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THEDIRECTORY.COM, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

July 14, 2014

This report contains forward-looking statements. These forward-looking statements include, without limitation, statements containing the words "believes,""anticipates,""expects,""intends,""projects,""will," and other words of similar import or the negative of those terms or expressions. Forward-looking statements in this report include, but are not limited to, expectations of future levels of research and development spending, general and administrative spending, levels of capital expenditures and operating results, sufficiency of our capital resources, our intention to pursue and consummate strategic opportunities available to us.. Forward-looking statements subject to certain known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to those described in "Risk Factors" of the reports filed with the Securities and Exchange Commission.

CORPORATE OVERVIEW Overview



TheDirectory.com, Inc. ("we", "us", "our" or the "Company") operates under a build, buy or partner business model and is an online local search company that provides local businesses in the U.S. and Canada with business listings on its network of online vertical directories and city guides. Additionally, the company offers its local business customers access to a portfolio of online and offline marketing and identity management products and services that help assist businesses in both attracting and maintaining customers.

Results of Operations for the three months ended May 31, 2014 and 2013

The following table sets forth the summary income statement for the three and six months ended May 31, 2014 and 2013:

Three Months Ended May 31, 2014 May 31, 2013 Revenues $ 477,973$ 126,211 Operating Expenses $ (407,854)$ (112,399) Other Income (Expense), net $ (38,355)$ (4,657) Net Income $ 179,764$ 9,155 Sales Revenue



Our sales revenue for the three month period ended May 31, 2014 was $477,973 as compared to revenue of $126,211 for the same period in the prior year, representing an increase of $351,762 or 278%. The increase in sales revenue was directly related to our $5 Million credit facility we entered into in October of 2013 which provided us with the financial resources to increase our traffic acquisition programs versus the comparable period in 2013. Approximately 80% of our revenue came from our PPC (pay per click) activities during the quarter.

Cost of Revenue

Our cost of revenue for the three month period ended May 31, 2014 increased $192,284 to $196,501, as compared to cost of revenue of $4,217 for the three month period ended May 31, 2013. The increase in cost of revenue is, as evidenced by the corresponding growth in our revenue, is directly related to our ability to increase our traffic acquisition programs when compared to the year over year period.

General & Administrative Expenses

For the three month period ended May 31, 2014, general and administrative expenses increased to $75,740, as compared to general and administrative expenses of $37,014 for the same period in 2013, and represented an increase of $38,726. The increase in general and administrative expenses during the three month period ended May 31, 2014 was primarily attributed to increases in both legal and accounting fee's relating to becoming an SEC exchange act reporting Company.

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Sales and Marketing

For the three month period ended May 31, 2014, sales and marketing expenses increased to $64,049, as compared to sales and marketing expenses of $13,856 for the same period in the prior year, and represented an increase of $50,193. The increase in sales and marketing expenses for the three month period ended May 31, 2014 versus the same period of 2013 was primarily attributed to an increase in our sales related activities associated with the growth of our business. We expect these expenses to continue to rise as our expansion plans further develop especially for the remainder of 2014 as our new locations become fully staffed and operational.

Consulting Fees



For the three month period ended May 31, 2014, consulting fees decreased to $25,900, as compared to consulting fees of $51,849 for the same period in the prior year, and represented a decrease of $25,949. The decrease in consulting fees is primarily related to our reliance on internal employees during the period. In the previous period of 2013 we were involved in the recoding of our platform which incurred a higher level of consulting fees. For the remainder of 2014 we'll continue to incur consulting fees on an as needed basis.

R&D

For the Three month period ended May 31, 2014, research and development fees were similar to the prior year increasing just $837 from $5,463 in the 2013 period to $6,300 during the same period of 2014. We do not anticipate material changes in R & D expenses for the remainder of 2014 over previous levels.

Amortization of Intangibles

For the three month period ended May 31, 2014, amortization of intangibles increased to $39,364, as compared to amortization of intangibles of $0 for the same period in the prior year. The increase in costs for the three month period ended May 31, 2014 are related to financing fees and asset amortization costs incurred during the period that did not exist in the comparable period in 2013.

Interest Expenses

During the three month period ended May 31, 2014, our interest expenses increased to $38,355, as compared to interest expenses of $4,657 for the same period in the prior year. The increase in interest expenses for the three month period ended May 31, 2014 is a result of costs incurred relating to our $5 million credit facility established in October 2013 that did not exist in the previous year.

Net Income



During the three month period ended May 31, 2014, our net income increased $170,609 to $179,764, as compared to net income of $9,155 for the same period in the prior year. The increase in net income for the three month period ended May 31, 2014 came primarily as a result of a $148,000 deferred tax benefit that did not exist in the previous period as well as our ability to increase our traffic acquisition programs as a result of our financing facility closed in October of 2013 as well as our ability to manage and control our other non-traffic related expense levels during the period.

