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5BARZ INTERNATIONAL, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Edgar Glimpses Via Acquire Media NewsEdge) Plan of Operations Business 5BARz International Inc. ("5BARz" or the "Company") designs, manufactures and sells a line of cellular network infrastructure devices for use in the office, home and mobile market places. The Companies products incorporate multiple patented technologies to create a highly engineered, single-piece, plug 'n play device that strengthens weak cellular signals to deliver high quality signals for voice, data and video reception on cell phones and other cellular equipped devices. The 5BARz™ solution represents a critical solution for cellular network carriers in providing a clear, reliable, high quality signal for their subscribers with a growing need for high quality connectivity, especially as relates to the use of data on mobile devices. The Company's products are engineered to incorporate a great number of features more fully addressed herein. The Company is in the process of developing the global integration of their products through cellular operators, with each sector of integration to be managed in geographic areas. The initial business focus has been Latin America, with formative developments in the US and Western European market sectors. Strategy and focus areas Our focus is on three foundational priorities; · Leadership in our core business, maintaining the highest standards in developing highly engineered devices to manage cellular signal in the vicinity of the user. · Effective collaboration with cellular network operators to ensure that our products fully meet their needs in providing their subscriber base with a portfolio of state of the art solutions for maintaining excellence in cellular connectivity. · Architectural design creation, to facilitate the effective integration of the Companies product into new and innovative applications, such as built into automobiles, computers and numerous other areas of application. The Company is uniquely positioned to take advantage of recent market transitions. As more and more users are migrating to the use of cellular equipped devices for communication, internet access, navigation and even entertainment, consumer demand for clear and consistent cellular signal has never been more important. In our opinion, this evolution driven by mobile device proliferation is in early stages. 5BARz is uniquely positioned to meet this growing demand with their developing line of product. The Company has recently unveiled a highly evolved innovative, carrier grade device, incorporating technologies and a combination of functionality which represents the most advanced product developed in this market, to date. This next generation cellular network extender, branded as 5BARz™ incorporates patented technology to create a highly engineered, single-piece, plug 'n play unit that strengthens weak cellular signals to deliver higher quality signal for voice, data and video reception on cell phones, and other cellular equipped devices. 4 -------------------------------------------------------------------------------- The 2014 5BARz Cellular Network Extender recently unveiled at the Mobile World Congress in Barcelona, Spain, March 2014. This product supports 2G & 3G cellular devices for multi-bands or may be factory tuned for a single channel. The technology has successfully integrated both the send and receive antennae into the single device, and hosts an abundance of features which have never before been integrated into a single portable cellular device. The Company's initial product, the Road Warrior, won the prestigious 2010 innovation of the year award at CES (the largest consumer electronics show in the world) for achievements in product design and engineering. The Road Warrior, has passed FCC Certification, and has been produced in limited quantities to date by a contract manufacturer in the Philippines. Management at 5BARz are confident that this new cellular device will alleviate much of the frustration experienced by users globally associated with weak or compromised cellular signal. This technology facilitates cellular usage in areas where structures, create "cellular shadows" or weak spots within metropolitan areas, and highly congested areas such as freeways, and also serves to amplify cellular signal as users move away from cellular towers in urban areas. The market potential of the technology is far reaching. The market opportunity for the 5BARz™ technology represents some 6.8 billion cell phone subscribers worldwide serviced by 900 cellular network operators. These cellular network operators represent the Company's primary point of entry to the Global marketplace. The 5BARz business opportunity to bring this state of the art technology to market represents a significant step forward in the deployment of micro-cell technology, referred to as a 'cellular network infrastructure device" in the industry. Company History 5BARz was incorporated on November 17, 2008 and is a Nevada Corporation. In 2010 the Company acquired the "Master Global Marketing and Distribution Rights" for the marketing and distribution of 5BARz™ products throughout the world. In addition to the acquisition of the marketing and distribution rights, the Company acquired a 60% interest in the underlying intellectual property comprising the 5BARz™ products, and holds a security interest over the balance of those assets. On March 27, 2012, 5BARz acquired a 60% controlling interest in CelLynx Group Inc. and it's consolidated subsidiary CelLynx Inc., the Company which commenced development of the 5BARz technology. 5 -------------------------------------------------------------------------------- On November 10, 2011, the Company incorporated a subsidiary Company in Zurich Switzerland called 5BARz AG. At March 31, 2014, the Company held a 94.3% equity interest in that entity. 