Quote Level 2 Charts News Trades Historical Financials Message Board

- Quarterly Report (10-Q)

Date : 08/14/2009 @ 4:06PM
Source : Edgar (US Regulatory)
Stock : (DRGZ)
Quote : 0.0121  0.0 (0.00%) @ 2:50PM

- Quarterly Report (10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2009

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from: _____________ to _____________

DYNAMIC RESPONSE GROUP, INC.

(Name of Registrant in its Charter)

 

Florida   000-28201   52-2369185

(State or Other Jurisdiction

of Incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

4770 Biscayne Boulevard, Suite 780, Miami, FL, 33137

(Address of Principal Executive Office) (Zip Code)

305-576-6889

(Registrant’s telephone number, including area code)

N/A

(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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.

x   Yes     ¨   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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   ¨     No   ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 1 2b-2 of the Exchange Act).

¨   Yes     x   No

As of August 11, 2009, there were 4,213,123 shares of common stock issued and outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION    3
ITEM 1.    FINANCIAL STATEMENTS    3
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS    16
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    26
ITEM 4T.    CONTROLS AND PROCEDURES    26
PART II – OTHER INFORMATION    27
ITEM 1.    LEGAL PROCEEDINGS    27
ITEM 1A.    RISK FACTORS    27
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS    27
ITEM 3.    DEFAULTS UPON SENIOR SECURITIES    29
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS    29
ITEM 5.    OTHER INFORMATION    30
ITEM 6.    EXHIBITS    30

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

DYNAMIC RESPONSE GROUP, INC.

CONSOLIDATED BALANCE SHEETS

 

     June 30,
2009
    December 31,
2008
 
     (Unaudited)     Audited  
ASSETS     

Current Assets:

    

Cash

   $ 38,615      $ 192,332   

Accounts receivable

     139,472        657,311   

Inventory

     91,255        479,035   

Direct response advertising cost

     1,027,333        839,487   

Other current assets

     224,061        542,645   
                

Total current assets

     1,520,736        2,710,810   

Property and equipment, net

     124,242        146,925   

Intangible assets, net

     824,533        824,533   

Restricted cash

     —          217,392   

Other assets

     831,695        88,536   
                

Total assets

   $ 3,301,206      $ 3,988,196   
                
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY     

Current Liabilities:

    

Accounts payable and accrued expenses

   $ 6,703,406      $ 7,307,302   

Due to related parties

     74,507        56,961   

Convertible promissory notes

     —          1,928,998   
                

Total current liabilities

     6,777,913        9,293,261   

Commitments and contingencies

    

Stockholders’ Deficiency:

    

Series A Preferred Stock; $.0001 par value, 50,000,000 shares authorized, 83,007 and 0 shares issued and outstanding as of June 30, 2009 and December 31, 2008, respectively

     —          830   

Common stock; $.0001 par value, 250,000,000 and 100,000,000 shares authorized, 902,033 and 905,723 shares issued and outstanding as of June 30, 2009 and December 31, 2008, respectively

     90        90   

Additional paid-in capital

     17,174,287        15,063,541   

Accumulated deficit

     (20,651,084     (20,369,526
                

Total stockholders’ deficiency

     (3,476,707     (5,305,065
                

Total liabilities and stockholders’ deficiency

   $ 3,301,206      $ 3,988,196   
                

See Notes to Consolidated Financial Statements

 

3


Table of Contents

DYNAMIC RESPONSE GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     For the 3 Months Ended June 30,     For the 6 Months Ended June 30,  
     2009     2008     2009     2008  

Gross revenue

   $ 2,824,040      $ 9,552,292      $ 7,941,239      $ 19,560,277   

Returns and allowances

     (192,813     (2,304,120     (762,322     (4,289,804
                                

Net revenues

     2,631,227        7,248,172        7,178,917        15,270,473   

Cost of revenues

     475,496        1,652,776        1,699,034        3,016,516   
                                

Gross profit

     2,155,731        5,595,396        5,479,883        12,253,957   

Operating Expense:

        

Selling and marketing

        

Media and advertising

     622,379        3,679,095        2,011,446        6,498,160   

Commissions

     11,840        488,905        15,906        1,116,017   

Fulfillment and shipping

     334,981        970,100        982,533        1,975,846   

Call Center

     185,029        429,525        395,624        854,661   

Royalties

     —          138,407        11,975        403,928   

Other

     12,348        117,857        46,086        206,670   
                                

Total selling and marketing

     1,166,577        5,823,889        3,463,570        11,055,282   

Merchant charge

     152,284        328,834        342,224        753,186   

General and administrative

     639,698        1,209,953        1,352,922        1,971,060   

Bad debt

     58,959        —          453,392        —     
                                

Total operating expenses

     2,017,518        7,362,676        5,612,108        13,779,528   
                                

Income (loss) from operations

     138,213        (1,767,280     (132,225     (1,525,571
                                

Other income (expenses)

        

Other income

     53        3,919        6,487        14,198   

Interest expense

     (78,309     (105,684     (155,820     (178,050
                                

Total other expenses

     (78,256     (101,765     (149,333     (163,852
                                

Income (Loss) before income taxes

     59,957        (1,869,045     (281,558     (1,689,423

Provision for (benefit from) income taxes

     —          —          —          231,308   
                                

Net Income (Loss)

   $ 59,957      $ (1,869,045   $ (281,558   $ (1,458,115
                                

Basic and diluted weighted average common shares outstanding

     1,120,954        881,780        1,014,453        867,355   
                                

Basic and diluted earnings (loss) per share

   $ 0.05      $ (2.12   $ (0.28   $ (1.68
                                

See Notes to Consolidated Financial Statements

 

4


Table of Contents

DYNAMIC RESPONSE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     For the Six Months Ended June 30,  
     2009     2008  

Cash flows from operating activities:

    

Net (loss)

   $ (281,558   $ (1,458,115

Adjustments to reconcile net income (loss) to net cash used in operating activities

    

Depreciation

     28,678        5,910   

Provision for returns

     —          —     

Allowance for doubtful accounts

     2,466        170,537   

Bad debt expense

     453,392        —     

Conversion of accounts payable and accrued expenses to Series B preferred stock

     101,918     

Changes in assets and liabilities:

    

Accounts receivable

     61,981        (48,720

Inventory

     387,780        271,513   

Inventory reserve

     —          (61,927

Direct response advertising costs

     (187,846     (263,106

Prepaid expenses and other current assets

     318,584        (123,842

Deferred tax asset

     —          (231,308

Other assets

     (525,767     (185

Accounts payable and accrued expenses

     (603,898     2,055,169   
                

Net cash used in operating activities

     (244,270     315,926   
                

Cash flows used in investing activities:

    

Purchase of equipment

     (5,996     —     

Capital expenditures

       (1,034

Payments toward patent agreement

     —          (149,850
                

Net cash provided by (used in) investing activities

     (5,996     (150,884
                

Cash flows used in financing activities:

    

Proceeds from loans payable

     —          —     

Repayment of loans payable

     —          —     

Net repayment of related party loans

     (935     (48,417

Principal payments for obligation under capital lease

     —          (11,065

Proceeds from shareholder loans

     18,482        —     

Proceeds from conversion of notes payable

     79,002        —     
                

Net cash used in financing activities

     96,549        (59,482
                

Net decrease in cash

     (153,717     105,560   

Cash, beginning of period

     192,332        571,571   
                

Cash, end of period

   $ 38,615      $ 677,131   
                

Supplemental disclosures of cash flow information:

    

Cash paid for taxes

   $ —        $ —     
                

Cash paid for interest

   $ 77,511      $ 72,366   
                

See the accompanying notes to financial statements

 

5


Table of Contents

DYNAMIC RESPONSE GROUPS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

NOTE 1 - NATURE OF BUSINESS

Dynamic Response Group, Inc. (the Company), is a marketing company engaged in the business of Electronic & Multi Media Retailing, including print, radio, television and the internet and considers itself an emerging leader in the use of direct response transactional television programming, known as infomercials, to market consumer products.

