss Our net loss for the three and six months ended June 30, 2014 was $217,774 and $638,088, respectively, compared to net losses of $699,344 and $1,670,756, respectively, for the same periods ended June 30, 2013. We expect to continue to incur net losses for the foreseeable future and cannot assure you when, if ever, we will be able to mitigate our losses or begin to achieve profitability. Our management believes that expansion of our operations and continued global economic uncertainty are likely to continue to adversely affect our operating results and will lead to net losses for at least the next 12 months of operations. Liquidity and Capital Resources As of June 30, 2014, we had $37,910 in cash and $698 in prepaid expenses and deposits. To date, we have financed our operations through the issuance of stock and debt securities, in addition to sales-generated revenue. The following table provides detailed information about our net cash flow for all financial statement periods presented in this Report. Three months ended June 30, 2014 2013Net cash used by operating activities $ (125,398 ) $ (493,910 ) Net cash used by investing activities (30,000 ) - Net cash provided by financing activities 193,309 490,993 Net increase (decrease) in cash 37,909 (2,917 ) Cash at the beginning of period 1 11,568 Cash at the end of period $ 37,910 $ 8,651 Operating Activities. Net cash used in operating activities was $125,398 for the three months ended June 30, 2014. In comparison, our net cash used during the three months ended June 30, 2013 was $493,910, the bulk of which was attributable to increased expenditures, in 2013,related to our initial entry into the digital media marketing space and development of our PITOOEY!TM app. Our management expects to continue to experience net cash outflows related to operating activities for at least the next fiscal year, related primarily to continued PITOOEY!TM app development, expansion of our service offerings and continued growth of our base of operations. Investing Activities. During the three months ended June 30, 2014 and the three months ended June 30, 2013, we purchased $30,000 and $0, respectively, of Work in Process-Software. We do expect to make material investments in software development, furniture, fixtures and equipment during the next 12 months of operations. Financing Activities. Net cash provided by financing activities for the three months ended June 30, 2014 was $193,309, as compared to $490,993 for the comparable period ended June 30, 2013. During 2013, we obtained significant financing in an effort to expand our operations and pursue new business opportunities. To that end, for the three months ended June 30, 2014 and 2013, we obtained financing in the form of loans totaling $80,104 and $354,064, respectively, from third party sources. Also during the three month periods ended June 30, 2014 and 2013, we repaid $8,640 and $50 respectively, of our third party notes payable and $55 and $0, respectively, of related party notes payable. In addition to issuing debt securities, during the three months ended June 30, 2014 and 2013, we sold a total of $0 and $114,000, respectively, of common stock and $121,900 and $0, respectively, of preferred stock. We expect to use future sources of cash to invest in our core businesses, including new product and service innovations, advertising and marketing, as well as the capital expenditures in the expansion of our business. -25- Net Change in Cash. During the three months ended June 30, 2014, we experienced a net increase in cash on hand of $37,709. Comparatively, we had a net decrease in cash of $2,917 during the three months ended June 30, 2013. Six months ended June 30, 2014 2013Net cash used by operating activities $ (421,513 ) $ (1,290,413 ) Net cash used by investing activities (30,000 ) (56,910 ) Net cash provided by financing activities 347,396 937,870 Net increase (decrease) in cash (104,119 ) (409,453 ) Cash at the beginning of period 142,029 418,104 Cash at the end of period $ 37,910 $ 8,651 Operating Activities. Net cash used in operating activities was $421,513 for the six months ended June 30, 2014. In comparison, our net cash used during the six months ended June 30, 2013 was $409,453 the bulk of which was attributable to increased expenditures, in 2013, related to our initial entry into the digital media marketing space and development of our PITOOEY!TM app. Our management expects to continue to experience net cash outflows related to operating activities for at least the next fiscal year, related primarily to continued PITOOEY!TM app development, expansion of our service offerings and continued growth of our base of operations. Investing Activities. During the six months ended June 30, 2014 and the six months ended June 30, 2013, we purchased $10,000 and $56,910, respectively of Work in Process-Software Development, computers, furniture and office equipment. We do expect to make material investments in software development, furniture, fixtures and equipment during the next 12 months of operations. Financing Activities. Net cash provided by financing activities for the six months ended June 30, 2014 was $347,396, as compared to $937,870 for the comparable period ended June 30, 2013. During 2013, we obtained significant financing in an effort to expand our operations and pursue new business opportunities. To that end, for the six months ended June 30, 2014 and 2013, we