NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2014
(UNAUDITED)
1.
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
CrowdGather, Inc. (hereinafter referred to as “we”, “us”, “our”, or “the company”) is a social networking, internet company that specializes in developing and hosting forum based websites and provides targeted advertising and marketing services for our online customers. We are headquartered in Woodland Hills, California, and were incorporated under the laws of the State of Nevada on April 20, 2005.
Principles of Consolidation
The accompanying condensed consolidated financial statements include our activities and our wholly-owned subsidiary, Adisn, Inc. All intercompany transactions have been eliminated.
Basis of Presentation
The condensed consolidated unaudited financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material changes in the information disclosed in the notes to the financial statements included in our annual report on Form 10-K for the year ended April 30, 2013. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended January 31, 2014, are not necessarily indicative of the results that may be expected for any other interim period or the entire year. For further information, these unaudited financial statements and the related notes should be read in conjunction with our audited financial statements for the year ended April 30, 2013, included in our annual report on Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us 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 reported periods. Actual results could materially differ from those estimates.
CROWDGATHER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2014
(UNAUDITED)
1.
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Identifiable Intangible Assets
In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification No. 350,
Intangibles – Goodwill and Other
(ASC 350), goodwill and intangible assets with indefinite lives are not amortized but instead are measured for impairment at least annually in the fourth quarter, or when events indicate that impairment exists. As required by ASC 350, in the impairment tests for indefinite-lived intangible assets, we compare the estimated fair value of the indefinite-lived intangible assets, website domain names, using a combination of discounted cash flow analysis and market value comparisons. If the carrying value exceeds the estimate of fair value, we calculate the impairment as the excess of the carrying value over the estimate of fair value and accordingly record the loss.
Intangible assets that are determined to have definite lives are amortized over the shorter of their legal lives or their estimated useful lives and are measured for impairment only when events or circumstances indicate the carrying value may be impaired in accordance with ASC 360,
Property, Plant and Equipment
discussed below.
Impairment of Long-Lived Assets
In accordance with ASC 360, we estimate the future undiscounted cash flows to be derived from the asset to assess whether or not a potential impairment exists when qualitative events or circumstances indicate the carrying value of a long-lived asset may be impaired. If the carrying value exceeds our estimate of future undiscounted cash flows, we then calculate the impairment as the excess of the carrying value of the asset over our estimate of its fair value.
Investments
Investments are classified as available for sale and consist of marketable equity securities that we intend to hold for an indefinite period of time. Investments are stated at fair value and unrealized holding gains and losses, net of the related tax effect, are reported as a component of accumulated other comprehensive income until realized. Realized gains or losses on disposition of investments are computed on the “specific identification” method and are reported as income or loss in the period of disposition on our consolidated statements of operations.
Inventory
Inventory is valued at the lower of cost or market, using the first-in, first-out (FIFO) method.
Revenue Recognition
We currently work with third-party advertising networks and advertisers pay for advertising on a cost per thousand views, cost per click or cost per action basis. All sales are recorded in accordance with ASC 605,
Revenue Recognition
. Revenue is recognized when all the criteria have been met:
• When persuasive evidence of an arrangement exists.
• The services have been provided to the customer.
• The fee is fixed or determinable.
• Collectability is reasonably assured.
CROWDGATHER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2014
(UNAUDITED)
1.
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cost of Revenue
Our cost of revenue consists primarily of expenses associated with the fulfillment of specific customer advertising campaigns, including the purchases of advertising inventory and the costs associated with the manufacturing and distribution of our synthetic human pheromone consumer products.
Stock Based Compensation
We account for employee stock option grants in accordance with ASC 718,
Compensation – Stock Compensation
. ASC 718 establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. ASC 718 requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period).
For options and warrants issued as compensation to non-employees for services that are fully vested and non-forfeitable at the time of issuance, the estimated value is recorded in equity and expensed when the services are performed and benefit is received as provided by ASC 505-50,
Equity – Disclosure
. For unvested shares, the change in fair value during the period is recognized in expense using the graded vesting method.
Comprehensive Loss
We apply ASC No. 220,
Comprehensive Income
(ASC 220). ASC 220 establishes standards for the reporting and display of comprehensive income or loss, requiring its components to be reported in a financial statement that is displayed with the same prominence as other financial statements. Our comprehensive loss was $338,597 and $1,554,329 for the three and nine months ended January 31, 2014, respectively.
