Digital Brand Media & Marketing Group, Inc. - Quarter Report: 2013 May (Form 10-Q)

In March, 2010, the Company issued a convertible debenture in the amount of $25,000 at 0% interest. The note matured in September 2010 and was convertible into shares of the Company’s common stock at $.01 per share.

In March 2011, the Company received $81,653 from a non-affiliated third party in the form of a convertible debenture at 0% interest and is due on demand. This note is convertible into approximately 80,000 shares of common stock.

Effective September 1, 2010 the Company adopted (FASB ASC 815-40-15-5) ("ASC 815") "Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock" which outlines new guidance for being indexed to an entity's own stock and the resulting liability or equity classification based on that conclusion. The adoption of ASC 815 affects the accounting for convertible instruments with provisions that protect holders from declines in the stock price ("down - round" provisions).

In March, April, May and July 2011, the Company entered into agreements with a third party non-affiliate to four 8% interest bearing convertible debentures for $203,000 due in nine months (“The 8% Convertible Notes”), with the conversion features commencing 6 months after the loan issuance date. The loans are convertible at an average share price computed on the 30 days prior to conversion. In connection with these debentures, the Company recorded a $207,705 discount on debt, related to the beneficial conversion feature of the note to be amortized over the life of the note or until the note was converted or repaid. As of August 31, 2012 these notes have been converted into 2,663,719 shares of common stock which were sold into the public market under Rule 144 completed April 2012. The Company has recorded amortization expense amounting to $100,533 for the year ended August 31, 2012.

During the year ended August 31, 2012, the Company entered into convertible loans with third party non-affiliates in which $100,000 of debt was assigned from a shareholder and $248,156 was received in cash. These loans bear interest ranging from 0% - 15% and mature in one year or less. They are convertible in six months or less at a discount based on average share prices ranging between 10 and 30 days. As a result the Company recorded $300,758 in debt discount related to the beneficial conversion feature. In connection with these debentures, the Company has recorded amortization expense amounting to $263,585 for the years ended August 31, 2012 with $137,709 net discount balance remaining.  As of August 31, 2012, $250,500 of debt was converted into 3,797,719 shares of common stock and $29,625 has been paid in cash. As of August 31, 2012, the balance of the Company’s convertible debt amounts to $250,642, net of discount.

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DIGITAL BRAND MEDIA & MARKETING GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – CONVERTIBLE NOTES PAYABLE (continued)

During the nine months ended May 31, 2013, the Company and an issuer of two convertible debentures totaling $110,000 and accrued interest of $4,570 restructured the convertible notes to a non-convertible loan totaling $185,000.

During the nine months ended May 31, 2013, the Company entered into convertible loans with third party non-affiliates in which $125,000 was received in cash. These loans bear interest ranging from 5% - 12% and mature in one year or less. They are convertible in one year or less at a discount based on average share prices ranging between 10 and 30 days. As a result, the Company recorded $125,000 in debt discount related to the beneficial conversion feature in connection with these debentures, $45,000 of which was initially recorded as a derivative liability due to the variable convertible terms and $80,000 was recorded in additional paid in capital. During the nine months ended May 31, 2013, the Company has recorded amortization expense amounting to $170,967 for the nine months ended May 31, 2013 with $91,739 net discount balance remaining.  As of May 31, 2013, the balance of the Company’s convertible debt amounts to $242,218, net of discount.

NOTE 6 - DERIVATIVE LIABILITIES

The Company accounts for the embedded conversion features included in its convertible instruments. The aggregate fair value of derivative liabilities at May 31, 2013 and August 31, 2012 amounted to $126,213 and $112,828, respectively. In addition, for the nine months ended May 31, 2013 and 2012, the Company has recorded a gain (loss) related to the change in fair value of the derivative liability amounting to $31,615 and $(213,323), respectively. At each measurement date, the fair value of the embedded conversion features was based on the binomial and the Black Scholes method, respectively.