As shown in the accompanying financial statements, the Company’s operating and capital requirements in connection with operations have been and will continue to be significant. Although the Company realized net income during the second quarter, losses from operations raise doubt about the Company’s ability to continue as a going concern. Management is currently working with outstanding creditors with the intent to convert some of the Company’s debt to equity, whereby the creditors will take shares of a newly created Series B Preferred Stock in place of the debt owed. The Series B Preferred Stock will earn escalating interest over the years it is outstanding. The Company has also taken steps to reduce its obligation to its 15% convertible note holders by converting the notes into a newly created Series C Preferred Stock. As the Company generates revenue it will convert the preferred shares to cash and return the preferred stock to treasury.

The Company has recently reacquired the rights to market Aeropedic, which tested high in the marketplace and has also acquired the rights to market GemMagic. Additionally, Medico Express, a majority owned subsidiary of the Company, received its Medicare certification in July 2009 and commenced operations in August. The Company will earn a management fee from Medico Express.

The Company’s ability to continue as a going concern is dependent upon the ability to generate sales from existing and new products and obtaining adequate capital to launch new products. The Company is presently in the final stages of negotiating with several institutions to secure financing for Medico Express and the Company’s operations. Management anticipates that revenues earned from sales will be the primary source of funds for operating activities; however, there can be no assurance that management’s plans will be successful.

The financial statements have been prepared on a “going concern” basis and accordingly do not include any adjustments that might result from the outcome of this uncertainty.

Interim reporting

The accompanying interim unaudited financial information has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company as of June 30, 2009 and the related operating results and cash flows for the interim period presented have been made. The results of operations of such interim period are not necessarily indicative of the results of the full year. This financial information should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

6


Table of Contents

DYNAMIC RESPONSE GROUPS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

 

NOTE 2 - BASIS OF PRESENTATION AND CONSOLIDATION

The accompanying consolidated financial statements include the results of operations of all subsidiaries over which the Company holds a majority interest. The results of operations of these companies are accounted for using the consolidated method of accounting. All material inter-company accounts and transactions have been eliminated.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results will differ from those estimates. Significant estimates during the periods include the provision for doubtful accounts, provision for product returns, evaluation of obsolete inventory, and the useful life of long-term assets, such as property, plant and equipment.

Revenue recognition

The Company recognizes product revenue, net of estimated sales discounts, returns and allowances, in accordance with Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition in Financial Statements” which established that revenue can be recognized when persuasive evidence of an arrangement exists, the product has been shipped, all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection is reasonably assured.

In addition, the Company recognizes product revenue in accordance with Statement of Financial Accounting Standard (SFAS) No. 48 “Revenue Recognition When Right of Return Exists”. This statement requires that in order to recognize revenue at the point of sale when the buyer has a return privilege, the amount of future returns must be reasonably estimable by the seller company.

Fair value of financial instruments

The carrying amounts of financial instruments, including cash, accounts receivable, inventory and accounts payable and accrued expenses approximates fair value at June 30, 2009 due to the relatively short maturity of the instruments. The carrying value of long-term debt approximates fair value at June 30, 2009 based upon terms available for companies under similar arrangements.

Cash and cash equivalents

The Company considers all highly liquid debt securities purchased with original or remaining maturities of three months or less to be cash equivalents. The carrying value of cash equivalents approximates fair value.

 

7


Table of Contents

DYNAMIC RESPONSE GROUPS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

 

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Restricted cash

In accordance with Accounting Review Board (ARB) No. 43, Chapter 3A “Current Assets and Current Liabilities”, cash which is restricted as to withdrawal is considered a noncurrent asset. Restricted cash consists of a reserve for credit card processing of $0 and $217,392 which the Company holds in separate escrow accounts for the six months ended June 30, 2009 and the year ended December 31, 2008, respectively.

Accounts receivable

Accounts receivable are reported at net realizable value. The Company has established an allowance for doubtful accounts based upon factors pertaining to the credit risk of specific customers, historical trends, and other information. Delinquent accounts are written-off when it is determined that the amounts are uncollectible. At June 30, 2009 and December 31, 2008, the provision for doubtful accounts was $2,466 and $103,516, respectively.

Inventories

Inventories are stated at the lower of cost or market, with cost being determined by the first-in, first-out (FIFO) method. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. The Company writes down inventory during the period in which such products are considered no longer effective.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is recorded on the straight-line basis over the estimated useful lives of the assets, which range from three to ten years. Normal maintenance and repairs of property and equipment are expensed as incurred while renewals, betterments and major repairs that materially extend the useful life of property and equipment are capitalized. Upon retirement or disposition of property and equipment, the asset and related accumulated depreciation or amortization is removed from the accounts and any resulting gain or loss is charged to operations.

Intangible assets

The Company accounts for intangible assets in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”. Generally, intangible assets with indefinite lives, and goodwill, are no longer amortized; they are carried at lower of cost or market and subject to annual impairment evaluation, or interim impairment evaluation if an interim triggering event occurs, using a new fair market value method. Intangible assets with finite lives are amortized over those lives, with no stipulated maximum, and an impairment test is performed only when a triggering event occurs. Such assets are amortized on a straight-line basis over the estimated useful life of the asset.

 

8


Table of Contents

DYNAMIC RESPONSE GROUPS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

 

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Intangible assets consist of payments made toward the Procede name, trademarks and related formulas used in the Company’s primary product. In March 2009, the Company discontinued the marketing and sale of Procede in its existing state and formula. The Company is currently re-formulating the product and expects to market its updated formula targeting men and women in late 2010. The Company is continuing to fulfill its continuity orders to existing customers.

Income taxes

The Company uses the liability method for income taxes as required by SFAS No. 109 “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when it is more likely than not that the deferred tax assets will not be realized.

Shipping and handling costs

Shipping and handling costs are included in cost of revenues in accordance with guidance established by the Emerging Issues Task Force (EITF) No. 00-10, “Accounting for Shipping and Handling Costs”. EITF 00-10 permits companies to adopt a policy of including shipping and handling costs in cost of sales or other income statement line items.

Advertising

Advertising costs are expensed as incurred, except for direct response advertising. Direct response advertising consists primarily of costs associated with eliciting sales to customers, principally the direct response television advertising, and the e-commerce catalog mailings. In accordance with the American Institute of Certified Public Accountants’ (AICPA) Statement of Position (SOP) No. 93-7, “Reporting on Advertising Costs”, these capitalized direct response advertising costs are amortized over the period during which the future benefits are expected to be received, generally six to twelve months.

The Company incurred advertising expenses of $622,379 and $2,011,446 during the three months ended June 30, 2009 and 2008, respectively. The Company capitalized direct response advertising at a net cost of $187,846 and $316,347 during the six months ended June 30, 2009 and 2008, respectively.

Income (loss) per share

The Company presents basic income (loss) per share and diluted earnings per share in accordance with the provisions of SFAS No. 128 “Earnings per Share”. Under SFAS No.128, basic net income/loss per share is computed by dividing the net income/loss for the year by the weighted average number of common shares outstanding during the year. Diluted net income/loss per share is computed by dividing the net income/loss for the year by the weighted average number of common shares and common share equivalents outstanding during the year.