Recent Accounting Pronouncements
There were various accounting updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on our condensed consolidated financial position, results of operations or cash flows.
Reclassifications
Certain amounts in the prior year financial statements have been reclassified for comparative purposes to conform to the current year presentation.
CROWDGATHER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2014
(UNAUDITED)
2.
INVENTORY
As of January 31, 2014, inventory consisted of all finished goods of our synthetic human pheromone consumer products in the amount of $31,982.
3.
INVESTMENTS
Pursuant to our agreement with Human Pheromone Sciences, Inc., we converted our $50,000 advance payment into 714,286 shares of Human Pheromone restricted common stock in January 2012. These securities are classified as available for sale and are stated at fair value.
4.
PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
|
|
January 31,
2014
|
|
|
April 30,
2013
|
|
|
|
|
|
|
|
|
|
|
Furniture, fixtures and office equipment
|
|
$
|
30,919
|
|
|
$
|
30,919
|
|
|
Computers, servers and equipment
|
|
|
581,774
|
|
|
|
558,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
612,693
|
|
|
|
589,726
|
|
|
Less: accumulated depreciation
|
|
|
(462,745
|
)
|
|
|
(363,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
149,948
|
|
|
$
|
225,980
|
|
Depreciation expense was $35,286 and $98,999 for the three and nine months ended January 31, 2014, respectively.
5.
CONCENTRATIONS OF CREDIT RISK
As of January 31, 2014, five customers accounted for approximately 56% of our outstanding receivables and a corresponding 37% of our sales for the nine months ended January 31, 2014.
CROWDGATHER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2014
(UNAUDITED)
6.
INTANGIBLE ASSETS
Intangibles are either amortized over their estimated lives, if a definite life is determined, or are not amortized if their life is considered indefinite. We account for the intangible assets at cost. Intangible assets acquired in a business combination, if any, are recorded under the purchase method of accounting at their estimated fair values at the date of acquisition. For the nine months ended January 31, 2014, we recorded $4,750 of amortization associated with its definite lived intangibles. Intangibles consist of the following:
|
|
|
|
January 31,
|
|
|
April 30,
|
|
|
|
Est. Life
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
Online forums and related websites
|
Indefinite
|
|
$
|
6,973,327
|
|
|
$
|
6,973,327
|
|
|
Target advertising technology
|
Indefinite
|
|
|
2,250,000
|
|
|
|
2,250,000
|
|
|
Trademarks and trade names
|
10 years
|
|
|
-
|
|
|
|
190,000
|
|
|
|
|
|
|
9,223,327
|
|
|
|
9,413,327
|
|
|
Less: accumulated amortization
|
|
|
|
-
|
|
|
|
(45,224)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,223,327
|
|
|
$
|
9,368,103
|
|
During the nine months ended January 31, 2014, we entered into a settlement agreement with the former shareholders of Adisn, Inc. As a result of the settlement, the trademarks and trade names originally purchased from Adisn, Inc. were returned and we recorded a net impairment of $140,026, ($190,000 asset less $49,974 accumulated amortization).
7.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. Goodwill is not amortized, but is tested for impairment on an annual basis and between annual tests in certain circumstances. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. As January 31, 2014, we determined that the fair value of the goodwill exceeded its carrying value and therefore goodwill was not impaired.
CROWDGATHER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2014
(UNAUDITED)
8.