NOTE 7 – ACCRUED PAYROLL

As of May 31, 2013 and August 31, 2012 the Company owes $803,469 and $716,475 respectively, in accrued salary to its employees. The amounts are non-interest bearing.

During the year ended August 2012, the Company and an officer agreed to end accruing the officer’s salary as of August 31, 2011. The officer was issued 268,367 shares of preferred stock to satisfy the accrued salary balance through August 31, 2011. The issuance of preferred stock may, if mutually agreed, continue annually in each fiscal year.

NOTE 8 - COMMON STOCK AND PREFERRED STOCK

In September, 2011, 65,000 shares of common stock were valued at $58,500 to consultants under the terms of the agreements for services.

In January 2012, 268,367 shares of preferred stock were issued to satisfy $228,929 in accrued salary due to an officer of the Company.

In January 2012, 471,345 shares of preferred stock were issued to three officers of the Company in connection with compensation.

In March 2012, 97,596 shares of preferred stock were converted into 51,769 shares of common stock for the minority shareholders pursuant to the share exchange agreement with Stylar Limited a/k/a Digital Clarity.

In May 2012, the Company announced the appointment of an executive officer as Head, US Operations and issued him 50,000 shares of preferred stock as a sign on bonus.

During the year ended August 31, 2012, 3,797,719 shares of common stock were issued to satisfy approximately $250,499 of convertible notes payable and 119,215 shares of common stock were issued to satisfy $8,120 in accrued interest.

During the year ended August 31, 2012, 1,489,375 shares of common stock were issued to satisfy $228,499 of loans payable. These conversions resulted in a modification expense of $172,694.

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DIGITAL BRAND MEDIA & MARKETING GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - COMMON STOCK AND PREFERRED STOCK

In November 2012, 41,995 shares of preferred stock were issued for an accrual to satisfy a debt of $35,824.

In November 2012, 433,637 shares of preferred stock were issued to four officers of the Company in connection with compensation.

On March 5, 2013, Digital Brand Media & Marketing Group, Inc. received approval from the Financial Industry Regulatory Authority (FINRA) for its 100 to 1 reverse stock split. All shares have been retroactively adjusted to reflect the 100 to 1 reverse stock split.

In April 2013, 496,118 shares of series 1 preferred stock were converted into 26,314,099 shares of restricted common stock by an officer of the Company.

As of May 31, 2013 there are 2,000,000 shares authorized of $.001 par value series 1 preferred stock, of which 935,402 were outstanding.   

As of May 31, 2013 there are 2,000,000 shares authorized of $.001 par value series 2 preferred stock, of which 0 were outstanding.   

As of May 31, 2013 there are 1,000,000,000 shares authorized of $.001 par value common stock, of which 35,842,074 were issued and outstanding. 

During the nine months ended May 31, 2013, 2,027,995 shares of restricted common stock were issued to satisfy $69,396 of loans payable.

During the nine months ended May 31, 2013, 2,000,000 Preferred Shares-Series 2 were cancelled as a result of the termination of the arrangement with BrandEntertain. As a result the consideration associated with the transaction totaling $219,798 was reversed and reflected in the statement of operations as a reduction to consulting expense.

NOTE 9 – CAPITAL CONTRIBUTION

During the year ended August, 2011 an officer of the Company made contributions of $190,000 to assist with Company accounts payable and various professional fees. These contributed funds are considered paid in capital.

During the year ended August, 2012 an officer of the Company made contributions of $95,000 to assist with Company accounts payable and various professional fees. These contributed funds are considered paid in capital.

NOTE 10 - EMPLOYMENT AND CONSULTING AGREEMENTS

In April, 2010 a term sheet was agreed with a Company officer for annual remuneration of £100,000 ($160,000) for the Chairman and Director of the Company, Mr. Neil Gray. Mr. Gray may receive a bonus totaling 50-75% of his base salary after certain Company performance objectives are achieved following the first year of operation. In 2010, Mr. Gray as a sign on bonus received 3.0 million restricted shares.  The term sheet is ongoing and renewable on an annual basis with accruals ceasing as of August 31, 2011.  The issuance of preferred stock may, if mutually agreed continue annually in each fiscal year.  Mr. Grey's term sheet was renewed on September 1, 2012. 