5BARz Ag has been granted the exclusive rights by way of a sub-license for the Sales and Marketing of the 5BARz™ products in the region, commonly referred to as the "DACH" in Europe, comprised of Germany, Austria and Switzerland. Prior to December 30, 2010 the Registrant was a designated shell Company pursuant to Section 12B-2 of the Exchange Act of 1934, and operated under the name Bio-Stuff Inc. The business of Bio-Stuff was comprised of the development of bio-degradable products. That business was abandoned by the Company in 2010 when the 5BARz business opportunity was acquired. Milestones 2007: A 5BARz™ working prototype was developed of an affordable consumer friendly single piece plug 'n play booster with a minimum of 45dB of gain in both up and down paths. This product was comprised of a unique software and hardware configuration which incorporated intuitive technology which operates in a manner which provides a modulated signal improvement I a manner which does not disrupt the network while improving signal stability and signal fidelity. July, 2008: Dollardex Group entered into an exclusive "Master Global Marketing and Distribution Agreement" (the "Distribution Agreement") for the 5BARz™ products. July 2009: First production run and FCC Certification of 5BARz Road Warrior August 2009: Field testing and final modification of 5BARz Road Warrior January 2010: 5BARz Road Warrior Selected as CES Innovations 2010 Design and Engineering Award. Marketing commenced in the Philippines for product designated for the US January 2011: 5BARz International Inc. acquires the "Master Global Marketing and Distribution Agreement" for the marketing and distribution of 5BARz™ products throughout the world, and enters into agreement for the acquisition of a 50% interest in the underlying intellectual property. January 2011 - 5BARz International Inc. engages sales agents in Latin America, to present prototype products to R&D departments at major wireless carriers in the region, with positive results. July 2011 - The Company received initial purchase order for the balance of limited production of the 5BARz Road Warrior units comprised of 16,000 units or a $3.2 million dollar purchase order. The first 1,000 units of this order was shipped early in 2014. March 2012 - 5BARz incorporated a subsidiary Company, 5BARz Ag, and sub-licensed that entity the Sales and Marketing Rights for the region commonly referred to as the "DACH", (Germany, Austria and Switzerland). The Company engaged the services of BDC Investment Ag, of Zurich, Switzerland to finance that entity and develop within the German speaking European marketplace. February/March 2012 - The Company formed an Advisory Board comprised of leading executives within the technology sector to assist in the integration of the 5BARz™ technology and products into global markets. See bios in news - www.5BARz.com Dr. Gil Amelio - Director ATT, Former CEO - Apple Computer Mr. Marcelo Caputo - CEO Telefonica USA Mr. Finis Connor - Founder of Seagate Technology and Connor Peripherals March 2012 - 5BARz International Inc. completed the acquisition of a 60% interest in CelLynx Group, Inc. (the originator of the 5BARz™ technology), developing a fully integrated subsidiary for the global deployment of the 5BARz™ business opportunity. 6 -------------------------------------------------------------------------------- August 2012 - Internal Engineering develop functional prototype units of the revised cradle-less 5BARz™ cellular network extender with several new and improved features over the Road Warrior unit. June 2013 - Company enters into a Technical Collaboration with a leading international Cellular Network Operator, to deliver a network extender that will be designed and built, based upon the 5BARz™ patented technology, to meet the specific requirements of that wireless network operator. October 2013 - Company opens its state-of-the-art "innovation center" in San Diego, California. The center houses the 5BARz' engineering division as it expands operations to accelerate development of the 5BARz™ technology. November 2013 - 5BARz appoints Gil Amelio, former CEO of Apple Computers as Chairman of the Board of 5BARz International Inc. February 2014 - 5BARz files several new patent applications. February 2014 - 5BARz International, Inc. unveils the 5BARz Network Extender at the Mobile Wireless Congress in Barcelona, Spain. This new product is a highly evolved, innovative, carrier grade technology and device that delivers much improved cellular signals, enhanced voice, data, and video reception, on cellular equipped devices. 7 -------------------------------------------------------------------------------- The Market Opportunity The market opportunity for the 5BARz™ technology represents more than 6.8 billion cell phone subscribers worldwide and is growing as a result of the following factors; · Dead zones, weak signals, and dropped calls are the biggest problems in the industry. Now, by adding internet and video, the quality issue is increasing exponentially. · 76% of cellular subscribers use their mobile phone as the primary phone · More consumers are using mobile phones for web browsing, up and down- loading photos, videos and music · More mobile phones are operating at higher frequencies which have less ability to penetrate buildings · Weak signals make internet applications inaccessible and slow and increase the drain on cell phone batteries. · Forty percent of all mobile phone users report inadequate service in their homes or office and we estimate that 60% of the 6.8 billion mobile phone users worldwide consider continuous connectivity to be very important. Consumer demand for quality in the cell phone user experience is becoming an increasingly important factor. The 5BARz™ technology meets this need. 5BARz is currently developing relationships with Cellular network operators internationally to integrate the 5BARz™ product into cellular networks globally. Why Poor Signals Exist A variety of factors may cause dropped calls and dead zones, including congestion, radio signal interference, tower hand-off, and lack of coverage. Despite continued infrastructure investment by operators, and antenna technology improvements by base station providers and mobile phone makers, these problems will continue for the foreseeable future. This is because many of the contributing factors can't be controlled by the operators and manufacturers. To understand how innovative 5BARz™ products are in improving phone signals, it's first important to understand the causes of poor signal quality. Congestion In 1999, sales of mobile phones surpassed combined sales of personal computers and automobiles. By 2010, mobile phones had replaced land-line phones in 30% of U.S. households. Smart phones, led by iPhones and Android phones, have become indispensible personal assistants. Laptop computer sales outnumber desktop computer sales, and most laptops are equipped with cellular data chipsets or