Notes to the
Condensed
Consolidated Financial Statements
December 31, 2013
Audited
Note 1. General
Nature of Business
We, together with our wholly owned subsidiaries, are engaged in developing, operating and monetizing websites that focus on specific industries, also known as vertical finder websites or finder sites. We currently are either developing finder sites, or providing marketing services on our existing finder sites, in the prefabricated home and tattoo industries. We provide finder site services in three different sectors: media, technology, and marketing. All of our operations are conducted through our wholly-owned subsidiaries, each of which is incorporated or qualified to do business in the states in which it does so.
SearchCore, Inc. was formed on July 14, 2003 in the State of Nevada as Tora Technologies, Inc. On November 21, 2006, we changed our name to Makeup.com Limited, on January 29, 1010, we changed our name to LC Luxuries Limited, and on November 5, 2010, we changed our name to General Cannabis, Inc. On January 6, 2012, we changed our name to SearchCore, Inc.
Principal Services
Our business service is to connect consumers with brands, products and services via our finder sites. We specialize in creating, operating and monetizing vertical finder sites. We identify niche, fragmented and/or disjoined markets, and attempt to capitalize on those markets by incorporating our existing platform as it relates to technology, marketing, advertising and sales. We only pursue markets in which we anticipate we will be the among the top finder sites in any respective industry. This includes marketing and services in both the business-to-business and the business-to-consumer marketplaces. When a consumer or business utilizes one of our finder sites, they are searching primarily for specific products, related items, social engagement, and/or reviews. Initially, we may waive all or a portion of advertising or marketing fees to clients who subscribe with us and market their brand, product or service on our finder sites. Once a client has subscribed with us then we offer various marketing packages that serve to increase the exposure of their business and thus increase the likelihood of connecting more consumers with their brand, product or service. We charge a fee for these various services. The fee varies depending on the service we provide. We believe that the previous success of our first finder site will enable us to continue and expand into other markets we believe has high growth potential.
Our principal services are offered through the following wholly owned subsidiaries:
Sports Asylum, Inc.
VerticalCore Management, Inc.
VerticalCore Merchant, Inc.
VerticalCore Media, Inc.
VerticalCore Technologies, Inc.
Wisdom Homes of America, Inc.
Wisdome Home Loans of America, Inc.
Other Subsidiaries
We have three (3) additional wholly-owned subsidiaries which have no operations and are dormant. These are
General Marketing Solutions, Inc.
,
General Processing Corporation
, and
LV Luxuries Incorporated
(which operated as makeup.com). Currently, we have no imminent or specific plans for any of these entities and they are held as corporations in good standing.
Recent Developments
Expanding Our Focus on Manufactured Homes
We have expanded our focus in an attempt to create additional income streams from industries, such as the manufactured housing and the travel trailer industries, for whom we have created, or are creating, search engine finder sites. Our expansion in this direction to create additional revenue is the result of several developments over the past year. First, the number of competitors in the finder site space has increased, and the internet presence and capital that some of those companies have far exceed our capabilities. For example, Google has more prominently entered into the finder site space by displaying colored photographs and locations of business search results at the top of the page. As a result of the increase in competition, and some of the competition such as Google owning the search engines, we believe this will create a more challenging environment to generate revenue. The second reason we decided to expand our focus is that we believe we are uniquely qualified to leverage our technology and retail expertise, specifically in the manufactured housing industry, and to a lesser extent, the travel trailer industry. Our staff currently has over 125 years of combined manufactured home industry experience. We believe this experience will assist us in negotiating terms with factories, hiring top tier talent, and identifying retail center locations.
ManufacturedHomes.com Finder Site
Our vertical finder site, www.ManufacturedHomes.com, acts as an information marketplace which provides detailed, focused and relevant information specific to the manufactured home product or service that a consumer is searching. We focus on becoming a top ranked website on all major search engines within the manufactured housing industry. We acquire premium domains, develop relevant content and resources as it relates to the manufactured housing industry, and execute campaigns within search engines to capture traffic.
For consumers, www.ManufacturedHomes.com is designed to provide the technological means necessary to quickly search information in order to get their desired results. Our finder site aggregates detailed data and information about specific businesses and products, along with reviews by other consumers, all of which when taken together create content in a value-added, engaging experience.
For manufactured home factories and retail centers, www.ManufacturedHomes.com provides a simple means to outsource their internet traffic aggregation and online marketing advertising. Our finder site manages various internet marketing tactics on behalf of our clients including Search Engine Optimization (SEO) and Search Engine Management (SEM). This process helps to increase the ranking of the finder site which makes the site easily accessible to prospective consumers. In short, we assist business owners in the manufactured housing industry to focus on their core product or service while alleviating the technological challenges associated with search engine optimization. www.ManufacturedHomes.com helps to narrow down the target market to those individuals that are highly targeted for the manufactured home factory or retail center.
Manufactured Homes Retail Centers
We believe there are gains to be realized through leveraging our finder site technology and capitalizing on other opportunities in a specific industry. As a result, we are currently expanding our focus in the manufactured housing industry and looking to leverage ancillary opportunities that we have discovered within that industry. Specifically, we are currently concentrating on the manufactured home retail center sector of the industry. In February 2014 we opened our first retail center in Rhome, Texas. We anticipate opening additional retail centers in the midwest, southeast and southwest regions of the country. The retail centers are operated by our wholly owned subsidiary, Wisdom Homes Of America, Inc.
The strategic reasons for concentrating in a specific industry such as the manufacturing housing industry include our management’s experience in both technology and retail center management, our ability to utilize technology in an industry in which technology has, for the most part, been either absent or lagged other comparable industries, and our portfolio of premium domains specific to the industry. In addition, our staff is regularly in communication with manufactured home factories and retail centers across the country in order to introduce them to our proprietary CRM system and the features offered on our geo-targeted website www.manufacturedhomes.com. As a result of our regular communication with nationwide retailers, we believe we will be able to target regional trends developing in the manufactured housing industry.
Note 2. Basis Of Presentation And Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP).
Reclassifications
Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the consolidated results of operations or financial position for any years presented.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates are based on knowledge of current events and anticipated future events and accordingly, actual results may differ from those estimates.
Risks related to cash
The Company maintains cash in bank and deposit accounts, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.
