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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
     
 
ý
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 2011
 
or
 
o
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from__________to ___________                      
 
Commission file number- 333-170578
 
YELLOW7, INC.
(Exact name of registrant as specified in the charter)
 
Texas   61-155055
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
104 Hardwicke Lane, Little Elm, Texas   75068
(Address of principal executive office)
 
(Zip Code)

(972) 731-6720 ext 305
(Registrant's telephone number including area code)
 
        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 requirement for the past 90 days. Yes ý    No o
 
        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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o    No o
 
        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer o
 
Accelerated Filer o
 
Non-accelerated filer o
(Do not check if a
smaller reporting company)
 
Smaller reporting company x
 
        Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). YES o    NO ý
 
        As of  November 11, 2011, there were 61,800,000 shares of the Registrant's common stock, $.0001 par value outstanding.
 
 
-1-

 
Yellow7, Inc.
Index
 
   
Page No.
 
PART I—FINANCIAL INFORMATION
Item 1.
3
 
 
4
 
 
5
 
 
6
 
 
7
 
 
8
 
Item 2.
 
13
 
Item 3.
 
17
 
Item 4.
 
17
 
PART II—OTHER INFORMATION
 
Item 1.
 
18
 
Item 2.
 
18
 
Item 3.
 
18
 
Item 4.
 
18
 
Item 5.
 
18
 
Item 6.
 
18
 
19
 
 
 
-2-

 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
        This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that involve substantial risks and uncertainties. In addition, we, or our executive officers on our behalf, may from time to time make forward-looking statements in reports and other documents we file with the Securities and Exchange Commission, or SEC, or in connection with oral statements made to the press, potential investors or others. All statements, other than statements of historical facts, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words "expect," "estimate," "anticipate," "predict," "believe," "think," "plan," "will," "should," "intend," "seek," "potential" and similar expressions and variations are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
 
        Forward-looking statements in this report are subject to a number of known and unknown risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those described in the forward-looking statements, including, but not limited to, the risks and uncertainties described in the section entitled "Risk Factors" in our Annual Report on Form 10-K filed with the SEC on March 31, 2011, in this report as well as in the other documents we file with the SEC from time to time, and such risks and uncertainties are specifically incorporated herein by reference.
 
        Forward-looking statements speak only as of the date the statements are made. Except as required under the federal securities laws and rules and regulations of the SEC, we undertake no obligation to update or revise forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information. We caution you not to unduly rely on the forward-looking statements when evaluating the information presented in this report.
 
PART I—FINANCIAL INFORMATION
 
ITEM 1.    FINANCIAL STATEMENTS
 
 
        The financial statements of Yellow7, Inc. ("Yellow7" or the "Company") as of September 30, 2011 and December 31, 2010 and for the nine months ended September 30, 2011 and June 30, 2010 included herein have been prepared by the Company, without audit, pursuant to U.S. generally accepted accounting principles and the rules and regulations of the SEC. In addition, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements reflect, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the results for the interim periods. The results of operations for such interim periods are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K filed with the SEC, on March 31, 2011.
 
 
-3-

 
Yellow7, Inc.
(Formerly Yellow7, LLC)
Condensed Balance Sheets
September 30, 2011 and December 31, 2010
 
ASSETS
 
   
September 30, 2011
   
December 31, 2010
 
 
   
(Unaudited)
       
Current Assets:
           
Cash and cash equivalents
  $ 3,922     $ 12,021  
Accounts receivable, net of allowance of $3,500 and $3,500, respectively
    36,395       20,342  
Deferred tax asset - current
    14,000       16,000  
Total current assets
    54,317       48,363  
                 
Furniture and Equipment, net
    85,168       105,814  
                 
    $ 139,485     $ 154,177  
                 
LIABILITIES AND MEMBERS'/STOCKHOLDERS' EQUITY
 
                 
Liabilities:
               
Accounts payable and accrued expenses
  $ 100,358     $ 97,593  
Loans payable - current portion
    20,195       23,392  
Total current liabilities
    120,553       120,985  
                 