In September 2010 a term sheet was agreed with a company officer for annual remuneration of $150,000 with Ms. Linda Perry for her role as a consultant and as Executive Director for US interface/oversight regarding external regulatory reporting requirements. In addition, she is lead executive for capital funding requirements and business development.  The term sheet is ongoing and renewable on an annual basis.  Ms. Perry's term sheet was renewed on September 1, 2012. 

In April, 2011 a term sheet was agreed with a Company officer, Mr. Reggie James, where remuneration was split between his duties as Co-Chief Operating Officer, Senior Vice President and Executive Director of Digital Brand Media and Marketing Group, Inc. and Managing Director of Digital Clarity.  The term sheet is ongoing and renewable on an annual basis.  Mr. James's term sheet was renewed on September 1, 2012.

In June 2012, a term sheet was agreed with the Steven Baughman, Co-Chief Operating Officer and Head, US Operations with a sign on bonus of 50,000 preferred shares, further compensation is performance reflecting multiple projects and business development activities.

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DIGITAL BRAND MEDIA & MARKETING GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Item 2. Management's Discussion and Analysis or Plan of Operations

Readers are cautioned that certain statements contained herein are forward-looking statements and should be read in conjunction with our disclosures under the heading "Forward-Looking Statements" on page 1. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. This discussion also should be read in conjunction with the notes to our consolidated financial statements contained in Item 8. "Financial Statements and Supplementary Data," of this Report.

Background

Digital Brand Media & Marketing Group, Inc. (f/k/a RTG Ventures, Inc.) (the “Company”) is an OTC:QB listed company. Subsequent to the close of the fiscal year 2011 following substantial investment, the Company conducted a structural review of its total product and services offering. The review was carried out by the Board of Directors. The result was to bring technology development being outsourced directly into the Company to steward on a daily basis and any activities which were not revenue generating in the near term were eliminated. It was unanimously agreed that the company would adopt a lean approach that focused on the relationships and partnerships built up over the year in the music arena as well as build on the early stage development of its CloudChannel product by bringing the technology in-house following product development disappointments of the technology being developed in Ukraine. Within this shift, it was agreed that a new, more appropriate name be given to the services and technology offered by the Company that reflected the change and would allow the building of brand value in its own right. Pulse Station reflected that change.

Operations Overview/Outlook

Operationally, 2012 was important in evaluating the direction of the company and steering it toward a sustainable growth plan that will center on technology and digital marketing in 2013, as described below: 

Music & Entertainment Solutions

Digital Brand Media & Marketing Group, Inc. is taking its strengths including its relationships to build its business focus on music and entertainment. The Company, under very competitive global market conditions and growing development needs, continued to identify partnership opportunities using its platform, Pulse Station, and conducted a robust review of performance with excellent results.

The heart of the business is the marketing consultancy. Understanding each client and developing the model to individualize the outlook has been essential. This kind of close relationship with the client resulted in Digital Clarity being considered a close professional advisor.

In fiscal year 2013, the Company has taken the positive results of the last year and used that model to expand geographic reach with existing and new partners.

Digital Marketing Services

2012 saw a massive growth in the adoption of Social Media as a communication, marketing and engagement avenue. Through Stylar, Digital Brand Media & Marketing Group’s wholly owned digital marketing agency brand, Digital Clarity, it was clear that the direction, talent and growth of the company is in its human capital and outside relationships.

The clear opportunity is at the foundation of the company, namely the need to expedite and encourage development in the digital marketing services sector. The Company must jumpstart the growth by significant capital infusion in fiscal year 2013 to grow simultaneously in multiple geographies.