Cash and Cash equivalents
The Company considers only highly liquid investments such as money market funds and commercial paper with maturities of 90 days or less at the date of their acquisition as cash and cash equivalents.
Fair Value of Financial Instruments
The accounting standards regarding disclosures about fair value of financial instruments defines financial instruments and required fair value disclosure of those instruments. This accounting standard defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. Receivables, investments, payables, short and long term debt and warrant liabilities qualified as financial instruments. Management believes the carrying amounts of receivables, payables and debt are a reasonable estimate of fair value because of the short period of time between the origination of such instruments, their expected realization, and if applicable, their stated interest rate is equivalent to interest rates currently available. The three levels are defined as follows:
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Level 1
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Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
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Level 2
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Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
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Level 3
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Inputs to the valuation methodology are unobservable and significant to the fair value.
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The Company analyzes all financial instruments with features of both liabilities and equity under the accounting standards regarding accounting for certain financial instruments with characteristics of both liabilities and equity, accounting for derivative instruments and hedging activities, accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, and the accounting standard regarding determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. The accounting standard specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. This standard provides a two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for this accounting standard scope exception. All warrants issued by the Company are denominated in U.S. dollars.
Accounts Receivable
Accounts receivable are recorded at the invoice amount and do not bear interest.
Advertising Cost
The Company expenses advertising costs when incurred. Advertising expense for the twelve months ended December 31, 2013 and 2012 was $73,000 and $298,000, respectively.
Allowance for Doubtful Accounts
Allowance for doubtful accounts is defined as a company's estimate of the amount of probable credit losses in the company's existing accounts receivable. The Company does not maintain an allowance for doubtful accounts based upon management’s review of the Company’s revenue structure whereby substantially all receivables are confirmed before they are booked as revenue. The Company reviews its allowance for doubtful accounts policy periodically. The Company does not have any off-balance-sheet exposure related to its customers.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the useful lives of the assets, generally from three to seven years. Property and equipment at December 31, 2013 and December 31, 2012 are presented net of accumulated depreciation of $16,000 and $121,000, respectively.
Goodwill
In accordance with
Goodwill and Other Intangible Assets
, goodwill is defined as the excess of the purchase price over the fair value assigned to individual assets acquired and liabilities assumed and is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis in the Company's fourth fiscal quarter or more frequently if indicators of impairment exist. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of the Company's reporting units with each respective reporting unit's carrying amount, including goodwill. The fair value of reporting units is generally determined using the income approach. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, the second step of the goodwill impairment test is performed to determine the amount of any impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. No amortization is recorded for goodwill with indefinite useful life. No goodwill impairment was recognized during the twelve months ended December 31, 2013 and 2012, respectively.
Intangible Assets
In accordance with
Goodwill and Other Intangible Assets
, intangible assets that are determined not to have an indefinite useful life are subject to amortization. The Company amortizes intangible assets using the straight-line method over their estimated useful lives.
Impairment of Long-Lived and Intangible Assets
In accordance with
Accounting for the Impairment or Disposal of Long-Lived Assets
, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company assesses the recoverability of the long-lived and intangible assets by comparing the carrying amount to the estimated future undiscounted cash flow associated with the related assets. No impairment of intangible assets was recognized during the twelve months ended December 31, 2013 and 2012, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with the provisions of
Share-Based Payment
, which addresses the accounting for equity-based compensation and which requires that the cost of all equity-based compensation arrangements, be reflected in the financial statements over the vesting period based on the estimated fair value of the awards. During the twelve months ended December 31, 2013 and 2012, the Company had $230,000 and $210,000, respectively, in stock-based compensation expense related to issuances of shares of the Company’s common stock to consultants.
Treasury Stock
We account for treasury stock using the cost method and include treasury stock as a component of shareholders’ equity. Other than the share transaction described in
Note 3. Equity Transactions
, we currently do not have or intend to initiate a share repurchase program.
Revenue Recognition
We recognize revenue in accordance with ASC 605, “
Revenue Recognition
,” by recognizing as revenue the fees we charge customers as referenced below because persuasive evidence of an arrangement exists, the fees we charge are substantially fixed or determinable during the period that we provide the services, we and our customers understand the specific nature and terms of the agreed upon transactions, collectability is reasonable assured and services have been rendered.
The Company and its wholly owned subsidiaries recognize revenue as follows:
We generate revenue through attracting internet and mobile searchers to our internet properties. The users then frequent our clients who pay us a fee to list on our site.
Our Internet properties generate revenues from merchants and advertisers within the industry verticals served. This is the revenue model we employed with our previously owned finder site weedmaps.com and is the same revenue model we employ with our current finder sites. The revenue model follows a subscription-based approach, generating recurring monthly revenue from a variety of different package listings, lead generation and advertising.
Advertising Package Tiers -
For our finder sites we typically create advertising package tiers in order to more easily distinguish the different services we offer at different price points. The different advertising package tiers also makes it easy for our clients to distinguish which package tiers are premium and thus likely to generate more traffic to their brand, product or service. The range of prices we charge for each advertising package tier differs per each finder site, per region, and per each tier package. Each region is internally created by us based on geographic location, industry density and demographics.
Listing Revenue -
We generate revenues from fees we charge clients to advertise or list their location, products, and services on one or more of our finder websites. We recognize as revenue the fees we charge customers that advertise or list their related company on our websites.
For example, our listing packages typically are made up of two groups, Premium Listings and Standard Listings. The most important distinction between Premium Listings and Standard Listing packages is typically positioning on our finder websites. This distinction is important because the business that appears first in an internet search results list has an increased likelihood of a website visitor clicking on that business and thus “converting” the website visitor to a potential customer for our client. In general, being in the top section of the search results on any of our finder websites for a given geographical region is deemed preferable because of the increased conversion rates (or click-through rates). As a result, we charge a premium dollar amount for a Premium Listing so that the client is placed in the top section of search results for a given region.
Standard Listing Packages are basic packages which typically allow a customer to list their brand, product, or service on one or more of our finder sites with the capability to edit their listing. A Standard Listing also typically allows a customer to add photos, create a menu, and respond to customer reviews, for example.
Advertising Revenue -
We generate revenues from fees we charge customers for placing ads for their related companies on our websites (i.e. Advertising Packages). Our Advertising Packages can include banner ads placed on our finder sites, emails, texts, special promotions, and events. All of our Advertising Packages are considered Ad Revenue pursuant to our revenue recognition policy.
