UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission file number 000-54190
YESDTC HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Nevada (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | |
300 Beale Street, Suite 613 San Francisco, CA (Address of principal executive offices) | | 94105 (Zip Code) |
Registrant’s telephone number, including area code (925) 922-2560
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.0001 per share
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ |
| Non-accelerated filer | ¨ | Smaller reporting company | x |
| (Do not check if a smaller reporting company) | | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
As of May 19, 2011, there were 141,300,000 shares of Common Stock, par value $0.0001 per share, outstanding.
YESDTC HOLDINGS, INC.
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| Part I | FINANCIAL INFORMATION | |
| Item 1. | Financial Statements. | |
| | Condensed Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010 | 3 |
| | Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 (Unaudited) | 4 |
| | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011and 2010 (Unaudited) | 5 |
| | Notes to Unaudited Condensed Consolidated Financial Statements | 6 |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 20 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk. | 23 |
| Item 4. | Controls and Procedures. | 23 |
| Part II | OTHER INFORMATION | |
| Item 1. | Legal Proceedings | 24 |
| Item 1A. | Risk Factors | 24 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 24 |
| Item 3. | Defaults Upon Senior Securities | 24 |
| Item 4. | (Removed and Reserved) | 24 |
| Item 5. | Other Information | 24 |
| Item 6. | Exhibits | 24 |
| | Signatures | 25 |
YESDTC HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | | |
| Assets | | March 31, 2011 | | | December 31, 2010 | |
| Current Assets | | Unaudited | | | | |
| Cash and cash equivalents | | $ | 20,803 | | | $ | 14,224 | |
| Accounts receivable | | | 370,912 | | | | 37,471 | |
| Inventory | | | 14,498 | | | | 68,287 | |
| Prepaid expenses | | | 357,800 | | | | 298,295 | |
Total Current Assets | | | 764,013 | | | | 418,277 | |
| | | | | | | | | |
| Debt issue costs, net | | | 2,025 | | | | 4,492 | |
| Total Assets | | $ | 766,038 | | | $ | 422,769 | |
| | | | | | | | | |
| Liabilities and Stockholders’ Deficit | | | | | | | | |
| | | | | | | | | |
| Current Liabilities | | | | | | | | |
| Reserve for sales returns | | $ | 22,351 | | | $ | 4,342 | |
| Accrued expenses | | | 124,787 | | | | 92,888 | |
| Accounts payable, related party | | | 30,000 | | | | 15,000 | |
| Short term notes payable | | | 180,000 | | | | -- | |
| Short term convertible notes payable and put premium, net of discount of $22,643 | | | 38,832 | | | | -- | |
| Short term loans- related party | | | 13,500 | | | | 240,000 | |
| Warrant liability | | | 717,880 | | | | 1,041,200 | |
| Embedded conversion option liability | | | 655,000 | | | | 950,000 | |
Senior secured convertible notes, net of debt discount of $43,055 and $75,555 at March 31, 2011 and December 31, 2010, respectively | | | 80,945 | | | | 84,445 | |
Senior secured convertible notes due to related parties, net of debt discount of $18,889 at December 31, 2010 | | | -- | | | | 21,111 | |
Total Current Liabilities | | | 1,863,295 | | | | 2,448,986 | |
| | | | | | | | | |
| Commitments and Contingencies (Note 13) | | | | | | | | |
| | | | | | | | | |
| Stockholders' deficit | | | | | | | | |
Series A convertible preferred stock, par value $0.0001; 100,000,000 shares authorized; 42,400 issuable at March 31, 2011 and none outstanding at December 31, 2010 | | | 212,000 | | | | -- | |
Common stock, par value $0.0001; 900,000,000 shares authorized; 141,300,000 and 139,800,000 issued and outstanding at March 31, 2011 and December 31, 2010, respectively | | | 14,130 | | | | 14,130 | |
Common stock issuable, par value $0.0001; 67,934,816 shares at March 31, 2011 and 27,662,353 shares at December 31, 2010, respectively | | | 6,794 | | | | 2,767 | |
| Additional paid-in-capital | | | 3,126,092 | | | | 2,174,182 | |
| Accumulated deficit | | | (4,456,273 | ) | | | (4,200,629 | ) |
Total Stockholders' Deficit | | | (1,097,257 | ) | | | (2,026,217 | ) |
| Total Liabilities and Stockholders' Deficit | | $ | 766,038 | | | $ | 422,769 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
YESDTC HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | | | |
| | | Three Months ended March 31, | |
| | | 2011 | | | 2010 | |
| | | | | | | |
| Sales | | $ | 449,996 | | | $ | -- | |
| Cost of sales | | $ | 109,128 | | | $ | -- | |
| Gross margin | | $ | 340,868 | | | $ | -- | |
| | | | | | | | | |
| Operating Expenses: | | | | | | | | |
| Sales and marketing | | | 340,350 | | | | 66,812 | |
| General and administrative | | | 814,979 | | | | 329,814 | |
| Total Operating Expenses | | | 1,155,329 | | | | 396,626 | |
| | | | | | | | | |
| Operating Loss | | | (814,461 | ) | | | (396,626 | ) |
| | | | | | | | | |
| Other income/(expense) | | | | | | | | |
| | | | | | | | | |
| Interest expense | | | (59,503 | ) | | | (28,691 | ) |
Change in fair value of embedded conversion option liability | | | 295,000 | | | | (1,500,000 | ) |
| Change in fair value of warrant liability | | | 323,320 | | | | (1,644,000 | ) |
| Total Other Income/(Expense) | | | 558,817 | | | | (3,172,691 | ) |
| | | | | | | | | |
| | | | | | | | | |
| Net Loss | | $ | (255,644 | ) | | $ | (3,569,317 | ) |
Net loss per common share – basic and diluted | | $ | (0.00 | ) | | $ | (0.03 | ) |
Weighted average common shares outstanding – basic and diluted | | | 188,404,969 | | | | 141,590,574 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
YESDTC HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | Three Months ended March 31, | |
| | | 2011 | | | 2010 | |
| Cash Flows From Operating Activities | | | | | | |
| Net loss | | $ | (255,644 | ) | | $ | (3,569,317 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Amortization of offering costs from the issuance of convertible notes | | | 2,467 | | | | 1,225 | |
| Amortization of debt discount from the issuance of convertible notes | | | 52,721 | | | | 25,000 | |
| Amortization of common stock warrants to a related party | | | 230,488 | | | | -- | |
| Amortization of common stock options issued for services | | | 200,000 | | | | 200,000 | |
| Amortization of stock based prepaid assets | | | 115,495 | | | | 69,167 | |
| Issuance of common stock in exchange for services | | | 15,000 | | | | -- | |
| Contributed services | | | 12,500 | | | | -- | |
| Contributed services related to prior issuance of common stock to founders | | | -- | | | | 8,900 | |
| Change in fair value of embedded conversion option liability | | | (295,000 | ) | | | 1,500,000 | |
| Change in fair value of warrant liability | | | (323,320 | ) | | | 1,644,000 | |
| | | | | | | | | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (333,441 | ) | | | -- | |
| Inventory | | | 53,789 | | | | -- | |
| Prepaid expenses | | | (175,000 | ) | | | 7,500 | |
| Reserve for sales returns | | | 18,009 | | | | -- | |
| Accrued expenses | | | 44,848 | | | | (56,127 | ) |
| Accounts payable, related party | | | 15,000 | | | | (25,641 | ) |
| Total Adjustments | | | (366,444 | ) | | | 3,374,024 | |
