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30DC, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------------------------------------------(Edgar Glimpses Via Acquire Media NewsEdge) THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO AND THE OTHER FINANCIAL INFORMATION INCLUDED ELSEWHERE IN THIS REPORT. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD LOOKING STATEMENTS AS A RESULT OF ANY NUMBER OF FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" ON PAGE 10 AND ELSEWHERE IN THIS REPORT. OVERVIEW 30DC offers internet marketing services and related training that help Internet companies in marketing and operating their businesses. 30DC's core business platforms are the MagCast Publishing Platform ("MagCast") and Market Pro Max. Other revenue streams include sales of instructional courses and from commissions on third party products sold via introduction to the 30DC customer base of active online participants and subscribers which are referred to as affiliate marketing commissions. The Company's assets consist primarily of property and equipment, goodwill and internally developed intangible property such as domain names, websites, customer lists and copyrights. In May of 2012 the Company signed a joint venture agreement ("JV Agreement") with Netbloo Media, Ltd. ("Netbloo") for the MagCast which was jointly developed. MagCast provides customers access to a cloud-based service to create an application ("App") to publish a digital magazine on the digital distribution platforms Apple Newsstand and Google Play and includes executive training modules to develop and market a digital magazine. MagCast was launched in May 2012 and a majority of sales were the result of affiliate marketing relationships which result in commission of 50% of gross revenue for those sales to the affiliate responsible for the sale. In October 2012 the Company reached an agreement to purchase Netbloo's 50% interest in the MagCast JV Agreement and Market Pro Max an online marketing platform that allows anyone to create digital products and quickly build a variety of eCommerce marketing websites for a purchase price of 13,487,363 shares of the Company's common stock. Effective February 28, 2014, the Company divested assets and liabilities that made up the Immediate Edge, which had been the Company's primary subscription program, to Raine Ventures, LLC ("Raine") in exchange for the 10,560,000 common shares of the Company which Raine had held. The Company expects future growth to come from new products which are developed internally or through joint venture arrangements. There can be no assurance new products will be developed and if developed there can be no assurance that new products will produce significant revenue. -19-During the year ended June 30, 2014, the Company released new versions of existing products, developed new products and continued to identify potential others. In July 2014, the Company released MagCast version 6 which among other new features allows customers to publish their digital magazines on Google Play which enables them to reach users of Android devices in addition to users of Apple iPads and iPhones. In April 2014, the Company began offering access to an Internet marketing forum on a subscription basis and is looking to build additional recurring revenue streams. The Company has no plans at this time for purchases or sales of fixed assets which would occur in the next twelve months. The Company has no expectation or anticipation of significant changes in number of employees in the next twelve months. LIQUIDITY AND CAPITAL RESOURCES The Company had a cash balance of $186,414 at June 30, 2014 and the Company had a working capital deficit of $1,550,503. For the year ended June 30, 2014, the Company generated sufficient cash from operations to fund current year operating and administrative expenses. The Company made some debt service payments and settled a number of outstanding payables by issuing common shares of the Company. However, the Company had not generated consistent profits and has significant outstanding liabilities. Until the Company achieves sustained profitability it does not have sufficient capital to meet its needs and continues to seek loans or equity placements to cover such cash needs. The Company expects increased revenue from further sales of MagCast Publishing Platform through its Digital Publishing Blueprint training course and by marketing to customers outside its historical customer base with the goal of recurring revenue through annual licenses. The Company also expects increased revenue from further sales of Market Pro Max through its Ultimate Product System training course and introduction of new products some of which will be extensions of existing product lines. Additionally, the Company intends to increase funds available by raising capital, though at this time the Company has not commenced any offerings and cannot guarantee that they will be successful in its capital raising efforts. If the results of operations and capital raised, if any, are not