Content Production Revenue -
We generate revenues from photo and video production of content which is displayed on our finder websites (i.e. Content Production). Typically, Content Production that we create on behalf of our clients is considered an add-on or ancillary service. We typically create video “virtual” tours of our client’s establishments and products, which are then displayed on our finder websites. We recognize as revenue the fees we charge customers for photo and video production services. All of our Content Production services are considered Content Production Revenue pursuant to our revenue recognition policy.
Manufactured Home Retail Centers
- we anticipate generating revenues through our manufactured home retail center Wisdom Homes Of America, Inc., which we started in January 2014. We anticipate opening and/or acquiring additional retail centers in 2014 and branding them under the name Wisdom Homes Of America, Inc. Our first center was opened in Rhome, Texas in February, 2014. We will purchase factory built houses and sell them to the end user. We also anticipate structuring the sale of used manufactured homes.
Income Taxes
The Company follows
Accounting for Income Taxes
which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between the income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently due plus deferred taxes.
The charge for taxation is based on the results for the year as adjusted for items that are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect to temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent it is probable that taxable profit will be available against which deductible temporary differences can be utilized.
Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also recorded in equity.
Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.
Uncertain tax positions
The Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50% likely of being ultimately realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being sustained. The Company classifies income tax-related interest and penalties as interest expense and SGA expense, respectively, on the Consolidated Statement of Operations.
Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board, or FASB, issued an accounting standards update to require disclosure of information about the effect of rights of offset with certain financial instruments on an entity’s financial position. In January 2013, the FASB issued an accounting standards update that clarifies the aforementioned offsetting disclosure requirements. The disclosure requirements are only applicable to rights of offset of certain derivative instruments, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with standards set forth by the FASB Codification subject to master netting arrangements or similar agreements. Adoption of this standard had no significant impact on the Company’s consolidated financial statements.
In February 2013, the FASB issued an accounting standards update that requires presentation for reclassification adjustments from accumulated other comprehensive income into net income in a single note or on the face of the financial statements. The Company has adopted the amendments in this standard effective in the first quarter of 2013. The adoption of this standard had an immaterial effect on the Company’s consolidated financial statements and as such, the required presentation is not included herein.
In July 2013, the FASB issued an accounting standards update that specifies that unrecognized tax benefits should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. When a net operating loss carryforward, a similar tax loss or tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes or the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this accounting standards update is not expected to have significant impact on the Company’s consolidated financial statements.
FASB issued an accounting standards update amending ASC 220 to improve the comparability, consistency and transparency of reporting of comprehensive income. It amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU No. 2011-05 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. In December 2011, FASB issued ASU 2011-12. ASU 2011-12 indefinitely deferred the provisions of ASU 2011-05 requiring the presentation of reclassification adjustments on the face of the financial statements for items reclassified from other comprehensive income to net income. The adoption of this standard did not have a material impact on our financial statements.
FASB issued an accounting standards update amending ASC 820, which is effective for interim and annual periods beginning after December 31, 2011, to achieve common fair value measurement and disclosure requirements between GAAP and IFRS. This amendment changes the wording used to describe fair value and requires additional disclosures. The adoption of this amendment did not have a material impact on our financial statements.
In September 2011, the FASB issued an amendment to an existing accounting standard, which provides an option to perform a qualitative assessment to determine whether further impairment testing on goodwill is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this standard did not have a material impact on our financial statements.
During May 2009 and February 2010, the FASB issued a new authoritative pronouncement regarding recognized and non-recognized subsequent events. This guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The adoption of this guidance had no impact on our results of operations or financial position.
Other Recently Issued, but Not Yet Effective Accounting Pronouncements
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
Note 3. Equity Transactions
At December 31, 2013 the total number of shares of our common stock that were issued and outstanding was 39,368,772.
Treasury Share Retirements
During the quarter ended March 31, 2013, 42,581,596 shares of treasury stock were retired pursuant to an agreement whereby we repurchased shares of our common stock, which were held in escrow and released pursuant to the sale of our finder site weedmaps.com during the year ended December 31, 2012.
Stock-based Compensation
On August 20, 2012, we approved the issuance of Twenty Thousand (20,000) shares of our common stock, restricted in accordance with Rule 144, to each then-member of our Board of Directors, namely James Pakulis, Bonnie Goldstein, and Munjit Johal, as a one-time bonus for serving as a director. The shares were issued during the quarter ended March 31, 2013.
On July 15, 2013, we issued an aggregate of 945,000 shares of our common stock, restricted in accordance with Rule 144, to seven (7) existing shareholders, who had previously purchased shares from us, as consideration under a Stock Issuance and Release Agreement (the “Release”) we entered into with each of them. The Release was the resolution of discussions with the investors regarding our efforts in pursuing an S-1 registration statement. One of the shareholders that had previously purchased shares from us was James Pakulis, our Chief Executive Officer; he was issued 150,000 shares pursuant to the Release.
On October 25, 2013, we entered into a Securities Purchase Agreement with a third-party creditor pursuant to which we sold 67,424 shares of our common stock, restricted in accordance with Rule 144, at a per-share purchase price of $0.165, for a total purchase price of $11,125. The Purchase Price was paid in full satisfaction of accounts payable owed to the creditor by the Company.
Common Stock Issuances
On December 31, 2012, we entered into a Securities Purchase Agreement by and among us, on the one hand, and Sports Asylum, Inc., a Nevada corporation, and its shareholders, Sabas Carrillo (“Carrillo”), an individual, and James Pakulis (“Pakulis”), an individual and one of our officers and directors, on the other hand. Pursuant to the agreement, upon the closing of the transaction, we purchased 100% of the issued and outstanding equity interests of Sports Asylum in exchange for (a) the cancellation of a previous Secured Promissory Note issued to Sports Asylum, entered into on or about August 22, 2012 and with an outstanding principal balance of Two Hundred Eighty Five Thousand Dollars ($285,000) and (b) Two Hundred Fifteen Thousand Dollars ($215,000) represented by promissory notes in the original principal amount of One Hundred Sixty One Thousand Two Hundred Fifty Dollars ($161,250) to Pakulis and Fifty Three Thousand Seven Hundred Fifty ($53,750) to Carrillo. The closing of the purchase took place on December 31, 2012. On July 11, 2013, we entered into a First Amendment to Promissory Note with each of Pakulis and Carrillo to extend the date that we will begin making payments thereunder from June 30, 2013 to September 30, 2013, and extended the maturity date of the notes by a corresponding three (3) months. On October 25, 2013, we entered into a Securities Purchase Agreement with Carrillo pursuant to which we sold 328,381 shares of our common stock, restricted in accordance with Rule 144, for a total purchase price of $54,182.81. The Purchase Price was paid in full satisfaction of the promissory note in the original principal amount of $53,750.