USB modems. Apple's iPad has sparked the connected tablet market too. Vending machines, automobiles, mobile sensors, and many other devices include "machine to machine" cellular data modules. As a result, the number of cellular voice and data devices will soon exceed the number of people on Earth. If sheer numbers weren't enough, new uses for mobile devices are causing even faster growth in bandwidth usage. Obvious uses include video entertainment, videoconferencing, downloaded and streaming music, MMS, email, and application downloads. Facebook, Twitter, Foursquare, and many other social networking applications put further load on operator networks. Also, surprising sources of traffic have emerged, such as deliberate "miscalls". A miscall is when one subscriber calls another, but hangs up before the receiving party answers. Since operators don't charge for these uncompleted calls, subscribers are using miscalls as a free way to communicate. In India, orders for milk are made this way. In Syria, five miscalls in a row signals the recipient to "go online" to the Internet and chat. In Bangladesh, it's estimated that up to 70% of traffic at peak times is due to miscalls. This practice isn't limited to countries with low per-capita income, and yet it places a high load on operator networks. 8 -------------------------------------------------------------------------------- There are sources of congestion based on location and time, too. Transportation clusters like airports, major highway intersections, bridges, and toll road gates all bring many people together at peak times. Also, because of home land-line replacement, many residential neighborhoods have many mobile phones in simultaneous use in mornings and evenings. Lastly, local population growth and immigration can result in too many phones for existing infrastructure. Due to long planning times, investment requirements, local government permits, and construction time, it's difficult for infrastructure to keep up with the pace of change in many developing areas, especially in growth countries. Radio Signal Interference Interference comes from both obvious and subtle causes. Certain materials aren't transparent to radio signals, especially durable materials used in buildings, large structures, and even automobiles. As a result there are radio shadows in which a mobile phone can't sense the signal from a base station. In addition, radio signals from adjacent channels or reflected signals can interfere with each other due to wave cancellation effects. In some cases these forms of interference primarily attenuate the signal (make it weaker). However, interference can also add noise, so that the ratio of signal to noise becomes too low for the mobile phone and the base station to understand each other. Tower Hand-Off Mobile phone networks are called "cellular" networks because they are made up of overlapping areas of coverage that are provided by base stations in fixed locations. As a mobile subscriber travels by automobile or train, he will eventually reach the limit of a base station's coverage. At that point, his mobile phone will "hand off" to a base station for the next coverage area. If signal quality is poor due to interference, or if the new base station is congested with too many mobile phones, the subscriber's connection may be lost. Lack of Coverage Some rural or developing areas don't have enough people or population density for operators to justify the cost of installing base stations except at wide intervals. In these areas the signal strength from the base station or the mobile phone may be too low to create or maintain a connection. This results in "dead zones" or dropped calls. Solutions to Poor Signal Quality Operators know that dead zones, dropped calls, and poor voice quality are big problems, and that re-dialing while driving can be unsafe. Operators also are concerned about subscribers' ability to make emergency calls. They understand that people rely on mobile phones for business and connecting with family. As mobile phones replace landlines, operators are especially aware that mobile signal quality is critical. Operators also see that wireless data is increasingly important for personal and business use. To help, operators work with phone and base station manufacturers to improve antenna performance. They invest in new base stations in growth areas. They invest in technologies that enable more connections per base station. Operators have even provided refunds for dropped calls. However, many factors causing poor signal quality can't be controlled by operators. Therefore products have emerged to help, provided by operators or companies who sell to either operators or subscribers. 9 -------------------------------------------------------------------------------- Femtocells Operators can provide femtocells to subscribers with poor signal quality at home. Usually the subscriber pays for hardware, installation, or a monthly fee. Femtocells are carrier grade, and are like small base stations that communicate with operators by using the home Internet connection as a "backhaul". In addition to backhaul the incoming call is routed thru the internet as well, which leads to the degredation of a call when trying to access the internet as well as engaging in a call. Lastly, femtocells only work with phones from one operator, so families with phones from multiple operators may have to request multiple femtocells. Repeaters Repeaters are usually carrier-grade equipment and are programmed for a specific operator. They extend cellular networks into buildings and small offices. As with femtocells, installation is complex and if not done properly they can cause network problems. Unlike femtocells, repeaters do not use the local Internet connections, but rather receive and re-transmit the signals between base stations and mobile phones. Boosters Boosters are usually sold online and through retail. They vary widely in amplification power, quality of amplification, and power balance. For example, these products amplify signals at 1, 3, 5, or even 10 watts all the time. Using power over 1 watt increases the probability that a booster will interfere with surrounding mobile devices. Also, it would be more energy efficient to adapt amplification power as needed, rather than to simply use the same wattage constantly. Many boosters don't support balanced power in both directions between base station and mobile phone. This may result