Non-current Liabilities
               
Loans payable - net of current portion
    66,185       80,609  
Total non-current liabilities
    66,185       80,609  
Total liabilities
    186,738       201,594  
                 
Members'/Stockholders' Equity (Deficit):
               
Common stock, $0.0001 par value; 100,000,000 shares authorized,
               
62,150,000 and 40,210,000 shares issued and outstanding, respectively
    6,215       4,021  
Additional paid in capital
    5,249       2,499  
Treasury stock, at cost; 350,000 and -0- shares at September 30, 2011 and
               
December 31, 2010, respectively
    (3,500 )     -  
Members' Equity (Deficit)
    -       -  
Retained Earnings (Deficit)
    (55,217 )     (53,937 )
      (47,253 )     (47,417 )
                 
    $ 139,485     $ 154,177  


 
-4-

 
Yellow7, Inc.
(Formerly Yellow7, LLC)
Condensed Statements of Operations
For the Nine Months Ended September 30, 2011 and 2010
(Unaudited)
 
   
For the Three Months Ended September 30,
   
For the Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenue, net
  $ 253,934     $ 133,364     $ 668,809     $ 531,284  
                                 
Cost of sales
                               
Contract labor
    8,479       7,810       30,819       34,588  
Other costs of sales
    63,497       7,137       78,075       22,969  
Total cost of sales
    71,976       14,947       108,894       57,557  
                                 
Gross profit
    181,958       118,417       559,915       473,727  
                                 
Operating expenses:
                               
Advertising
    14,289       8,627       23,275       16,249  
Provision for bad debts
    -       18,065       -       18,065  
Depreciation
    6,889       7,092       20,646       21,275  
Rent
    10,950       10,425       33,384       34,738  
Officers' compensation
    -       65,500       -       65,500  
Salaries
    (102,037 )     23,186       100,882       76,960  
Telephone
    3,631       4,357       12,351       13,477  
Other
    269,042       24,483       356,661       98,504  
      202,764       161,735       547,199       344,768  
                                 
Net (loss) income before other income and expenses
    (20,806 )     (43,318 )     12,716       128,959  
                                 
Other income and (expenses)
                               
Interest income
    2,536       -       2,536       -  
Income tax benefit
    3,000       8,000       (2,000 )     8,000  
Interest expense
    (913 )     (12,783 )     (9,588 )     (14,239 )
      4,623       (4,783 )     (9,052 )     (6,239 )
                                 
Net income
  $ (16,183 )   $ (48,101 )   $ 3,664     $ 122,720  
                                 
Net Income per common share - Basic and
                               
fully diluted
  $ (0.00 )     N/A     $ 0.00       N/A  
                                 
Weighted average number of shares
                               
outstanding - Basic and fully diluted
    43,212,192       N/A       43,212,192       40,205,250  
                                 
Pro-forma disclosure of income tax (provision)/benefit:
                               
Provision for income taxes
  $ -     $ -     $ (2,000 )   $ (29,000 )
Income tax benefit
    (7,000 )     18,000       -       -  
                                 
Pro-forma net income
  $ (27,806 )   $ (25,318 )   $ 10,716     $ 99,959  
                                 
Pro-forma disclosure of net income per common
                               
share - Basic and fully diluted
  $ (0.00 )   $ (0.00 )   $ 0.00     $ 0.00  
                                 
Pro-forma weighted average number of shares
                               
outstanding - Basic and fully diluted
    43,212,192       40,200,000       43,212,192       40,205,250  
 
 
-5-

 

Yellow7, Inc.
(Formerly Yellow7, LLC)
Statement of Stockholders' Equity (Deficit)
September 30, 2011
(Unaudited)
 
   
Common Stock
    Additional Paid in    
Treasury Stock
    Members' Equity     Retained Earnings    
Total Stockholders'
 
   
Shares
   
Amount
   
Capital
   
Shares
   
Amount
   
(Deficiency)
   