As a foundation, the financial review showed that Digital Clarity continued to be revenue generating and remained cash flow positive.

Key Milestones

During the latter part of 2012, Digital Clarity continued to make inroads into established and emerging markets. As part of this push, that was greatly enhanced and supported by a newly created Head of US Operations, Steven Baughman, the company won a major deal with a US based entertainment group. The group was seeking a seasoned agency that could fulfill its complex specifications and grow with its aggressive expansion plans throughout the US and beyond. Digital Clarity was awarded the contract, removing the competitors to win the design and development of the new website centered on an intelligent design as well as a strong understanding and execution of social media integration.

Further to that success, Digital Clarity has also been in deep negotiation with a Luxury Brand Group that takes established and well known global high-end fashion brands into the rapidly growing Middle East market.

Digital Clarity is working with the group due to the agency’s ability to leverage on contacts within the region and the ability to deliver tangible strategy. The Middle East remains an important market for the company. These two initiatives are examples of the Company’s development activities which will serve as models for the 2013 fiscal year.

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Key Differentiators

2012 was about establishing strong foundations, streamlining operations and assessing activities on a cost benefit basis. 2013 is about growth and outreach.

As the internet and mobile arena continues to mature, the need to make sense of and manage companies through this often complex market is clearly an area of massive growth. The company is confident that the talent and experience within the digital marketing team is poised for a major springboard in fiscal 2013, but must be expanded significantly in order to support the global reach intended.

Experience

The company has reach and experience across a large number of vertical markets including: Automotive, Retail, Travel, Finance, Property, Recruitment, Advertising, Entertainment/Sports, B2B, Start-ups to name a few.

Relationships and Industry Contacts

The team at Digital Clarity have professional and personal contacts at companies such as Google, Microsoft and Facebook, often being invited to attend strategic market briefings and insights.

Partnerships and agency management have allowed Digital Clarity to work on some of the biggest brands, sitting behind the agencies as a support and resource to deliver very high quality service and results to their clients.

Team Expertise

·

PPC campaign experience especially Google AdWords existed

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SEO evolution from aggressive link building and onsite SEO through to strategic marketing integration of inbound marketing

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Website design and development based on results driven design and planning Brand consultancy.

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Social media management and advertising.Several clients have been “won” directly via Digital Clarity’s internal social media strategy

·

Sales and account management experience from multi-disciplined backgrounds

Evolution and Flexibility

The market is continually changing. Digital Clarity has always remained ahead of the curve and given their clients peace of mind by remaining a true strategic partner.

Creative, Individualized Solutions and Customer Service

Case Studies and testimonials reflect the client-centric approach of Digital Clarity. Being selected over larger more established firms support that we provide the client with skills that are differentiating. The Digital Clarity Brand is being established positively.

Growth opportunities in the Market

As the use of web mobile sites and applications grow, so do the complexities and challenges of using these sites and platforms commercially. Digital Clarity directs business through the maze of an often confusing and sophisticated set of barriers, to create a clear path for the customer to our client’s product or service. As this market matures, the need for companies to rely on the services from Digital Clarity can only grow. Here we look at some of the growth areas in Digital Clarity’s arsenal. 

Growth & Opportunities in Design

§    644,275,754– number of active web pages 1st QTR 2012 - NetCraft

§    6million domain added in first QTR 2012 - Verisign

§    By 2015, Mobile Internet Usage Will Increase by Factor of 26 - CISCO

§    665million media tablets in use worldwide By end of 2016 - Gartner Group

Growth & Opportunities in Search

§    The North American Search industry will grow from $19.3 bn in 2011 to $26.8bn in 2013 - SEMPO

§    Revenue from Localized Mobile Ads to Reach $5.8 Billion in U.S. by 2016 - BIA/Kelsey

§    U.S. search spend grew by 11 percent Year over Year, while ROI improved by 26 percent - Adobe

§    72% of Consumers Want Mobile-Friendly Sites - Google Research

§    2million search queries are made on Google, every minute - Google

§    Growth in Corporate Search - 50% of Fortune 100 Companies have a Google+ Account

Growth & Opportunities in Social Media

§    Fortune Global 100 companies have more accounts on each platform than ever before with an average:

§    10.1 Twitter accounts

§    10.4 Facebook pages

§    8.1 YouTube channels

§    2.6 Google Plus pages

§    2.0 Pinterest accounts

§    Seventy-four percent of companies studied have a Facebook page.