sufficient to fund the company's expenses as they come due, the Company will defer amounts due to related parties and to the extent possible utilize shares of the Company to satisfy its liabilities. Included in liabilities of discontinued operations at June 30, 2014 is $61,050 notes payable plus related accrued interest that are in default for lack of repayment by their due date. During the year ended June 30, 2014, operating activities provided the Company with $110,067. During the year ended June 30, 2013, the Company used $988,778 in operating activities. The increase of $1,098,045 in funds provided from operating activities was due to a number of factors. For the year ended June 30, 2014 the Company had net income of $58,918 compared to a loss of $407,642 during the year ended June 30, 2013. During the year ended June 30, 2014, the Company had an increase in accrued expenses and refunds of $257,813 while during the year ended June 30, 2013 the Company had a decrease in accrued expenses and refunds of $820,102 which was due to a large balance in accrued affiliate commissions at the beginning of that year. During the year ended June 30, 2014 deferred revenue increased by 103,441 due to the introduction of a new Done For You service which is sold as an additional service for MagCast customers while during the year ended June 30, 2013 deferred revenue decreased by $218,239 which was primarily due to the discontinuation of the Company's historic mentoring program. Offsetting factors include $93,513 in forgiveness of debt income during the year ended June 30, 2014 which is non-cash income and pay down of $179,493 in accounts payable during the year ended June 30, 2014 compared to $42,580 during the year ended June 30, 2013. -20-During the years ended June 30, 2014 and June 30, 2013 no funds were provided by or used for financing activities. During the year ended June 30, 2014 the Company used $112,020 for discontinued operations which included payments to creditors of approximately $59,000 compared to the year ended June 30, 2013 when discontinued operations provided $86,408 which was primarily due to sale of $105,000 in marketable securities which had been held by Infinity prior to the 30DC share transaction. GOING CONCERN The consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern which assumes that the Company will realize its assets and discharge its liabilities in the ordinary course of business. As of June 30, 2014 the Company had a working capital deficit of approximately $1,550,500 and had accumulated losses of approximately $3,084,500. The Company's ability to continue as a going concern is dependent upon its ability to obtain the necessary financing or to earn profits from its business operations to meet its obligations and pay its liabilities arising from normal business operations when they come due. In the past few years, the Company switched its focus to developing its own products. In May 2012, the Company launched MagCast which the Company expects to be an integral part of its businesses on an ongoing basis. MagCast is being sold directly to customers and through an affiliate network which expands the Company's selling capability and has a broad target market beyond the Company's traditional customer base. In April of 2014, the Company began offering the Ultimate Product System which incorporates 30DC's digital marketing platform Market Pro Max. Until the Company achieves sustained profitability it does not have sufficient capital to meet its needs and continues to seek loans or equity placements to cover such cash needs. No commitments to provide additional funds have been made and there can be no assurance that any additional funds will be available to cover expenses as they may be incurred. If the Company is unable to raise additional capital or encounters unforeseen circumstances, it may be required to take additional measures to conserve liquidity, which could include, but not necessarily be limited to, issuance of additional shares of the Company's stock to settle operating liabilities which would dilute existing shareholders, curtailing its operations, suspending the pursuit of its business plan and controlling overhead expenses. The Company cannot provide any assurance that new financing will be available to it on commercially acceptable terms, if at all. These conditions raise substantial doubt about the Company's ability to continue as a going concern. RESULTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2014 COMPARED TO THE YEAR ENDED JUNE 30, 2013 During the year ended June 30, 2014, the Company recognized revenues of $2,795,633 from its operations compared to $1,467,817 during the year ended June 30, 2013. Revenues of the Company were from the following sources during the year ended June 30, 2014 compared to June 30, 2013. Year Ended Year Ended Increase or June 30, 2014 June 30, 2013 (Decrease) ----------------- ----------------- ------------------ Revenue Commissions $ 79,594 $ 251,106 $ (171,152) Subscription Revenue 25,794 16,121 9,673 Products and Services 