(Deficiency)
    Deficiency  
Balance - January 1, 2010
    -     $ -     $ -       -     $ -     $ (10,880 )   $ -     $ (10,880 )
                                                                 
Net income for the period from
    -       -       -       -       -               -       -  
January 1, 2010 through July 13, 2010
                                            170,821               170,821  
Distributions
    -       -       -       -       -       (142,400 )     -       (142,400 )
Conversion from Limited Liability
                                                            -  
Company to Corporation
                                    -       (17,541 )     17,541       -  
Sale of stock for cash
    40,200,000       4,020       -       -       -       -       -       4,020  
Sale of stock for cash
    10,000       1       2,499       -       -       -       -       2,500  
Net loss for the period from July 14,
                                                            -  
2010 through September 30, 2010
    -       -       -       -       -       -       (71,478 )     (71,478 )
Balance - December 31, 2010
    40,210,000       4,021       2,499       -       -       -       (53,937 )     (47,417 )
                                                                 
Cancellation of stock
    (27,500,000 )     (2,750 )     2,750       -       -       -       -       -  
Purchase of treasury stock, at cost
    -       -       -       350,000       (3,500 )     -       -       (3,500 )
Stock dividend (4:1)
    49,440,000       4,944       -       -       -       -       (4,944 )     -  
Net income
    -       -       -       -       -       -       3,664       3,664  
Balance - September 30, 2011
    62,150,000     $ 6,215     $ 5,249       350,000     $ (3,500 )   $ -     $ (55,217 )   $ (47,253 )


 
-6-

 
Yellow7, Inc.
(Formerly Yellow7, LLC)
Condensed Statements of Cash Flows
For the Nine Months Ended September 30, 2011 and 2010
(Unaudited)
 
   
2011
   
2010
 
             
Cash flows from operating activities:
           
Net income
  $ 3,664     $ 122,720  
Adjustments to reconcile net loss to net cash used
               
by operating activities:
               
Depreciation expense
    20,646       21,275  
Provision for doubtful accounts
    -       18,065  
Accounts receivable
    (16,053 )     (6,053 )
Deferred tax asset - current
    2,000       (8,000 )
Accounts payable and accrued expenses
    2,765       (211 )
Net cash used by operating activities
    13,022       147,796  
                 
Cash flows from financing activities:
               
Proceeds from issuance of common stock
    -       6,520  
Purchase of treasury stock, at cost
    (3,500 )     -  
Distributions to members
    -       (142,400 )
Loans payable
    (17,621 )     (17,989 )
Net cash provided by financing activities
    (21,121 )     (153,869 )
                 
Net decrease in cash
    (8,099 )     (6,073 )
Cash at beginning of period
    12,021       8,955  
Cash at end of period
  $ 3,922     $ 2,882  
                 
Supplemental cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 14,239     $ 14,239  
Income taxes
  $ -     $ -  

 
 
-7-

 

Yellow7, Inc.
(Formerly Yellow7, LLC)
Notes to Financial Statements
September 30, 2011
 
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Organization
 
Yellow7, Inc. (the "Company") was organized in Texas in January 2008 as a limited liability company. Prior to that date the Company was organized as a general partnership. On July 13, 2010 the Company's' equity structure was converted to that of a corporation. The Company provides software development and web development services to the general public.
 
Basis of Presentation
 
The accompanying unaudited financial statements of Yellow7 have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such principles and regulations of the Securities and Exchange Commission for Form 10-Q. All adjustments, consisting of normal recurring adjustments, have been made which, in the opinion of management, are necessary for a fair presentation of the results of interim periods. The results of operations for such interim periods are not necessarily indicative of the results that may be expected for a full year. The unaudited financial statements contained herein should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended December 31, 2010.
 
The balance sheet at September 30, 2011 has been derived from the audited financial statements at that date but does not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and notes thereto for the fiscal year ended December 31, 2010.
 