 

9


Table of Contents

DYNAMIC RESPONSE GROUPS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

 

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Provision for Returns

In the normal course of business, the Company does not provide stock-balancing or price protection rights to its distributors; however, on a non-recurring basis, the Company has accepted product returns. Management establishes provisions for estimated returns concurrently with the recognition of revenue. The provisions are established based upon consideration of a variety of factors, including, among other things, recent and historical return rates for both specific distributors and projected economic conditions.

Concentration of credit risks

The Company is subject to concentrations of credit risk primarily from cash and cash equivalents and accounts receivable. The Company maintains accounts with financial institutions, which at times exceeds the insured Federal Deposit Insurance Corporation limit of $250,000. The Company minimizes its credit risks associated with cash by periodically evaluating the credit quality of its primary financial institutions. The Company’s accounts receivables are due from the individuals in which it markets its products. The Company does not require collateral to secure its accounts receivables. No customers accounted for more than 10% of its net accounts receivables.

Reclassifications

Certain amounts in prior year consolidated financial statements have been reclassified for comparative purposes to conform to the presentation in the current year condensed consolidated financial statements.

New accounting pronouncements

Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”), which amends Accounting Research Bulletin 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS No. 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS No. 160 is effective for fiscal periods, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company has adopted SFAS No. 160 as of January 1, 2009 and does not anticipate that its adoption will have a material impact on its consolidated financial statements as of June 30, 2009.

 

10


Table of Contents

DYNAMIC RESPONSE GROUPS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

 

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Business Combinations

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS No. 141(R)). This Statement replaces SFAS No. 141, Business Combinations, and requires an acquirer to recognize the assets acquired, the liabilities assumed, including those arising from contractual contingencies, any contingent consideration, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS No. 141(R) also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS No. 141(R)). In addition, SFAS No. 141(R)'s requirement to measure the noncontrolling interest in the acquiree at fair value will result in recognizing the goodwill attributable to the noncontrolling interest in addition to that attributable to the acquirer.

SFAS No. 141(R) amends SFAS No. 109, Accounting for Income Taxes, to require the acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. It also amends SFAS No. 142, Goodwill and Other Intangible Assets, to, among other things, provide guidance on the impairment testing of acquired research and development intangible assets and assets that the acquirer intends not to use. SFAS No. 141(R) applies prospectively to 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, 2008. The Company has adopted SFAS No. 141(R) as of January 1, 2009 and does not anticipate that its adoption will have a material impact on its consolidated financial statements as of June 30, 2009.

NOTE 4 - ACCOUNTS RECEIVABLE

Accounts receivable consist of trade receivables due from individuals. The balances at June 30, 2009 and December 31, 2008 are $133,618 and $657,311, which is shown net of allowances for doubtful accounts of $2,466 and $103,516.

NOTE 5 - INVENTORIES

Inventories at June 30, 2009 and December 31, 2008 consist of the following:

 

     2009    2008  

Finished Goods

   $ 91,255    $ 550,890   

Reserves

     —        (71,855
               

Inventory, net

   $ 91,255    $ 479,035   
               

 

11


Table of Contents

DYNAMIC RESPONSE GROUPS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

 

NOTE 6 - PROPERTY AND EQUIPMENT

Property and equipment and related accumulated depreciation at June 30, 2009 and December 31, 2008 consist of the following:

 

     2009     2008  

Computer

   $ 145,205      139,210   

Leasehold improvement

     24,327      24,327   

Furniture and fixtures

     9,917      9,617   
              
     179,149      173,154   

Accumulated depreciation

     (54,907   (26,229
              

Property and equipment, net

   $ 124,242      146,925   
              

Depreciation expense totaled $28,678 and $5,910 during the six months ended June 30, 2009 and 2008, respectively.

NOTE 7 - INTANGIBLE ASSETS

In August 2008, the Company discontinued the marketing and sale of Procede in its existing state and formula. The Company is currently re-formulating the product and expects to market its updated formula targeting men and women in late 2010. The Company is continuing to fulfill its continuity orders to existing customers to which it had committed prior to discontinuance of the marketing product. The Company continues to capitalize $825,533 toward the intangible asset, which represents the value associated with the Procede name, trademarks and related formulas.

NOTE 8 - ACCRUED COMPENSATION

Accrued compensation consists of unpaid wages to officers and consultants. Accrued compensation in the amounts of $40,218 and $75,850 were recorded as of June 30, 2009 and December 31, 2008 respectively.

NOTE 9 - CONVERTIBLE NOTES

The total convertible notes as of June 30, 2009 and December 31, 2008 are $0 and $1,928,998. As of June 30, 2009, the Company entered into securities exchange agreements with the holders of its 15% convertible notes to convert an aggregate of $2,008,000 due on the notes into 2,008,000 shares of preferred stock with a stated value of $1.00 per share designated as Series C Preferred Stock together with the right to receive shares of common stock of Medico Express, Inc.

Interest expense associated with the convertible notes totaled $150,978 and $200,509 for the six months ended June 30, 2009 and 2008.

 

12


Table of Contents

DYNAMIC RESPONSE GROUPS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

 

NOTE 10 - LEGAL

The Company is subject to claims and lawsuits in the ordinary course of business. In the opinion of management, the Company is adequately covered by insurance. If not insured, management believes such matters will not, in the aggregate, have a material adverse impact upon the Company’s financial position, results of operations, or cash flows.

The Company has been served with a lawsuit from a company that claims to have the exclusive right to Riddex. The product owner and the Company have been named in the suit. The Company has documentation that directly contradicts the claim.

NOTE 11 - EQUITY

Increase of authorized common stock and reverse stock split

On June 10, 2009, the Company increased its authorized common stock from 100,000,000 shares to 250,000,000 shares and its preferred stock from 10,000,000 shares to 50,000,000 shares. Immediately following, on June 11, 2009, the Company implemented a 100 for 1 reverse stock split and changed its trading symbol from DRGP.OB to DRGZ.OB.

Conversion of Series A Preferred Stock

As a result of filing the amendment to its articles of incorporation, 8,300,749 shares, being all of the issued and outstanding shares of the Company’s Series A Preferred Stock, automatically converted into shares of the Company’s common stock at a rate of one for twelve, or an aggregate of 99,608,988 shares of common stock. The converted Series A Preferred shares resumed the status of authorized shares of preferred stock without differentiation as to series and may be reissued as part of a new series of preferred stock subject to the conditions and restrictions on issuance set forth in the Articles of Incorporation or in any certificate of designation creating a series of preferred stock or any similar stock or as otherwise required by law.

Debt Conversion

On June 30, 2009, the Company received conversion notices to convert an aggregate of $305,843 in past due consulting fees and accrued salary owed to a consultant and an employee for services, respectively, for services rendered between 2007 and 2008. Under the terms of agreements between the Company and the consultant and employee, respectively, dated January 2009, the consultant and employee could convert the obligations into shares of the common stock of the Company at the conversion rate of $0.02 per share beginning June 30, 2009, subject to volume limitations whereby the aggregate number of shares of common stock so converted, together with the converting party’s then current beneficial ownership of the Company’s common stock, does not exceed 9.9% of the Company’s issued and outstanding common stock in any three month period.