§    Ninety-three percent of corporate Facebook pages are updated weekly.

§    Forty-eight percent of companies are now on Google Plus.

§    Twenty-five percent of companies have Pinterest accounts.

§    Each corporate Facebook page has an average of 6,101 people talking about it.

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The need for Digital Brand Media & Marketing Group, Inc. to reach Global Markets

It is clear that the economy continues its slow recovery from the global effect of market forces which impact on all areas of commerce and trade. As the markets remain volatile, the opportunities for a company like Digital Brand Media & Marketing Group, Inc. to approach new business with its proven track record increase. The core markets remain US and English speaking European markets. Emerging markets are a target for the remainder of 2013. We already have identified a partner in the Middle East and are actively developing a significant client. In addition, BRIC countries (Brazil, Russia, India and China) would be the next targets from the emerging markets.

The company intends to further extend its services in the Middle Eastern market initially then review the successes using a lean methodology and continuous improvement along the way, and then roll out to the BRIC markets.

US           

The US remains at the center of the entertainment, technology and digital industries and as such the emphasis looking forward and building on the recent success in the last quarter of the 2012 calendar year means that Digital Brand Media & Marketing Group, Inc. and its agency Digital Clarity are perfectly positioned to spring board into this market using the successful models established this past year.

Currently, negotiations are taking place to extend relationships with collaborative partners that have clients in the entertainment and media sectors that can leverage Digital Clarity’s experience in the digital and social space.

With the appointment of Steven Baughman as Head of US Operations in June 2012, we are establishing a strong digital marketing presence in the Los Angeles area to cover the music and entertainment market and then plan to do the same later in 2013 in New York. We intended to establish the satellite office during the 2013 fiscal year but didn’t have the bandwidth to do so and develop our client base as well. As California remains a key regional base from which to build and expand relationships, the need to have a New York satellite office is equally important to serve and build relationships the largest advertising market in the US.

Europe

As the current base of the digital marketing agency is in London England, it is perfectly placed to reach out to the broader European market to replicate the Company’s model in the stronger economies in this region. As with the relationships mentioned in the US, opportunities are being explored as to how US partners can leverage Digital Clarity’s reach in this region and help take established US agencies into the European region.

Middle East

The Middle East is a fertile market for heritage based US and European brands looking for entry into this lucrative market. The fastest area for growth in this sector is to leverage on the luxury arena. Digital Clarity is already in discussions with a number of different luxury groups each with different brands within the group.

Given the complexity of the region as well as the enormous potential, it is important that Digital Clarity aligns itself with established players in local markets. With this in mind, Digital Clarity will look to collaborate with some digital agency partners where there is already a relationship and  create a strategy that allows  the company to look at the breakdown of current digital competence of these brands focusing on various touch points such as tablets, sites, mobile & social reach in the Middle East.

Our value proposition is very much about creating digital penetration of the Middle Eastern market for a particular group and how those brands would be positioned to create brand value – a bye product of which would be sales.

Areas supporting growth in the Middle East

§ Leverage of trade shows – e.g. MEE in November in Dubai – World Travel & Luxury Goods

§ 214,000 Chinese tourists visited Dubai in 2011, a 50% increase from the previous year.