The condensed statements of operations include pro-forma information that shows the tax benefit/(expense) for all periods shown as if the Company's equity structure had been that of a corporation as of January 1, 2009. Pro-forma information has also been included for (loss) income per common share (basic and fully diluted) and for the weighted average number of shares outstanding (basic and fully diluted) as if the Company had issued the initial 40,200,000 shares on January 1, 2009.
 
Concentration of Credit Risk
 
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of trade accounts receivable. The Company minimizes its credit risk by performing credit evaluations of its customers' financial condition. The Company maintains an allowance for doubtful accounts based upon expected collectability.
 
 
-8-

 

Yellow7, Inc.
(Formerly Yellow7, LLC)
Notes to Financial Statements
September 30, 2011
 
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Accounts Receivable and Allowance for Doubtful Accounts
 
An allowance for uncollectible accounts is estimated and recorded based on the Company's historical bad debt experience and on management's judgment. The allowance for uncollectible accounts at September 30, 2011 and December 31, 2010 was $3,500 and $3,500, respectively.
 
Furniture and Equipment
 
Furniture and equipment are stated at cost. Maintenance, repairs and minor renewals are expensed as incurred. Furniture and equipment that is retired or sold, and the related gain or loss, if any, is taken into income currently. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.
 
The estimated useful lives for computing depreciation are:
 
Equipment and vehicles
5 - 10 years
Furniture and fixtures
5 - 7 years
Leasehold improvements
5 years
 
Use of Estimates
 
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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
 
Segment Information
 
The Company follows Accounting Standards Codification ("ASC") 280, "Segment Reporting". The Company currently operates in a single segment and will evaluate additional segment disclosure requirements as it expands its operations.
 
Income Taxes
 
Until July 12, 2010 the Company was a limited liability company, and therefore was not subject to income tax, as any income or loss was included in the personal returns of the individual members. Accordingly, no provision was made for income taxes in the financial statements through that date. On July 13, 2010 the Company converted its equity structure to that of a corporation at which time it became subject to income tax.
 
 
-9-

 

Yellow7, Inc.
(Formerly Yellow7, LLC)
Notes to Financial Statements
September 30, 2011
 
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Income Taxes (continued)
 
Subsequent to July 12, 2010, deferred income taxes are recognized for the tax consequences related to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes at each year end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is recognized when, based on the weight of all available evidence, it is considered more likely than not that all, or some portion, of the deferred tax assets will not be realized. Income tax expense is the sum of current income tax plus the change in deferred tax assets and liabilities.
 
ASC 740, Income Taxes, requires a company to first determine whether it is more likely than not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.
 
Net Income (Loss) per Common Share
 
Basic net income (loss) per common share is calculated using the weighted average common shares outstanding during each reporting period. Diluted net income (loss) per common share adjusts the weighted average common shares outstanding for the potential dilution that could occur if common stock equivalents (convertible debt and preferred stock, warrants, stock options, and restricted stock shares and units) were exercised or converted into common stock. There were no common stock equivalents at September 30, 2011.
 
Financial Instruments
 
The carrying value of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the short maturities of those instruments.
 
Cash and Cash Equivalents
 
For purposes of the statement of cash flows, the Company considers all highly liquid equity instruments with a maturity of three months or less to be cash equivalents.
 
Advertising
 
Advertising costs are charged to operations as incurred.
 
-10-

 

Yellow7, Inc.
(Formerly Yellow7, LLC)
Notes to Financial Statements
September 30, 2011
 
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Recent Accounting Pronouncements
 
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS).” This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level three fair value measurements. This pronouncement is effective for reporting periods beginning on or after December 15, 2011. The adoption of ASU 2011-04 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.
 
In June 2011, the FASB issued guidance on the presentation of comprehensive income. This guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The guidance allows two presentation alternatives; present items of net income and other comprehensive income in (1) one continuous statement, referred to as the statement of comprehensive income, or (2) in two separate, but consecutive, statements of net income and other comprehensive income. This guidance is effective as of the beginning of a fiscal year that begins after December 15, 2011. Early adoption is permitted, but full retrospective application is required under both sets of accounting standards. The Company is currently evaluating which presentation alternative it will utilize.
 