2,689,885 940,506 1,749,379 Seminars and Mentoring - 260,084 (260,084) ----------------- ----------------- ------------------ Total Revenues $ 2,795,633 $ 1,467,817 $ 1,327,816 ----------------- ----------------- ------------------ -21- The Company has made a strategic decision to be more product and less services focused. While profitable, the Company's historic mentoring program was labor intensive and the Company did not believe this could be scaled much further. Commission revenue is opportunistic based upon product promotions by third parties the Company has a relationship with. During the year ended June 30, 2013, approximately 70% of affiliate commissions were earned from one third party whose products were sold to the Company's customers which produced commissions at a much lower level during the year ended June 30, 2014 which was responsible for majority of the decrease of $171,152 in commission income. The $1,749,379 increase in products and services revenue was primarily due to the timing of the re-launch promotion of the MagCast Publishing Platform in August 2013 which had sales exceeding $1.5 million. The prior MagCast launch was in June 2012 just before the start of the year ended June 30, 2013 and there was no launch in that year. The $260,084 decrease in seminars and mentoring income resulted primarily from the phase out of the Company's historic mentoring program at the end of December 2012. The Company discontinued its historical mentoring program as of December 31, 2012 to redirect Company resources toward products and services sales growth which management believes has more potential for long-term growth than mentoring which is labor intensive and does have the ability to leverage and scale. During the year ended June 30, 2014, the Company incurred $2,843,828 in operational expenses compared to $2,036,404 during the year ended June 30, 2013. Operational expenses during the years ended June 30, 2014 and 2013, include the following categories: Year Ended Year Ended Increase or June 30, 2014 June 30, 2013 Decrease ------------- ------------- ------------- Accounting Fees $ 107,612 $ 129,785 $ (22,173) Credit Card Processing Fees 128,339 33,497 94,842 Commissions 754,866 208,858 546,008 Independent Contractors 480,307 313,756 166,551 Depreciation and Amortization 80,745 67,280 13,465 Directors Fees 143,618 76,814 66,804 Internet Expenses 39,991 31,595 8,396 Legal Fees 46,346 53,832 (7,486) Officer's Salaries 233,619 276,814 (43,195) Related Party Contractors 654,653 684,909 (30,256) Telephone and Data Lines 37,109 57,276 (20,167) Travel & Entertainment 56,603 32,214 24,389 Other Operating Expenses 80,020 69,774 10,246 ------------- ------------- ------------- Total Operating Expenses $ 2,843,828 $ 2,036,404 $ 807,424 ============= ============= ============= The decrease of $22,173 in accounting fees was due to an increase in fees due to multiple filings during the year ended June 30, 2013 which included a late filing. The $94,842 increase in credit card processing fees is due to the $1,749,379 increase in products and services revenue. Credit card processing fees vary based upon the card used by a customer and are higher for sales to customers outside the United States. The $546,008 increase in commissions is due to the $1,749,379 increase in products and services revenue. Commissions are paid to affiliates for sales referrals which led directly to a sale. -22-The increase of $166,551 in independent contractors is primarily due to the approximately $43,000 increased cost for contractors for maintenance and support of the MagCast Publishing Platform, approximately $13,000 cost for an affiliate manager who was contracted to help with the affiliate program related to the MagCast promotional relaunch, approximately $29,000 for a contractor who helped during the annual offering of the free Challenge program and additional development projects, $72,000 for Clinton Carey, former Chief Operating Officer of the Company who is helping shape sales strategy to extend marketing of MagCast outside the Company's traditional customer base, approximately $6,000 for investor relations costs and $10,000 for an analysis by a strategic marketing consultant offset by approximately $6,000 for a contractor who helped during the free Challenge program during the year ended June 30, 2013 who was not contracted during the year ended June 30, 2014. The increase of $13,465 in depreciation and amortization is due to a $22,000 increase in amortization of intangible assets from the asset acquisition in October 2012 offset by a decrease in depreciation of approximately $9,000 due to the end of depreciable life for some of the Company's fixed assets. The increase of $66,804 in directors' fees is due to $110,000 in director fees which resulted from the Company's board September 2013 approval of directors' fees for non-executive directors in the total amount of $110,000 per year, offset by a decrease from $76,814 to $33,618 in the amount of expense related to stock options previously issued to Henry Pinskier, a director