NOTES TO FINANCIAL STATEMENTS
December 31, 2016
NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION
Northsight Capital Inc. (Northsight or the Company) was incorporated in the State of Nevada on May 21, 2008. In May, 2011, Safe Communications, Inc. (n/k/a Kuboo, Inc.) acquired 80% of the Companys issued and outstanding common stock, and, as a result, became its parent company. On June 25, 2014, the Company completed the acquisition of approximately 7500 cannabis related Internet domain names, in exchange for which the Company issued 78.5 million shares of its common stock and a promissory note in the principal amount of $500,000. As a result of this transaction, the seller of the domain names became an 81% stockholder of the Company. Kuboo, Inc. continues to be a significant stockholder of the Company. John Venners, our EVP of Operations and a director, is also a director of Kuboo, Inc. See Note 17 - Related Party Transactions.
The Companys principal business is to provide a wide variety of online directories for a broad range of businesses engaged in the lawful sale and distribution of cannabis and hemp related products. The following constitute the Companys major product categories: a monthly listing in one or more of the Companys online directories, paid advertising in one or more of the Companys online directories and leasing to customers one or more Internet domain names for the customers exclusive use.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP).
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Such estimates include, but are not limited to, allowance for doubtful accounts and valuations of intangible assets, among others. Actual results could differ from those estimates.
Risk and Uncertainties
The Company operates in an industry that is subject to rapid change and intense competition. The Companys operations are subject to significant risk and uncertainties including financial, operational, technological, regulatory and other risks, including the potential risk of business failure.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less at the date of purchase and money market accounts to be cash equivalents. As of December 31, 2016 and 2015, the Company had no cash equivalents and all cash amounts consisted of cash on deposit.
Stock-Based Compensation
Share-based compensation awards, including stock options and restricted stock awards, are recorded at estimated fair value on the awards grant date, based on estimated number of awards that are expected to vest. The grant date fair value is amortized on a straight-line basis over the time in which the awards are expected to vest, or immediately if no vesting is required. Share-based compensation awards issued to non-employees for services are recorded at either the fair value of the services rendered or the fair value of the share-based payments whichever is more readily determinable. The fair value of restricted stock awards is based on the fair value of the stock underlying the awards on the grant date as there is no exercise price.
F-6
The fair value of stock options is estimated using the Black-Scholes option-pricing model. The determination of the fair value of each stock award using this option-pricing model is affected by our assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards and the expected term of the awards based on an analysis of the actual and projected employee stock option exercise behaviors and the contractual term of the awards. We recognize stock-based compensation expense over the requisite service period, which is generally consistent with the vesting of the awards, based on the estimated fair value of all stock-based payments issued to employees and directors that are expected to vest.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of various payments that the Company has made in advance for goods or services to be received in the future. These prepaid expenses include service contracts paid in advance.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable represents obligations from customers that are subject to normal collection terms and are recorded at the invoiced amount, net of any allowance for doubtful accounts, and do not typically bear interest. The Company assesses the collectability of the accounts by taking into consideration the aging of accounts receivable, changes in customer credit worthiness, general market and economic conditions, and historical experience. Bad debt expenses are recorded as part of selling, general and administrative expenses in the statements of operations. The Company writes off the receivable balance against the allowance when management determines a balance is uncollectible. At December 31, 2016, the Company has recorded a full allowance of $34,204 against its receivable balance due to the uncertainty of its collectability.
Property and Equipment/Web Development Costs
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed on a straight-line basis over the estimated useful lives of the respective assets or, in the case of leasehold improvements, the remaining lease term, if shorter. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed and the resulting gains or losses are recorded as part of other income or expense in the statements of operations. Repairs and maintenance costs are expensed as incurred.
The estimated useful lives of the property and equipment are as follows:
|
|
|
Property and Equipment
|
|
Estimated Useful Life
|
Furniture, fixtures and equipment
|
|
3 years
|
Web development costs
|
|
5 years
|
Investment in joint Venture
The Companys ownership of the joint venture company is accounted for under the equity method of accounting, in accordance with ASC 323. Under the equity method of accounting, an Investee Companys accounts are not reflected within the Companys Balance Sheets and Statements of Operations; however, the Companys share of the earnings or losses of the Investee Company is reflected as a gain or loss on the Companys investment. Additionally, under the equity method of accounting, the Companys initial investment in the joint venture company was recorded at the historic cost basis of the contributed domain of $0. Accordingly, the Company expensed $475,751 related to the value of warrants the Company issued and is included as a component of loss on investments in the Companys Statements of Operations.