Note 2. FURNITURE AND EQUIPMENT
 
   
September 30, 2011
   
December 31, 2010
 
Vehicles
  $ 138,195     $ 138,195  
Equipment
    21,154       21,154  
Furniture and fixtures
    9,070       9,070  
      168,419       168,419  
Accumulated depreciation
    (83,251 )     (62,605 )
    $ 85,168     $ 105,814  
 
Depreciation expense was $20,646 and $21,275 for the nine months ended September 30, 2011 and 2010, respectively.
 
-11-

 

Yellow7, Inc.
(Formerly Yellow7, LLC)
Notes to Financial Statements
September 30, 2011
 
Note 3. LOANS PAYABLE
 
At September 30, 2011 and December 31, 2010, the Company was obligated for the following loans:
 
   
September 30, 2011
   
December 31, 2010
 
             
10.99% Loan payable due in 60 equal monthly installments of $1,000 through March 2014; secured by vehicle
  $ 26,471     $ 32,654  
                 
10.99% Loan payable due in 60 equal monthly installments of $1,081 through March 2014; secured by vehicle
    28,556       35,290  
                 
10.50% Term loan payable due in 61 equal monthly installments of $623 through October 2011
    -       2,971  
                 
8.00% Loan payable due in 144 equal monthly installments of $383 through October 2020; secured by motor home
    31,353       33,086  
      86,380       104,001  
Less current portion
    (20,195 )     (23,392 )
    $ 66,185     $ 80,609  
 
Note 4. STOCKHOLDERS' EQUITY
 
In July 2010, when the Company changes its equity structure to that of a corporation it issued 40,200,000 shares of common stock at par value for cash.
 
In August 2010, the Company issued 10,000 shares of common stock at $0.25 for cash.
 
In July 2011, two stockholders returned a total of 27,500,000 to the Company. The shares were then cancelled.
 
In July 2011, the Company purchased 350,000 shares from a stockholder at $0.01 per share ($3,500). These shares have been recorded as treasury stock by the Company at cost.
 
In July 2011, the Company declared a 4:1 stock dividend and issued 49,440,000 shares of common stock to stockholders of record as of July 22, 2011.
 
Note 5. RELATED PARTY TRANSACTIONS
 
In November 2006, the Company signed a five year lease for its offices with a managing member of the Company. The lease, which terminates in October 2011 calls for monthly rental payments of $3,337. Rent expense for the nine months ended September 30, 2011 and 2010 was $33,384 and $34,738, respectively.
 
 
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ITEM 2:    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion should be read in conjunction with (i) our financial statements for the years ended December 31, 2010 and  December 31, 2009 together with the notes to these financial statements; and (ii) the section entitled “Business” that appears elsewhere in this report.  The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this report. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this report.  Our financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.

The statements in this report include forward-looking statements.  These forward-looking statements are based on our management’s current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations.  You should not rely upon these forward-looking statements as predictions of future events because we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur.  You can identify a forward-looking statement by the use of the forward-terminology, including words such as “may”, “will”, “believes”, “anticipates”, “estimates”, “expects”, “continues”, “should”, “seeks”, “intends”, “plans”, and/or words of similar import, or the negative of these words and phrases or other variations of these words and phrases or comparable terminology.  These forward-looking statements relate to, among other things: our sales, results of operations and anticipated cash flows; capital expenditures; depreciation and amortization expenses; sales, general and administrative expenses; our ability to maintain and develop relationship with our existing and potential future customers;  and, our ability to maintain a level of investment that is required to remain competitive.  Many factors could cause our actual results to differ materially from those projected in these forward-looking statements, including, but not limited to: variability of our revenues and financial performance; risks associated with technological changes; the acceptance of our products in the marketplace by existing and potential customers; disruption of operations or increases in expenses due to our involvement with litigation or caused by civil or political unrest or other catastrophic events; general economic conditions, government mandates and conditions in the advertising industry in particular; and, the continued employment of our key personnel and other risks associated with competition.