Note 4. Other Current Assets
At December 31, 2013, the Company had recorded a $1,200,000 note receivable which represented the current portion of a $3,000,000 note receivable pursuant to the sale of our finder site weedmaps.com. On December 11, 2012, we entered into an Agreement and Plan of Reorganization, pursuant to which we sold our finder site weedmaps.com. Pursuant to the terms of the sale and as partial consideration we received a Secured Promissory Note in the original principal amount of Three Million Dollars ($3,000,000). Pursuant to the Note we will receive (1) Two Hundred Fifty Thousand Dollars ($250,000) on January 15, 2013 (which payment date was extended to January 31, 2013), which payment we did receive; One Hundred Thousand Dollars ($100,000) each month beginning on February 25, 2013 and continuing on the twenty fifth (25th) of each month thereafter for a total of twenty eight (28) months, which payments for February through December 2013 we did receive; and Sixteen Thousand Five Hundred Dollars ($16,500) on July 25, 2015.
At December 31, 2013, the Company had recorded $15,000 in prepaid filing fees, $5,200 in deposits, and $17,200 in prepaid insurance.
Note 5. Property And Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the useful lives of the assets, generally from three to seven years. Property and equipment at December 31, 2013 and December 31, 2012 consist of the following:
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December 31,
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December 31,
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Property and Equipment
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2013
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|
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2012
|
|
|
Furniture and Computer Equipment
|
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$
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42,000
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|
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$
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11,000
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Less: Accumulated Depreciation
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(16,000
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)
|
|
|
(6,000
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)
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Property and Equipment, net
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$
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26,000
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|
|
$
|
5,000
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For the twelve months ended December 31, 2013 depreciation expense was $10,000. For the twelve months ended December 31, 2012, depreciation expense, including depreciation for assets sold with our finder site weedmaps.com, totaled $121,000.
Note 6. Intangible Assets
Intangible assets consist of a suite of domain names. The domain names have been determined to have an indefinite useful life based primarily on the renewability of the domain name. Intangible assets with an indefinite life are not subject to amortization, but will be subject to periodic evaluation for impairment.
Intangible asset amounts at December 31, 2013 and December 31, 2012 are as follows:
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December 31,
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December 31,
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|
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Intangible Assets
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|
2013
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|
|
2012
|
|
|
|
|
|
|
|
|
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Domain names
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$
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420,862
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|
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$
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195,602
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Subtotal
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$
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420,862
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|
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$
|
195,602
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|
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Accumulated amortization
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|
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—
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|
|
|
—
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Total intangible Assets
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$
|
420,862
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|
|
$
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195,602
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|
See
Note 8. Discontinued Operations
for a discussion regarding the web software, trademarks and goodwill related to Sportify.com.
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Summary of our premium and non premium domain names
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Amount
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ToyHaulers.com*
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$
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31,000
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TravelTrailer.com*
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|
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51,000
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ModularHomes.com*
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141,000
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|
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Manufacturedhome.com and Manufacturedhouse.com*
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50,000
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|
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Manufacturedhomes.com*
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130,000
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|
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Manufacturedhomes.net*
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14,000
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Various other nonpremium domain names
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4,000
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|
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|
|
|
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Total premium and non premium domain names
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$
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421,000
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* These domain names have been pledged as collateral in connection with a financing sale-leaseback with Domain Capital.
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Note 7. Other Assets
At December 31, 2013, the Company had recorded a $473,000 note receivable which represented the noncurrent portion of a $3,000,000 note receivable we received pursuant to the sale of our finder site weedmaps.com. See
Note 4. Other Current Assets
for more information on the sale of our finder site weedmaps.com.
The balance of other assets at December 31, 2013 included $11,000 in rent deposits and $84,000 in deferred tax assets.
Note 8. Discontinued Operations
Sports Asylum, Inc.
During the quarter ended December 31, 2013, we entered into a definitive plan to sell the assets related to Sportify.com which includes the web software, trademarks, nonpremium sports-related domain names and goodwill associated with our acquisition of Sports Asylum, Inc. Sports Asylum, Inc. owns and operates the intellectual property associated with
www.sportify.com
. We entered into a definitive plan to sell the assets related to Sportify because during the quarter ended December 31, 2013, management decided to focus the Company’s efforts and resources to expanding our operations in the manufactured housing industry through our highly specific search-driven internet marketing finder site called ManufacturedHomes.com. At December 31, 2013 we have reclassed the assets, which have a net book value of $456,000 which amount is comprised of $100,000 in sports related nonpremium domain names, $10,000 in Sportify.com premium domain name, $1,000 in trademarks, $59,000 in goodwill, $430,000 in web software and $143,000 in accumulated amortization, to discontinued operations. At December 31, 2013, the $456,000 in net assets is recorded as
Other assets – discontinued operations
. The Sports Asylum assets are being held for sale and as of the filing of this report, a buyer has been identified and we are currently in negotiations.
Karate.com and Rodeo.com
During the quarter ended December 31, 2013, we entered into a definitive plan to sell the premium domain names Karate.com and Rodeo.com. We entered into a definitive plan to sell the Karate.com and Rodeo.com because during the quarter ended December 31, 2013, management decided to focus the Company’s efforts and resources to expanding our operations in the manufactured housing industry through our highly specific search-driven internet marketing finder site called ManufacturedHomes.com. At December 31, 2013 we have reclassed Karate.com and Rodeo.com, which have a net book value of $100,000 which amount is comprised of $500,000 in domain names and $400,000 in debt, to discontinued operations. At December 31, 2013, the $500,000 in domain names is recorded as
Other assets – discontinued operations
and the $400,000 in debt is recorded as
Noncurrent liabilities – discontinued operations.
Karate.com and Rodeo.com
are being held for sale and as of the filing of this report, a buyer has been identified and we are currently in negotiations.
General Health Solutions, Inc.
