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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) Overview YesDTC is a direct-to-consumer venture marketing company specializing in the creation of innovative, high quality direct-response-television (DRTV) and internet marketing programs to reach a broad based consumer audience of domestic and international customers. The Company brings a unique set of skills to the business of successful consumer product marketing. Specifically, YesDTC was established to provide financing for DRTV and internet based marketing campaigns; develop and produce the creative content of these media ads by the Company's team of experts; and arrange all aspects of advertisement broadcasting, including interfacing with media buyers. 17 --------------------------------------------------------------------------------Characteristics of our Revenues and Expenses We began generating revenues in July 2010 with the launch of our first product. We marketed three products in 2010 through our network and are actively pursuing other products. Sales and marketing expenses primarily consist of the costs of our marketing initiatives and business development expenses. General and administrative expenses include costs attributable to corporate overhead and the overall support of our operations. Our primary costs include charges related to common stock and options to purchase common stock issued for services and recognized as compensation, accounting, legal and other professional services, and other general operating expenses. Market Information We operate in one segment which is the business of direct-to-consumer services. Although we provide services in multiple markets, these operations have been aggregated into one reportable segment based on the similar economic characteristics among all markets, including the nature of the services provided and the type of customers purchasing such services. As we were formed on November 13, 2009 and had minimal operational activity in 2009 there is no substantive comparative period for purposes of this analysis, however, the following discusses the comparison of the operational results for the years ended December 31, 2010 and 2009. Year Ended December 31, 2010 Compared to Year Ended December 31, 2009 Revenues and Cost of Revenues. We began marketing and selling our products in July 2010 and eventually marketed a total of three products during the year which resulted in revenues of approximately $198,000. While we are in the formation stage of our business, we had begun to lay the groundwork for future initiatives and expect additional products in 2011. We had no revenues or cost of revenues for the year ended December 31, 2009. Sales and Marketing. Sales and marketing expenses for the year ended December 31, 2010 totaled approximately $539,000 as compared to approximately $59,000 for the year ended December 31, 2009. These costs primarily related to the cost of custom designed direct-to-consumer marketing campaigns. For the year ended December 31, 2010, approximately $73,000 of the total expenses were to a company controlled by Jon Schulberg, a director of the Company, as compared to $48,000 for the year ended December 31, 2009. General and Administrative. General and administrative expenses for the year ended December 31, 2010 totaled approximately $2.1 million as compared to approximately $16,000 for the year ended December 31, 2009. These costs were principally related to costs associated with legal and consulting services as well as approximately $1.7 million related to the recognition stock compensation expense due to the issuance of stock and options to purchase common stock to service providers. Approximately $61,500 of these expenses was paid to a director for consulting services rendered. Interest Expense. Interest expense for the year ended December 31, 2010 totaled approximately $120,000 as compared to approximately $6,000 for the year ended December 31, 2009. These costs primarily related to the amortization of amounts recognized as debt discounts from the issuance of warrants as part of a financing, interest on the face amount of notes, and amortization of debt issue costs including interest due on short term notes sold to our CEO. Change in fair value of embedded conversion option. Change in fair value of the embedded conversion option for the year ended December 31, 2010 totaled other income of approximately $4.1 million as compared to an expense of approximately $5.0 million for the year ended December 31, 2009. These costs relate to the recognition of changes in the fair value of the embedded conversion option derivative liability of the convertible debt which was sold as part of a financing. Change in fair value of warrant liability. Change in fair value of warrant liability for the year ended December 31, 2010 totaled other income of approximately $4.4 million as compared to an expense of approximately $4.8 million for the year ended December 31, 2009. These costs relate to the recognition of changes in the fair value of the warrant derivative liability issued as part of a financing. 18 --------------------------------------------------------------------------------Liquidity and Capital Resources We have historically met our liquidity and capital requirements primarily through the public sale and private placement of equity securities and debt financing. At December 31, 2010, cash and cash equivalents totaled approximately $14,000. Net Cash Used in Operating Activities. Net cash used in operating activities for the year ended December 31, 2010 totaled approximately $907,000 as compared to approximately $160,000 for the year ended December 31, 2009. The use of cash was primarily related to the acquisition of inventory for sale in our distribution network, the accumulation of accounts receivable from sales of the Wordsmart product and the prepayment of royalties for the Wordsmart product offset by accrued liabilities. Net Cash Provided By/Used in Investing Activities. We did not use cash in investing activities for the year ended December 31, 2010 or 2009. Net Cash Provided By Financing Activities. Net cash provided by financing activities for the year ended December 31, 2010 totaled approximately $473,000 as compared to approximately $608,000 for the year ended December 31, 2009. The cash provided was the result of the sale of common stock through a PIPE financing and the sale short term notes to our CEO which resulted in net proceeds of approximately $233,000 and $240,000, respectively. Working Capital. As of December 31, 2010, we had working capital deficit of approximately $2.0 million including approximately $2.0 million of liabilities related to derivative liabilities. Based on our current operating activities and plans, we believe our existing