For a discussion of the factors that could cause actual results to differ materially from the forward-looking statements see the “Liquidity and Capital Resources” section under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this item of this report and the other risks and uncertainties that are set forth elsewhere in this report or detailed in our other Securities and Exchange Commission reports and filings.  We believe it is important to communicate our expectations. However, our management disclaims any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

Overview

We are an operational company, incorporated as a limited liability company on February 26, 2007 and converted to a corporation on July 13, 2010.  We have generated revenues and expect to generate increased revenues in the foreseeable future.  
 
Our Officers and Directors are responsible for our managerial and organizational structure which will include preparation of disclosure and accounting controls under the Sarbanes Oxley Act of 2002. When these controls are implemented, they will be responsible for the administration of the controls. Should they not have sufficient experience, they may be incapable of creating and implementing the controls which may cause us to be subject to sanctions and fines by the Securities and Exchange Commission which ultimately could cause you to lose your investment.
 
Since incorporation, the Company has financed its operations through private investment.  We will continue to raise expansion capital through private placement or debt financing.  As of  September 30, 2011, we had revenues of $668,809 and had total expenses of  $547,199 as compared to revenues of $531,284 and expenses of  $344,768 for the period September 30, 2010.  As of  September 30, 2011 we had net income of $3,664 as compared to net income of $122,720 for the period ended September 30, 2010.

 
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Results of Operations
 
As of September 30, 2011, the Company reported an increase in revenues compared to the period ended June 30, 2011.
 
As of September 30, 2011 we have experienced an increase in business; however, we have experienced slower payment of accounts receivables from our clients based on the economic environment.  Management expects that slow payments on accounts receivables will decrease as the economy continues to strengthen as indicated by a recent increase in corporate profits.  We further expect our business to grow as corporate profits increase based on the fact that many businesses’ profits are advertising driven.
 
To date, the Company has successfully implemented its business plan and is attempting to secure additional funding to continue the expansion process into the medical and mobile industries. The Company intends to continue developing its own internet properties including lead generation websites, social communities, and directory services targeting specific industries. Management believes there is a current trend for increased advertising and web development related services based upon recent increased corporate profits.   Most businesses rely on advertising of some sort to increase their respective revenue models.  Web development and on-line marketing services are the Company’s primary sources of revenue and management expects these numbers to increase as economic growth increases.  The following represents the approximate percentage of revenue attributed to each service provided by the Company for the period ended September 30, 2011.
 
·  
Web Design (15%)
 
·  
Web Development (15%)
 
·  
Mobile Design/Development (5%)
 
·  
Mobile Application Development (5%)
 
·  
Website Application Development (10%)
 
·  
Paid Search Marketing (5%)
 
·  
Media Planning/Buying (2%)
 
·  
Banner Advertising / Rich Media Advertising (5%)
 
·  
Social media Marketing (5%)
 
·  
Search Engine Optimization (20%)
 
·  
Email Marketing (5%)
 
·  
Reputation management (1%)
 
·  
Mobile Marketing (2%)
 
·  
Flash Design/Development (5%)
 
 
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The Company’s ability to expand operations is somewhat dependent upon capital to hire additional sales representatives without additional capital. If Yellow7 does not produce sufficient cash flow to support its operations over the next 12 months, the Company will need to raise additional capital by issuing capital stock in exchange for cash in order to continue as a going concern.  There are no formal or informal agreements to attain such financing. Yellow7 can not assure any investor that, if needed, sufficient financing can be obtained or, if obtained, that it will be on reasonable terms.
 
Yellow7 management may incur software development costs within the next 12 months.

Yellow7 currently does not own any significant plant or equipment that it would seek to sell in the near future.  

Yellow7 management anticipates hiring employees or independent contractors over the next 12 months as needed. Currently, the Company believes the services provided by its officers and directors appear sufficient at this time.

The Company has no plans to seek a business combination with another entity in the foreseeable future, however, may entertain strategic acquisitions in the marketing and advertising sector which compliment its business plan.
 