Results of Operations for the six months ended May 31, 2014 and 2013

The following table sets forth the summary income statement for the six months ended May 31, 2014 and 2013:

Six Months Ended May 31, 2014 May 31, 2013 Revenues $ 1,279,508$ 226,470 Operating Expenses $ (942,369)$ (199,076) Other Income (Expense), net $ (92,627)$ (8,695) Net Income $ 392,512$ 18,699 5



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Sales Revenue

Our sales revenue for the six month period ended May 31, 2014 was $1,279,508 as compared to revenue of $226,470 for the same period in the prior year, representing an increase of $1,053,038. The increase in sales revenue was directly related to our $5 Million credit facility we entered into in October of 2013 which provided us with substantial financial resources, on a relative basis, to increase our traffic acquisition programs during the six month period. We expect total revenue levels to be substantially higher year over year for the remainder of 2014. Approximately 82% of our revenue came from our PPC (pay per click) activities during the six month period ending May 31, 2014.

Cost of Revenue

Our cost of revenue for the six month period ended May 31, 2014 increased $552,195 to $561,199, as compared to cost of revenue of $9,004 for the same period in the previous year. The increase in cost of revenue is, as evidenced by the corresponding growth in our revenue levels, directly related to our increased access to financial resources which have allows us to increase our traffic acquisition programs when compared to the year over year period.

General & Administrative Expenses

For the six month period ended May 31, 2014, general and administrative expenses increased to $150,351, as compared to general and administrative expenses of $76,372 for the same period in 2013, and represented an increase of $73,979. The increase in general and administrative expenses during the three month period ended May 31, 2014 was primarily attributed to increases in both legal and accounting fee's relating the filing of our form 10 to become an SEC exchange act reporting Company.

Sales and Marketing



For the six month period ended May 31, 2014, sales and marketing expenses increased to $98,476, as compared to sales and marketing expenses of $18,806 for the same period in the prior year, and represented an increase of $79,670. The increase in sales and marketing expenses for the six month period ended May 31, 2014 versus the same period of 2013 was primarily attributed to an increase in our sales related activities associated with the growth of our business. We expect these expenses to continue to rise as our expansion plans further develop especially for the remainder of 2014 as our new locations in FL and NJ become fully staffed and operational.

Consulting Fees

For the six month period ended May 31, 2014, consulting fees decreased to $45,420, as compared to consulting fees of $87,304 for the same period in the prior year, and represented a decrease of $41,884. The decrease in consulting fees is primarily related to our reliance on internal employees during the 2014 period. In the previous period of 2013 we were involved in the recoding and redesign of our core directory platform which incurred a higher level of consulting fees. For the remainder of 2014 we'll continue to incur consulting fees on an as needed basis.

R&D



For the six month period ended May 31, 2014, research and development fees increased $5,211 from $7,590 in the 2013 period to $12,801 during the same period of 2014. The increase was related to expenses incurred during Q1 as a result of certain technology assets we acquired. We do not anticipate material changes in R & D expenses for the remainder of 2014 over previous levels.

Amortization of Intangibles

For the six month period ended May 31, 2014, amortization of intangibles increased to $74,122, as compared to amortization of intangibles of $0 for the same period in the prior year. The increase in costs for the six month period ended May 31, 2014 are related to financing fees and asset amortization costs incurred during the period that did not exist in the comparable period in 2013.

Interest Expenses

During the six month period ended May 31, 2014, our interest expenses increased $83,932 to $92,627, as compared to interest expenses of $8,695 for the same period in the prior year. The increase in interest expenses for the six month period ended May 31, 2014 is a direct result of various costs incurred relating to our $5 million credit facility established in October 2013 that did not exist in the previous year.

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Net Income

During the six month period ended May 31, 2014, our net income increased $373,813 to $392,512, as compared to net income of $18,699 for the same period in the prior year. The increase in net income for the six month period ended May 31, 2014 came primarily as a result of a $148,000 income tax benefit we realized during the second quarter of 2014 that did not exist in the previous period as well as our ability to increase our traffic acquisition programs as a result of our financing facility closed in October of 2013 as well as our ability to manage and control our other non-traffic related expense levels during the period.

The following table summarizes total current assets, liabilities and stockholder's equity (deficit) at November 30, 2013 compared to May 31, 2014:

Period ended May 31, 2014 Nov. 30, 2013 Increase/(Decrease) Total Assets $ 3,412,277$ 3,335,086 $ 77,191 Total Liabilities $ 2,502,407$ 3,861,270$ (1,358,863) Stockholders' Equity $ 909,870$ (526,184) $ 1,436,054



Liquidity and Capital Resources

As of the period ended May 31, 2014, we had total assets of $3,412,277, for an increase of $77,191from our asset level of $3,335,086 as of November 30, 2013. The $77,191 increase to current assets is primarily attributed to the increase in our deferred tax asset of $148,000 now that we are a profitable Company. Accounts receivables were $376,398 at the period ended May 31, 2014 compared to $270,717 as of November 30, 2013, the increase is a result of the increase in revenue we experienced as a result of our increased traffic acquisition programs and improved monetization of traffic during the period. Other assets were relatively unchanged dropping $59,122 to $2,875,019 at May 31, 2014 from $2,934,141 at November 30, 2013. Our cash position at May 31, 2014 dropped to $7,750 from $128,910 at November 30, 2013. The drop was attributed more to an ending period function as well as our desire to increase our payment levels related to our credit facility with TCA thereby reducing our interest expenses.

