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BRAZIL INTERACTIVE MEDIA, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements Statements in this report may be "forward-looking statements." Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those described above and those risks discussed from time to time in this report, including the risks described under "Risk Factors" in our Form 8-K filed March 21, 2013 and any risks described in any other filings we make with the SEC. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this report. Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate these estimates, including those related to useful lives of real estate assets, cost reimbursement income, bad debts, impairment, net lease intangibles, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates. Our Company Brazil Interactive Media, Inc., is a publicly listed company quoted on the OTCQB under the symbol "BIMI." The Company is a Delaware corporation formed on September 24, 2001 with the name Naturewell, Incorporated, which in the first quarter of 2013, became Brazil Interactive Media, Inc. through a merger that resulted in the Company becoming the owner of a Brazilian interactive television technology and television production company, BIMI, Inc. Prior to 2013, the Company business was the research and development of healthcare products intended for a variety of health conditions. On May 9, 2008, the Company completed the sale of essentially all of its assets, as a result becoming a shell company as defined under Rule 12b-2 of the Exchange Act. As described below, the Company ceased to be a shell company when it acquired a Brazilian television and interactive media technology company in March of 2013. On May 15, 2014, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement"), between the Company, Cannamerica, Inc., Delaware corporation and a wholly owned subsidiary of the Company ("Merger Sub"), and Hollister & Blacksmith, Inc. d/b/a American Cannabis Consulting, Inc., a Colorado corporation ("ACC"). Pursuant to the Merger Agreement, Merger Sub will be merged with and into ACC through a reverse triangular merger transaction upon the terms and subject to the conditions of the Merger Agreement, and in accordance with the General Corporation Law of the State of Delaware. Pursuant to the transactions contemplated by the Merger Agreement, (i) each share of common stock of ACC will be exchanged for shares of the Company based on a ratio of 3,171.0628 to one, (ii) ACC shall continue as the surviving corporation after the transactions contemplated by the Merger Agreement, (iii) each share of common stock of Merger Sub will be converted into and exchanged for one share of common stock of ACC and (iv) the Company shall change its name to "American Cannabis Company, Inc." ACC was incorporated as Hollister & Blacksmith, Inc. on March 5, 2013 under the laws of the State of Colorado, and is based out of Denver, Colorado. Table of Contents 17 On May 16, 2014, the Company entered into a Separation and Exchange Agreement (the "Separation Agreement"), by and among the Company, BIMI, Inc., a Delaware corporation and wholly-owned subsidiary of the Company, and Brazil Investment Holding, LLC ("Holdings"), a Delaware limited liability company and the majority stockholder of the Company. Pursuant to the Separation Agreement, the Company agreed to distribute all shares of common stock of BIMI, Inc. held by the Company in exchange for all of the common stock held by Holdings, thereby resulting in a complete separation of BIMI, Inc. The Company and BIMI, Inc. each shall retain all assets and liabilities in its respective name, and shall take any and all actions necessary so that (i) the Company will own or be liable for all existing Company assets and liabilities and (ii) BIMI, Inc. will own or be liable for all existing BIMI, Inc. assets and liabilities, including all assets and liabilities of BIMI Inc.'s subsidiaries. The Separation Agreement further provides that all intercompany agreements by and between the Company, or any of its subsidiaries, and BIMI Inc., or any of its subsidiaries, are terminated except for confidentiality, non-disclosure or release of liability agreements. The foregoing descriptions of the Merger Agreement and Separation Agreement do not purport to be complete and are qualified in their entirety by the terms of the Merger Agreement, which is filed as an exhibit to the Form 8-K filed by the Company with the Securities and Exchange Commission on May 15, 2014 and the terms of the Separation Agreement, which is filed as an exhibit to the Form 8-K filed by the Company with the Securities and Exchange Commission on May 20, 2014. Further, additional information relevant to the transactions contemplated by the Merger Agreement and Separation Agreement can be found in the Company's Preliminary Information Statement filed on Schedule 14C with the Securities and Exchange Commission on May 29, 2014, as amended June 16, 2014 and July 29, 2014. Business and Operations of the Company Prior to the effectiveness of the Separation Agreement, the Company was the parent of Brazil Interactive Media Participações, Ltda., a Brazilian holding company, which through its wholly-owned subsidiary, EsoTV Brasil Promoção Publicidade Licenciamento e Comércio Ltda., combines live television broadcasts with interactive media technology and telecommunications components to create live, interactive television programming for the Brazilian viewing public. Since the merger on March 13, 2013 and up until the effectiveness of the Separation Agreement, the Company has been in the business of producing live TV shows using interactive media technology to