Impact of Inflation
 
We believe that the rate of inflation has had negligible effect on us.  We believe we can absorb most, if not all, increased non-controlled operating costs by operating our Company in the most efficient manner possible.

Liquidity and Capital Resources
 
Cash Flows from Operating Activities
 
We have generated positive cash flows from operating activities for the period ended September 30, 2011.  Operating expenditures during the period covered by this report include general and administrative costs (See “Financial Statements). 

Cash Flows from Investing Activities
 
We made no investments as of  September 30, 2011.
 
Cash Flows from Financing Activities
 
We have financed our existing operations and new business issuance of equity securities.  Primarily from our increased business in our existing operations, we have received no additional equity financing during the period ended September 30, 2011.

Intangible Assets

There were no intangible assets during the period September 30, 2010 through September 30, 2011.

Material Commitments
 
There were no material commitments for the period September 30, 2010 through September 30, 2011.

Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
  
 
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Critical Accounting Policies
 
Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
 
We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

Cash and Cash Equivalents

We consider all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. We have no cash equivalents.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Intangible Assets

We evaluate the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. There was no impairment loss for the period from September 30, 2010 through September 30, 2011.

Income Taxes

The Company accounts for income taxes as outlined in ASC 740 “Income Taxes”, which was previously Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

Fair Value of Financial Instruments

The Company considers that the carrying amount of financial instruments, including accounts payable, approximates fair value because of the short maturity of these instruments.

Share Based Payments
(included in ASC 718 “Compensation-Stock Compensation”)

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which replaces SFAS No. 123 and supersedes APB Opinion No. 25. Under SFAS No. 123(R), companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees or independent contractors are required to provide services. Share-based compensation arrangements include stock options and warrants, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, or “SAB 107”. SAB 107 expresses views of the staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations and provides the staff's views regarding the valuation of share-based payment arrangements for public companies. SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods. On April 14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS 123(R). Companies may elect to apply this statement either prospectively, or on a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods under SFAS 123.

 
-16-

 
The Company has fully adopted the provisions of SFAS No. 123(R) and related interpretations as provided by SAB 107. As such, compensation cost is measured on the date of grant as the fair value of the share-based payments. Such compensation amounts, if any, are amortized over the respective vesting periods of the share-based payments.

Recent Accounting Pronouncements

The Company has adopted all recently issued accounting pronouncements.  The adoption of the accounting pronouncements, including those not yet effective, is not anticipated to have a material effect on the financial position or results of operations of the Company.
 
ITEM 3:    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Market risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. Changes in these factors could cause fluctuations in results of our operations and cash flows. In the ordinary course of business, we are exposed to interest rate and foreign currency exchange rate risks.
 
ITEM 4.    CONTROLS AND PROCEDURES.
 
Based upon the required evaluation of our disclosure controls and procedures, our President and Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2011 our disclosure controls and procedures were adequate and effective to ensure that information was gathered, analyzed and disclosed on a timely basis.
 
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our fiscal quarter ended September 30, 2011, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II—OTHER INFORMATION
 
ITEM 1.    LEGAL PROCEEDINGS.
 
Not applicable.

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

There have been no sales of unregistered securities during this quarter ended September 30, 2011.

ITEM 3.   DEFAULT UPON SENIOR SECURITIES

Not applicable.

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

There have been no matters submitted to a vote of the Company’s shareholders.

ITEM 5.   OTHER INFORMATION
 
None.

ITEM 6.   EXHIBITS
 
 
 
 
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In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
Yellow7, Inc.
 
 
(Registrant)
 
       
November 21, 2011
By:
/s/ Jason Burgess
 
   
Jason Burgess
 
   
President and Chief Executive Officer
 
       
  
   
       
 November 21, 2011
By:
/s/ Jon Burgess
 
   
Jon Burgess
 
   
Chief Financial Officer
 
 
 
 
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INDEX TO EXHIBITS
 
 

 
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