in only solving the signal quality problem in one direction. Since communication is bi-directional, this doesn't actually solve the problem. Varying quality of amplification also introduces noise, which can interfere with surrounding devices. A New Class of Solution 5BARz has evaluated the causes of poor signal quality, the needs of both operators and subscribers, and the solutions in the market. Femtocells, repeaters, and boosters either don't solve all parts of the problem, or aren't optimal due to cost or other drawbacks. Using expertise starting with a team of engineers who designed sophisticated base station amplifiers for operators, 5BARz has developed a new class of carrier-grade technology. That engineering team grew to a multi-national teams of engineers working on project specific challenges integrated into the 5BARz™ products. The result is a highly engineered hybrid of repeaters and boosters, intended for use in automotive applications, home, and office. 5BARz has tested these products in the lab, in the real world, and with operators. These products advance the state of the art to provide the following advantages: Low Power Use 5BARz™ products only amplify when required. The automotive products use less than 1/2 watt, while the home product uses less than 1 watt. This not only saves energy, but also minimizes interference with other wireless devices and the network itself. In fact, new rules being proposed by the U.S. Federal Communications Commission are expected to mandate low power standards such as 5BARz now provides. Simple Setup 5BARz™ products don't require a technician to run wires, carefully determine proper location, or optimize orientation. No use of home Internet connection is required, and there are no switches or settings. The unit has a simple plug and play installation requirement. 10 -------------------------------------------------------------------------------- Balanced Amplification This feature, plays a key role in ensuring that the product does not interfere with the macro network, and is a feature covered by the Company's patented technology. Receive and sent signals need automatic balance management in order for both directions of a communication channel to be improved. 5BARz™ products are not only smart about adapting amplification levels, but also about balancing amplification for incoming signals from the base station, and return signals from the mobile phone. This attribute is critical in that it ensures that the operation of the unit automatically avoids interference with the Macro Network. This automated process is a part of the 5BARz™ patented technology. Signal Stability 5BARz has done extensive design, testing, and re-design to avoid a number of problems experienced by the antenna design of alternatives. For example, booster products can experience oscillations when people, animals, or vehicles move nearby. These oscillations can weaken the booster effect or cause interference with other wireless devices. Many booster products achieve size similar to 5BARz™' products by putting antennas close together in the same product package, but don't optimize radio wave interactions between those antennas. This weakens the boosters' effectiveness, and is one reason why other manufacturers compensate by using too much wattage, in turn wasting power and increasing the probability of interfering with other radio frequency devices and the network. Integrated Antennae The Company has developed and patented technology which facilitates the integration of both the receive and transmit antenna into the single device, without creating a feedback loop. This represents a very significant technological advance permitting the unit to be a self contained plug and play consumer electronic. Broadband / Narrow band support The Company's products can provide amplification for bands from 5 to 60 Mhz. Smart signal processing The Company's product is also capable of "interference & echo" cancellation, in addition to automatic noise suppression. As a result, the signal that reached your cell phone is both better quality and a stronger signal. Self regulating intelligent power management The unit is designed to sense cellular signal strength and will automatically adjust amplification to optimum levels. Enhanced cell phone user experience The 5BARz unit covers an area of some 4,000 square feet, providing a much increased voice experience and increased data throughput. In addition, the cell phone handset can experience power savings up to 80%. Additional features · May be factory tuned for specific channel or frequency · Multi band 2G/3G support with 4G LTE coming soon · No back-haul (internet access) required · No latency 11 -------------------------------------------------------------------------------- Intellectual property Title Patent Application Patent Issued Cell Phone Signal Booster 11/625331 - US 8005513Dual Cancellation Loop Wireless Repeater 12/106468 - US Wireless repeater 13/214983 - US Wireless Repeater Management Systems 12/328076 - US Dual Loop Active and Passive Repeater Antenna Isolation Improvement 12/425615 - US 5BARz™ Trademark 78/866260 3819815 Multi-Band Wireless Repeater - CN 200980146487.1 Multi-Band Wireless Repeater - IN 2288/DELNP/2011 Multi-Band Wireless Repeater - KR (PCT) 10-2011-7009297 Multi-Band Wireless Repeater - MX MX/a/2011/002908 301028 Multi-Band Wireless Repeater - US 12/235313 8027636Remote Management of Network Extenders 61/943319 High Gain Wireless Repeaters 61/943145 Self Organizing Network Extenders 61/943797 12 -------------------------------------------------------------------------------- Comparative Analysis 5BARz Femtocell Traditional Repeaters • Carrier-specific box • Bi-directional • Plug and play that connects to the amplifier and external Options for solutions that internet through the antennas Installation Consumer significantly broadband service at the of antennas required improves wireless home and acts like a with minimum spacing service short-range network tower of 35 feet or more site between the antennas • Need to determine what the two pieces of equipment, cables, and multiple power cords • Simply place are for the unit where • Complex manual … there is some or • Connect the unit to your Determine the ideal marginal wireless broadband service where location for bothEasy to service, turn on your router is located and antennas, outdoor Understand the unit and the the voice only wireless network antenna