As of the period ended May 31, 2014, total liabilities dropped $1,358,863 to $2,502,407 from $3,861,270 at the period ended November 30, 2013. The drop is primarily related to an across the board focus on debt reduction during the six month period ending May 31, 2014 by management. Our commercial line of credit liability dropped from 1,300,000 at November 30, 2013 to $672,565 at May 31, 2014. Notes payable, in the aggregate, dropped $592,524 from $1,658,524 at November 30, 2013 to $1,066,000 at May 30, 2014. Lastly our long term debt dropped from $330,000 at November 30, 2013 to $150,000 at May 31, 2014. These debt reductions and growth measures will remain in place through the remainder of 2014 and may be extended into 2015 until we meet our goal of being essentially debt free.

We will require additional capital to support our growth plans, which contemplate strategic acquisitions, debt reduction and to facilitate our current expansion plans. As of May 31, 2014 we had $4.3 million available under our commercial line of credit facility. Our primary focus for the remaining part of 2104 is to balance our focus on debt reduction and growth. So while our business plan calls for additional capital, if we can pay off or substantially reduce all of our convertible debt, we think we'll have access to less dilutive funding vehicles to facilitate our growth plans. Our current credit facility may be drawn down, at the investor's sole discretion subject to a use of proceeds or other investor defined metric such as Company financial performance. Standard requested draw down's shall not exceed 80% of the repayments previously made to the investor. There are no contractual guarantees or formal metric based obligations for TCA to provide the Company with access to additional draw downs. Future draw-downs of the credit facility are solely at the discretion of TCA. We may also need to raise funds through private placements of our equity securities that may cause dilution to our existing stockholders.

We believe our currently anticipated levels of revenues and cash flow will be sufficient to meet our obligations over the next 12 months even though we may be subject to uncertainties and market conditions beyond our control that could affect our anticipated results.

We continue to evaluate potential acquisition candidates and financing opportunities that may help us execute our growth plans. If we raise funds through the sale of additional equity securities, the common stock currently outstanding will be diluted.

Off-Balance Sheet Arrangements

We currently have no 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.

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Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make judgments and estimates.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

Derivative Financial Instruments

We estimate the fair value of our complex derivative financial instruments that are required to be carried as liabilities at fair value pursuant to Statements on Financial Accounting Standards No. 133, "Accounting for Derivative Financial Instruments and Hedging Activities (SFAS 133)."

We do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we frequently enter into certain other financial instruments and contracts, such as debt financing arrangements, preferred stock arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts or (iii) may be net-cash settled by the counterparty to a financing transaction. As required by SFAS 133, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements.

We estimate fair values of derivative financial instruments using various techniques, and combinations thereof, that are considered to be consistent with the objective measuring of fair values. In selecting the appropriate technique(s), we consider, among other factors, the nature of the instrument, the market risks that such instruments embody and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, we generally use the Black-Scholes option valuation technique, since it embodies all of the requisite assumptions, including trading volatility, estimated terms and risk free rates, necessary to fair value these instruments. For complex derivative instruments, such as embedded conversion options, we generally use the flexible Monte Carlo valuation technique since it embodies all of the requisite assumptions, including credit risk, interest-rate risk and exercise/conversion behaviors, that are necessary to fair value these more complex instruments. For forward contracts that contingently require net-cash settlement as the principal means of settlement, we project and discount future cash flows applying probability-weightage to multiple possible outcomes. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in our trading market price which has high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption changes.

Revenue Recognition

We recognize revenue when we sell a listing for one of our directories or city guides in the month the payment obligation was generated. Sales generated from third-party advertisers who list ads on our network, that are based on a PPC model or any other payment model are recognized in the month the revenue obligation is generated.

Accounts Receivable



Accounts receivable consist primarily of trade receivables, net of a valuation allowance for doubtful accounts.

Cash and cash Equivalents

For purposes of the statement of cash flows, we consider all short-term debt securities with maturity of three months or less to be cash equivalents.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are removed from the accounts, with any resultant gain or loss included in the results of operations. Depreciation is computed over the estimated useful lives of the assets (3-20 years) using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. Maintenance and repairs are charged to operations as incurred.

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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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from those estimates.

Goodwill and Intangible Asset Impairment

Realization of long-lived assets, including goodwill, is periodically assessed by our management. Accordingly, in the event that facts and circumstances indicate that property and equipment, and intangible or other assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset's carrying amount to determine if a write-down to market value is necessary. In management's opinion, there was no impairment of such assets at May 31, 2014.

Deferred Tax Asset Allowance

The Company had a 100% valuation allowance on the deferred tax assets for net operating losses. Since the Company has become profitable, the allowance has been reduced and the deferred tax assets has been added to the balance sheet.

Off Balance Sheet Arrangements:

We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as "special purpose entities" (SPEs).


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