| Net Cash Used In Operating Activities | | | (622,088 | ) | | | (195,293 | ) |
| | | | | | | | | |
| Cash Flows From Investing Activities | | | | | | | | |
| Net Cash Provided By (Used In) Investing Activities | | | -- | | | | -- | |
| | | | | | | | | |
| Cash Flows From Financing Activities | | | | | | | | |
| Proceeds from sale of short term notes, related party | | | 213,000 | | | | -- | |
| Proceeds from sale of series A convertible preferred stock | | | 212,000 | | | | -- | |
| Proceeds from sale of short term notes | | | 180,000 | | | | -- | |
| Proceeds from sale of short term convertible notes | | | 37,500 | | | | -- | |
| Subscriptions received from the sale of common stock | | | 16,667 | | | | -- | |
| Repayments of short term notes, related party | | | (30,500 | ) | | | -- | |
| Net Cash Provided by Financing Activities | | | 628,667 | | | | -- | |
| | | | | | | | | |
| Net Increase/(Decrease) In Cash and Cash Equivalents | | | 6,579 | | | | (195,293 | ) |
| Cash and Cash Equivalents – Beginning of period | | | 14,224 | | | | 447,626 | |
| Cash and Cash Equivalents – End of Period | | $ | 20,803 | | | $ | 252,333 | |
| Supplemental Disclosures of Cash Flow Information | | | | | | |
| Cash paid during the period for: | | | | | | |
| Interest | | $ | -- | | | $ | -- | |
| Income taxes | | $ | -- | | | $ | -- | |
Non-cash investing and financing activities: | | | | | | | | |
| Conversion short term notes, related party to common stock | | $ | 417,497 | | | $ | -- | |
| Conversion of senior secured convertible notes to common stock | | $ | 37,950 | | | $ | -- | |
| Conversion of senior secured convertible notes, related party to common stock | | $ | 42,500 | | | $ | -- | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
YESDTC HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
Note 1. Organization and Nature of Business
YESDTC Holdings, Inc. (referred to as “YESDTC”, the “Company’’, “we”, “our” or “us”) was initially formed as YesDTC, Inc. a Delaware corporation on November 13, 2009. We subsequently recapitalized on December 11, 2009 through a reverse merger and recapitalization with PR Complete Holdings, Inc. (“PR” or the “Company”) with YesDTC, Inc. as the surviving subsidiary of PR. (see Note 8). PR was founded as an unincorporated business in September 2006 and incorporated under the laws of the State of Nevada on May 22, 2008, and subsequently became a public shell company, as defined by the Securities and Exchange Commission (“SEC”). The name of PR was changed to YesDTC Holdings, Inc. prior to the merger.
We are a direct-to-consumer global marketer and distributor of consumer goods and products. 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. We are in the business of identifying, marketing, selling and distributing consumer goods and household items directly to consumers via DRTV and internet media outlets, including high-quality television infomercials. 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.
Note 2. Summary of Significant Accounting Policies and Basis of Presentation
Going concern: As reflected in the accompanying unaudited consolidated financial statements, the Company has a net loss of $255,644, and net cash used in operations of $622,087 for the three months ended March 31, 2011. Additionally, as of March 31, 2011 the Company had a working capital deficit, stockholders’ deficit and an accumulated deficit of $1,099,282, $1,097,257 and $4,456,273. These matters raise substantial doubt about our ability to continue as a going concern. Our unaudited consolidated financial statements do not include any adjustments to reflect the possible effects on recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern.
Historically, we have financed our working capital and capital expenditure requirements primarily from long-term notes and sales of common stock. Although we have a working capital deficit of $1,099,282 at March 31, 2011, a majority of the working capital deficit results from the derivative liabilities and we believe that with our ability to raise additional funds, we have sufficient funds and have future cash flows to continue in operation at least through the end of 2011. While we expect to invest in our product strategy, we believe that based on our current cash and working capital position, our existing borrowing capacity and the expected growth in our business, we will be able to execute our business plan successfully and continue operations through December 2011. The forecast that our financial resources will last through that period is a forward-looking statement that involves significant risks and uncertainties. It is reasonably possible that should we require additional financing, we will not be able to obtain it to continue operations. Furthermore, any additional equity or convertible debt financing will be dilutive to existing shareholders and may involve preferential rights over common shareholders. Debt financing, with or without equity conversion features, may involve restrictive covenants. We may seek additional equity and/or debt financing to sustain our growth strategy although as of the date of these consolidated financial statements, our financial projections do not indicate that our existing operations and our expected growth plans will require us to.
Our business plan is based on our ability to generate future revenues from the sale of products which we expect to be able to market and sell through our distribution channels. However, the time required for us to become profitable from operations is highly uncertain, and we cannot assure you that we will achieve or sustain operating profitability or generate sufficient cash flow to meet our planned capital expenditures, working capital and debt service requirements.
YESDTC HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and with the rules and regulations of the U.S Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results for the periods shown. The results of operations for the periods presented are not necessarily indicative of the results expected for the full fiscal year or for any future period. The information included in these unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis and Plan of Operation contained in this report and the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
Use of Estimates: The preparation of the unaudited consolidated 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. Actual results could differ from those estimates. Significant estimates in the accompanying unaudited consolidated financial statements include valuation of inventories, valuation of discounts on debt, valuation of the liabilities for derivative instruments, valuation of equity based instruments issued for other than cash, estimates of the reserve for sales returns, and the valuation allowance for deferred tax assets.
Principles of Consolidation: The unaudited consolidated financial statements include the accounts of YesDTC Holdings, Inc. and its subsidiary. All significant inter-company balances and transactions have been eliminated in the consolidation.
Concentration of Credit Risk: Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. At March 31, 2011 and December 31, 2010, we had no cash deposits that exceeded federally insured limits.