When the Companys carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Companys financial statements unless the Company guaranteed obligations of the Investee Company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized. On disposal of investments in joint ventures and associated companies, the difference between disposal proceeds and the carrying amounts of the investments are recognized in profit or loss.
F-7
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances exist that indicate the carrying amount of an asset may not be recoverable. When indicators of impairment exist, an estimate of undiscounted future cash flows is used in measuring whether the carrying amount of the asset or related asset group is recoverable. Measurement of the amount of impairment, if any, is based upon the difference between the assets carrying value and estimated fair value.
Revenue Recognition
Revenue is recognized when all of the following criteria are met:
·
Persuasive evidence of an arrangement exists. Evidence of an arrangement consists of an order from the Companys distributors, resellers or customers.
·
Delivery has occurred. Delivery is deemed to have occurred when title and risk of loss has transferred, either upon shipment of products to customers or upon delivery.
·
The fee is fixed or determinable. The Company assesses whether the fee is fixed or determinable based on the terms associated with the transaction.
·
Collection is reasonably assured. The Company assesses collectability based on credit analysis and payment history.
Revenue for ads sold is recognized upon delivery of the advertising or is amortized over the time period the advertisement runs using the straight-line method if the advertising contract spans multiple periods.
Advertising and Promotion
Advertising and promotion expenses include digital and print advertising, trade show events, endorsements and sponsorships, and promotional giveaways. Advertising costs are expensed as incurred unless they cover a specific period of time, in which case they are amortized over the service period. Advertising costs of $328 and $81,568 were incurred for the years ended December 31, 2016 and 2015, respectively.
Income Taxes
Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases, operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely to be realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
The Company records interest and penalties related to unrecognized tax benefits in income tax expense. There were no interest or penalties related to unrecognized tax benefits for the years ended December 31, 2016 and 2015.
Fair Value of Financial Instruments
The fair values of the Companys assets and liabilities that qualify as financial instruments under FASB ASC Topic 825, Financial Instruments, approximate their carrying amounts presented in the accompanying financial statements at December 31, 2016 and 2015.
Loss Contingencies
The Company recognizes contingent losses that are both probable and estimable. In this context, the Company defines probability as circumstances under which events are likely to occur. In regards to legal costs, we record such costs as incurred.
F-8
Earnings per Share Policy
The Company complies with the accounting and disclosure requirements of FASB ASC 260, Earnings Per Share. Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per common share incorporates the dilutive effect of common stock equivalents on an average basis during the period.
The calculation of diluted net loss per share excludes all warrants as of December 31, 2016 and 2015, since their effect is anti-dilutive.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Companys financial statements upon adoption
NOTE 3 LIQUIDITY/GOING CONCERN
The Company has accumulated losses of $20,683,410 and have had sustained negative cash flows from operating activities since inception (May 2008). These factors raise substantial doubt about the Companys ability to continue as a going concern.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. During the year ended December 31, 2016, the Company raised gross proceeds of $100,000 from non-related parties and $656,600 from related parties in capital through the issuance of notes payable. Management plans to (i) raise additional capital as soon as possible, to fund continued operations of the Company and (ii) eventually to generate profits from operations.
In the event the Company does not generate sufficient funds from revenues or financing through the issuance of its common stock or from debt financing, the Company will be unable to fully implement its business plan and pay its obligations as they become due, any of which circumstances would have a material adverse effect on its business prospects, financial condition, and results of operations. The accompanying financial statements do not include any adjustments that might be required should the Company be unable to recover the value of its assets or satisfy its liabilities.
NOTE 4 INVESTMENT IN JOINT VENTURE
On February 29, 2016, the Company entered into a joint venture agreement with Tumbleweed Holdings, Inc. (TW), pursuant to which a newly formed joint venture company had been developing an online dating service around the URL, www.jointlovers.com. Per the Joint Venture Agreement, the Company and TW own 60% and 40% respectively of equity of the joint venture company. Under the joint venture agreement, the Company and TW agreed as follows:
·
The Company contributed the URL www.jointlovers.com to the joint venture entity, in exchange for 60% of the joint venture company.
·
TW contributed $30,000 and agreed to contribute an additional $70,000 towards the development of the online web portal, in exchange for 40% of the joint venture company. With any additional funds required for development to be contributed 60% by the Company and 40% by TW.
·
Revenue from the joint venture company will be shared proportionally with a portion of operating income to be used to repay principal and income due under the convertible notes referenced below (up to $165,000 in principal amount of notes).
F-9
·
TW agreed to purchase an aggregate of $150,000 in principal amount of convertible notes, convertible into shares of the Companys common stock at a conversion price of $.20 per share. In addition to repayment of principal, if the joint venture company has revenues, the notes are entitled to receive a portion of the joint venture companys operating income until they have received an amount equal to 50% of the face value of the notes.