 

13


Table of Contents

DYNAMIC RESPONSE GROUPS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

 

NOTE 11 - EQUITY (CONTINUED)

Series B Preferred Stock

Between June and July 2009, the Company entered into agreements with certain media vendors to convert accounts payable owed by the Company to the vendors into an aggregate of 10,000,000 shares of preferred stock designated as Series B Preferred Stock of the Company. The Series B Preferred Stock has a stated value of $0.50 per share. Holders of Series B Preferred shares will be entitled to non-cumulative quarterly dividends at the initial rate of 4% for the first two years, increasing to 8% in the third year, 12% in the fourth year and a 15% in the fifth year and thereafter. Holders of the Series B Preferred Stock are not entitled to voting rights or preference upon liquidation. Each holder of Series B Preferred Stock shall have the right to convert all or part of his or her shares of Series B Preferred Stock into shares of the Company’s common stock by dividing the stated value by $0.50 subject to closing price and volume limitations and subject to adjustment in the event of the subdivision, combination or consolidation by stock split, stock dividend, combination or like event.

No shares were issued and outstanding as of June 30, 2009; however, as of July 30, 2009, the Company has issued 143,840 shares of Series B Preferred Stock to participating vendors.

Series C Preferred Stock

As of June 30, 2009, the Company entered into securities exchange agreements with the holders of its 15% convertible notes to convert an aggregate of $2,008,000 due on the notes into 2,008,000 shares of preferred stock with a stated value of $1.00 per share designated as Series C Preferred Stock together with the right to receive shares of common stock of Medico Express, Inc. The Series C Preferred ranks senior to the Company’s common and Series B Preferred Stock. Holders of Series C Preferred shares will be entitled to non-cumulative quarterly dividends at the initial rate of 10% for the first year, increasing to 15% in the second year and thereafter. Holders of the Series C Preferred Stock are not entitled to voting rights. Each holder of Series C Preferred Stock shall have the right to convert all or part of his or her shares of Series C Preferred Stock into shares of the Company’s common stock by dividing the stated value by $0.50 subject to closing price limitations and subject to adjustment in the event of the subdivision, combination or consolidation by stock split, stock dividend, combination or like event.

No shares were issued and outstanding as of June 30, 2009; however, as of June 30, 2009, the Company has issued 2,008,000 shares of Series C Preferred Stock.

 

14


Table of Contents

DYNAMIC RESPONSE GROUPS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008

 

NOTE 12 - SUBSEQUENT EVENTS

Series B Preferred Stock

On July 30, 2009, the Company amended its Articles of Incorporation to designate the rights and preferences of 10,000,000 shares of redeemable preferred stock designated as Series B Preferred Stock (the “Series B Preferred Stock”) with a stated value of $0.50 per share. Holders of Series B Preferred shares will be entitled to non-cumulative quarterly dividends at the initial rate of 4% for the first two years, increasing to 8% in the third year, 12% in the fourth year and a 15% in the fifth year and thereafter. Holders of the Series B Preferred Stock are not entitled to voting rights or preference upon liquidation. Each holder of Series B Preferred Stock shall have the right to convert all or part of his or her shares of Series B Preferred Stock into shares of the Company’s common stock by dividing the stated value by $0.50 subject to closing price and volume limitations and subject to adjustment in the event of the subdivision, combination or consolidation by stock split, stock dividend, combination or like event. The shares of Series B Preferred Stock shall be entitled to piggy-back registration rights.

Series C Preferred Stock

On July 30, 2009, the Company amended its Articles of Incorporation to designate the rights and preferences of 2,000,000 shares of redeemable preferred stock designated as Series C Preferred Stock (the “Series C Preferred Stock”) with a stated value of $1.00 per share. The Series C Preferred shall rank senior to the Company’s common and Series B preferred stock. Holders of Series C Preferred shares will be entitled to non-cumulative quarterly dividends at the initial rate of 10% for the first year, increasing to 15% in the second year and thereafter. Holders of the Series C Preferred Stock are not entitled to voting rights. Each holder of Series C Preferred Stock shall have the right to convert all or part of his or her shares of Series C Preferred Stock into shares of the Company’s common stock by dividing the stated value by $0.50 subject to closing price limitations and subject to adjustment in the event of the subdivision, combination or consolidation by stock split, stock dividend, combination or like event. The shares of Series C Preferred Stock shall be entitled to piggy-back registration rights.

Adoption of 2009 Equity Incentive Plan

On July 7, 2009, the Board of Directors and a majority of the holders of the voting capital of the Company, consisting of two shareholders with an aggregate of 53%, voted to adopt the 2009 Dynamic Response Group, Inc Equity Incentive Plan (the “Plan”).

 

15


Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that relate to, among other things, our business strategy, the market opportunity for our products, including expected demand for our products, our estimates regarding our capital requirements and other plans, objectives, and intentions. Any statements contained in this Quarterly Report that are not statements of historical fact may be deemed to be forward-looking statements, including any statements relating to future actions and outcomes including but not limited to prospective products, future performance or results of current or anticipated products, sales and marketing efforts, costs and expense trends, future interest rates, outcome of contingencies and their future impact on financial condition, results of operations, liquidity, business strategies, cost savings, objectives of management, and other matters. Forward-looking statements can be identified by the use of words such as “may,” “should,” “will,” “could,” “estimates,” “predicts,” “potential,” “continue,” “anticipates,” “believes,” “plans,” “expects,” “future” and “intends” and similar expressions. Forward-looking statements may involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance to differ from those projected in the forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Factors that could cause or contribute to differences in results and outcomes from those in our forward-looking statements include, without limitation, those items discussed in the “Risk Factors” section or other sections in the Company’s Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission (“SEC”), as well as in Item IA of Part II of this Quarterly Report. All forward-looking statements are expressly qualified in their entirety by such risk factors. We undertake no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

OVERVIEW

The Company . We are a marketing company, developer and distributor of personal development, wellness and entertainment consumer goods and services through print catalogs, radio, direct mail, direct response television programming (also known as “DRTV” or infomercials) and the Internet. Our operations are vertically integrated from content creation, through product development and sourcing, to customer service and distribution.

The Company was organized in 1982 as a Delaware corporation under the name Robotic Systems & Technology, Inc. In 1994, the Company changed its name to Concord International Group, Inc. which merged into Maxnet, Inc. in June 1997. In July 1997, Maxnet, Inc. merged into Maxplanet Corp. In May 2006, the Maxplanet Corp. filed articles of domestication to change its state of incorporation from Delaware to Florida and in June 2006 merged into Youth Enhancement Systems, Incorporated. In March 2007 the Company changed its name to Dynamic Response Group, Inc.

 

16


Table of Contents

The Company has been a reporting company since March 2007 and its common stock is quoted on the Over-the-Counter-Bulletin-Board under the symbol “DRGZ.OB”. Our principal place of business is located at 4770 Biscayne Boulevard, Suite 780, Miami, Florida 33137. Our telephone number is (305) 576-6889. Our website is www.dynamicresponsegroup.com. The information on our website is not incorporated into and is not a part of this Quarterly Report.

Products and Services. Our success depends in part on our ability to offer products that reflect consumers’ tastes and preferences and therefore, items are added and removed from our product line accordingly. Our current product offerings consist of Riddex Plus, an electronic pest control product that creates an irritating environment for rodents, roaches and other pests inside walls, chasing them from homes and deterring future pests from entering.