Inventories: Inventories consist of finished goods and are recorded at lower of cost or market, determined on a first-in-first out basis.
Fair value of financial instruments and fair value measurements: We measure our financial and non-financial assets and liabilities in accordance with generally accepted accounting principles. For certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, the carrying amounts approximate fair value due to their short maturities. Amounts recorded for notes payable, net of discount, also approximate fair value because current interest rates available to us for debt with similar terms and maturities are substantially the same.
Upon inception, we adopted accounting guidance for financial and non-financial assets and liabilities. The adoption did not have a material impact on our results of operations, financial position or liquidity. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
YESDTC HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
Financial Assets and Liabilities: We currently measure and report at fair value liabilities for price adjustable warrants and price adjustable embedded conversion options in convertible debt. The fair value liabilities for price adjustable warrants and embedded conversion options has been recorded as determined utilizing the Black-Scholes option pricing model. The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010:
| | | Balance at March 31, 2011 | | | Quoted priced in active markets for identical assets | | | Significant other observable inputs | | | Significant unobservable inputs | |
| | | | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| Liabilities: | | | | | | | | | | | | |
| Fair value liability for warrant liabilities | | $ | 717,880 | | | $ | - | | | $ | - | | | $ | 717,880 | |
| Fair value liability for embedded conversion options | | | 655,000 | | | | - | | | | - | | | | 655,000 | |
| Total financial liabilities | | $ | 1,372,880 | | | $ | - | | | $ | - | | | $ | 1,372,880 | |
| | | Balance at December 31, 2010 | | | Quoted priced in active markets for identical assets | | | Significant other observable inputs | | | Significant unobservable inputs | |
| | | | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | |
| Fair value liability for warrant liabilities | | $ | 1,041,200 | | | $ | - | | | $ | - | | | $ | 1,041,200 | |
| Fair value liability for embedded conversion options | | | 950,000 | | | | - | | | | - | | | | 950,000 | |
| Total financial liabilities | | $ | 1,991,200 | | | $ | - | | | $ | - | | | $ | 1,991,200 | |
| | | | | | | | | | | | | | | | | |
Following is activity through March 31, 2011 from inception (November 13, 2009) of the fair value measurements using significant unobservable Level 3 inputs:
| Balance at November 13, 2009 (Inception) | | $ | - | |
| Change in fair value of derivative liability charged to other expense | | $ | 10,480,000 | |
| Ending balance at December 31, 2009 | | $ | 10,480,000 | |
| Change in fair value of derivative liability recorded as other income | | | (8,488,800 | ) |
| Ending balance at December 31, 2010 | | $ | 1,991,200 | |
| Change in fair value of derivative liability recorded as other income | | | (618,320 | ) |
| Ending balance at March 31, 2011 | | $ | 1,372,880 | |
| | | | | |
YESDTC HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
Non-Financial Assets and Liabilities: We currently have no non-financial assets and liabilities recorded at fair value.
Segment Information: The FASB has established standards for reporting information on operating segments of an enterprise in interim and annual financial statements. The Company operates in one segment which is the business of direct-to-consumer services. The Company’s chief operating decision-maker reviews the Company’s operating results on an aggregate basis and manages the Company’s operations as a single operating segment.
Revenue Recognition: The Company recognizes revenue, net of actual and estimated returns, from sales to customers when 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.
Basic and Diluted Net Income/(Loss) Per Share: Basic net loss per share is computed on the basis of the weighted average number of common shares outstanding during each year. Diluted net loss per share is computed on the basis of the weighted average number of common shares and common stock equivalents outstanding. Common stock equivalents having an anti-dilutive effect on diluted net income (loss) per share are excluded from the calculation.
At March 31, 2011 and December 31, 2010 the following common stock equivalents were outstanding, all of which were excluded from the computation of diluted net earnings per share since the effect was anti-dilutive and which may dilute future earnings per share:
| | | March 31, 2011 | | | December 31, 2010 | |
| Series A convertible preferred stock | | | 42,400,000 | | | | -- | |
| Options for common stock | | | 27,000,000 | | | | 27,000,000 | |
| Warrants for common stock | | | 87,365,669 | | | | 54,800,000 | |
| Convertible debt (1) | | | 31,000,000 | | | | 50,000,000 | |
| Total | | | 187,765,669 | | | | 131,800,000 | |
| | | | | | | | | |
| (1) | Excludes the convertible debt sold to an investor in March 2011 as the conversion price, under the terms of the note cannot be reasonable known. However, if price per share outstanding at March 31, 2011 ($0.015) were used and after the application of the 39% discount to that price, the notes would be convertible into approximately 4.1 million common shares. |
Reclassifications. Certain accounts in the prior year consolidated financial statements have been reclassified for comparative purposes to conform to the presentation in the current year consolidated financial statements. These reclassifications have no effect on the previously reported net loss.
Recent Accounting Pronouncements:
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.
YESDTC HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
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.
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.
Note 3. Accounts receivable
The Company’s accounts receivable is comprised of:
| | | March 31, 2011 | | | December 31, 2010 | |
| Trade receivables | | $ | 370,912 | | | $ | 37,471 | |
| Total | | $ | 370,912 | | | $ | 37,471 | |
Bad debt expense for the periods ended March 31, 2011 and 2010 was $0 and $0, respectively.
Note 4. Inventory
The Company’s inventory is comprised of:
| | | March 31, 2011 | | | December 31, 2010 | |
| Inventory held for resale | | $ | 14,498 | | | $ | 68,287 | |
| Total | | $ | 14,498 | | | $ | 68,287 | |
At December 31, 2010, the Company recorded a write-down of inventory of $150,000 due to obsolescence. Refer to Note 14 for additional disclosure regarding certain minimum annual purchases related to inventory held for resale.
Note 5. Prepaid expenses
The Company’s prepaid expenses are comprised of:
| | | March 31, 2011 | | | December 31, 2010 | |
| Prepaid royalties | | $ | 200,000 | | | $ | 25,000 | |
| Stock compensation expense, net of amortization | | | 157,800 | | | | 273,295 | |
| Total | | $ | 357,800 | | | $ | 298,295 | |
Note 6. Accrued Expenses
Accrued expenses consist of the following:
| | | March 31, 2011 | | | December 31, 2010 | |
| | | | | | | |
| Professional fees | | $ | 61,507 | | | $ | 14,459 | |
| Product royalties | | | 22,186 | | | | 1,656 | |
| Accrued liquidated damages | | | 18,000 | | | | 12,000 | |
| Accrued Interest | | | 7,068 | | | | 15,702 | |
| Website related expenses | | | 5,526 | | | | 23,731 | |
| Rent | | | -- | | | | 14,840 | |
| Other | | | 10,500 | | | | 10,500 | |
| Total | | $ | 124,787 | | | $ | 92,888 | |
YESDTC HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
Note 7. Short Term Loans – Related Party
At March 31, 2011 and December 31, 2010, the Company’s has loans due to its President and Chief Executive Officer (“CEO”) as follows of:
| | | March 31, 2011 | | | December 31, 2010 | |
| Short term loans | | $ | 13,500 | | | $ | 240,000 | |
| Total | | $ | 13,500 | | | $ | 240,000 | |
From September 2010 through March 2011, we entered into a series of unsecured promissory notes with our CEO whereby he loaned the Company a total of $498,000. The loans bear an interest rate of 10% and are generally due ninety days from their issuance date. In November and December 2010 and in January through March 2011, the company repaid a principal amount of $45,000 and $30,500, respectively, related to these loans and converted a total amount of $409,000 in 2011 as discussed below.