§ 25% of luxury goods sold in the Mall of the Emirates were bought by Chinese tourists 2011

§  A recent survey by Chalhoub Group revealed that 70% of survey respondents shopped with friends and 40% with sisters and mothers. The survey found that having the right logo and fashion brand displayed on handbags or clothes is particularly important. For example, up to 90% of people surveyed in Riyadh, Saudi Arabia, believed it was important to have a prestigious logo displayed on their clothing or accessories.

Key differentiators

Artist Collaboration with the head of US Operations, Steven Baughman is an area that will see exponential growth in the coming 12 months and beyond. Artists and brands that look to leverage their celebrity status will look to companies such as Digital Clarity to help drive and develop their brand in the growing and complex arena of social media.

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Financial Overview/Outlook
The third quarter of the 2013 fiscal year continued the Company realignment from the previous year. Cost of sales decreased further while revenues continue to increase.

In addition, by the end of the fiscal year 2012 and continuing through the third quarter of 2013, all debt is in the hands of friendly lenders who have shown their support to the Company.

Going forward, Digital Brand Media & Marketing Group, Inc. intends to embark on a significant capital raise to allow the Company to scale up geographically and maximize our global reach through partnered relationships. This strategy is the most efficient and effective path to grow Digital Brand Media & Marketing Group, Inc. quickly into multiple revenue streams. We have proven the model in the last year. Our marketing services' offering is a labor intensive endeavor, wherein human capital is a key differentiator of knowledge and/or relationships.

The Board of Directors sees the remainder of fiscal 2013 as poised for growth on multiple fronts. With capital infusion, which will allow us to bring in new clients, grow existing successful clients and service them accordingly, coupled with an offer of a deferred tax asset to attract partners with significant revenue and expansion patterns, we will have a model in place which will be sustainable.

Off-Balance Sheet Arrangements

We are not currently a party to, or otherwise involved with, any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Recently Issued Accounting Pronouncements

Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, could have a material effect on the accompanying financial statements.

Reclassifications

Certain amounts in the prior period financial statements have been reclassified to conform with the current period presentation.

Significant and Critical Accounting Policies

Our discussion of the financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of any contingent assets and liabilities at the date of the financial statements. Management regularly reviews its estimates and assumptions, which are based on historical factors and other factors that are believed to be relevant under the circumstances. Actual results may differ from these estimates under different assumptions, estimates or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. See “Notes to Consolidated Financial Statements” for additional disclosure of the application of these and other accounting policies.

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LIQUIDITY AND CAPITAL RESOURCES

After the Board’s strategic review post-2011 fiscal year, we have migrated the technology in-house and are concentrating on activities which will grow Digital Clarity organically and by acquisition. We spent fiscal year 2012 establishing a client model for existing and new customers which can be exported geographically.

NINE MONTHS ENDED MAY 31, 2013

We had $30,190 cash at May 31, 2013. Our working capital deficit amounted to approximately $1.965 million at May 31, 2013.

During the nine months ended May 31, 2013, we used cash in our operating activities amounting to approximately $260,060. Our cash used in operating activities was comprised of our net loss from continuing operations of approximately $420,479 adjusted for the following:

Additionally, the following variations in operating assets and liabilities impacted our cash used in operating activity:

During the nine months ended May 31, 2013, we generated cash from financing activities of $229,500, which consist of the proceeds from convertible notes payable and loans payable. In addition we made payments for loans payable of $15,000.

NINE MONTHS ENDED MAY 31, 2012

We had $28,926 cash at May 31, 2012. Our working capital deficit amounted to approximately $1,740,000 at May 31, 2012.

During the nine months ended May 31, 2012, we used cash in our operating activities amounting to approximately $ 354,000. Our cash used in operating activities was comprised of our net loss from continuing operations of approximately $1,058,000 adjusted for the following:

Additionally, the following variations in operating assets and liabilities impacted our cash used in operating activity:

During the nine months ended May 31, 2012, we generated cash from financing activities of approximately $325,000, which consist of the proceeds from capital contributions, loans payable and convertible notes payable less a payment of debt made totaling $13,625.