obtained financing in the form of loans totaling $151,768 and $369,064, respectively, from third party sources. Also during the six month periods ended June 30, 2014 and 2013, we repaid $46,551 and $137,119 respectively, of our third party notes payable and $14,622 and $0, respectively, of related party notes payable. For the six months ended June 30, 2014 and 2013, we obtained financing in the form of related party loans totaling $2,500 and $80,875, respectively. In addition to issuing debt securities, during the six months ended June 30, 2014 and 2013, we sold a total of $37,000 and $625,000 respectively, of common stock and $121,900 and $0, respectively, of preferred stock. We expect to use future sources of cash to invest in our core businesses, including new product and service innovations, advertising and marketing, as well as the capital expenditures in the expansion of our business. Net Change in Cash. During the six months ended June 30, 2014, we experienced a net decrease in cash on hand of $104,119. Comparatively, we had a net decrease in cash of $409,453 during the six months ended June 30, 2013. Factors Affecting Future Growth We expect to require significant capital to continue to fund research and development activities related to development of the PITOOEY! TM app. Without sufficient cash flow from operations we will require additional cash resources, including the sale of equity or debt securities, to meet our planned capital expenditures and working capital requirements for the next 12 months. We will require additional cash resources due to changed business conditions, implementation of our strategy to successfully expand our operations. If our own financial resources and then current cash-flows from operations are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities will result in dilution to our stockholders. The incurrence of indebtedness will result in increased debt service obligations and could require us to agree to operating and financial covenants that could restrict our operations or modify our plans to grow the business. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, will limit our ability to expand our business operations and could harm our overall business prospects. -26- We only recently began to venture into the mobile and social media marketing space. We are experiencing significant changes to our corporate and operational structures and have been expanding our base of employees. Over the next 12 months, we expect the number of full- and part-time employees to fluctuate substantially, though we are unable to predict the amount of such fluctuations. We anticipate that as our level of maturity and sophistication in the mobile app space grows, through our experience and the engaging of external app developers and user marketing individuals and firms, that our future topline growth estimates will become more predictable. This should provide more stable estimates of future revenue and expense projections, as well as a better gauge of ongoing gross and net margins. There are no known trends, events or uncertainties that have had or that are reasonably expected to have a material impact on our revenues from continuing operations. However, we may not adequately encapsulate unforeseen economic or industry specific factors that may be beyond our control. These external forces may restrict growth and advertising spending by our clients, which could, in turn, adversely affect our operations. We currently do not own any significant plant or equipment that we would seek to sell in the near future. We have not paid for expenses on behalf of our directors. Additionally, we believe that this fact shall not materially change. Hiring and Retaining Key Personnel Our ability to compete and grow depends in large part on the efforts and talents of our employees. During the first nine months of 2013, in addition to experiencing employee attrition, we also implemented, and continue to implement, certain cost reduction initiatives to better align our operating expenses with our revenue, including reducing our headcount and consolidating certain facilities. These cost reduction initiatives could negatively impact our ability to attract, hire and retain key employees which is critical to our ability to grow our business and execute on our business strategy. Off Balance Sheet Arrangements 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 or capital expenditures or capital resources that is material to an investor in our securities. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in our consolidated financial statements and related notes. Our significant accounting policies are described in Note 3 to our consolidated financial statements included in our Annual Report on Form 10- K for the year ended December 30, 2012. We have identified below our critical accounting policies and estimates that we believe require the greatest amount of judgment. These estimates and judgments have a significant impact on our consolidated financial statements. Actual results could differ materially from those estimates. The accounting policies that reflect our more significant estimates and judgments and that we believe are the most critical to fully understand and evaluate our reported financial results include the following: 1. Intangible assets 2. Merchant reserves 3. Property and equipment 4. Revenue recognition 5. Stock-based compensation -27- |