On March 14, 2011, Mr. Noel converted $97,000 of his 2010 promissory notes and $20,000 of his 2011 promissory notes at $0.015 per share which resulted in Mr. Noel being issued 7,800,000 common shares. Mr. Noel waived repayment of approximately $3,010 of accrued but unpaid interest which was recognized as a gain in contributed capital. Mr. Noel was also issued warrants to purchase an aggregate of 7,800,000 shares of the Company’s common stock at an exercise price of $0.015 per share for a term of 3 years. The Company recognized approximately $115,000 associated with the issuance of the warrants in the three months ended March 31, 2011. The warrants to purchase common stock granted to Mr. Noel were valued using the Black-Scholes valuation model with the following assumptions: volatility of 270% based on a historical volatility analysis, expected term of 1.5 years was computed using the simplified method based on the option term, zero expected dividends, and risk free interest rate of 1.24%.
On March 7, 2011, Mr. Noel converted $118,000 of his 2011 promissory notes at a rate of $0.0254 to 4,645,669 common shares. Mr. Noel waived repayment of approximately $828 of accrued but unpaid interest which was recognized as a gain in contributed capital. In connection with the conversion of the promissory notes, Mr. Noel was also issued warrants to purchase an aggregate of 4,645,669 shares of the Company’s common stock at an exercise price of $0.0254 per share for a term of 3 years. The Company recognized approximately $116,000 associated with the issuance of the warrants in the three months ended March 31, 2011. The warrants to purchase common stock granted to Mr. Noel were valued using the Black-Scholes valuation model with the following assumptions: volatility of 270% based on a historical volatility analysis, expected term of 1.5 years was computed using the simplified method based on the option term, zero expected dividends, and risk free interest rate of 1.24%.
On January 7, 2011, Mr. Noel converted a total of $174,000 of 2010 promissory notes together with accrued but unpaid interest of $4,656 into an aggregate of 7,114,613 shares of the Company’s common stock at a conversion rate of $0.02511 which was equal to the quoted market price on the January 7, 2011.
Note 8. Senior Secured Convertible Notes
In December 2009, the Company issued 5% senior secured convertible promissory notes due December 2011 having an aggregate principal amount of $200,000 and five-year warrants exercisable into 50,000,000 shares of our common stock at an exercise price of $0.10 per share. The notes are convertible into 50,000,000 shares of our common stock. The notes are secured by a security interest in substantially all assets of the Company, pursuant to a security agreement. All of the shares of common stock underlying the notes and warrants are subject to a registration rights agreement under which we are obligated to file a registration statement covering such shares within 180 days of the closing date of the financing and to use our best efforts to cause such registration statement to be declared effective within 365 days of the closing date. Holders of our securities issued in the financing also have the right to seek “piggyback” registration of their shares in certain circumstances. Mr. Noel, our President and Chief Executive Officer purchased $40,000 of the notes convertible into 10,000,000 common shares and warrants are exercisable into 10,000,000 shares of our common stock at an exercise price of $0.10 per share under the same terms and conditions as our other investors.
YESDTC HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
On various dates in January, February and March 2011, holders of $76,000 of senior secured convertible notes , including our CEO who converted his entire note in the principal amount of $40,000, dated December 19, 2009 converted the notes into an aggregate of 20,115,500 million shares of the Company’s common stock. The notes were converted at a rate of $0.004 per share as described in the note agreements. The Company recognized as interest expense $35,889 of capitalized debt discount initially capitalized upon their issuance in 2009 as part of the recognition of the conversion of these notes in the three months ending March 31, 2011.
Pursuant to the terms of the notes, the subscribers have the right, so long as the notes are not fully repaid, to convert the notes into shares of the Company’s common stock at a conversion price of $0.004 per share, as may be adjusted. The notes contain anti-dilution provisions, including but not limited to if the Company issues shares of its common stock at less than the then existing conversion price, the conversion price of the Bridge Notes will automatically be reduced to such lower price. The notes contain limitations on conversion, including the limitation that the holder may not convert its note to the extent that upon conversion the holder, together with its affiliates, would own in excess of 4.99% of the Company’s outstanding shares of common stock (subject to an increase upon at least 61-days’ notice by the subscriber to the Company of up to 9.99%).
The warrants contain anti-dilution provisions, including but not limited to if the Company issues shares of its common stock at less than the then existing conversion price, the conversion price of the warrants will automatically be reduced to such lower price. The warrants contain limitations on exercise, including the limitation that the holders may not convert their warrants to the extent that upon exercise the holder, together with its affiliates, would own in excess of 4.99% of the Company’s outstanding shares of common stock (subject to an increase upon at least 61-days’ notice by the subscriber to the Company of up to 9.99%).
The warrants may be exercised on a “cashless” basis commencing 12 months after their issuance, only with respect to underlying shares not included for unrestricted public resale in an effective registration statement on the date notice of exercise is given by the holder.
Pursuant to the terms of the subscription agreement, the Company agreed to file a registration statement covering the resale of 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. If the Company does not timely file the registration statement or cause it to be declared effective by the required dates, then: (i) the exercise price of the warrants is reduced to $0.05 per share and (ii) each subscriber shall be 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.
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 March 31, 2011 and 2010, we have recorded a charge of $18,000 and $0, respectively, related to accrual of the liquidated damages due to the holders.
The Company also granted the subscribers, until the later of one year from the closing or so long as the notes are outstanding, a right of first refusal in connection with future sales by the Company of its common stock or other securities or equity linked debt obligations, except in connection with certain circumstances.