We discontinued the operations of General Health Solutions, Inc., which constitutes our entire Medical Clinic Management segment. We discontinued the operations of General Health Solutions because of increasing costs associated with managing the clinics and the recent increased competition in the medicinal cannabis clinic industry. A major factor in the success of managing the medicinal cannabis clinics is running successful online Pay Per Click (“PPC”) advertising campaigns. In PPC campaigns targeting is key, and factors that determine the pricing pertaining to certain key words depend heavily on the number of advertisers bidding on those certain key words. Taken together, i) our increasing success with our technology in our Marketing and Media Segment and ii) the increasing costs of PPC campaigns coupled with the increasing number of sole-practitioner doctors now offering medicinal cannabis recommendation letters as part of their medical practice offerings, which places downward pressure on pricing, led us to decide to discontinue the operations of General Health Solutions, which composes our entire Medical Clinic Management Segment and focus our efforts instead on our technology in our Marketing and Media Segment.
During February 2012, we committed to a definitive plan to terminate the Management Agreement (“Agreement”) and services associated with the Agreement, which resulted in General Health Solutions, Inc., our Medical Clinic Management segment being reported as discontinued operations. For comparative purposes, all prior periods presented have been restated to reflect the reclassification of this segment to discontinued operations on a consistent basis. Following the closure of the clinics during the first quarter 2012, we do not expect any continuing cash flows from discontinued operations.
The assets and liabilities of our discontinued operations related to General Health Solutions at December 31, 2013 consists of $10,000 in accounts payable and $107,000 in notes payable plus $44,000 in accrued interest recorded as
Current liabilities - discontinued operations
.
Note 9. Accounts Payable
Accounts payable at December 31, 2013 included amounts owed to certain vendors related to the ongoing normal course of the Company’s operations.
Note 10. Accrued Liabilities
Accrued liabilities at December 31, 2013 and December 31, 2012 are comprised of the following:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Accrued liabilities
|
|
2013
|
|
|
2012
|
|
|
Tax payable
|
|
$
|
1,342,000
|
|
|
$
|
2,144,000
|
|
|
Obligations on stock based compensation
|
|
|
440,000
|
|
|
|
27,000
|
|
|
Obligations on marketing agreements
|
|
|
27,000
|
|
|
|
27,000
|
|
|
Payroll liabilities
|
|
|
118,000
|
|
|
|
21,000
|
|
|
Other
|
|
|
104,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
2,031,000
|
|
|
$
|
2,219,000
|
|
At December 31, 2013 we had $1,342,000 in federal and state taxes payable which represent amounts due and payable for the years ended December 31, 2011 and 2012.
Note 11. Notes Payable
On December 31, 2012, we entered into a Securities Purchase Agreement by and among us, on the one hand, and Sports Asylum, Inc., a Nevada corporation, and its shareholders, Sabas Carrillo (“Carrillo”), an individual, and James Pakulis (“Pakulis”), an individual and one of our officers and directors, on the other hand. Pursuant to the agreement, upon the closing of the transaction, we purchased 100% of the issued and outstanding equity interests of Sports Asylum in exchange for (a) the cancellation of a previous Secured Promissory Note issued to Sports Asylum, entered into on or about August 22, 2012 and with an outstanding principal balance of Two Hundred Eighty Five Thousand Dollars ($285,000) and (b) Two Hundred Fifteen Thousand Dollars ($215,000) represented by promissory notes in the original principal amount of One Hundred Sixty One Thousand Two Hundred Fifty Dollars ($161,250) to Pakulis and Fifty Three Thousand Seven Hundred Fifty Dollars ($53,750) to Carrillo. The closing of the purchase took place on December 31, 2012. On July 11, 2013, we entered into a First Amendment to Promissory Note with each of Pakulis and Carrillo to extend the date that we will begin making payments thereunder from June 30, 2013 to September 30, 2013, and extended the maturity date of the notes by a corresponding three months. On November 8, 2013, effective as of September 30, 2013, we entered into a Second Amendment to Promissory Note with each of Pakulis and Carrillo to extend the date that we will begin making payments thereunder from September 30, 2013 to December 31, 2013, and extended the maturity date of the notes by a corresponding three months. On March 19, 2014, effective as of December 31, 2013, we entered into a Third Amendment to Promissory Note with Pakulis to extend the date that we will begin making payments thereunder from December 31, 2013 to January 1, 2015, and extended the maturity date of the notes by a corresponding twelve months. On October 25, 2013, we entered into a Securities Purchase Agreement with Carrillo pursuant to which we sold 328,381 shares of our common stock, restricted in accordance with Rule 144, for a total purchase price of $54,183. The Purchase Price was paid in full satisfaction of the promissory note in the original principal amount of $53,750.
On February 27, 2013, we purchased the domain name know as www.toyhaulers.com. The purchase price was $30,000, payable $15,000 at closing and $2,500 per month over six (6) consecutive months. During the year ended December 31, 2013, the remaining balance outstanding was paid.
On February 22, 2013, we purchased the domain name know as www.traveltrailer.com. The purchase price was $50,000, payable $15,000 at closing and $5,000 per month over seven (7) consecutive months. During the year ended December 31, 2013, the remaining balance outstanding was paid.
On January 25, 2013, we purchased the domain name known as www.modularhomes.com for total consideration of One Hundred Forty Thousand Dollars ($140,000), payable in a down payment of Fifty Thousand Dollars ($50,000) and the balance over twelve (12) equal monthly payments. On July 12, 2013, we modified our remaining payment obligation by increasing the purchase price by $6,000 and extending the payment terms as follows: $2,000 on July 15, 2013 and on the first of each month for five (5) subsequent months, followed by ten (10) monthly payments of $5,460 beginning January 1, 2014. During the year ended December 31, 2013, the remaining balance outstanding was paid.