Products in Development and Testing . Both Vibio, an exercise platform wholly owned and developed by us, and Spin Fryer, a patented technology that allows for the cooking of fried foods with 50% less oil on the food after cooking, are still in development. We expect to have a working prototype of the Spin Fryer in late 2009. Medico Express, Inc., a licensed durable medical equipment provider and subsidiary of the Company, was approved for billing privileges from Medicare on July 28, 2009 enabling this subsidiary to begin providing direct-to-consumer Medicare reimbursed diabetic medical products targeting the Hispanic community in the United States, Puerto Rico and the Virgin Islands. We anticipate testing our first commercial for Medico in August 2009.

In July, we reacquired our rights to market and sell Aeropedic, a mattress topper constructed from high quality memory foam with adjustable functions, from Allstar Marketing Group, LLC (“Allstar”) and are in the process of shooting a commercial which we anticipate testing in during the third quarter of this year. We also acquired the rights to market and sell Gem Magic, a one step tool that allows consumers to add gems and rhinestones to fabric to create designer looks at a fraction of the cost, from Allstar. The Company will market and distribute Gem Magic in exchange for 60% of the net revenue. The Company will also receive 40% royalties based on gross profits at such time as the Company meets a $1 million marketing benchmark. The term of the agreement is for one year with automatic renewals upon the Company meeting sales of 100,000 units. We are currently editing advertisements for Gem Magic and plan on testing during the fourth quarter of 2009.

Sales and Marketing . We purchase media to advertise our products and programs through radio, direct mail, the Internet and through DRTV or infomercials. Our primary focus on sales and marketing is through DRTV programming that we develop, test and produce in-house for distribution through licensed distributors in the United States. None of our products are currently sold outside the United States. We also use the Internet to sell our products and to provide information for each product to consumers. We offer each of our products through their own websites and promote our websites through visual media, print publications, product packaging and Internet links.

Distribution, Customer Service and Returns . Through each medium, we provide a phone number to our call centers that a consumer calls to order a product. The call center takes the order and transmits order and payment information to our fulfillment center. We also license our products and our advertising through distributors who invest in media and take a larger percentage of the

 

17


Table of Contents

sales. These distributors purchase the goods from us at wholesale and take on the responsibility of marketing our products. We currently outsource order fulfillment, payment processing, inventory management and customer service through Planet E Shop that allows us to distribute products, just-in-time, from a fulfillment center located in Dallas, Texas. This center oversees our customer support for Internet sales and returns and exchanges. Products ordered through one of our in-bound call center partners are generally shipped within 48 hours.

We also have an exclusive agreement with Global DR, an international sourcing and distribution-company with distribution in over seventy countries worldwide. Global grants us exclusive rights on a right of first refusal basis to license Global’s internationally successful products and infomercials for marketing in the United States market. Conversely, the agreement grants Global the exclusive right to distribute our products in its distribution stream worldwide.

SUBSIDIARIES

The Company’s wholly owned subsidiaries are TMK Holdings, Inc, a Florida corporation, Consumer Dynamix Corp, a Florida corporation, ProCede Corp, a Florida corporation and TV Short Force, Inc., a Florida corporation. The Company is the majority shareholder of Medico Express, Inc. (f/k/a USA 24/7, Inc.) a Florida corporation.

RECENT DEVELOPMENTS

On June 10, 2009, the Company increased its authorized common stock from 100,000,000 shares to 250,000,000 shares and its preferred stock from 10,000,000 shares to 50,000,000 shares. Immediately following, on June 11, 2009, the Company implemented a 100 for 1 reverse stock split and changed its trading symbol from DRGP.OB to DRGZ.OB. As a result of increasing its authorized capital, 8,300,749 shares, being all of the issued and outstanding shares of the Company’s Series A Preferred Stock, automatically converted into shares of the Company’s common stock at a rate of one for twelve, or an aggregate of 99,608,988 shares of common stock.

On July 30, 2009, the Company designated 10,000,000 shares of its preferred stock as Series B Preferred Stock and 2,008,000 shares of preferred stock as Series C Preferred Stock, as more fully described in Part II, Item 2 of this Quarterly Report on Form 10-Q.

On July 8, 2009, the Company filed a registration statement on Form S-8 under the Securities Act of 1933, as amended (the “Securities Act”) in order to register a maximum of 5,000,000 shares of the Company’s common stock, issuable under the 2009 Dynamic Response Group, Inc Equity Incentive Plan (the “Plan”) as more fully described in Part II, Item 4 of this Quarterly Report on Form 10-Q.

OUTLOOK

As a result of reducing expenses, implementing salary furloughs, and eliminating underperforming products, we recognized net income of $59,957 for the second quarter of 2009 as compared to a net loss of $341,516 during the first quarter. Gross profit, as a percentage of gross revenue, was higher during the second quarter 2009 as compared to the first quarter 2009 and as compared to the same quarter in 2008.

 

18


Table of Contents

To increase sales, we have added to our product lineup, most notably with Aeropedic which we anticipate testing in during the third quarter of this year and Gem Magic which we expect to begin testing during the fourth quarter of 2009. Our subsidiary, Medico, was approved for billing privileges on July 28, 2009, enabling this subsidiary to begin providing direct-to-consumer Medicare reimbursed diabetic medical products targeting the Hispanic community in the United States, Puerto Rico and the Virgin Islands. We anticipate testing our first commercial for Medico during August of this year.

Management is currently in the final stages of negotiating with several institutions to secure financing for the operations of Medico and the Company.

To reduce debt on our books, management has structured equity conversions of an aggregate of $2.3 million which includes accounts payable and convertible notes.

We expect the challenges resulting from the global economic downturn to stabilize throughout the remainder of fiscal 2009 and believe that our strategy of restructuring our product mix and reducing expenses and debt will help us weather the economic downturn in the long run and improve operating efficiency.

Our financial statements are consolidated to include the accounts of the Company and our wholly owned Florida subsidiaries, TMK Holdings, Inc, Consumer Dynamix Corp, ProCede Corp and TV Short Force, Inc. along with Medico Express, Inc., a Florida corporation of which the Company is the majority shareholder.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and accompanying notes included under Part I, Item 1 of this Quarterly Report and our audited financial statements and accompanying notes and the information set forth under Item 7 “Management’s Discussion and Analysis or Plan of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2008 as filed on April 15, 2009 (our “2008 Annual Report”).

Results of Operations - Comparative Three Month Periods Ended June 30, 2009 and 2008

We recognized a net profit of $59,957 for the three months ended June 30, 2009 up $1,929,002 as compared to $(1,869,045) for the same period in 2008.

 

19


Table of Contents

NET REVENUE BY PRODUCT

 

Product

   Three Months ended
June 30, 2009
    Three Months ended
June 30, 2008
    Change  

Riddex Plus

   $ 2,414,302    92   $ 4,905,438    68     ($2,491,136   -51

ProCede (1)

   $ 14,508    1   $ 743,819    10     ($729,311   -98

Turbo Cooker (2)

   $ 7,713    *        —        $ 7,713     

The Official NASCAR Members Club (3)

     —      —        $ 516,783    7     ($516,783   -100

Legends of Soul (3)

   $ 2,468    *      $ 594,616    8     ($592,148   -100

Other

   $ 192,235    7   $ 487,515    7     ($295,280   -61

NET REVENUE

   $ 2,631,227    100   $ 7,248,172    100    

 

* Less than 1%

 

(1) Due to underperforming sales, we discontinued our marketing efforts for this product during the second half of 2008. Sales during the second quarter 2009 reflect sales from residual orders.

 

(2) We launched Turbo Cooker during the second quarter of 2008; however, due to less than favorable profit margins, we discontinued this product during the first quarter of 2009.