Due to the price protection feature of the convertible note embedded conversion option and the warrants issued with the notes, both the embedded conversion options and warrants were determined to be derivative liabilities to be bifurcated and reflected at fair value on the accompanying consolidated balance sheet. (see Note 10) The fair value liability of the warrants was $5,000,000 and was allocated $200,000 to debt discount and $4,800,000 to other expense.�� The entire $5,000,000 fair value of the embedded conversion options was charged to other expense. Prior to the conversions noted above, the debt discount was being amortized to interest expense over the two-year debt term. Interest expense totaled approximately $15,500 and $25,000 for the three months ended March 31, 2011 and, 2010, respectively.
In connection with the notes, the Company incurred placement agent fees totaling $9,800. These financing costs are recorded as an other asset, debt issue costs and are being amortized ratably through December 2011.
YESDTC HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
Note 9. Short Term Convertible Notes Payable
In March 2011, the Company issued 8% convertible promissory notes due December 12, 2011 having an aggregate principal amount of $37,500. The notes are convertible into shares of our common stock based on a discount to the conversion date average trading price of our common stock after applying a 39% discount. The notes are not eligible to be converted until 180 days from the date of the note or approximately September 10, 2011.
The notes contain anti-dilution provisions, including but not limited to if the Company issues shares of its common stock at less than the then existing conversion price, the conversion price of the notes will automatically be reduced to such lower price. The notes contain limitations on conversion, including the limitation that the holder may not convert its note to the extent that upon conversion the holder, together with its affiliates, would own in excess of 4.99% of the Company’s outstanding shares of common stock (subject to an increase upon at least 61-days’ notice by the subscriber to the Company of up to 9.99%).
The Company also granted the subscribers, as long as the notes are outstanding, a right of first refusal in connection with future sales by the Company of convertible securities or other securities or equity linked debt obligations, except in connection with certain circumstances.
Due to the variable conversion price feature of the convertible note, it was determined to be a stock settled note and we recorded a put premium and offsetting debt discount of $23,975 which we recorded as a component on the loan balance on the accompanying consolidated balance sheet. The debt discount will be charged to interest expense over six months which is equal to the conversion lockout period of the note and accordingly the note will be accreted to its total stock settled liability of $61,475. As of March 31, 2011, the Company has recognized $1,332 of the discount as interest expense.
In connection with the notes, the Company incurred legal fees totaling $2,500 which were recorded as an expense in the three months ended March 31, 2011.
Note 10. Derivative Liabilities
In June 2008, the FASB issued an accounting standard related to the accounting for derivative financial instruments indexed to a company’s own stock. Under this standard, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The conversion feature of the Company’s notes, warrants issued with the notes, and warrants issued in the private placement of common stock and for services (see Notes 8 and 11) do not have fixed settlement provisions because their conversion and exercise prices, respectively, may be lowered if the Company issues securities at lower prices in the future. The Company was required to include the reset provisions in order to protect the note holders from the potential dilution associated with future financings. In accordance with this standard, the conversion feature of the notes was separated from the host contract, the notes, and recognized as an embedded derivative instrument. Both the conversion feature of the notes and the warrants have been re-characterized as derivative liabilities. The fair value of these liabilities are re-measured at the end of every reporting period with the change in value reported in the statement of operations as other expense or income. The derivative liabilities were initially valued in 2009 on the issuance dates using the Black-Scholes option pricing model and the following assumptions:
| | | December 31, 2009 | |
Debenture conversion feature: | | | |
| Risk-free interest rate | | | 1.38 | % |
| Expected volatility | | | 1,042 | % |
| Expected life (in years) | | | 2 | |
| Expected dividend Yield | | | - | |
| | | | | |
| Warrants: | | | | |
| Risk-free interest rate | | | 1.38 | % |
| Expected volatility | | | 1,042 | % |
| Expected life (in years) | | | 5 | |
| Expected dividend Yield | | | - | |
| | | | | |
| Fair value at issuance date: | | | | |
| Debenture embedded conversion feature | | $ | 5,000,000 | |
| Warrants | | $ | 5,480,000 | |
YESDTC HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
The risk-free interest rate was based on rates established by the Federal Reserve. The Company based expected volatility on the historical and current volatility for its common stock. The expected life of the Debentures’ conversion option was based on the maturity of the Debentures and the expected life of the warrants was based on their full contractual term. The expected dividend yield was based upon the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the future.
The warrants issued with the private placement and for services were recorded as equity as part of the cash sale and then the fair value ($450,000 ad $30,000, respectively) was immediately reclassified to liabilities. Due to the high volatility assumptions used in the Black-Scholes computation, there was no change in fair value of the derivative liabilities from the issuance date through December 31, 2009.
During the three months ended March 31, 2011 and 2010 the change in fair value of the embedded conversion option liability and warrant liability was $295,000, $323,320, ($1,500,000) and ($1,644,000), respectively, reflected as other income in the accompanying consolidated unaudited financial statements.
The derivative liabilities were valued as at March 31, 2011 using the following assumptions under the Black-Scholes model:
| | | March 31, 2011 | |
| | | | |
| Warrants: | | | |
| Risk-free interest rate | | | 1.24 | % |
| Expected volatility | | | 270 | % |
| Expected life (in years) | | | 1.5 | |
| Expected dividend Yield | | | - | |
| | | | | |
Note 11. Capital Stock, Stock Options, and Contributed Capital
Issuance of Series A Convertible Preferred Stock
The Company is authorized to issue 100,000,000 shares of preferred stock at a par value of $0.0001.
In January 2011, the Company designated Series A Convertible Preferred Stock. The Series A is convertible into 1,000 shares of common stock for each Series A share, has a liquidation preference at $5.00 per share stated value over any other classes of capital stock, votes on an as converted basis and accrues dividends at a rate of 10% of stated value of shares outstanding whether or not declared by the Board. A holder of Series A may not convert if upon such conversion the holder, together with its affiliates, would own in excess of 4.99% of the Company’s outstanding shares of common stock (subject to an increase upon at least 61-days’ notice by the subscriber to the Company of up to 9.99%).
On January 11, 2011, the Company completed an offering of Series A Convertible Preferred Stock to two investors one of which is our CEO’s brother, Mark Noel. The two investors purchased 42,400 preferred shares for an aggregate purchase price of $212,000 or $0.20 per preferred share. The preferred shares are convertible into 42,400,000 shares of our common stock $0.0001 par value. As part of the offering the investors were also issued 20,120,000 warrants with an exercise price of $0.05, subject to reduction as described in the offering documents. The warrants shall be exercisable until three (3) years after their issue date.
Common Stock
The Company is authorized to issue 900,000,000 shares of common stock at a par value of $0.0001. The holders of common stock are entitled to one vote per share. The holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the board of directors out of legally available funds. Upon liquidation, dissolution or winding-up, the holders of the Company’s common stock are entitled to share ratably in all assets that are legally available for distribution. The holders of the Company’s common stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of the Company’s common stock are subject to, and may be adversely affected by, the rights of the holders of any series of preferred stock, which may be designated solely by action of the board of directors and issued in the future.