On August 9, 2013, we entered into a sale-leaseback agreement with Domain Capital, LLC, pursuant to which we transferred our interest in the following domains to Domain Capital in exchange for One Hundred and Fifty-Thousand Dollars ($150,000.00): www.manufacturedhome.com, www.manufacturedhomes.com, www.manufacturedhouse.com, www.manufacturedhomes.net, www.modularhomes.com, www.traveltrailer.com, and www.toyhaulers.com (the Domains). That same day, we entered into a Lease Agreement with Domain Capital, pursuant to which we are leasing the Domains at a cost of Five Thousand One Hundred and Ninety-Nine Dollars and Eighty Cents ($5,199.80) per month. The initial term of the Lease Agreement is thirty-six (36) months, and the sum of the lease payments due over the initial term are equal to the consideration we received for the Domains (i.e., $150,000.00) plus interest of 15%. The transactions closed on August 15, 2013, the date that the purchase price was delivered to us. At the termination of the Lease Agreement, pursuant to the terms of a Buyback Agreement, we can exercise an option to re-purchase the Domains for a total purchase price of one dollar ($1.00), assuming we are not in default under the Lease Agreement at that time. The proceeds we received from Domain Capital were used to satisfy outstanding debts related to our acquisition of the following three domains, with the balance allocated to working capital: www.modularhomes.com, www.traveltrailer.com, and www.toyhaulers.com.
On June 10, 2013, July 11, 2013, August 22, 2013 and December 12, 2013, respectively, we entered into Securities Purchase Agreements with Asher Enterprises, Inc., pursuant to which we sold to Asher 8% Convertible Promissory Notes in the original principal amounts of $53,000, $53,000, $32,500 and $63,000, respectively (the “Notes”). The Notes have maturity dates of March 12, 2014, April 15, 2014, May 27, 2014 and September 16, 2014, respectively, and are convertible after one hundred and eighty (180) days into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 58% multiplied by the Market Price (representing a discount rate of 42%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means the closing bid price on the applicable day. The “Fixed Conversion Price” shall mean $0.00005. The shares of common stock issuable upon conversion of the Notes will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The Notes can be prepaid by us at a premium as follows: (a) between 31 and 60 days after issuance - 114% of the principal amount; (b) between 61 and 90 days after issuance - 120% of the principal amount; (c) between 91 and 120 days after issuance - 124% of the principal amount; (d) between 121 and 180 days after issuance - 130% of the principal amount. The purchase and sale of the Notes closed on June 14, 2013, July 16, 2013, August 28, 2013, and December 23, 2013, respectively, the dates that the purchase price was delivered to us. The issuance of the Notes was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.
On December 6, 2013, we repaid the promissory note to Asher Enterprises, Inc. that, on June 10, 2013, we entered into in connection with a Securities Purchase Agreement, pursuant to which we sold to Asher a 8% Convertible Promissory Note in the original principal amount of $53,000 (the “Note”). We repaid the entire principal balance of the Note, plus accrued interest and a prepayment premium, in the amount of Seventy Thousand Nine Hundred Thirty Two Dollars and Eighty Eight Cents ($70,932.88).
On January 3, 2014, we repaid the promissory note to Asher Enterprises, Inc. that, on July 11, 2013, we entered into in connection with a Securities Purchase Agreement, pursuant to which we sold to Asher a 8% Convertible Promissory Note in the original principal amount of $53,000 (the “Note”). We repaid the entire principal balance of the Note, plus accrued interest and a prepayment premium, in the amount of Seventy Thousand Eight Hundred Thirty Nine Dollars and Ninety Four Cents ($70,839.94).
Below is a summary of our note payable amounts:
|
Notes payable - current portion
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
Sportify
|
|
$
|
-
|
|
|
$
|
54,000
|
|
|
Domain Capital
|
|
|
44,000
|
|
|
|
-
|
|
|
Asher Enterprises
|
|
|
152,000
|
|
|
|
-
|
|
|
|
|
$
|
196,000
|
|
|
$
|
54,000
|
|
|
Notes payable - noncurrent portion
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
Domain Capital
|
|
|
96,000
|
|
|
|
|
|
|
|
$
|
96,000
|
|
|
$
|
-
|
|
|
Summary of notes payable:
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
Sportify
|
|
$
|
-
|
|
|
$
|
54,000
|
|
|
Domain Capital
|
|
|
140,000
|
|
|
|
-
|
|
|
Asher Enterprises
|
|
|
152,000
|
|
|
|
-
|
|
|
|
|
$
|
292,000
|
|
|
$
|
54,000
|
|
Note 12. Notes Payable- Related Party
Sportify Note
On December 31, 2012, we entered into a Securities Purchase Agreement by and among us, on the one hand, and Sports Asylum, Inc., a Nevada corporation, and its shareholders, Sabas Carrillo (“Carrillo”), an individual, and James Pakulis (“Pakulis”), an individual and one of our officers and directors, on the other hand. Pursuant to the agreement, upon the closing of the transaction, we purchased 100% of the issued and outstanding equity interests of Sports Asylum in exchange for (a) the cancellation of a previous Secured Promissory Note issued to Sports Asylum, entered into on or about August 22, 2012 and with an outstanding principal balance of Two Hundred Eighty Five Thousand Dollars ($285,000) and (b) Two Hundred Fifteen Thousand Dollars ($215,000) represented by promissory notes in the original principal amount of One Hundred Sixty One Thousand Two Hundred Fifty Dollars ($161,250) to Pakulis and Fifty Three Thousand Seven Hundred Fifty Dollars ($53,750) to Carrillo. The closing of the purchase took place on December 31, 2012. On July 11, 2013, we entered into a First Amendment to Promissory Note with each of Pakulis and Carrillo to extend the date that we will begin making payments thereunder from June 30, 2013 to September 30, 2013, and extended the maturity date of the notes by a corresponding three months. On November 8, 2013, effective as of September 30, 2013, we entered into a Second Amendment to Promissory Note with each of Pakulis and Carrillo to extend the date that we will begin making payments thereunder from September 30, 2013 to December 31, 2013, and extended the maturity date of the notes by a corresponding three months. On March 19, 2014, effective as of December 31, 2013, we entered into a Third Amendment to Promissory Note with Pakulis to extend the date that we will begin making payments thereunder from December 31, 2013 to January 1, 2015, and extended the maturity date of the notes by a corresponding twelve months.
Below is a summary of our note payable - related party amounts:
|
Notes payable - related party
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
Current portion
|
|
$
|
-
|
|
|
$
|
161,000
|
|
|
Noncurrent portion
|
|
|
161,000
|
|
|
|
-
|
|
|
|
|
$
|
161,000
|
|
|
$
|
161,000
|
|
Note 13. Other Long Term Accrued Liabilities
At December 31, 2013, we had a balance of $118,750 in noncurrent tax payable.
