Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following is management’s discussion and analysis of the consolidated financial condition and results of operations of Type 1 Media, Inc. (“Type 1 Media”, the “Company”, “we”, and “our”) for the three and six month period ended June 30, 2014. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements. The following information should be read in conjunction with the consolidated interim financial statements for the period ended June 30, 2014 and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q (this “Report”).
Overview
Type 1 Media was incorporated in the State of Delaware on January 12, 2012. Type 1 was formed primarily to inform people new to type 1 diabetes about living well with the condition as well as products and services that will help them thrive.
Type 1 Media began its business by creating short custom videos for pharmaceutical companies and medical devices companies who sell medications and products that people with type 1 diabetes need, as well as videos for charities concerned with type 1 diabetes. These projects, completed in 2012, helped build the Company’s reputation so that the Company could seek sponsorship for a larger project, titled
Welcome to Type 1,
which is detailed in the “Business Strategy" section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
The Company intends to expand its business through the acquisition and development of new and existing companies. At this time, the Company has not identified or actively sought out a potential acquisition target.
Results of Operations
Comparison of the three months ended June 30, 2014 and 2013.
We are still in our development stage and our revenues for the three months ended June 30, 2014 and 2013 were $11,249 and $9,090, respectively.
Our operating expenses for the three months ended June 30, 2014 were $12,447 compared to operating expenses of $12,886 for the three months ended June 30, 2013.
The Company’s net profit for the three months ended June 30, 2014 was $5,323 compared to a net profit of $3,796 for the three months ended June 30, 2013.
Comparison of the six months ended June 30, 2014 and 2013.
Our revenues for the six months ended June 30, 2014 and 2013 were $34,948 and $9,090, respectively.
Our operating expenses for the six months ended June 30, 2014 were $34,789 compared to operating expenses of $31,331 for the six months ended June 30, 2013.
The Company’s net profit for the six months ended June 30, 2014 was $8,049 compared to a net profit of $22,241 for the six months ended June 30, 2013.
Liquidity and Capital Resources
As of June 30, 2014, cash flows used in operating activities was $82,088, cash flows from investing activities was $0, and net cash flows from financing activities was $(469) resulting in a total cash balance of $27,822 as of June 30, 2014.
The accrued expenses in the amount of $39,086 consist of salaries unpaid to Jonathan White and Oliver Brown, the Company’s two most involved employees. Both Jonathan White and Oliver Brown are aware that the repayment of these salaries from the Company is contingent upon the success of the Company and have deferred the salaries owed to them. Neither Dr. White nor Mr. Brown expect to demand their salary if it cause liquidity problems for the Company.
The current budget for the next 12 months is divided into three main departments and estimates website production costs for the next 12 months at $105,500 (Design: $14,000, Development: $51,000, Promotion: $27,500, Administration: $13,000), video production costs at $164,950 (Pre-Production: $12,000, Production: $32,450, Post-Production: $52,500, Distribution: $68,000), and operating costs at $178,601 (Salaries: $110,000, Travel: $26,500, Office: $21,201, Promotion: $20,900.
This plan of operations assumes that the original sponsorship target of $540,000 is met, minus the $90,000 that has already been obtained and spent. Should we obtain fewer sponsorships than expected, we will adjust our budget, starting with video post-production effects and titles, which can easily be easily substituted with more generic titles and effects.
Based on our financial history since inception, our independent registered public accounting firm has expressed substantial doubt as to our ability to continue as a going concern. Our independent registered public accounting firm raised the issue that the Company had a deficit accumulated during the development stage at June 30, 2014 and a net loss and net cash used in operating activities for the quarter then ended.
Limited Operating History
We have generated no independent financial history and have not previously demonstrated that we will be able to expand our business. Our business is subject to risks inherent in growing an enterprise, including limited capital resources and possible rejection of our business model and/or sales methods.
Critical Accounting Policies and Estimates
Our significant accounting policies are more fully described in Note 2 to our financial statements for the three months ended June 30, 204. 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, liabilities, revenues, and expenses, and the related disclosures of contingent assets and liabilities. Actual results could differ from those estimates under different assumptions or conditions. We believe that the following critical accounting policies are subject to estimates and judgments used in the preparation of our consolidated financial statements:
Basis of Presentation – Unaudited Interim Financial Information
The accompanying unaudited consolidated interim financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for the interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) to Form 10-K and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim consolidated financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented. Unaudited interim consolidated results are not necessarily indicative of the results for the full fiscal year. These consolidated financial statements should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2013 and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC on May 15, 2014.
Use of Estimates and Assumptions and Critical Accounting Estimates and Assumptions
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 and disclosure of contingent assets and liabilities at the date(s) of the financial statements and the reported amounts of revenues and expenses during the reporting period(s).
Critical accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates and assumptions affecting the financial statements were:
(i)
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Assumption as a going concern
: Management assumes that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business ;
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(ii)
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Allowance for doubtful accounts
: Management’s estimate of the allowance for doubtful accounts is based on historical sales, historical loss levels, and an analysis of the collectability of individual accounts and general economic conditions that may affect a client’s ability to pay . The Company evaluated the key factors and assumptions used to develop the allowance in determining that it is reasonable in relation to the financial statements taken as a whole;
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(iii)
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Fair value of long-lived assets
: Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives. The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates acquired assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events;
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(iv)
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Valuation allowance for deferred tax assets
: Management assumes that the realization of the Company’s net deferred tax assets resulting from its net operating loss (“NOL”) carry–forwards for Federal income tax purposes that may be offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company has incurred recurring losses, (b) general economic conditions, and (c) its ability to raise additional funds to support its daily operations by way of a public or private offering , among other factors.