YESDTC HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
Sale of Common Stock for Cash
On December 27, 2010, the Company entered into a subscription agreement with two accredited investors pursuant to which the Company issued and sold an aggregate of 2,500,000 shares of the Company’s common stock for proceeds of $50,000, or $0.02 per share.
On November 19, 2010, the Company entered into a subscription agreement with one accredited investor pursuant to which the Company issued and sold 2,500,000 shares of the Company’s common stock for proceeds of $50,000, or $0.02 per share.
On November 17, 2010, the Company entered into a subscription agreement with one accredited investor pursuant to which the Company issued and sold 7,500,000 shares of the Company’s common stock for proceeds of $150,000, or $0.02 per share.
Sale of Common Stock in Exchange for Services
Investor services agreements
In September and November 2010, we entered into agreements with five separate service providers to provide a variety of investor related services over periods ranging from six to twelve months. The resulting agreements required us to issue 13 million restricted common shares which we valued at $316,450. The shares vest ratably over the service periods. The shares value was recorded as a prepaid asset. The agreements are terminable by either party with various notice periods. The Company will recognize the expense of $316,450 associated with the grants over the contract periods. The expense was determined using the fair value of the common stock on the day of the grant ranging from $0.021 to $0.0315. For the three months ended March 31, 2011 and 2010, we recognized approximately $108,000 and $0 related to these grants.
Marketing agreement
In February 2010, the Company entered into an agreement to purchase certain direct response advertising services from a vendor for product campaigns focused on the United States and certain international locations. In exchange for the services to be provided, the Company agreed to pay the vendor:
1) An initial set up fee of $40,000 paid in full as of March 31, 2010.
2) 500,000 common shares which vest monthly for 12 months beginning February 1, 2010.
3) Monthly fees of $5,000 in cash and the equivalent of $5,000 in fully vested common shares.
As of March 31, 2011, the Company has fully recognized the expense of approximately $85,000 associated with the 500,000 share grant. The monthly $5,000 of stock-based expense is recognized as the related shares become due, all other costs associated with the agreement as expensed as they are incurred. The expense for the 500,000 shares was determined using the $0.17 per share closing stock price on the day of the grant which was the contract date of February 11, 2010. Since the inception of this agreement, the Company has become obligated to issue 2,262,034 common shares (599,681 shares in 2011), respectively, to the vendor as payment of the $5,000 monthly stock-based fees. For the three months ended March 31, 2011 and 2010, we recognized approximately $22,000 and $24,000 of expense, respectively, related to these grants.
Consulting agreement with our CFO
In January 2010, our CFO, when he joined the Company, signed a one-year consulting agreement, to perform accounting related services, which includes monthly payments of $5,000 and allows the CFO to purchase 1,500,000 restricted common shares at a price of $0.0001. The shares vest ratably over two years. The agreement is terminable by either the Company or our CFO with 10 days notice. The Company recognized the expense of $150,000 associated with the grant over the contract period through December 2010. The expense was determined using the fair value of the common stock on the day of the grant which was equivalent to the $0.10 per share price paid by investors in the PIPE transaction concluded in December 2009 which was last sale of common shares to a third party.
YESDTC HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
Common Stock Issued for Conversion of Debt
In 2001 holders of $76,000 of senior secured convertible notes , including our CEO who converted his entire note in the principal amount of $40,000, dated December 19, 2009 converted the notes and $4,450 of related accrued interest into an aggregate of 20,115,500 million shares of the Company’s common stock. (see Note 8)
In 2001 our CEO converted $409,000 of his short term loan and $8,497 of related accrued interest into 19,560,282 common shares as more fully described in Note 7.
Contributed Capital
Upon formation through the period ended December 31, 2010, the Company’s Chief Executive Officer has not taken a salary or other benefits. From inception through the period ended December 31, 2009, the value of these amounts was determined to be de minimis. For the 2011 fiscal year, we have valued these services at $50,000 and recorded them as compensation expense on a quarterly basis and $12,500 was recorded as of March 31, 2011. Management believes its estimate of the value of services provided by the CEO is reasonable.
Common Stock Options Issued in Exchange for Services
Compensation to the Board of Directors
In September 2010, for services rendered, the Board of Directors approved the issuance of 2 million options to purchase our common stock exercisable at $0.02 per share which were immediately vested to each of our five outside directors which resulted in a total of 10 million options to purchase our common stock to be issued. The Company recognized the expense of approximately $299,000 associated with the options in the period they were issued. The options to purchase common stock granted to the vendor were valued using the Black-Scholes valuation model with the following assumptions: volatility of 253% based on a historical volatility analysis, expected term of 5 years based on the option term, zero expected dividends, and risk free interest rate of 0.74%.
Direct Response Marketing Services Agreement with a Related Party
In January 2010, the Company entered into an agreement with Mr. Jon Schulberg, a member of the board of directors, to provide direct response advertising and marketing services. The agreement provides that Mr. Schulberg and his company Schulberg Media Works will perform certain agency creation production and management services. In exchange for the services, Mr. Schulberg will receive 10 million options to purchase our common stock exercisable at $0.07 per share. The options will vest quarterly beginning June 30, 2010 and became fully vested as of March 31, 2011. In addition to the options, Mr. Schulberg invoices the Company for services performed with an agreed upon discount of 20%. Mr. Schulberg is also be entitled to a 3% royalty fee on campaigns and product launches which Mr. Schulberg or his company produces and manages, to date no such commissions have been earned. Had the Company achieved $8 million in revenue for 2010, we would have been obligated to issue Mr. Schulberg an additional 10 million options to purchase our common stock if the Company which would have had have an exercise price of $0.07. The Company recognized the expense of $1,000,000 associated with the first 10,000,000 options over the vesting period. The options to purchase common stock granted to the vendor were valued using the Black-Scholes valuation model with the following assumptions: volatility of 723% based on a historical volatility analysis, expected term of 5 years based on the option term, zero expected dividends, and risk free interest rate of 1.40%. We determined that the common stock options had a fair value of $0.10 per share. We recognized $800,000 in 2010 and in 2011, the remaining expense of $200,000 related to this grant was recognized.
In September 2010, for additional direct response advertising and marketing services to be rendered by Mr. Schulberg, we issued Mr. Schulberg 4 million options to purchase our common stock exercisable at $0.02 per share which were immediately vested. The Company recognized the expense of approximately $120,000 associated with the options in the period they were issued. The options to purchase common stock granted to the vendor were valued using the Black-Scholes valuation model with the following assumptions: volatility of 253% based on a historical volatility analysis, expected term of 5 years based on the option term, zero expected dividends, and risk free interest rate of 0.74%.