Note 14. Income Per Common Share
Income per common share is based on the weighted average number of common shares outstanding. The Company complies with
Earnings Per Share
, which requires dual presentation of basic and diluted earnings per share on the face of the statements of operations. Basic per share earnings or loss excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted-average common shares outstanding for the period. Diluted per share earnings or loss reflect the potential dilution that could occur if convertible preferred stock or debentures, options and warrants were to be exercised or converted or otherwise result in the issuance of common stock that is then shared in the earnings of the entity.
As of December 31, 2013, there were 250,000 common stock purchase warrants outstanding that were not included in the computation of diluted EPS because to do so would have been antidilutive for the period presented.
Note 15. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Significant components of the Company's tax provisions and deferred tax assets as of December 31, 2013 and December 31, 2012 are as follows:
The components of tax provision:
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
Current
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(475,000
|
)
|
|
$
|
1,184,225
|
|
|
State
|
|
|
70,750
|
|
|
|
285,075
|
|
|
|
|
|
(404,250
|
)
|
|
|
1,469,300
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(651,000
|
)
|
|
|
895,000
|
|
|
State
|
|
|
(268,000
|
)
|
|
|
186,000
|
|
|
|
|
|
(919,000
|
)
|
|
|
1,081,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(77,000
|
)
|
|
|
(68,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
$
|
(1,400,250
|
)
|
|
$
|
2,482,300
|
|
The total tax provision is $1,391,250 of which $1,400,250 corresponds to current operations and $9,000 (tax benefit) corresponds to discontinued operations.
The components of deferred tax asset:
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
State taxes
|
|
$
|
129,000
|
|
|
$
|
129,000
|
|
|
Net operating losses
|
|
|
357,000
|
|
|
|
434,000
|
|
|
Depreciation
|
|
|
137,000
|
|
|
|
-
|
|
|
Accruals and other
|
|
|
-
|
|
|
|
8,000
|
|
|
|
|
|
623,000
|
|
|
|
571,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
|
Installment gain
|
|
|
(390,000
|
)
|
|
|
(1,195,000
|
)
|
|
|
|
|
233,000
|
|
|
|
(624,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(295,000
|
)
|
|
|
(372,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets/(liabilities)
|
|
$
|
(62,000
|
)
|
|
$
|
(996,000
|
)
|
For the years ended December 31, 2013 and 2012, a reconciliation of the federal statutory tax rate to the Company's effective tax rate is as follows:
|
Effective Tax Rate
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
Federal statutory
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
|
State and local, net of federal
|
|
|
2.17
|
%
|
|
|
2.65
|
%
|
|
Permanent and other items
|
|
|
0.80
|
%
|
|
|
-20.60
|
%
|
|
Installment gain
|
|
|
8.53
|
%
|
|
|
-2.62
|
%
|
|
Return to provision
|
|
|
0.68
|
%
|
|
|
0.56
|
%
|
|
Change in Valuation allowance
|
|
|
-0.85
|
%
|
|
|
-0.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total effective tax rate
|
|
|
45.33
|
%
|
|
|
13.87
|
%
|
The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible. The amount of deferred tax assets considered realizable could change if future taxable income is realized. At December 31, 2013 and December 31, 2012, the Company had U.S. federal tax net operating loss carryforwards (“NOLs”) of approximately $664,000 and $1.5 million, respectively, which begin to expire in 2021. At December 31, 2013 and December 31, 2012, the Company had State NOLs of $2.25 million and zero, respectively. The NOLs are subject to limitations under IRC Section 382 of the Internal Revenue Code (“Section 382”).
Note 16. Related Party Transactions
All material intercompany transactions have been eliminated upon consolidation of our entities. During the twelve months ended December 31, 2013, cash transfers, equity and accounts between the Company and its subsidiaries have been eliminated upon consolidation.
On August 20, 2012, we approved the issuance of Twenty Thousand (20,000) shares of our common stock, restricted in accordance with Rule 144, to each then-member of our Board of Directors, namely James Pakulis, Bonnie Goldstein, and Munjit Johal, as a one-time bonus for serving as a director. The shares were issued during the quarter ended March 31, 2013.
On July 15, 2013, we issued an aggregate of 945,000 shares of our common stock, restricted in accordance with Rule 144, to seven (7) existing shareholders, who had previously purchased shares from us, as consideration under a Stock Issuance and Release Agreement (the “Release”) we entered into with each of them. The Release was the resolution of discussions with the investors regarding our efforts in pursuing an S-1 registration statement. One of the shareholders that had previously purchased shares from us was James Pakulis, our Chief Executive Officer; he was issued 150,000 shares pursuant to the Release.
See
Note 12. Notes Payable- Related Party
for information regarding a Securities Purchase Agreement we entered into on December 31, 2012, with Sports Asylum, Inc., a Nevada corporation, and its shareholders, Sabas Carrillo, an individual, and James Pakulis, an individual and one of our officers and directors.
Note 17. Commitments And Contingencies
Our executive offices are located in Lake Forest, California, at 26497 Rancho Parkway South, Lake Forest, CA 92630. Our office space is approximately 7,000 square feet and is shared with Miracle Housing, Inc., a business controlled by one of our employees, Brad Nelms. Our rent, pursuant to a verbal agreement with Miracle Housing, is $8,000 per month and covers exactly all of the obligations of Miracle Housing under its primary lease. The Company is confident that this commercial space will provide adequate space to meet our needs and provide for future growth.
During April 2013, we entered into a new lease at 3265 N Fort Apache Rd, Suite 110, Las Vegas, NV 89129. The office space is approximately 2,500 square feet. Pursuant to the terms of the lease, our rent is $2,500 per month for twelve (12) months.
Set forth below is a summary of our current obligations as of December 31, 2013 comprised exclusively of the rental lease obligations to make future payments due by the period indicated below:
|
Lake Forest Office
|
|
Minimum
Payments
|
|
|
Monthly
Base Rent
|
|
|
2014
|
|
$
|
96,000
|
|
|
$
|
8,000
|
|
|
Las Vegas Office
|
|
Minimum
Payments
|
|
|
Monthly
Base Rent
|
|
|
2014
|
|
$
|
10,000
|
|
|
$
|
2,500
|
|
Note 18. Warrants
As of December 31, 2013, there were 250,000 common stock purchase warrants outstanding. The following table summarizes information about common stock warrants outstanding at December 31, 2013.
|
Outstanding
|
|
|
Exercisable
|
|
|
Exercise
Price
|
|
|
Number
Outstanding
|
|
|
Weighted Average Remaining Contractual Life (years)
|
|
|
Weighted Exercise Price Average
|
|
|
Number Exercisable
|
|
|
Weighted Average Exercise Price
|
|
|
$
|
4
|
|
|
|
250,000
|
|
|
|
0.87
|
|
|
$
|
4
|
|
|
|
250,000
|
|
|
$
|
4
|
|
Note 19. Subsequent Events
The Company evaluated its December 31, 2013 financial statements for subsequent events through March 27, 2014, the date the financial statements were available to be issued.