During the year ended December 31, 2016, Tumbleweed contributed a total of $85,000 to the joint venture company.
Additionally, both parties agreed to issue the other a warrant to purchase 4.9% of their outstanding common stock. Pursuant to this agreement, TW agreed to issue a warrant to the Company to purchase 9,770,878 shares of its common stock at an exercise price of $0.02 per share, and the Company agreed to issue a warrant to TW to purchase 5,525,318 shares of the Companys common stock at an exercise price of $0.08 per share, valued at $475,751. The warrants have a three-year term and a cashless exercise right (see Note 6 Securities and Note 13 Stock Warrants for details). As of the date of these financial statements, TW has not yet issued the warrants due to the Company. Therefore, the Company has not yet recorded their value on its balance sheet.
The Companys ownership of the joint venture company is accounted for under the equity method of accounting, in accordance with ASC 323. Under the equity method of accounting, an Investee Companys accounts are not reflected within the Companys Balance Sheets and Statements of Operations; however, the Companys share of the earnings or losses of the Investee Company is reflected as a gain or loss on the Companys investment. Additionally, under the equity method of accounting, the Companys initial investment in the joint venture company was recorded at the historic cost basis of the contributed domain of $0. Accordingly, the Company expensed $475,751 related to the value of warrants the Company issued and is included as a component of loss on investments in the Companys Statements of Operations.
When the Companys carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Companys financial statements unless the Company guaranteed obligations of the Investee Company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized. During the year ended December 31, 2016, the joint venture company experienced a net loss attributable to the Companys 60% ownership of $10,695 which is included on the companys statements of operations.
As of December 31, 2016, Tumbleweed was in default under the terms of the joint venture agreement and owed the joint venture company the remaining $15,000 in development funding and the Company $50,000 for the final note purchase, both of which were due by April 29, 2016. Additionally, Tumbleweed owes the joint venture company $18,904, representing its 40% share of costs in excess of the first $100,000. The Company is currently in litigation with TW, seeking to compel TW to comply with its funding obligations under the Joint Venture Agreement.
On September 22, 2016, Tumbleweed Holdings Inc., instituted a counterclaim in Arizona in response to the above legal action. The complaint alleged that (i) The Company breached the joint venture agreement by failing to leverage relationships and failing to provide budgeting and accounting records, (ii) the Company breached implied covenant of good faith and fair dealing by enticing TW into making significant contributions and then failing to perform under the agreement, (iii) the Company was unjustly enriched by having use of funds contributed by TW, (iv) the Company converted funds contributed by TW into its own assets, and (v) the Company has not provided accounting for all funds received by TW. TW seeks damages in the amount to be determined at trial. The Company believes these claims are without merit and intends to vigorously defend itself against them.
F-10
Summary balance sheet information on the joint venture for at December 31, 2016 and 2015 is as follows:
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
2016
|
|
2015
|
|
(Unaudited)
|
|
(Unaudited)
|
ASSETS
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
Accounts Receivable Related Party
|
$
|
33,704
|
|
$
|
-
|
Total Current Assets
|
|
33,704
|
|
|
-
|
|
|
|
|
|
|
Web Development Costs
|
|
128,936
|
|
|
-
|
Total Assets
|
$
|
162,640
|
|
$
|
-
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
Accounts payable related party
|
$
|
34,204
|
|
$
|
-
|
Total Current Liabilities
|
|
33,704
|
|
|
-
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
Common stock
|
|
1
|
|
|
-
|
Additional paid-in capital
|
|
146,560
|
|
|
-
|
Accumulated deficit
|
|
(18,125)
|
|
|
-
|
Total Stockholders Equity
|
|
128,436
|
|
|
-
|
Total Liabilities and Stockholders Equity
|
$
|
162,640
|
|
$
|
-
|
Summary revenue information on the joint venture for the years ended December 31, 2016 and 2015 is as follows:
|
|
|
|
|
|
|
For the Years Ended
|
|
December 31, 2016
|
|
December 31, 2015
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
Revenues
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
General administrative
|
|
14,525
|
|
|
-
|
Rent - related party
|
|
3,600
|
|
|
-
|
Total operating expenses
|
|
18,125
|
|
|
-
|
|
|
|
|
|
|
Loss from operations
|
|
(18,125)
|
|
|
-
|
|
|
|
|
|
|
Net Loss
|
$
|
(18,125)
|
|
$
|
-
|
|
|
|
|
|
|
Company Share of Net Loss
|
$
|
(10,695)
|
|
$
|
-
|
NOTE 5 ADVANCES RELATED PARTY
With the formation of the Companys joint venture (see Note 4 Investment in Joint Venture), Tumbleweed Holdings agreed to fund one hundred percent of the first $100,000 of web development costs related to the web site www.jointlovers.com. During the year ended December 31, 2016, the Joint Venture Company incurred costs totaling $128,936 related to the development of jointlovers.com as well as $18,125 in general and administrative costs. Per the Joint Venture Agreement, the Company is responsible for 60% of all costs after the initial $100,000, representing a total share of $28,056 in the joint ventures costs. During this same period, the company paid costs totaling $62,260 on behalf of the Joint Venture Company satisfying the Companys share of $28,056 while the excess $34,204 is due to the Company. Due to the uncertainty of collectability, the Company has recorded an allowance for bad debt equaling the amount due.