YESDTC HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
Services Agreement with our General Manager
In September 2010, in addition to the 2 million options he received for his board of directors service, we issued Mr. Kirsebom 3 million options to purchase our common stock for investor relations and marketing services to be rendered by Mr. Kirsebom, our general manager and a member of the board of directors, exercisable at $0.02 per share which were immediately vested. The Company recognized the expense of approximately $90,000 associated with the options in September 2010. The options to purchase common stock granted were valued using the Black-Scholes valuation model with the following assumptions: volatility of 253% based on a historical volatility analysis, expected term of 5 years based on the option term, zero expected dividends, and risk free interest rate of 0.74%.
The Company uses the Black-Scholes option pricing model to value options granted to employees, directors and consultants. Compensation expense, including the effect of forfeitures, is recognized over the period of service, which is generally the vesting period. Stock-based compensation for the amortization of stock options granted under the Company’s stock option plans totaled approximately $708,000 during the year ended December 31, 2010. No options were issued in the three months ended March 31, 2011. Stock-based compensation is included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.
The fair values of stock option grants were calculated on the dates of grant using the Black-Scholes option pricing model and the following weighted average assumptions:
| | | | September 2010 Grant Date |
| | | | | |
| Risk-free interest rate | | | 0.74% | |
| Expected volatility | | | 253% | |
| Expected life (in years) | | | 5 | |
| Expected dividend yield | | | 0% | |
| Weighted average per share grant date fair value | | $ | 0.06 | |
The risk-free interest rate was based on rates established by the Federal Reserve for the expected term. The Company’s expected volatility was based upon the historical volatility for its common stock. The expected life of the Company’s options was determined using the simplified method (as these options have the same characteristics whether employee or non-employee options) as a result of limited historical data regarding the Company’s activity. The dividend yield is based upon the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the future.
Note 12. Stock Warrants
The Company has issued warrants to purchase shares of common stock which expire at various dates through December 2014. Changes in warrants outstanding for the three months ended March 31, 2011 was as follows:
| | | Number of Warrants | | | Weighted Average Exercise Price | |
| Warrants outstanding as of December 31, 2010 | | | 54,800,000 | | | $ | 0.10 | |
| E Issued during 2011 | | | 32,565,669 | | | | 0.035 | |
| E Exercised during 2011 | | | -- | | | | -- | |
| Forfeited/expired | | | -- | | | | -- | |
| Warrants outstanding as of March 31, 2011 | | | 87,365,669 | | | $ | 0.06 | |
There is no intrinsic value associated with the Company’s warrants outstanding or exercisable as of March 31, 2011.
The number of shares issuable upon the exercise of outstanding warrants, and the proceeds upon the exercise of such warrants, will be lower if a warrant holder elects to exercise on a cashless basis.
YESDTC HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
The 87,365,669 warrants include 20,120,000 issued in connection with the sale of the Series A Convertible Preferred and 12,445,669 issued to our CEO in connection with the conversion of short term notes in 2011 and, 50,000,000 issued with senior secured convertible notes, 4,500,000 issued with common stock in the private placement and 300,000 issued with common stock to a legal services provider all in 2009.
The Company uses the Black-Scholes valuation model to value options or warrants granted to employees, directors and consultants. Compensation expense, including the effect of forfeitures, is recognized over the period of service, generally the vesting period. The fair values of stock warrant grants were calculated on the dates of grant using the Black-Scholes option valuation model and the following weighted average assumptions:
| | | Three months Ended March 31, 2011 | |
| | | | |
| Risk-free interest rate | | | 1.24 | % |
| Expected volatility | | | 269.9 | % |
| Expected life (in years) | | | 1.5 | |
| Expected dividend yield | | | 0 | % |
The risk-free interest rate is based on rates established by the Federal Reserve. The Company’s expected volatility was based upon the historical and current volatility for its common stock. The expected life of the Company’s options was determined using the contractual life for non-employee warrants. The dividend yield is based upon the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the future.
The 12,445,669 warrants issued to our CEO in 2011 in connection with his debt conversion was valued at $230,489 and recognized immediately as compensation due to immediate vesting.
Note 13. Commitments and Contingencies
Lease Obligations. The Company has no operating lease obligations.
Minimum Purchase Commitments. The Company entered into a 6 year distribution agreement in December 2009 with a vendor to purchase and distribute certain products in Japan. The contract called for minimum purchase commitments as follows:
| Year Ending December 31, | | Units | | | Amounts | |
| | | | | | | |
2011 | | | 180,000 | | | | 1,800,000 | |
2012 | | | 216,000 | | | | 2,160,000 | |
2013 | | | 259,000 | | | | 2,590,000 | |
| | | | 655,000 | | | $ | 6,550,000 | |
The Company did not purchase the required minimum amounts in 2010 and has not purchased any materials in 2011. We are currently in negotiation with the vendor to amend the purchase requirements and the sole remedy of the vendor for the Company not meeting the minimum purchase commitment is that the vendor may cancel the distribution agreement. As of March 31, 2011 the vendor has not taken any such actions.
A company controlled by our CEO, Mr. Noel, performs consulting services for the vendor and is paid in fully vested common stock for those services. Mr. Noel is not a control person of the vendor and is not an officer or director of the vendor, and the vendor does not consider Mr. Noel, Allay or the Company, individually or in the aggregate, to be in a position to exercise control over the business or affairs of the vendor a result of the ownership of the securities or otherwise. Other than pursuant to the terms of such securities, there are no restrictions on the disposition of shares by any of the foregoing persons of entities.
YESDTC HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
Note 15. Related Parties
The company converted to common stock $409,000 certain short term notes due to our CEO at market prices. As part of the transaction he was also issued 3 year warrants (see Note 7).
Senior convertible notes of $40,000 held by our CEO were converted to 10,587,105 common shares in 2011 (see Note 8).
There were accounts payable of $30,000 due to our CFO at March 31, 2011.
The Company incurred approximately $36,000 and $0 of expenses in the three months ended March 31, 2011 and 2010 to related parties who are affiliated with Directors of the Company.
Note 16. Subsequent Events
Shares Issued in Exchange for Services
As part of the Marketing Agreement disclosed in Note 11, in April 2011 the Company became obligated to issue 381,679 common shares to the vendor as payment of $5,000 monthly stock-based fees.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis summarizes the significant factors affecting our condensed consolidated results of operations, financial condition and liquidity position for the three months ended March 31, 2011. This discussion and analysis should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for our year-ended December 31, 2010 and the condensed consolidated unaudited financial statements and related notes included elsewhere in this filing. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.