and chairman of the Company which is being amortized on a straight-line basis over the vesting period. The decrease of $43,195 in officer's salaries results from a decrease of $76,814 to $33,619 in the amount of expense related to stock options previously issued to Theodore A. Greenberg, chief financial officer and a director of the Company which is being amortized on a straight-line basis over the vesting period. Related Party Contractor Fees consist of payments to Marillion Partnership under the contract for services which includes managing marketing and development for the Company and providing the services of Edward Dale as 30DC's Chief Executive Officer, the consulting contract with GHL Group, Ltd. whose President, Gregory H. Laborde is a Director of the Company and a services contract with Netbloo Media, Ltd. which was the joint developer of the MagCast Publishing Platform. The $30,256 net decrease results primarily from a $40,000 one-time bonus awarded to the Marillion Partnership upon completion of the asset acquisition which included the remaining 50% of the MagCast Publishing Platform during in the year ended June 30, 2013, approximately $44,000 less paid the Marillion Partnership which resulted from a change in the AU/USD exchange rate and approximately $21,000 decrease in the amount paid to GHL, Group, Ltd. which was due to $45,000 in stock issued to GHL during the year ended June 30, 2013 offset by additional cash payments to GHL of approximately $24,000 and $75,000 additional paid Netbloo which started in October 2012. The $20,167 decrease in telephone and date lines expense is primarily due to a decrease in the contracted amount with Telstra AU. Travel and Entertainment increased by $24,389 due to a company-wide group meeting and travel to an investor conference, both in November 2013 offset by a number of trips by Edward Dale during the year ended June 30, 2013 to present and sell MagCast at conferences sponsored by affiliates. During the year ended June 30, 2014, the Company recognized net income from continuing operations of $45,318 compared to a net loss of $555,126 during the year ended June 30, 2013. The increase of $600,444 was primarily the result of the $1,327,816 increase in revenues offset by the $807,424 increase in operational expenses during the period shown above. -23-CRITICAL ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS GOODWILL AND INTANGIBLE ASSETS The Company accounts for goodwill and intangible assets in accordance with ASC 350 "Intangibles-Goodwill and Other" ("ASC 350"). ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. The Company completed an evaluation of goodwill at June 30, 2014 and determined that there was no impairment. Goodwill represents the excess of the purchase price over the fair value of net assets acquired in the Company's share exchange with Infinity which occurred on September 10, 2010 and the excess of the purchase price over the fair value of net assets acquired in the Company's purchase of Netbloo's 50% interest in the MagCast JV Agreement and Market Pro Max on October 24, 2012. Goodwill associated with the Immediate Edge business was one of the assets divested on February 28, 2014. Since the Company is one reporting unit for goodwill purposes, ASC 350-20-40, which requires a calculation of the relative fair values of the disposed business and retained business, was followed to determine the amount of goodwill allocated to the Immediate Edge. ASC 350 requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification of reporting units; assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions or the occurrence of one or more confirming events in future periods could cause the actual results or outcomes to materially differ from such estimates and could also affect the determination of fair value and/or goodwill impairment at future reporting dates. REVENUE RECOGNITION The Company generally applies revenue recognition principles in accordance with ASC 605, "Revenue Recognition". Accordingly, revenue is generally recognized when persuasive evidence of an agreement exists, services have been rendered or product delivery has occurred, the selling price to the customer is fixed or determinable and collectability is reasonably assured. The Company generates revenues in four categories, (i) commissions, (ii) seminars and mentoring (iii) subscriptions and (iv) products and services. Commissions are all affiliate marketing commissions generated when a customer is referred to a third-party via the Internet and the customer makes a purchase, which is paid for at the time of purchase. Revenue from commissions is recognized when the customer purchase is made from the third-party. Seminars and mentoring are educational in nature. Seminars are live events held in different cities throughout the world where customers will pay a fee to attend what is typically a three-day event. Seminar fees are paid in advance and classified as deferred revenue until the seminar is held. Mentoring services are offered over a period of time, typically a