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RESULTS OF OPERATIONS

Comparison of the Results for the Nine Months Ended May 31, 2013 and 2012

We currently generate revenue through our Pay-Per-Click Advertising, Search Engine Marketing, Search Engine Optimization Services, Web Design, Social Media & Digital analytics.

Revenue for the nine months ended May 31, 2013 and 2012 was approximately $330,000 and $332,000, respectively. For the nine months ended May 31, 2013 our primary sources of revenue are the Per-Click Web Design, and Search Engine Optimization Services. These primary sources amounted to greater than 85% of our revenues. Our secondary sources of revenue are our Social Media and Email Media. These secondary sources amounted to approximately 15% of our revenues.

For the nine months ended May 31, 2012 our primary sources of revenue are the Per-Click Advertising, and Search Engine Optimization Services. These primary sources amounted to greater than 74% of our revenues. Our secondary sources of revenue are our Social Media and Web Design. These secondary sources amounted to approximately 26% of our revenues. For the nine months ended May 31, 2011 our primary sources of revenue were the Per-Click Advertising, and Search Engine Optimization Services.

We recognize revenue upon the completion of our performance obligation, provided that: (1) evidence of an arrangement exists; (2) the arrangement fee is fixed and determinable; and (3) collection is reasonably assured.

Cost of sales for the nine months ended May 31, 2013 and 2012 was approximately $180,000 and $222,000, respectively. For the nine months ended May 31, 2013, cost of sales included advertising, salaries and media spend. This resulted in a gross profit of approximately $150,000 for the nine months ended May 31, 2013.

                 For the nine months ended May 31, 2012, cost of sales included advertising, salaries and media spend. This resulted in a gross profit of approximately $110,000 for the nine months ended May 31, 2012.

General and administrative costs decreased 20% to approximately $153,000 from approximately $193,000 for the nine months ended May 31, 2013 and 2012, respectively. This is primarily attributable to the streamlining of overhead resulting in a decrease in expenditures.

Payroll decreased for the nine months ended May 31, 2013 by 5% to approximately $11,000 as a result of the Company’s decrease in the number of employees. The Company has also adjusted its salary related to the elimination of an accrual of an officer of the Company.

               Professional fees (which include accounting/auditing, consulting and legal fees) decreased by approximately $155,000 for the nine months ended May 31, 2013. This decrease is primarily attributable to the termination of the arrangement with BrandEntertain and cancellation of 2,000,000 series 2 preferred shares. As a result of this cancellation, the Company reversed the consideration reserved totaling $219,798 relating to this transaction which is reflected in the statement of operations as a reduction to consulting expense.

Amortization and depreciation for the nine months ended May 31, 2013 and 2012 was approximately $173,000 and $206,000 respectively. The decrease is due to the full amortization of debt discount associated with existing notes, the conversion of existing notes as well as a decrease in the number of new convertible notes.

Interest expense for the nine months ended May 31, 2013 and 2012 was approximately $128,000 and $49,000 respectively. The increase of approximately $79,000 is primarily related to interest of $70,430 recorded in relation to two convertible debentures restructured to a non-convertible loan.

Gain (loss) on derivative liability totaled approximately $32,000 and $(213,000) for the nine months ended May 31, 2013 and 2012, respectively and was due to the calculation of a derivative liability associated with the issuance of convertible note payables issued in 2013 and 2012 as well as the reversal of derivative liabilities relating to the restructuring of convertible notes to a loan payable (non-convertible).

Other interest – modification expense totaled approximately $0 and $162,000 for the nine months ended May 31, 2013 and 2012, respectively and was due to the price modification associated with the calculation of convertible shares issued associated with the convertible note payables issued in 2012.

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Comparison of the Results for the Three Months Ended May 31, 2013 and 2012

We currently generate revenue through our Pay-Per-Click Advertising, Search Engine Marketing, Search Engine Optimization Services, Web Design, Social Media & Digital analytics.