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These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly.
Actual results could differ from those estimates.
Revenue Recognition
The Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.
The Company applies the aforementioned criteria of the revenue recognition policy in the accounting standards to the transactions that generated revenue in the Company’s financial statements as follows:
Whiteboard Video Creation
The Company creates whiteboard video for its customers. The Company charges 50% of the total estimated fees of the project as a retainer receivable before commencing the job. The Company recognizes whiteboard video creation revenue when the creation is completed and delivered to the customer.
Content Sponsorships
The Company sells sponsorship block in its website to pharmaceutical companies and medical device manufacturers. The Company recognizes content sponsorship revenue ratably over the period in which the related sponsorship content is available on the Company’s website.
The Company assesses collection based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. The Company does not request collateral from customers. If the Company determines that collection of a fee is not reasonably assured, the Company defers the fee and recognizes revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash.
Recent Accounting Pronouncements
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in this Update change the requirements for reporting discontinued operations in Subtopic 205-20.
Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The ASU states that a strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity. Although “major” is not defined, the standard provides examples of when a disposal qualifies as a discontinued operation.
The ASU also requires additional disclosures about discontinued operations that will provide more information about the assets, liabilities, income and expenses of discontinued operations. In addition, the ASU requires disclosure of the pre-tax profit or loss attributable to a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements.
The ASU is effective for public business entities for annual periods beginning on or after December 15, 2014, and interim periods within those years.
In May 2014, the FASB issued the FASB Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”)
This guidance amends the existing FASB Accounting Standards Codification, creating a new Topic 606, Revenue from Contracts with Customer. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
To achieve that core principle, an entity should apply the following steps:
1.
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Identify the contract(s) with the customer
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2.
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Identify the performance obligations in the contract
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3.
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Determine the transaction price
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4.
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Allocate the transaction price to the performance obligations in the contract
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5.
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Recognize revenue when (or as) the entity satisfies a performance obligations
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The ASU also provides guidance on disclosures that should be provided to enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue recognition and cash flows arising from contracts with customers. Qualitative and quantitative information is required about the following:
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Contracts with customers – including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and performance obligations (including the transaction price allocated to the remaining performance obligations)
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2.
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Significant judgments and changes in judgments – determining the timing of satisfaction of performance obligations (over time or at a point in time), and determining the transaction price and amounts allocated to performance obligations
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3.
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Assets recognized from the costs to obtain or fulfill a contract.
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ASU 2014-09 is effective for periods beginning after December 15, 2016, including interim reporting periods within that reporting period for all public entities. Early application is not permitted.
In June 2014, the FASB issued the FASB Accounting Standards Update No. 2014-12 “Compensation—Stock Compensation (Topic 718) : Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU 2014-12”).
The amendments clarify the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The Update requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.
The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
Our business plan within 12 months is outlined below:
For the next 6 months the Company is engaged in completing production of 25-35 short videos providing useful information and empowerment to people and families new to type 1. The following 6 months will primarily be spent driving traffic to the website via search engine optimization; visits to endorcrinologists, diabetes educators, nurses, dieticians, and health care teams; and presenting at conferences. These activities will overlap somewhat. The process of soliciting and creating sponsorship agreements with clients in the pharmaceutical and medical devices industries relevant to type 1 diabetes is ongoing.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Contractual Obligations
The Company sold two of the nine available sponsorship blocks to date, one for CAD60,000 and one modified block for CAD15,000.
On April 15, 2012 the Company sold one of the nine available sponsorship blocks at CAD60,000 expiring December 31, 2014 to Animas Canada, a Canadian company owned by Johnson & Johnson. The Company accounted for the sale of the content sponsorship block ratably over the period in which the related sponsorship content is available on the Company’s website. For the year ended December 31, 2012 the Company recognized content sponsorship revenue of CAD16,362 under this sponsorship agreement. For the year ended December 31, 2013 and 2012 the Company recognized content sponsorship revenue of CAD21,816 and CAD16,362 under this sponsorship agreement, respectively.
On May 9, 2013 the Company reached an agreement with, and sold one modified sponsorship blocks at CAD15,000 expiring December 31, 2013, Medtronic Canada, a Canadian company owned by Johnson & Johnson. The Company accounted for the sale of the content sponsorship block ratably over the period in which the related sponsorship content is available on the Company’s website. For the year ended December 31, 2013 the Company recognized content sponsorship revenue of CAD15,000 under this sponsorship agreement.
The Company entered into an agreement with Dads Against Diabetes (“D.A.D.”) pursuant to which the Company agreed to create a promotional video for D.A.D for a fee of $8,000.
The Company entered into an agreement with Type 1 Diabetes TrialNet (“TrialNet”) pursuant to which the Company agreed to create a promotional video for TrialNet for a fee of $14,000.
As of the date of this Report, the Company has been awarded the Lilly Grant by Lilly USA, LLC in the amount of $75,000. The funds may be used only for the stated purpose of the grant and may not be used for the purpose of promoting any of the Company or its affiliates’ products, including entertainment, capital and operating expenses, gifts, compensation, or personal travel.
As of the date of this Report, the full amount has been collected pursuant to the Lilly Grant.