one-year period. Fees for mentoring are paid in advance and mentoring revenue is recognized ratably over the period of service. The Company chose to discontinue its historical mentoring program with the final mentoring students completing the program in December 2012. Subscription revenue is primarily from monthly online subscriptions for information on Internet marketing. All subscriptions are paid in advance and subscription revenue is -24- recognized ratably over the term of the subscription. Products and services revenues are from sales of online educational courses and productivity tools which customers use in their Internet marketing businesses. Revenue from products and services is recognized in accordance with the specific guidance for recognizing software revenue, where applicable, the Company recognizes revenue from perpetual software licenses at the inception of the license term, assuming all revenue recognition criteria have been met. Term-based software license revenue is recognized on a subscription basis over the term of the license entitlement. The Company recognizes revenue for software hosting or software-as-a-service (SaaS) arrangements as the service is delivered, generally on a straight-line basis, over the contractual period of performance. In software hosting arrangements where software licenses are sold, the associated software revenue is recognized according to whether perpetual licenses or term licenses are sold, subject to the above guidance. In SaaS arrangements where software licenses are not sold, the entire arrangement is recognized on a subscription basis over the term of the arrangement. Deferred revenue consists of the unearned portion of subscription payments, seminar fees and mentoring revenue as of the financial statement date. Pursuant to ASC 808-10, the JV Agreement with Netbloo was classified as a collaborative arrangement. The Company was deemed to be the principal participant and recorded all transactions under the JV Agreement on a gross basis. The JV Agreement ended when 30DC acquired the remaining 50% in October 2012 and there was no longer a collaborative arrangement. DISCONTINUED OPERATIONS The Company accounts for discontinued operations in accordance with the provisions of ASC 205-20-45-1. The Company has included two businesses in discontinued operations; the Immediate Edge business which was divested effective February 28, 2014 (see note 3) and the business of Infinity which was discontinued after the share exchange with 30DC DE on September 10, 2010. EQUITY-BASED PAYMENTS The Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC 505-50, "Equity-Based Payments to Non-Employees", which requires that such equity instruments are recorded at their fair value on the measurement date, with the measurement of such compensation being subject to periodic adjustment as the underlying equity instruments vest. The Company account for equity instruments issued to employees in accordance with ASC 718 "Stock Compensation". Under this guidance, stock compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the estimated service period (generally the vesting period) on the straight-line attribute method. FOREIGN CURRENCY TRANSLATION AND REMEASUREMENT The functional currency of the Company's 30 Day Challenge division switched to the United States dollar from the Australian dollar on July 1, 2012. All other Company operations have and continue to use the United States dollar as their functional currency. For all accounting periods prior to July 1, 2012, the Company followed ASC 830 "Foreign Currency Matters", under which functional currency assets and liabilities are translated into the reporting currency, US Dollars, using period end rates of exchange and the related translation adjustments are recorded as a separate component of accumulated other comprehensive income. Functional statements of operations amounts expressed in functional currencies are translated using average exchange rates for the respective periods. Re-measurement adjustments and gains or losses resulting from foreign currency transactions are recorded as foreign exchange gains or losses in the Statement of Operations. The historical foreign currency translation loss remains on the Balance Sheet at $(102,858) which was the balance at June 30, 2012. -25- FORGIVENESS OF DEBT The company has settled some debts for cash and/or payment in stock for less than the full amount due to the creditor. The Company records the difference between the amount that was owed and the amount which was paid as other income. During the year ended June 30, 2014, the Company settled three amounts owed to vendors from prior years for a total amount of $93,513 less than the full amount owed. During the year ended June 30, 2013, the Company settled two amounts owed to vendors from prior years for a total amount of $13,461 less than the full amount owed. During the year ended June 30, 2014, discontinued operations includes $796 for the amount a note payable was settled for less than the amount due, inclusive of accrued interest. |