generate revenue with an interactive telephone calling component using its own unique and proprietary television programs that include quiz shows, games, psychics and live chat formats. Upon completion of the transactions contemplated by the Merger Agreement, the Company will complete the acquisition of ACC and be in the business of providing end-to-end solutions for businesses operating in the cannabis industry in states and countries where cannabis is regulated and has been de-criminalized for medical use and/or legalized for recreational use. ACC provides its clients end-to-end solutions based on its specialized knowledge of and experience with operating in regulated cannabis industries. ACC is both a consulting and advisory service provider and a supplier of products and equipment to businesses operating in this unique industry. ACC's service and product offerings including the following: • Guiding clients through state and local cannabis business license application processes; • Designing and implementing standard operating procedures and policies to ensure compliance with the legal regulations of the cannabis industry; • Assisting clients in monitoring their business to ensure compliance with laws and regulations of the cannabis industry as well as optimal business operation; • Educating and training ACC's clients on ACC's proven processes and techniques for maximum yields of pharmaceutical grade cannabis in regulated commercial cultivation environments; • Advising and consulting clients on the acquisition and start-up of cannabis businesses; Table of Contents 18 • Supplying customers with a variety of products that support all phases of their cannabis business, including: ? The Satchel™, a child-resistant exit bag that will assist owners and operators in the industry mitigate the risk of having product end up in the hands of unintended individuals; ? A commercial scale cultivation solution for use in regulated cannabis markets, which provides environmental controls, increases security, and achieves lean manufacturing for ACC's customers; and • Researching, designing, developing, and bringing to market new products for the specific needs of the cannabis industry that help ACC's customers operate their cannabis business on a daily basis. Results of Operations - Three months ended June 30, 2014 and June 30, 2013 Revenues We had revenue of $2,587,487 and $1,932,132 for the three months ended June 30, 2014 and 2013, respectively. The increase in our revenues is mainly attributed to a higher billing rate in 2014 negotiated with our new Telecom partner. Cost of Revenues Cost of revenues was recorded at $2,173,423 and $1,489,534 during the three months ended June 30, 2014 and 2013, respectively. Cost of revenues consists primarily of cost of media time, television production crew contractors and the cost of prize payouts. The increase in the cost of goods sold is attributed to media pressures in the market, which resulted in higher media pay rates, as well as an increase in media usage. Operating Expenses We had operating expenses of $1,792,024 and $468,495 for the three months ended June 30, 2014 and 2013, respectively. The expenses were mainly attributed to stock issuances for services rendered to the Company, as well as television studio rent and maintenance costs, depreciation of equipment, subcontractor costs, legal and professional fees, security and traveling expenses. Net Income We had net loss of $1,350,878 and a net loss of $59,043 for the three months ended June 30, 2014 and 2013, respectively. Net loss for the three months ended June 30, 2014 was due mainly to the expenses for services rendered which were satisfied by equity issuances. The net loss for the three months ended June 30, 20013 was due to insufficient gross profit to cover our operating expenses. Results of Operations - Six months ended June 30, 2014 and June 30, 2013 Revenues We had revenue of $4,466,321 and $4,240,137 for the six months ended June 30, 2014 and 2013, respectively. The increase in our revenues is mainly attributed to a higher billing rate in 2014 negotiated with our new Telecom partner. Cost of Revenues Cost of revenues was recorded at $4,038,732 and $3,185,803 during the six months ended June 30, 2014 and 2013, respectively. Cost of revenues consists primarily of cost of media time, television production crew contractors and the cost of prize payouts. The increase in the cost of goods sold is attributed to media pressures in the market, which resulted in higher media pay rate. Table of Contents 19 Operating Expenses We had operating expenses of $2,064,396 and $985,730 for the six months ended June 30, 2014 and 2013, respectively. The expenses were mainly composed of equity issuances for services rendered to the Company as well as television studio rent and maintenance costs, depreciation of equipment, subcontractor costs, legal and professional fees, security and traveling expenses. Net Income We had net loss of $1,570,426 and net income of $10,835 for the six months ended June 30, 2014 and 2013, respectively. Net loss for the six months ended June 30, 2014 was due to the higher operating expenses from services rendered to the Company, which was satisfied through equity issuances, and also media costs due to market pressures resulting in higher media cost rates. The net income for the six months ended June 30, 20013 was due to our gross profit level which was enough to cover our operating expenses Liquidity and Capital Resources Cash flows used in operating activities were $288,183 and $172,421 for the six months ended June 30, 2014 and 2013, respectively. The $288,183 provided by operating activities for the six months ended June 30, 2014 was