and voice and data service should be improved indoor coverage wireless service throughout the home antenna, then is improved for determine ideal everyone location for the bi-directional amplifier for proper cable routing to the antennas • Equipment charge $250 • Equipment charge for each carrier, 2 carrier starting at $350 for • One-time house or SOHO equals $500 dual band Professional Cost equipment charge equipment charge Equipment installation starting only$299 5BARz won't work if you change at $200Higher Road Warrior carriers Possible monthly performance antennas fee Requires use of starting at $100 broadband service • Go on roof to measure signal level; • Plug 'n play No outdoor network adjustments One • Carrier-specific set up antenna placement Setup part works for all May require ISP support based on testing for 2 carriers Currently Voice Only bars or more signal strength Antennas need to be spaced 35 feet or more apart • Designed by engineers and brought to production by • Broadband vulnerable: managers trained Degraded broadband • External antennas in the Six Sigma throughput Power outage less reliableReliability quality process Depends on carrier Connectors Outdoor Self contained, down/power down on carrier mounting Oscillation fewest command Intermittent prone cables/connectors handoffs with macro network • Oscillation suppression circuitry • Needs to be collocated with broadband service GPS • ProfessionalInstallation • None; Plug 'n antenna may need to be installation play installed near a window recommended with a cable going to the femtocell 13 -------------------------------------------------------------------------------- Products and Markets To date the Company has introduced two products to market incorporating the 5BARz™ patented technology as follows; 5BARz Network Extender 5BARz Road Warrior Specifications: Specifications: System Gain: up to 70 dB Maximum input power: +20 dBm Physical dimensions: 140 X 100 X 41 mm Output power: 0.25 watt average /1 watt Weight: 300 Grams maximum Number of simultaneous users: 10 Service Antenna: Cigarette lighter/power Frequency bands supported: 2100, 850, cord antenna 900, 1700 Frequency Bands: Full-band US Cellular Modes: 3G/2G (Next version will and full-band US PCS support 4G) and 1800 System gain Cell/PCS: 40/45 dB, Power consumption: 5W self-optimizing EIRP (uplink): 25 dBm System noise figure: 5 dB nominal at EIRP (downlink): 10 dBm maximum gain Flatness: +- 0.5dB Power Supply: 12 VDC Noise figure: < 3.5 dB Power dissipation: 6 WattsOperating Temperature: 0 to 40 degrees Dimensions: 5.0" x 4.75" x 1.35" C Weight: 1 lb (0.45kg) External supply: 100 - 240 VAC Commercial Grade Hardware Complies with new FCC requirements for BBA sold in the USA after March 2014 Markets and marketing strategy The Company's primary entry point to markets is through collaborative arrangements with Cellular Network operators globally. That market is comprised of 6.8 billion cellular subscribers globally segregated by geographic region as follows; The Company has initially embarked upon a multi channel marketing strategy with initial emphasis in Latin America as a direct result of the very favorable factors and the stage of development of the cellular markets in South and Central America and Mexico, more fully addressed herein. During 2011 through 2013, the Company introduced the initial product, the Road Warrior, to major wireless operators in that region for the purpose of their analysis of the 5BARz™ technology. It is the objective of management, that the 5BARz™ products and technology be integrated into the network infrastructure of selected cellular network operators in the region. The intent is to work with cellular network operators in integrating the fixed cellular network extenders, designed for use in the home or office markets. This fixed unit was first unveiled to the market in February 2014 at the Mobile World Congress in Barcelona Spain. These efforts have resulted in the development of a collaborative program, the first with a major global network operator in June 2013 whereby the Company is presenting a unique product for exclusive use on that operators network. This collaborative program has expanded from it's inception to date with the Company building custom product for numerous geographic regions as well as the commencement of establishing collaborative arrangements with a greater number of network operators. 14 -------------------------------------------------------------------------------- The mobile cellular network extenders (Road Warrior's), which are not carrier specific are to be marketed through more conventional distribution channels. The Company commenced shipments of that unit with the shipment of an initial order of 1,000 units into Mexico in early 2014. In addition, it is the intent of management to design future applications of the Company's technology that will be integrated into the marketplace through the redesign of the products, working in collaboration with Original Equipment Manufacturer's (OEM's), such as with automobile manufacturers, computer manufacturers, mobile home manufacturers etc. The Company has been expanding its employee/consultant base in Latin America, Europe and the USA due to significant product interest. Further the Company has set a structure for the development of the German speaking market place in Europe, through a subsidiary operation 5BARz AG in Zurich Switzerland. The LATAM Market The Company has analyzed the fundamentals of the mobile phone market in the LATAM countries and has determined that to be a key point for market penetration for the 5BARz™ products for the following reasons; First, the mobile phone market has just gone through a very strong decade of growth in Latin America, with mobile subscriptions having overtaken fixed lines as the preferred method of communication. As a result Latin America's mobile telephone industry has a high degree of market penetration. Mobile subscriptions totaled 88.2% of the region's population, compared to 55.2% in Asia Pacific, 90.4% in North America and 50.6% in the Middle East and Africa. Having recently invested heavily in subscription development, the cellular network operators are now focusing upon the maintenance of their substantial customer base, and the 5BARz™ technology can contribute substantially to achieving that customer satisfaction. The mobile telephone industry in Latin America has benefited from generally opening up