On January 3, 2014, we repaid the promissory note to Asher Enterprises, Inc. that, on July 11, 2013, we entered into in connection with a Securities Purchase Agreement, pursuant to which we sold to Asher a 8% Convertible Promissory Note in the original principal amount of $53,000 (the “Note”). We repaid the entire principal balance of the Note, plus accrued interest and a prepayment premium, in the amount of Seventy Thousand Eight Hundred Thirty Nine Dollars and Ninety Four Cents ($70,839.94).
On January 6, 2014, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher a 8% Convertible Promissory Note in the original principal amount of $63,000 (the “Note”). The Note has a maturity date of October 8, 2014, and is convertible after 180 days into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 58% multiplied by the Market Price (representing a discount rate of 42%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means the closing bid price on the applicable day. The “Fixed Conversion Price” shall mean $0.00005. The shares of common stock issuable upon conversion of the Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The Note can be prepaid by us at a premium as follows: (a) between 31 and 60 days after issuance – 114% of the principal amount; (b) between 61 and 90 days after issuance – 120% of the principal amount; (c) between 91 and 120 days after issuance – 124% of the principal amount; (d) between 121 and 180 days after issuance – 130% of the principal amount. The purchase and sale of the Note closed on January 10, 2014, the date that the purchase price was delivered to us.
On January 21, 2013, we entered into a Management Agreement with Tattoo Interactive, LLC (the “Management Agreement”), pursuant to which we will perform various marketing, promotion, and website management services with respect to the domain name known as
www.tattoo.com
and the commercial website located at that domain (the “Management Services”). The agreement has an initial term of twelve (12) months and shall automatically renew for successive one (1) year terms unless terminated in accordance with its terms. In the event we incur at least $25,000 in expenditures relating to the performance of the services in any single month, Tattoo Interactive shall pay us $10,000 as an expense-sharing allotment. Pursuant to the agreement, we will receive twenty percent (20%) of all advertising revenue (as defined therein), and after the payment of the advertising revenue (as defined therein), we will receive sixty five percent (65%) of all remaining designated gross revenue (as defined therein). We have a right of first refusal in the event Tattoo Interactive elects to sell the domain name, and in the event certain revenue goals, as set forth in the agreement, are satisfied, we will be granted certain equity interests in Tattoo Interactive.
On February 5, 2014, we received a fully signed copy of a First Amendment to Management Agreement (the “First Amended Agreement”) dated as of January 27, 2014, pursuant to which Tattoo Interactive shall no longer have an obligation to reimburse us for any expenses or costs related to the Management Services as of January 1, 2014. The First Amended Agreement will automatically terminate on April 30, 2014 (the “Initial Term”) unless a separate written agreement is executed by the parties (if so extended, the “Extended Initial Term”). If the parties agree to an Extended Initial Term, the Management Agreement will automatically renew for successive one (1) year terms unless terminated in accordance with the terms set forth in the First Amended Agreement. During the Initial Term, pursuant to our revenue sharing agreement, we will pay Tattoo Interactive a minimum monthly payment of $15,000. During the Extended Initial Term, our minimum monthly payment will be $25,000.
On February 24, 2014, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher a 8% Convertible Promissory Note in the original principal amount of $53,000 (the “Note”). The Note has a maturity date of November 26, 2014, and is convertible after 180 days into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 58% multiplied by the Market Price (representing a discount rate of 42%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means the closing bid price on the applicable day. The “Fixed Conversion Price” shall mean $0.00005. The shares of common stock issuable upon conversion of the Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The Note can be prepaid by us at a premium as follows: (a) between 0 and 30 days after issuance – 109% of the principal amount; (b) between 31 and 60 days after issuance – 114% of the principal amount; (c) between 61 and 90 days after issuance – 120% of the principal amount; (d) between 91 and 120 days after issuance – 124% of the principal amount; (e) between 121 and 180 days after issuance – 130% of the principal amount. The purchase and sale of the Note closed on February 28, 2014, the date that the purchase price was delivered to us.
On February 28, 2014, we issued a total of five million five hundred thousand (5,500,000) shares of our common stock, restricted in accordance with Rule 144, to a total of five (5) individuals and entities who had rendered services to us prior to December 31, 2013. These shares were used to satisfy an aggregate debt of Four Hundred and Forty Thousand Dollars ($440,000) owed to service providers.
During February 2014, we entered into a new lease at 4888 FM 2264, Rhome, TX. The parcel is approximately a 2-acre tract of land. Pursuant to the terms of the lease, our rent is $1,300 per month for 24 months.
On March 28, 2014, we entered into, with a third party investor, a 20% convertible secured promissory note with a maturity date of April 28, 2015 and in the principal amount of $100,000 (the Note), which is convertible into the Companys common stock at $0.08 per share and which is collateralized by up to $15,000 on a monthly basis by the $100,000 in monthly payments which we receive pursuant to our sale of WeedMaps Media, Inc. if not paid in full within six months of the date of the Note. Furthermore, as further collateral, we agreed to place 1,250,000 shares of our common stock into escrow.
On March 28, 2014, we entered into, with a third party investor, a 20% convertible secured promissory note with a maturity date of April 26, 2015 and in the principal amount of $100,000 (the Note), which is convertible into the Companys common stock at $0.08 per share and which is collateralized by up to $15,000 on a monthly basis by the $100,000 in monthly payments which we receive pursuant to our sale of WeedMaps Media, Inc. if not paid in full within six months of the date of the Note. Furthermore, as further collateral, we agreed to place 1,250,000 shares of our common stock into escrow. Finally, as an incentive to the third party investor to enter into the Note, we agreed to issue 300,000 shares of the Companys common stock.