due primarily to increase in accounts payable and accrued expenses. However, this was reduced by an increase in other receivables and prepayments and advances to suppliers. The $172,421 cash used in operating activities for the six months ended June 30, 2013 was attributed to mainly to an increase in Customer receivables which was then offset by an increase in accounts payable and accrued expenses due to new negotiated payment terms to vendors. Cash flows used in investing activities were $50,737 and $0 during the six months ended June 30, 2014 and 2013, respectively. This was mainly attributed to the purchase of television studio and broadcast equipment during the six months ended June 30, 2014. Cash flows provided by financing activities were $367,139 and $168,556 for the six months ended June 30, 2014 and 2013, respectively. For both periods, these cashflows provided were attributed mainly to equity issuances for preferred stock and debt issuance, as well as bank loan repayments and tax payments made which were offset by bank borrowings. Capital Expenditures Overall, we have funded our cash needs from inception through June 30, 2014 with a series of debt and equity transactions, primarily with related parties. If we are unable to receive additional cash from our related parties, we may need to rely on financing from outside sources through debt or equity transactions. Our related parties are under no legal obligation to provide us with capital infusions. Failure to obtain such financing could have a material adverse effect on our operations and financial condition. We had cash of $313,874 on hand as of June 30, 2014, of which $45,378 was restricted in escrow as part of a new loan agreement deal with Bradesco Bank which took effect on July 1, 2014. Currently, we have enough cash to fund our operations for the next few months. This is based on current positive cash flows from operation and potential funding from investor capital groups. Modifications to our business plans may require additional capital for us to operate. For example, if we are unable to raise additional capital in the future, this could affect our ability to purchase media in advance and at a discount. This may result in lower revenues and market share for us. In addition, there can be no assurance that additional capital will be available to us when needed or available on terms favorable to us. On a long-term basis, liquidity is dependent on continuation and expansion of operations, receipt of revenues, and additional infusions of capital and debt financing. Our current capital and revenues are insufficient to fund such expansion. If we choose to launch such an expansion campaign, we will require substantially more capital. However, there can be no assurance that we will be able to obtain additional equity or debt financing in the future, if at all. If we are unable to raise additional capital, our growth potential will be adversely affected and we will have to significantly modify our plans. Table of Contents 20 Our success will be dependent upon implementing our plan of operations and the risks associated with our business plans. Our strategy is to purchase TV media in advance at discounted prices which also affects our gross profit. We plan to strengthen our position in our market. Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements and it is not anticipated that the Company will enter into any off-balance sheet arrangements. Competition The Company is unaware of any direct competition with the Company's products or services in the Brazilian market. Intellectual Property In order to protect its proprietary television program formats and designs, the Company has applied for several trademarks with the Brazilian patent and trademark office. Customer Base Our overall target audience consists of members of the Brazilian television viewing public who use cellular telephones. During the third quarter of 2013, we began a focused effort to identify and categorize our client base, to allow us to better customize our live programming to maximize viewer participation, as well as prepare for the addition of advertising to our revenue model and better inform the creative process of our new product development. Previously, our business model, where income flows from third-party telecommunications providers who bill the Company's customers directly, did not allow us access to detailed information regarding the Company's customers. Beginning in the third quarter of 2013 the Company employs new systems operated by our technical and production teams to create and maintain a constantly updated database of comprehensive information regarding our customers. This database allows the Company to match the style and content of our production to the preferences of our clients. Employees The Company contracts with thirty-six independent technical television engineers, television production staff, financial staff, and clerical and administrative support persons on an on-going as-needed basis. The majority of our third-party contractors are members of a Brazilian television industry labor union, in accordance with Brazilian law. There are no employment agreements. Facilities The Company does not own any real estate. The Company leases its principal office at 3457 Ringsby Ct., Unit 111, Denver, CO 80216 with a month-to-month lease payment of $2,000 per month. The Company has no plans to acquire any property in the immediate future. The Company believes that its current facilities are adequate for its needs through the next twelve months, and that, should it be needed, suitable additional space will be available to accommodate expansion of the Company's operations. Table of Contents 21 |