 

(3) We discontinued our NASCAR and Legends of Soul product offerings in 2008 due to weakened consumer demand and increased return rates associated with these products.

Net revenue decreased $4,616,945 or 64% to $2,631,227 for the three months ended June 30, 2009 as compared to $7,248,172 for the six months ended June 30, 2008. The decrease in net revenue was due primarily to the aforementioned fewer product offerings during the second quarter as compared to the same quarter in 2008. By eliminating these underperforming products, we realized a 92% decrease in returns and allowances, down to $192,813 for the three months ended June 30, 2009 as compared to $2,304,120 for the same three months 2008. Returns and allowances during the second quarter of 2009 were 7% of our gross revenue as compared to 24% for the second quarter of 2008.

As a result of our reduced product offerings in late 2008 and the first two quarters of 2009, our cost of revenues decreased $1,177,280 or 71% to $475,496 for the three months ended June 30, 2009 as compared to $1,652,776 for the three months ended June 30, 2008. Cost of revenues, as a percentage, remained consistent at 17% of our gross revenue during the three months ended June 30, 2009 and for the same period in 2008. As a result of the decrease in our sales, gross profit decreased $3,439,665 or 61% to $2,155,731 for the three months ended June 30, 2009 as compared to $5,595,396 for the same three months ended June 30, 2008.

 

20


Table of Contents

Total operating expenses decreased $5,345,158 or 73% to $2,017,518 for the three months ended June 30, 2009 as compared to $7,362,676 for the three months ended June 30, 2008 as follows:

Selling and marketing expenses decreased $4,657,312 or 80% to $1,166,577 for the three months ended June 30, 2009 as compared to $5,823,889 for the three months ended June 30, 2008. The decrease was due primarily to a 100% decrease in royalties; a 98% decrease in commissions; an 82% decrease in media and advertising; and a 90% decrease in Other selling expense which consists of product development, testing and infomercials, and development of an in-house ecommerce center.

Merchant charges decreased $176,550 or 54% to $152,284 as compared to $328,834 for the three months ended June 30, 2008. The decrease in credit card merchant fees is directly related to our decrease in revenue.

General and administrative expenses decreased $570,255 or 47% to 639,698 for the three months ended June 30, 2009 compared to $1,209,953 for the same period in 2008. The decrease was the result of staff furloughs and reductions, legal and regulatory costs, and public relations costs.

Results of Operations - Comparative Six-Month Periods Ended June 30, 2009 and 2008

We recognized a net loss of $(281,557) for the six months ended June 30, 2009, up $1,176,557 as compared to $(1,458,115) for the same period in 2008.

NET REVENUE BY PRODUCT

 

Product

   Six Months ended June 30,
2009
    Six Months ended June 30,
2008
    Change  

Riddex Plus

   $ 6,279,351    87   $ 9,694,179    63     ($3,414,828   -35

ProCede (1)

   $ 49,875    1   $ 1,600,441    10     ($1,550,566   -97

Turbo Cooker (2)

   $ 178,714    2   $ 0    0   $ 178,714     

The Official NASCAR Members Club (3)

     —      —        $ 1,311,142    9     ($1,311,142   -100

Legends of Soul (3)

   $ 79,250    1   $ 1,886,476    12     ($1,807,226   -96

Other

   $ 591,727    8   $ 778,235    5     ($186,508   -24

NET REVENUE

   $ 7,178,917    100   $ 15,270,473    100    

 

(1) Due to underperforming sales, we discontinued our marketing efforts for this product during the second half of 2008. Sales during the second quarter 2009 reflect sales from residual orders.

 

(2) We launched Turbo Cooker during the second quarter of 2008; however due to less than favorable profit margins, we discontinued this product during the first quarter of 2009.

 

21


Table of Contents
(3) We discontinued our NASCAR and Legends of Soul product offerings in 2008 due to weakened consumer demand and increased return rates associated with these products.

Net revenue decreased $8,091,556 or 53% to $7,178,917 for the six months ended June 30, 2009 as compared to $15,270,473 for the six months ended June 30, 2008. As discussed in our results of operations for the three months ended June 30, the decrease in revenue was due primarily to .fewer product offerings following our elimination of underperforming products. We realized an 82% decrease in returns and allowances, down to $762,322 for the six months ended June 30, 2009 as compared to $4,289,804 for the same six months 2008. Returns and allowances for the six months ended June 30, 2009 were 10% of our gross revenue as compared to 22% for the same period 2008.

Cost of revenues decreased $1,317,483 or 44% to $1,699,033 for the six months ended June 30, 2009 as compared to $3,016,516 for the six months ended June 30, 2008. Cost of revenues was 21% of our gross revenue during the six months ended June 30, 2009 as compared to 15% for the six months ended 2008. The decrease was the result of the reduced number of products in our product mix. As a result of a decrease in our sales, gross profit decreased $6,774,073 or 55% to $5,479,884 for the six months ended June 30, 2009 as compared to $12,253,957 for the six months ended June 30, 2008.

Total operating expenses decreased $8,167,420 or 59% to $5,612,108 for the six months ended June 30, 2009 as compared to $13,779,528 for the six months ended June 30, 2008 as follows:

Selling and marketing expenses decreased $7,591,712 or 69% to $3,463,570 as compared to $11,055,282 for the six months ended June 30, 2008. The decrease was due primarily to payment of royalties during 2009, offset by a 99% decrease in commissions; a 69% decrease in media and advertising; and a 97% decrease in Other expenses which consists of product development, testing and infomercials, and development of an in-house ecommerce center.

Merchant charges decreased $410,962 or 55% to $342,224 as compared to $753,186 for the three months ended June 30, 2008. The decrease in credit card merchant fees is directly related to our decrease in revenue.

General and administrative expenses decreased $618,137 or 31% to $1,352,923 for the six months ended June 30, 2009 compared to $1,971,060 for the same period in 2008.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows for the Six Months Ended June 30, 2009

Our cash decreased $153,717 or 80% from $192,332 as of December 31, 2008 to $38,615 as of June 30, 2009 as a result of Medico Express start-up costs.

 

22


Table of Contents

The following is a summary of the Company’s cash flows provided by (used in) operating, investing, and financing activities for the six months ended June 30, 2009, the six months ended June 30, 2008 and for the cumulative period from inception:

 

     Six Months
Ended

June 30,
2009
    Six Months
Ended

June 30,
2008
    Cumulative
Period from
inception
(October 1982)

to June 30,
2009
 

Net Cash From/(Used in) Operating Activities

   $ (244,270   $ 315,926      $ (5,410

Net Cash Provided by (Used in) Investing Activities

   $ (5,996   $ (150,884   $ (318,651

Net Cash Provided by (Used in) Financing Activities

   $ 96,549      $ (59,482   $ (208,895

Net Increase/(Decrease) in Cash and Cash Equivalents

   $ (153,717   $ 105,560      $ (532,956

Cash Flows from Operating Activities

Operating activities used net cash of $244,270 for the six months ended June 30, 2009. Net cash used reflects cash used to support net changes in working capital items, which included bad debt expense, inventory, accounts payable and other assets.

Cash Flows used in Investing Activities

Our investing activities used $5,996 in net cash during the six months ended June 30, 2009, no change from our first quarter. Net cash used is composed entirely of capital expenditures on equipment related to our business intelligence and database system.

Cash Flows from Financing Activities

Our financing activities provided net cash of $96,549 for the six months ended June 30, 2009 primarily as a result of an $18,482 loan to the Company by Melissa K. Rice, our Chief Executive Officer, and $79,002 realized upon the conversion of notes payable into shares of our Series C preferred stock.