Forward-Looking Statements
Forward-looking statements in this Quarterly Report on Form 10-Q, including without limitation, statements related to our plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) our plans, strategies, objectives, expectations and intentions are subject to change at any time at our discretion; (ii) our plans and results of operations will be affected by our ability to manage growth and competition; and (iii) other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission (“SEC”).
In some cases, you can identify forward-looking statements by terminology such as ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘could,’’ ‘‘expects,’’ ‘‘plans,’’ ‘‘intends,’’ ‘‘anticipates,’’ ‘‘believes,’’ ‘‘estimates,’’ ‘‘predicts,’’ ‘‘potential,’’ or ‘‘continue’’ or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We are under no duty to update any of the forward-looking statements after the date of this Report.
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.
Characteristics of our Revenues and Expenses
We began generating revenues in July 2010 with the launch of our first product. We are currently marketing two products through our network and are actively pursuing others.
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.
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.
Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
Revenues and Cost of Revenues. We began marketing and selling our products in July 2010. For the three months ended March 31, 2011 we marketed a total of two products during the period which resulted in revenues of approximately $450,000. 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 for the three months ended March 31, 2010.
Cost of Goods Sold. Cost of goods sold for the three months ended March 31, 2011 totaled approximately $109,000 compared to $0 for the three months ended March 31, 2010. These costs relate to the purchase and distribution of our products through our 3rd party distribution network as well as royalties due on our products. We had no cost of goods sold for the three months ended March 31, 2010.
Sales and Marketing. Sales and marketing expenses for the three months ended March 31, 2011 totaled approximately $340,000 compared to approximately $67,000 for the three months ended March 31, 2010. The increase of approximately$273,000, or 407%, is primarily related to the cost of custom designed direct-to-consumer marketing campaigns, website services and fees to establish a range of services for product campaigns.
General and Administrative. General and administrative expenses for the three months ended March 31, 2011were approximately $815,000 as compared to approximately $330,000 for the three months ended March 31, 2010. The increase of approximately $485,000, or 147%, is principally related to the increase of approximately $285,000, or 106%, from the recognition of stock-based compensation charges to approximately $561,000 from approximately $269,000 for the three months ended March 31, 2011 and 2010, respectively, and costs associated with legal and consulting services associated with the start-up of our business.
Interest Expense. Interest expense for the three months ended March 31, 2011was approximately $60,000 as compared to approximately $29,000 for the three months ended March 31, 2010. The increase of approximately $31,000 or 107% is 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.
Change in fair value of embedded conversion option. Change in fair value of the embedded conversion option for the three months ended March 31, 2011 was approximately $295,000 as compared to approximately ($1,500,000) for the three months ended March 31, 2010. 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 three months ended March 31, 2011 was approximately $323,000 as compared to approximately ($1,644,000) for the three months ended March 31, 2010. These costs relate to the recognition of changes in the fair value of the warrant derivative liability issued as part of a financing.
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. Cash and cash equivalents totaled approximately $21,000 at March 31, 2011.
Net Cash Used in Operating Activities. Net cash used in operating activities for the three months ended March 31, 2011 totaled approximately $622,000 as compared to $195,000 from the comparable prior years period. The use of cash was primarily related to costs associated royalty prepayments, the establishment of our distribution network, the payment of accrued liabilities and expenses related to the basic infrastructure required to get the business off the ground.
Net Cash Provided By/Used in Investing Activities. We did not use cash in investing activities for the three months ended March 31, 2011 or 2010.
Net Cash Provided By Financing Activities. Net cash provided by financing activities for the three months ended March 31, 2011 totaled approximately $629,000. The cash provided was the result of proceed from the sale of short term notes to our CEO ($213,000), the sale of Series A convertible preferred stock ($212,000), the sale of short term notes to outside investors ($180,000) and proceeds from the sale of 8% convertible notes ($37,500), respectively.
Working Capital. As of March 31, 2011, we had working capital deficit of approximately $1.1 million including approximately $1.4 million of liabilities related to derivative liabilities incurred as a result of of financing activities. Based on our current operating activities and plans, we believe our existing working capital and our ability to sell stock or notes to investors will enable us to meet our anticipated cash requirements for at least the next twelve months.
We did not generate any cash from financing activities for three months ended March 31, 2010.
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 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
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.
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Item 4. Controls and Procedures.
We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective, as of the three months ended March 31, 2011, in ensuring that material information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in our system of internal controls over financial reporting during the three months ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company may become involved in litigation relating to claims arising out of its operations in the normal course of business. We are not involved in any pending legal proceeding or litigation and, to the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on the Company.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On January 11, 2011, the Company completed an offering of Series A Convertible Preferred Stock to two investors one of which is our CEO’s brother, Mark Noel. The two investors purchased 42,400 preferred shares for an aggregate purchase price of $212,000 or $0.20 per preferred share. The preferred shares are convertible into 42,400,000 shares of our common stock $0.0001 par value. As part of the offering the investors were also issued 20,120,000 warrants with an exercise price of $0.05, subject to reduction as described in the offering documents. The warrants shall be exercisable for three (3) years from their issue date.
This transaction did not involve any underwriters, underwriting discounts or commissions or any public offering and we believe was exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(2) thereof and/or Regulation D promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
There were no reportable events under this Item 3 during the quarterly period ended March 31, 2011.
ITEM 4. (REMOVED AND RESERVED). ITEM 5. OTHER INFORMATION. There were no reportable events under this Item 5 during the quarterly period ended March 31, 2011.
ITEM 6. EXHIBITS.
| Exhibit No. | | | Description | |
| 31.1 | Section 302 Certification of Principal Executive Officer. | |
| 31.2 | Section 302 Certification of Principal Financial Officer. | |
| 32.1 | Section 906 Certification of Principal Executive Officer. | |
| 32.2 | Section 906 Certification of Principal Financial Officer. | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | YESDTC HOLDINGS, INC. | |
| | | | |
| Date: May 23, 2011 | By: | /s/ Joseph A. Noel | |
| | | Joseph A. Noel | |
| | | Chief Executive Officer, President, Treasurer, Secretary and Director (Principal Executive Officer) | |
| | | | |
| | | | |
| Date: May 23, 2011 | By: | /s/ William J. Bush | |
| | | | |
| | | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |
| | | | |
| Exhibit No. | | Description |
| 31.1 | | Section 302 Certification of Principal Executive Officer |
| 31.2 | | Section 302 Certification of Principal Financial Officer |
| 32.1 | | Section 906 Certification of Principal Executive Officer |
| 32.2 | | Section 906 Certification of Principal Financial Officer |