to competition. This provides a very fertile ground for the introduction of a technology such as 5BARz™ to secure customer retention through quality of service. The inherent geographical difficulties in laying fixed line infrastructure have encouraged a move to mobiles, but in addition, that geography, the Andean and Rainforest regions and expanses of rural areas again benefit from the 5BARz™ technology whereby weak cellular signal is amplified within the vicinity of the user. Further the LATAM countries are experiencing a renewed era of strong growth, reflecting reviving economic growth and improving income levels. This again is a favorable factor for the introduction of our products to meet the growing demands of consumers. In addition, the launch of 3G and mobile broadband services has increased demand for mobile subscriptions. Mobile broadband is particularly desirable in areas with no or limited access to cable internet services. Moving to mobiles offers consumers the benefits of on-the-move communications and advantageous introductory deals. Greater access to communications also helps to narrow regional divides. All of these factors are enhanced by the 5BARz™ experience. Internet usage is expanding since 2010, with broadband internet subscriptions generally growing by higher rates than mobile subscriptions Initial 3G market expansion is likely to be greater in the region's wealthier markets, such as Argentina, Chile and Mexico, and these have been specifically targeted by our Company with very favorable results. 15 -------------------------------------------------------------------------------- Number of subscribers • Brazil: 271 million • Mexico: 92.9 million • Argentina: 56.7 million • Colombia: 49.1 million • Venezuela: 27.9 million • Chile: 21 million • Other countries: 103 million • Total: 621 million The DACH MARKET - 5BARz AG The DACH/D-Deutschland or Germany, A-Austria and CH-Switzerland group of countries in the European Union represents one of the most technologically advanced and progressive sectors of that economic group representing a German speaking majority population base of 90.3 million people, comprised of Germany with 78.3 million, Austria, 7.4 million, and Switzerland, 4.6 million Formation of Subsidiary Company, 5BARz AG On November 10, 2011, 5BARz International Inc. commenced the organization under the laws of Switzerland, in the Canton of Zurich, a wholly owned subsidiary called 5BAR AG. In so doing the registrant acquired 5,100,000 shares, of the issued and outstanding stock of the newly incorporated Company. Aggregate proceeds paid for the shares were CHF 51,000 representing the fully paid price of CHF 0.01 per share. 5BARz AG simultaneously had approved and issued to an escrow agent 4,900,000 fully paid shares, at a price of CHF 0.01 per share for aggregate proceeds of CHF 49,000. Those shares are being held for resale, and are more fully described herein. The net proceeds received on re-sale will be paid into 5BARz AG as additional paid in capital. The newly formed subsidiary has appointed two directors, one of which, Mr. Daniel Bland is the President, CEO and a Director of the registrant. The other Director is Mr. Peter Burkhardt of Oberengstringen, Zurich, Switzerland. Engagement of BDC Investment AG: On October 15, 2011, 5BARz AG, entered into an agreement with BDC Investment AG., an independent investment Company in Oberengstringen, Zurich, Switzerland to act as agent for the Company for the sale of the 4,900,000 shares referred to above, on a best efforts basis. In addition to acting as agent for the 5BARz AG, BDC Investment AG will provide consulting services and will be responsible for corporate communications, for 5BARz AG in the European marketplace. Global Marketing and Distribution Agreement On October 19, 2011, 5BARz International Inc. entered into a Marketing and Distribution agreement with 5BARz AG (a perpetual license agreement), through which 5BARz AG holds the exclusive rights for the marketing and distribution of products produced under the 5BARz™ brand for markets in Switzerland, Austria and Germany. 16 -------------------------------------------------------------------------------- Results of Operations Three month period ended March 31, 2014 compared to three month period ended March 31, 2013. 3 Months ended 3 Months ended March 31 2014 March 31, 2013 Difference Amortization and depreciation $ 19,895 828 19,067 Bank charges & interest 14,440 24,560 (10,120 ) Sales and marketing expenses 201,701 47,626 154,075 Research & development 1,022,122 0 1,022,122 General and administrative 1,172,209 442,401 729,808 Total Operating Expenses 2,430,367 515,415 1,914,952 Other income (expenses) 2,616 28,898 (26,282 ) Net Income (Loss) $ (2,427,751) (486,517 ) (1,941,234 ) The three months ended March 31, 2014 reflects a net loss of $2,420,859 representing an increase in the loss of $1,987,505 compared to the corresponding three month period loss of $433,354 for the period ended March 31, 2013. The most significant portion of that operating expense increase is the $1,022,122 in research and development expenses, resulting from the Company's team of engineers and outside consultants, working in conjunction with our collaborative partner, building prototype units to be provided to cellular network operators for adoption by them as a part of their solutions for improved connectivity for their subscribers. The Company's Innovation Center in San Diego California is fully operational at this time and did not exist in the corresponding quarter of the prior fiscal year. This represents the operational center for the 5BARz research and development efforts. The General and Administrative expenses have also increased by $729,808 during the quarter ended March 31, 2014, comprised in the most part of consulting ($182,519) and investor relations ($393,204) expenses and stock based compensation of $193,121, related to the acceleration of financings underway in the Company and general expansion of the Company's operations. These fees reflect a growing group of individuals involved with the Company as it's growth begins to accelerate. The Company has incurred losses from operations, from inception, November 14, 2008 to March 31, 2014 in the aggregate amount of $8,949,882. On December 30, 2010 the Company changed from a designated shell Corporation to an operating business with the acquisition of the assets comprising the 5BARz business opportunity. The loss from operations of that business for the period January 1, 2011 to March 31, 2014 was $8,896,652, after giving effect to the loss as a shell Company of $53,230 comprised of general and administrative expenses. The Company's financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation. The company will require additional capital to meet its' long term operating requirements. The Company expects to continue to raise additional capital through a multi faceted strategy to include the further sale of equity securities, sales of equity securities by subsidiary Companies, and factoring facilities as the Company's sales progress. In November 2011 the Company engaged BDC Investment AG, from Zurich, Switzerland to raise equity capital for the Company through the sale of up to 49% of the Company's subsidiary, 5BArz AG, common stock. 