Financial Position

Our total assets decreased $686,990 or 17% to $3,301,206 as of June 30, 2009 from $3,988,196 as of December 31, 2008. The decrease was primarily associated with a $153,717 decrease in cash; a $517,839 decrease in accounts receivable; a $387,780 decrease in inventory and a $318,584 decrease in other current asset, which was offset by an $187,846 increase in direct response advertising cost.

Obligations Outstanding

As of June 30, 2009 we owe $6,703,406 in accounts payable and accrued expenses to vendors and media providers and $74,507 to officers, employees and consultants to the Company for accrued wages and consulting expenses. The balance due to our officers, employees and consultants accrues interest at 12%.

 

23


Table of Contents

As of June 30, 2009, the Company owes Melissa K. Rice, our Chief Executive Officer, $18,596 which the Company has agreed to pay back at the interest rate of 12%.

In connection with unsecured convertible promissory notes that we issued to investors during 2005 and 2006, we, entered into conversion agreements with all of our note holders to convert $2,008,000, being all of the debt due and owing at June 30, 2009, into shares of our Series C preferred stock as more fully described in Part II, Item 2 of this Quarterly Report on Form 10-Q.

Material Commitments, Expenditures and Contingencies

We have commitments pursuant to our lease agreement and certain outstanding commitments to creditors as discussed under “Obligations Outstanding” in this section on Liquidity. We believe our available cash, cash expected to be generated from operations, and borrowing capabilities should be sufficient to fund our operations on both a short-term and long-term basis; however, as of June 30, 2009, the Company had cash and cash equivalents of $1.5 million, current liabilities of $6.8 million, stockholders’ deficit of $3.5 million and a cumulative net loss of $20,651,084 which may raise doubts about our ability to continue as a going concern without successfully deferring or reducing certain operating costs or raising funds. As a result, the accompanying unaudited financial statements have been prepared on the basis of a going concern assumption and do not reflect any adjustments that might result from the outcome of this uncertainty.

In preparation of launching Medico Express, we have expended $803,988 in connection with start up costs including licenses and required applications, hiring of personnel and creation of an in-house customer service department solely to handle fulfillment of Medico Express orders.

OFF BALANCE SHEET ARRANGEMENTS

None.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a discussion of our critical accounting estimates and policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2008 Annual Report. Our critical accounting policies have not changed materially since December 31, 2008.

 

24


Table of Contents

NEW ACCOUNTING PRONOUNCEMENTS

Recent accounting pronouncements that the Company has adopted or that will be required to adopt in the future are summarized in the notes to our financial statements and below:

Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”), which amends Accounting Research Bulletin 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS No. 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS No. 160 is effective for fiscal periods, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company has adopted SFAS No. 160 as of January 1, 2009 and does not anticipate that its adoption will have a material impact on its consolidated financial statements as of June 30, 2009.

Business Combinations

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS No. 141(R)). This Statement replaces SFAS No. 141, Business Combinations, and requires an acquirer to recognize the assets acquired, the liabilities assumed, including those arising from contractual contingencies, any contingent consideration, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS No. 141(R) also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS No. 141(R)). In addition, SFAS No. 141(R)’s requirement to measure the noncontrolling interest in the acquiree at fair value will result in recognizing the goodwill attributable to the noncontrolling interest in addition to that attributable to the acquirer.

SFAS No. 141(R) amends SFAS No. 109, Accounting for Income Taxes, to require the acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. It also amends SFAS No. 142, Goodwill and Other Intangible Assets, to, among other things, provide guidance on the impairment testing of acquired research and development intangible assets and assets that the acquirer intends not to use. SFAS No. 141(R) applies prospectively to 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, 2008. The Company has adopted SFAS No. 141(R) as of January 1, 2009 and does not anticipate that its adoption will have a material impact on its consolidated financial statements as of June 30, 2009.

 

25


Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a “smaller reporting company” as defined by Regulation S-K and as such, are not required to provide the information contained in this item pursuant to Regulation S-K.

 

ITEM 4T. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains 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”)) that are designed to ensure that information required to be disclosed in its reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of Melissa K. Rice, its Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on this evaluation, Melissa K. Rice, the Company’s Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2009.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2009, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

26


Table of Contents

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

We are occasionally subject to legal proceedings and claims that arise in the ordinary course of our business. It is impossible for us to predict with any certainty the outcome of pending disputes, and unless otherwise stated below, we cannot predict whether any liability arising from pending claims and litigation will be material in relation to our consolidated financial position or results of operations. We are currently not a party to any material litigation and are not aware of any threatened litigation that would have a material adverse effect on our business except as follows:

In April 2009, the Company was named as a defendant in an action brought in the 13th Judicial Circuit Court in and for Hillsborough County, Florida, by Reliant International Media, Corp., (n/k/a Responzetv American Inc., Lpd.) seeking specific performance on allegations of breach of contract and tortious interference in connection with an agreement to market and sell Riddex. At this time, the outcome of the litigation is undeterminable; however, the Company denies any allegations of wrongdoing and intends to vigorously defend itself.

 

ITEM 1A. RISK FACTORS

Please consider the following risk factors carefully. The descriptions below include material changes to the description of the risk factors previously disclosed in Item 1A of our 2008 Annual Report. The risks described below and in our 2008 Annual Report could materially and adversely affect our business, financial condition and results of operations. We also may be adversely affected by risks not currently known or risks that we do not currently consider to be material.

The Company has incurred recurring losses from operations, has limited cash and cash equivalents that raises substantial doubt about the Company’s ability to continue as a going concern . As of June 30, 2009, the Company had cash and cash equivalents of $1.5 million, current liabilities of $6.8 million and stockholders’ deficit of $3.5 million; however, during the six months ended June 30, 2009, the Company recognized a net profit of $59,959. Given the Company’s results from operations, current forecasts, and financial position as of June 30, 2009, our present capital resources may not be sufficient to fund our planned operations through and beyond 2009, and/or the Company may require significant additional funds in maintain operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. If we are not able to reduce or defer our expenditures, secure additional sources of revenue or otherwise secure additional funding, we may be unable to continue as a going concern, and we may be forced to restructure or significantly curtail our operations, file for bankruptcy or cease operations. We cannot assure you that we will successfully defer, reduce or eliminate certain operating expenditures or that we can obtain additional funding on reasonable terms, or at all. Further, if we raise additional funds by issuing equity securities, our stock price may decline, our existing stockholders will experience significant dilution, and the newly issued securities may have rights superior to those of existing shareholders.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Conversion of Series A Preferred Stock

On June 10, 2009, the Company increased its common stock from 100,000,000 shares to 250,000,000 shares and its preferred stock from 10,000,000 shares to 50,000,000 shares. As a result of filing the amendment to its articles of incorporation, 8,300,749 shares, being all of the issued and outstanding shares of the Company’s Series A Preferred Stock, automatically converted into shares of the Company’s common stock at a rate of one for twelve, or an aggregate of 99,608,988 shares of common stock. The converted Series A Preferred shares resumed the status of authorized shares of preferred stock without differentiation as to series and may be

 

27


Table of Contents

reissued as part of a new series of preferred stock subject to the conditions and restrictions on issuance set forth in the Articles of Incorporation or in any certificate of designation creating a series of preferred stock or any similar stock or as otherwise required by law. A copy of the amendment to increase the Company’s authorized stock was filed as an exhibit to Form 8-K on June 12, 2009. The Company’s Series A Preferred Certificate of Designations was filed as an exhibit with Form 8-K on December 12, 2008. Both amendments are incorporated by reference.