PREFERRED SERIES B STOCK
On April 8, 2013, we filed with the Secretary of State of Nevada the Certificate of Designation of the Relative Rights and Preferences of the Series B Preferred Stock (the “Certificate of Designation”) specifying the designations, preferences and relative rights of the Series B Convertible Preferred Stock (“Series B Shares”). The Certificate of Designation created a series of preferred stock consisting of 1,000,000 out of the 25,000,000 shares of our preferred stock, which will be designated “Series B Preferred Stock.” The Certificate of Designation provides, among other things, that: (i) the conversion price for the shares of Series B Shares is the price per share equal to the quotient of the original issue price of $1.00 per share (the “Original Issue Price”) divided by the number of shares of common stock into which each share of Series B Shares may be converted (the “Conversion Rate”), subject to adjustment from time to time for recapitalizations and as otherwise set forth in the Certificate of Designation; (ii) each share of Series B Shares is convertible into shares of common stock at the option of the holder at any time after the date of issuance at a Conversion Rate of 20 shares of common stock for each share of Series B Shares; (iii) the holder of outstanding Series B Shares will be entitled to receive dividends, when declared by the Board of Directors, at an annual dividend rate of 10% per share of Series B Shares, with such right to receive dividends being cumulative and will accrue and be payable annually; (iv) the shares of Series B Shares may be redeemed by us, at our option, at a redemption price equal to 120% of the amount obtained by multiplying the Original Issue Price of the Series B Shares by the number of shares of Series B Shares to be redeemed from the investor; and (v) so long as any shares of Series B Shares remain outstanding, we will not, among other things, amend or restate any provisions of our Articles of Incorporation or Bylaws, declare or pay dividends on any shares of common stock or other security other than Series B Shares, authorize or issue any equity security having a preference over or being on parity with the Series B Shares, change the authorized number of directors, or enter into indebtedness of more than $1,000,000, without the prior written consent of a majority of outstanding shares of Series B Shares.
On April 8, 2013, we sold 300,000 shares of Series B Shares to one foreign investor in exchange for $300,000, or $1.00 per share, pursuant to a securities purchase agreement (“Purchase Agreement”). In connection with the sale of Series B Shares, the investors also received warrants to purchase 3,000,000 shares of our common stock at a purchase price of $0.08 per share. The warrant agreements (“Warrants”) provide for an expiration period of five years from the date of the investment.
On July 16, 2013, pursuant to the Purchase Agreement, we sold 150,000 shares of Series B Shares to a foreign investor in exchange for $150,000, or $1.00 per share. In connection with the sale of Series B Shares, the investor also received Warrants to purchase 1,500,000 shares of our common stock at a purchase price of $0.08 per share. The Warrants have an exercise term equal to 5 years and are exercisable commencing on July 16, 2013.
The Purchase Agreement provided that the investor would purchase 300,000 shares of Series B Shares and Warrants for a purchase price of $300,000 on or before July 12, 2013 (the “First Subsequent Closing Date”). However, we then entered into the First Amendment to Securities Purchase Agreement (the “Amendment”), revising the First Subsequent Closing Date from July 12, 2013 to August 2, 2013. The sale of the 150,000 shares of Series B Shares and Warrants on July 16, 2013 represents the first portion of the first subsequent closing and the remaining 150,000 shares of Series B Shares and Warrants would be purchased by the investor on or before August 2, 2013.
As a result of the Amendment, we issued an Amended and Restated Common Stock Purchase Warrant (“Amended and Restated Warrant”) to replace the Warrants issued at the initial closing and provide that such Warrants will vest only if the Investor purchases an additional 300,000 shares of Series B Shares and Warrants for a purchase price of $300,000 on or before the First Subsequent Closing Date.
On August 2, 2013, pursuant to the Purchase Agreement and Amendment, we sold 150,000 shares of Series B Shares to a foreign investor in exchange for $150,000, or $1.00 per share. In connection with the sale of Series B Shares, the investor also received Warrants to purchase 1,500,000 shares of our common stock at a purchase price of $0.08 per share. The Warrants have an exercise term equal to 5 years and are exercisable commencing on August 2, 2013.
On October 9, 2013, pursuant to the Purchase Agreement, we sold 400,000 shares of Series B Shares to three foreign investors in exchange for $400,000, or $1.00 per share. In connection with the sale of Series B Shares, the investors also received Warrants to purchase 4,000,000 shares of our common stock at a purchase price of $0.08 per share. The Warrants have an exercise term equal to 5 years and are exercisable commencing on October 9, 2013.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2014
(UNAUDITED)
9.
CAPITAL LEASE OBLIGATION
On May 25, 2012, we entered into a capital lease obligation with Dell Financial Services for the acquisition of computer equipment. Pursuant to the agreement, we are required to pay $9,326 per month for twenty-four (24) months, including interest of approximately 8% per annum, with an option to purchase the equipment for $1.00 at the end of the lease. Accordingly, we have capitalized the acquisition cost of $209,384 for the computer equipment.