5BARz AG was incorporated in Zurich Switzerland and engaged in the marketing and distribution of the 5BARz products in Switzerland, Germany and Austria. The financial results provided above also reflect the results of operations of CelLynx Group, Inc. (a Nevada Corporation) and its wholly owned subsidiary CelLynx, Inc. ( a California Corporation) since the date of acquisition March 30, 2012. 17 -------------------------------------------------------------------------------- The Company's net loss during the three month period ended March 31, 2014 was $2,420,859 or $0.015 per share compared to a loss from operations of $433,354 or $0.004 per share during the three months ended March 31, 2013. The weighted average number of shares outstanding was 160,178,422 for the three month period ended March 31, 2014 compared to 110,476,917 for three month period ended March 31, 2013. Liquidity and Capital Resources As at March 31, 2014 As at March 31, 2014, the reporting issuer's current assets were $613,715 and current liabilities were $2,010,448, which results in a working capital deficit of $1,396,733. As at March 31, 2014, current liabilities were comprised in the most part of liabilities that were incurred by CelLynx Group, Inc. in the aggregate amount of $1,150,662 of which $1,087,498 are liabilities incurred in the early stages of development of CelLynx, prior to the acquisition of the Company by 5BARz, and the liabilities are several years old. During the three months ended March 31, 2014 the Company completed private placements for cash of $1,544,900, and issued shares for services aggregating a further $387,500. As at March 31, 2014, the Company's total assets were $5,378,372 comprised of intellectual property in the amount of $3,402,367 and goodwill arising on the acquisition of CelLynx Group, Inc. in the amount of $1,140,246. The intellectual property represents the technology, patents and patent applications and trademark registrations and license related to the 5BARz technology by the combined entity. In addition the Company has deposits and prepaid expenses of $69,083 in Switzerland related to their office and operations in 5BARz AG. As at March 31, 2014, the Company's total liabilities were $2,097,472 comprised of current liabilities as described above. The decrease in liabilities as at March 31, 2014 from year ended December 31, 2013 of $35,681 was the result of a sharp decline in notes payable, in that the Company settled $105,939 in notes payable for cash. Stockholders' equity decreased from an equity at December 31, 2013 of $3,360,578 to an equity balance of $3,280,900 at March 31, 2014. This decrease of $79,678 is attributable in the most part to equity transactions during the period of $2,344,986 being offset by a loss during the three month period ended March 31, 2014 of $2,427,751. Cash Flows from Operating Activities For the three month period ended March 31, 2014, net cash flows used in operating activities was $1,482,753 consisting primarily of cash used for general and administrative expenses and research and development costs. Cash Flows from Investing Activities For the three month period ended March 31, 2014, net cash flows used in investing activities was $30,917 comprised of expenditures on furniture and equipment assets, for the Company's Innovation Center in San Diego, as well as $14,961 paid for the filing of additional patent applications. Cash Flows from Financing Activities The Company has financed operations primarily from the issuance of equity. For the three month period ended March 31, 2014, net cash flows provided from financing activities was $1,434,710 comprised of proceeds from the sale of common stock in the amount of $1,554,089 and the repayment of convertible notes in the amount of $105,939 and payment of principle amounts due under a capital lease of $13,440. We expect that working capital requirements will continue to be funded through further issuances of securities, from the sales of equity in future subsidiaries licensed to sell 5BARz product in foreign jurisdictions and from proceeds generated by sales, or through the leverage of these payments. 18 -------------------------------------------------------------------------------- Plan of Operation and Funding The Company has entered into a series of private placements over the past several quarters to finance operations. Existing working capital, further sales of equity securities, funding through the sale of equity securities from subsidiary operations and anticipated cash flow are expected to be adequate to fund our operations over the next twelve months. We have no bank financing arrangements. Generally, we have financed operations to date through the proceeds of the private placement of equity and debt and an increase in liabilities due from individuals and businesses that work with the Company. In connection with our business plan, management anticipates additional increases in operating expenses and capital expenditures relating to: (i) development and marketing of our product; and (ii) working capital. We intend to finance these expenses with further issuances of securities. Thereafter, we expect we will need to raise additional capital and generate revenues to meet long-term operating requirements. Additional issuances of equity or convertible debt securities will result in dilution to our current shareholders. Further, such securities might have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of prospective new business endeavors or opportunities, which could significantly and materially restrict our business operations. Material Commitments