Revenue for the three months ended May 31, 2013 and 2012 was approximately $106,000 and $118,000, respectively. For the three months ended May 31, 2013 our primary sources of revenue are the Per-Click Advertising, Web Design and Search Engine Optimization Services. These primary sources amounted to greater than 90% of our revenues. Our secondary sources of revenue are our Social Media and Email Media. These secondary sources amounted to approximately 10% of our revenues.

                For the three months ended May 31, 2012 our primary sources of revenue are the Per-Click Advertising, and Search Engine Optimization Services. These primary sources amounted to greater than 58% of our revenues. Our secondary sources of revenue are our Social Media and Web Design. These secondary sources amounted to approximately 30% of our revenues.

We recognize revenue upon the completion of our performance obligation, provided that: (1) evidence of an arrangement exists; (2) the arrangement fee is fixed and determinable; and (3) collection is reasonably assured.

Cost of sales for the three months ended May 31, 2013 and 2012 was approximately $53,000 and $63,000, respectively. For the three months ended May 31, 2013, cost of sales included advertising, salaries and media spend. This resulted in a gross profit of approximately $53,000 for the three months ended May 31, 2013.

General and administrative costs decreased 49% to approximately $36,000 from approximately $70,000 for the three months ended May 31, 2013 and 2012, respectively. This is primarily attributable to the streamlining of overhead resulting in a decrease in expenditures.

Payroll decreased for the three months ended May 31, 2013 by 30% to approximately $51,000 as a result of the Company’s decrease in the number of employees. The Company has also adjusted its salary related to the elimination of an accrual of an officer of the Company.

Professional fees (which include accounting/auditing, consulting and legal fees) decreased by approximately $210,000 for the three months ended May 31, 2013. This decrease is primarily attributable to the termination of the arrangement with BrandEntertain and cancellation of 2,000,000 series 2 preferred shares. As a result of this cancellation, the Company reversed the consideration totaling $219,798 relating to this transaction which is reflected in the statement of operations as a reduction to consulting expense.

Amortization and depreciation for the three months ended May 31, 2013 and 2012 was approximately $71,000 and $67,000 respectively. The increase is due to an additional $125,000 debt discount recorded in 2013.

Interest expense for the three months ended May 31, 2013 and 2012 was approximately $92,000 and $16,000 respectively. An increase of approximately $76,000 is primarily related to interest of $70,430 recorded in relation to two convertible debentures restructured to a non-convertible loan.

Gain (loss) on derivative liability totaled approximately $174,000 and $(28,000) for the three months ended May 31, 2013 and 2012, respectively and was due to the calculation of a derivative liability associated with the issuance of convertible note payables issued in 2013 and 2012.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

As a “smaller reporting company”, as defined by Rule 10(f)(1) of Regulation S-K, the Company is not required to provide this information.

Item 4T. CONTROLS AND PROCEDURES

As of the end of the period covered by this quarterly report, our management evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Exchange Act. Based upon that evaluation, our management concluded that, as of May 31, 2013, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, as appropriate to allow timely decisions regarding required disclosure. 

Evaluation of Disclosure Controls

We maintain controls and procedures designed to ensure that we are able to collect the information that is required to be disclosed in the reports we file with the Securities and Exchange Commission (the "SEC") and to process, summarize and disclose this information within the time period specified in the rules of the SEC. Our management is responsible for establishing, maintaining and enhancing these procedures. Management is also responsible, as required by the rules established by the SEC, for the evaluation of the effectiveness of these procedures.

Internal Controls

We maintain a system of internal controls designed to provide reasonable assurance that transactions are executed in accordance with management's general or specific authorization; transactions are recorded as necessary to permit preparation of financial statements in conformity with Generally Accepted Accounting Principles ("GAAP") and maintain accountability for assets. Access to assets is permitted only in accordance with management's general or specific authorization.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this item.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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