The future maturities of our capital lease obligation as of January 31, 2014 are as follows:
|
January 31,
|
|
Amount
|
|
|
|
2015
|
|
$
|
27,629
|
|
-current
|
|
Total
|
|
$
|
27,629
|
|
|
During the nine months ended January 31, 2014, we made payments totaling $97,559, which included principal and interest of $92,532 and $5,027, respectively.
10.
STOCK OPTIONS
In May 2008 our board of directors approved the CrowdGather, Inc. 2008 Stock Option Plan (the Plan). The Plan permits flexibility in types of awards, and specific terms of awards, which will allow future awards to be based on then-current objectives for aligning compensation with increasing long-term shareholder value.
During the nine months ended January 31, 2014, we issued stock options for 2,100,000 shares of our common stock, exercisable at various dates through May 2023 at fair market value at the date of grant of $0.04 per share to the recipient pursuant to the Plan.
Additionally, during the nine months ended January 31, 2014, we granted 2,560,000 shares of our restricted common stock to certain key employees, consultants, advisors and directors. Such shares vest annually over a four year period.
For the nine months ended January 31, 2014, we recognized $562,600 of stock-based compensation costs as a result of the issuance of stock options to employees, directors and consultants in accordance with ASC 505.
CROWDGATHER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2014
(UNAUDITED)
10.
STOCK OPTIONS (Continued)
Stock option activity was as follows for the nine months ended January 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contract Term (Years)
|
|
Aggregate Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, May 1, 2013
|
6,098,750
|
|
$
|
0.75
|
|
8.25
|
|
$
|
3,355,810
|
|
|
Granted
|
2,100,000
|
|
|
0.04
|
|
9.33
|
|
|
69,300
|
|
|
Forfeited/Expired
|
(1,965,000)
|
|
|
0.64
|
|
7.70
|
|
|
(871,766)
|
|
|
Exercised
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 31, 2014
|
6,233,750
|
|
$
|
0.55
|
|
8.01
|
|
$
|
2,553,344
|
|
|
Exercisable, January 31, 2014
|
3,060,000
|
|
$
|
0.91
|
|
6.53
|
|
$
|
2,792,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the status of our unvested shares as of January 31, 2014 is presented below:
|
|
|
Number
of Shares
|
|
|
Weighted-Average Grant-Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
Non-vested balance, May 1, 2013
|
|
|
3,161,000
|
|
|
$
|
0.36
|
|
|
Granted
|
|
|
2,100,000
|
|
|
|
0.04
|
|
|
Vested
|
|
|
(974,688)
|
|
|
|
0.37
|
|
|
Forfeited/Expired
|
|
|
(1,112,562)
|
|
|
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested balance, January 31, 2014
|
|
|
3,173,750
|
|
|
$
|
0.15
|
|
As January 31, 2014, total unrecognized stock-based compensation cost related to unvested stock options was $523,305, which is expected to be recognized over a weighted-average period of approximately 8.01 years.
CROWDGATHER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2014
(UNAUDITED)
11.
PROVISION FOR INCOME TAXES
For the nine months ended January 31, 2014, we have recognized the minimum amount of franchise tax required under California corporation law of $800. We are not currently subject to further federal or state tax since we have incurred losses since our inception.
As of January 31, 2014, we had federal and state net operating loss carry forwards of approximately $15,800,000 which can be used to offset future federal income tax. The federal and state net operating loss carry forwards expire at various dates through 2034. Deferred tax assets resulting from the net operating losses are reduced by a valuation allowance, when, in our opinion, utilization is not reasonably assured.
As of January 31, 2014, we had the following deferred tax assets related to net operating losses. A 100% valuation allowance has been established due to the uncertainty of our ability to realize future taxable income and to recover its net deferred tax assets.
|
|
|
2014
|
|
|
Federal net operating loss (at 34%)
|
|
$
|
5,400,000
|
|
|
State net operating loss (at 8.84%)
|
|
|
1,425,000
|
|
|
|
|
|
6,825,000
|
|
|
Less: valuation allowance
|
|
|
(6,825,000
|
)
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
Our valuation allowance increased by $399,000 during the nine months ended January 31, 2014.
12.
SUBSEQUENT EVENT
On March 16, 2014, we entered into a web site purchase agreement to sell certain online forums and related website assets for $570,000 to an unrelated third party. The closing of the purchase agreement is subject to certain terms and conditions and is expected to close in our current fourth quarter of fiscal 2014.