Debt Conversion

On June 30, 2009, the Company received conversion notices to convert an aggregate of $305,843 in past due consulting fees and accrued salary owed to a consultant and an employee for services, respectively, for services rendered between 2007 and 2008. Under the terms of agreements between the Company and the consultant and employee, respectively, dated January 2009, the consultant and employee could convert the obligations into shares of the common stock of the Company at the conversion rate of $0.02 per share beginning June 30, 2009, subject to volume limitations whereby the aggregate number of shares of common stock so converted, together with the converting party’s then current beneficial ownership of the Company’s common stock, does not exceed 9.9% of the Company’s issued and outstanding common stock in any three month period. In approving the conversions, the Company is relying upon exemptions provided for in Sections 4(2) and 4(6) of the Securities Act including Regulation D promulgated thereunder based the consultant’s and employee’s knowledge of our operations and financial condition and experience in financial and business matters that allowed them to evaluate the merits and risk of receipt of these securities. No shares were issued and outstanding as of June 30, 2009; however, as of August 11, 2009, 850,000 shares have been issued to the consultant and 300,000 shares have been issued to the employee.

Series B Preferred Stock

In June 2009, the Company entered into agreements with certain media vendors to convert accounts payable owed by the Company to the vendors into an aggregate of 10,000,000 shares of preferred stock designated as Series B Preferred Stock of the Company. The Series B Preferred Stock has a stated value of $0.50 per share. Holders of Series B Preferred shares will be entitled to non-cumulative quarterly dividends at the initial rate of 4% for the first two years, increasing to 8% in the third year, 12% in the fourth year and a 15% in the fifth year and thereafter. Holders of the Series B Preferred Stock are not entitled to voting rights or preference upon liquidation. Each holder of Series B Preferred Stock shall have the right to convert all or part of his or her shares of Series B Preferred Stock into shares of the Company’s common stock by dividing the stated value by $0.50 subject to closing price and volume limitations and subject to adjustment in the event of the subdivision, combination or consolidation by stock split, stock dividend, combination or like event. The shares of Series B Preferred Stock shall be entitled to piggy-back registration rights. The Company’s Series B Preferred Certificate of Designations was filed as an exhibit with Form 8-K on July 30, 2009 and is incorporated by reference.

 

28


Table of Contents

No shares were issued and outstanding as of June 30, 2009; however, as of August 11, 2009, the Company has issued 143,840 shares of Series B Preferred Stock to participating vendors. In issuing the 143,840 shares of Series B Preferred Stock, the Company relied upon exemptions provided for in Sections 4(2) and 4(6) of the Securities Act including Regulation D promulgated thereunder based the vendors’ knowledge of our operations and financial condition and experience in financial and business matters that allowed them to evaluate the merits and risk of receipt of these securities.

Series C Preferred Stock

In June 2009, the Company entered into securities exchange agreements with the holders of its 15% convertible notes to convert an aggregate of $2,008,000 due on the notes into 2,008,000 shares of preferred stock with a stated value of $1.00 per share designated as Series C Preferred Stock together with the right to receive shares of common stock of Medico Express, Inc. The Series C Preferred ranks senior to the Company’s common and Series B Preferred Stock. Holders of Series C Preferred shares will be entitled to non-cumulative quarterly dividends at the initial rate of 10% for the first year, increasing to 15% in the second year and thereafter. Holders of the Series C Preferred Stock are not entitled to voting rights. Each holder of Series C Preferred Stock shall have the right to convert all or part of his or her shares of Series C Preferred Stock into shares of the Company’s common stock by dividing the stated value by $0.50 subject to closing price limitations and subject to adjustment in the event of the subdivision, combination or consolidation by stock split, stock dividend, combination or like event. The shares of Series C Preferred Stock shall be entitled to piggy-back registration rights. The Company’s Series C Preferred Certificate of Designations was filed as an exhibit with Form 8-K on July 30, 2009 and is incorporated by reference.

No shares were issued and outstanding as of June 30, 2009; however, as of August 11, 2009, the Company has issued 2,008,000 shares of Series C Preferred Stock. In issuing the 2,008,000 shares, the Company relied upon exemptions provided for in Sections 4(2) and 4(6) of the Securities Act including Regulation D promulgated thereunder based the note holders’ knowledge of our operations and financial condition and experience in financial and business matters that allowed them to evaluate the merits and risk of receipt of these securities.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

There were no defaults upon Senior Securities during the period ended June 30, 2009.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Increase to Authorized Capital

On January 5, 2009 the Board of Directors of the Company approved an amendment to increase the Company’s authorized capital subject to shareholder approval. Under Florida law and our Bylaws any action required or permitted to be taken at a meeting of shareholders may be taken without a meeting and without a vote if the action is taken by holders of outstanding stock having not less than the minimum number of votes that would have been necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Melissa K. Rice and Patrice Kawas, being the holders of a majority of the voting power of the voting capital stock of the Company approved the actions by written consents in lieu of a meeting on January 6, 2009.

 

29


Table of Contents

On January 7, 2009, the Company filed a preliminary information statement on Schedule 14C with the SEC which was amended by filing Amendment No. 1 to the 14C on January 16, 2009; Amendment No. 2 on March 12, 2009; and Amendment No. 3 on April 20, 2009. On April 24, 2009, the Company received notice from the SEC that the staff had completed its review and had no further comments.

On May 19, 2009, the Company filed a definitive information statement and on June 10, 2009, the Company increased its authorized common stock from 100,000,000 shares to 250,000,000 shares and its preferred stock from 10,000,000 shares to 50,000,000 shares. Immediately following, on June 11, 2009, the Company implemented a 100 for 1 reverse stock split and changed its trading symbol from DRGP.OB to DRGZ.OB.

Adoption of 2009 Equity Incentive Plan

On July 7, 2009, the Board of Directors and a majority of the holders of the voting capital of the Company, consisting of two shareholders with an aggregate of 53%, voted to adopt the 2009 Dynamic Response Group, Inc Equity Incentive Plan (the “Plan”). On July 8, 2009, the Company filed a registration statement on Form S-8 under the Securities Act of 1933, as amended (the “Securities Act”) in order to register a maximum of 5,000,000 shares of the Company’s common stock, par value $.0001 per share, issuable under the Plan which is filed as an exhibit to the registration statement and is herein incorporated by reference. As of August 11, 2009, 865,000 shares have been issued under the Plan.

 

ITEM 5. OTHER INFORMATION

There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors. There is no other information required to be disclosed under this item which was not previously disclosed.

 

ITEM 6. EXHIBITS

 

No.

  

Description

31.1    Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

30


Table of Contents

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.

 

Date: August 14, 2009     DYNAMIC RESPONSE GROUP, INC.
      /s/ Melissa K. Rice
    Melissa K. Rice
    Principal Executive Officer and Principal Financial Officer

 

31


Table of Contents

Exhibit Index

 

No.

  

Description

31.1    Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32



Your Recent History
LSE
GKP
Gulf Keyst..
LSE
QPP
Quindell
FTSE
UKX
FTSE 100
LSE
IOF
Iofina
FX
GBPUSD
UK Sterlin..
Stocks you've viewed will appear in this box, letting you easily return to quotes you've seen previously.

Register now to create your own custom streaming stock watchlist.


NYSE and AMEX quotes are delayed by at least 20 minutes.
All other quotes are delayed by at least 15 minutes unless otherwise stated.