working capital will enable us to meet our anticipated cash requirements for at least the next twelve months. Senior Convertible Debentures In December 2009, we sold $200,000 of senior convertible debentures. These debentures do not require periodic interest payments but do bear an interest rate of 5% per annum and mature on December 11, 2011. Holders of the debentures received five-year warrants to purchase an aggregate of 50,000,000 shares of common stock at an exercise price of $0.10 per share. Subsequent to December 31, 2010, the holders of $76,000 of the notes converted them into 19,000,000 common shares including our CEO who converted his $40,000 convertible note to 10,000,000 common shares. Under the terms of the notes, we were required to file a registration statement to register the shares of common stock underlying the notes and the warrants no later than 180 days from the closing of the offering and to have such registration statement declared effective no later than 365 days from the closing of the offering. We have not filed the required registration statement and as a result (i) the exercise price of the warrants has been reduced to $0.05 per share and (ii) each subscriber is entitled to liquidated damages equal to 1% of the aggregate purchase price paid by such subscriber for the notes and warrants for each month that the Company does not file the registration statement or cause it to be declared effective. At December 31, 2010, we have recorded a charge of $12,000 related to accrual of the liquidated damages due to the holders. Short term loans - related party From September through December 2010, we entered into a series of unsecured promissory notes with our CEO whereby he loaned the Company a total of $285,000. The loans bear an interest rate of 10% and are due generally ninety days from their issuance date. In November and December, the company repaid a principal amount of $45,000 related to these loans. All of these notes were converted to common stock in a series of conversions in January and March 2011. Impact of Inflation, Changing Prices and Economic Conditions Pricing for many products and services have historically decreased over time due to the effect of product and process improvements and enhancements. In addition, economic conditions can affect the buying patterns of customers. During 2009, the impact of the long economic recession caused many of our prospective customers to either delay their buying decisions. In addition, general pricing levels for consumer-to-direct services declined modestly during the year. We believe that certain customers may increase their purchase of products and services when economic conditions improve. 19 --------------------------------------------------------------------------------Critical Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses. Critical accounting policies are those that require the application of management's most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, we utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming our estimates and judgments, giving appropriate consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to other companies in our industry. We believe that of our significant accounting policies, the following may involve a higher degree of judgment and estimation, or are fundamentally important to our business. Revenue Recognition. The Company recognizes revenue, net of actual and estimated returns, from sales to customers when the all of the components of the sale have been completed including the shipment of the item and in some cases the receipt of cash. For certain products, the Company believes that collection is not probable until it receives the cash associated with an order at which point it recognizes the revenue associated with the corresponding sale. The Company applies the revenue recognition principles set forth in ASC 605 which provides for revenue to be recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price is fixed or determinable, and (iv) collectability is reasonably assured. Stock Based Awards. With our formation in 2009, we implemented ASC 718-10 which requires the fair value of all stock-based employee compensation awarded to employees and service providers to be recorded as an expense over the related vesting period. The statement also requires the recognition of compensation expense for the fair value of any unvested stock option and warrant awards outstanding at the date of adoption. Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements, financings, or other relationships with unconsolidated entities known as ''Special Purposes Entities.'' Recent Accounting Pronouncements In February 2010, the FASB issued Accounting Standards Update ("ASU") 2010-09, "Subsequent Events (Topic 855) - Amendments to Certain Recognition and Disclosure Requirements." ASC 2010-09 requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement that an SEC filer disclose the date through which subsequent events have been evaluated. ASC 2010-09 was effective upon issuance. The adoption of this standard had no effect on our consolidated financial position or results of operations. Disclosures have been modified to reflect the new requirements. The FASB has issued ASU 2010-29, "Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations." This amendment affects any public entity as defined by Topic 805, Business Combinations that enters into business combinations that are material on an individual or aggregate basis. The comparative financial statements should present and disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this standard is not expected to have a material impact on our consolidated financial position and results of operations. In December 2010 the FASB issued ASU 2010-28, "Intangibles - Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts." ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts by requiring an entity to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. This update will be effective for fiscal years beginning after December 15, 2010. The adoption of this standard is not expected to have a material impact on our consolidated financial position and results of operations. 20 --------------------------------------------------------------------------------In October 2009, the FASB issued an accounting standard that amended the rules on revenue recognition for multiple-deliverable revenue arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (i) vendor-specific objective evidence; (ii) third-party evidence; or (iii) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and also requires expanded disclosures. This standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of this standard is not expected to have any impact on our financial position and results of operations. |