Prior to the date of this Quarterly Report, the Company had entered into a material commitment to CelLynx Group, Inc. to make available under the terms of a line of credit agreement $2.2 million dollars, expiring October 5, 2013. To March 31, 2014, the Company has provided funding to CelLynx Group of $2,659,628. On September 30, 2013 the Company agreed to extend the funding of CelLynx Group, Inc. under the terms of an amended Line of Credit Agreement. This is a subsidiary Company, and this funding will be paid when proceeds are available. The commitment to fund and debts provided under the line of credit agreement mature in the lesser of one year or when CelLynx earns sufficient royalty income to become self sustaining. On July 24, 2013 the Company entered into a lease agreement in San Diego for facilities, which commenced on October 1, 2013. Pursuant to the terms of that lease, the Company committed over a period of 39 months to minimum lease payments of $281,154. Purchase of Significant Equipment On November 1 2013, the Company entered into an agreement for the acquisition of R&D equipment for use by their engineering group in their innovation center in San Diego, in the amount of $180,000 paid over three years. Off-Balance Sheet Arrangements As of the date of this Quarterly Report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Going Concern In our Annual Report on Form 10-K for the year ended December 31, 2013, our independent auditors included an explanatory paragraph in its report relating to our financial statements for the years ended December 31, 2013 and 2012, which states that we have incurred negative cash flows from operations since inception, and expect to incur additional losses in the future and have a substantial accumulated deficit. These conditions give rise to substantial doubt about our ability to continue as a going concern. Our ability to expand operations and generate additional revenue and our ability to obtain additional funding will determine our ability to continue as a going concern. Our condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. We have prepared our financial statements assuming that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business 19 -------------------------------------------------------------------------------- Recent accounting pronouncements In July 2012, the FASB issued ASU 2012-02, "Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment." This ASU simplifies how entities test indefinite-lived intangible assets for impairment which improve consistency in impairment testing requirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in the previously issued standards. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, early adoption is permitted. The adoption of this guidance did not have a material effect on the condensed consolidated financial statements. FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of September 30, 2013 that will become effective in subsequent periods; however, management does not believe that any of those updates would have significantly affected our financial accounting measures or disclosures had they been in effect during 2013 or 2012, and it does not believe that any of those pronouncements will have a significant impact on our consolidated financial statements at the time they become effective. Critical Accounting Policies and Estimates Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. Intangible assets Acquired patented and unpatented technology, licensing rights and trademarks are capitalized at their acquisition cost or fair value. The legal costs, patent registration fees, and models and drawings required for filing patent applications are capitalized if they relate to commercially viable technologies. Commercially viable technologies are those technologies that are projected to generate future positive cash flows in the near term. Legal costs associated with applications that are not determined to be commercially viable are expensed as incurred. All research and development costs incurred in developing the patentable idea are expensed as incurred. Legal fees from the costs incurred in successful defense to the extent of an evident increase in the value of the patents are capitalized. Capitalized costs for patents are amortized on a straight-line basis over the remaining twenty-year legal life of each patent after the costs have been incurred. Once each patent or trademark is issued, capitalized costs are amortized on a straight-line basis over a period not to exceed 20 years and 10 years, respectively. All research and development costs incurred in developing the patentable idea are expensed as incurred. The licensing right is amortized on a straight-line basis over a period of 10 years Goodwill Generally accepted accounting principles in the United States require the Company to perform a goodwill impairment test annually and more frequently when negative conditions or a triggering event arise. After an assessment of certain qualitative factors, if it is determined to be more likely than not that the fair value of a reporting unit is less than its carrying amount, entities must perform the quantitative analysis of the goodwill impairment test. Foreign currency translation Transactions in foreign currencies have been translated into US dollars using the temporal method. The functional currency of the Company's subsidiary 5BARz AG, is its local currency (Swiss Franc - CHF). Under this method, monetary assets and liabilities are translated at the year-end exchange rate. Non-monetary assets have been translated at the historical rate of exchange prevailing at the date of the transaction. Expenses have been translated at the exchange rate at the time of the transaction. Realized and unrealized foreign exchange gains and losses are included in operations. 20 -------------------------------------------------------------------------------- Impairment or disposal of long-lived assets The Company applies the provisions of Accounting Standards Codification ("ASC") Topic 360, "Property, Plant, and Equipment," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal. Accounting for Derivatives The Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, "Derivatives and Hedging". The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income (expense). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liability at the fair value of the instrument on the reclassification date. |