F-11
NOTE 6 SECURITIES
In conjunction with the formation of the joint venture discussed in Note 4, Tumbleweed Holdings agreed to issue the Company a warrant to purchase up to 9,770,878 shares of Tumbleweed Holdings, Inc. at an exercise price of $0.02 with an expiration date three years from the date of issuance. At December 31, 2016, Tumbleweed had not yet issued these warrants to the Company. The Company will record the value of these warrants on its balance sheet once they are received.
NOTE 7 WEB DEVELOPMENT COSTS AND DOMAIN NAMES ASSETS
In accordance with ASC 350-50, during the years ended December 31, 2016 and 2015, the Company did not capitalize any costs incurred towards the development of various websites, including a website on which third parties can advertise the sale and distribution of cannabis related products and services: an online yellow pages. The Company does not intend to engage in the sale or distribution of marijuana or related products. The Company recorded website development expenses of $25,184 and $79,205 which is included in general and administrative expenses during the years ended December 31, 2016 and 2015, respectively.
The Company amortizes web development costs over their related useful lives (approximately 1 to 5 years), using a straight-line basis. Fair value is determined through various valuation techniques, including market and income approaches as considered necessary. The Company recorded amortization of $72,366 and 62,583 during the years ended December 31, 2016 and 2015, respectively.
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
As of December 31, 2015
|
|
Amortization Period
|
Web development costs
|
|
|
311,912
|
|
|
327,912
|
|
5 years
|
Less: recapture of costs
|
|
|
-
|
|
|
(16,000)
|
|
|
Less: accumulated depreciation
|
|
|
(134,949)
|
|
|
(62,583)
|
|
|
|
|
$
|
176,963
|
|
$
|
249,329
|
|
|
NOTE 8 PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
As of December 31, 2015
|
|
Estimated Useful Life
|
Furniture and equipment
|
|
|
12,438
|
|
|
12,438
|
|
3 years
|
Total
|
|
|
10,996
|
|
|
10,996
|
|
|
Less: accumulated depreciation
|
|
|
(9,763)
|
|
|
(5,617)
|
|
|
|
|
$
|
2,675
|
|
$
|
6,821
|
|
|
The Company records depreciation expense on a straight-line basis over the estimated life of the related asset (approximately 3 years). The Company recorded depreciation expense of $4,146 and $4,145 during the years ended December 31, 2016 and 2015, respectively.
NOTE 9 ACCOUNTS PAYABLE AND ACCRUED EXPENSES RELATED PARTY
At December 31, 2016, the Company had a balance in related party accounts payable and accrued expenses of $704,997 which consisted of the following:
|
|
|
|
|
Party Name:
|
Relationship:
|
|
|
Amount
|
Howard Baer
|
Spouse of significant shareholder
|
Consulting fees
|
$
|
270,500
|
Howard Baer
|
Spouse of significant shareholder
|
Accrued Interest
|
|
56,555
|
John Venners
|
Director/EVP, President and CEO of Kuboo, Inc.
|
Consulting fees
|
|
233,466
|
John Venners
|
Director/EVP, President and CEO of Kuboo, Inc.
|
Advances
|
|
3,000
|
Kuboo, Inc.
|
Former parent company, significant shareholder
|
Rent
|
|
141,476
|
|
|
|
$
|
704,997
|
F-12
NOTE 10 NOTES PAYABLE RELATED PARTY
On May 19, 2015, the Company issued Kae Yong Park and her spouse Howard Baer (together, Park) a non-interest bearing, unsecured demand promissory note to evidence all unpaid advances received by the Company to that point and to cover all additional advances received afterward. Unpaid principal under the note is due and payable upon the earlier of (i) an event of default (as defined), (ii) written demand and (iii) the Companys receipt of capital (to the extent of net proceeds received) from any capital raising transaction after May 15, 2015, whether in the form of debt, equity or otherwise.
On September 30, 2015, the Company amended and restated its promissory note to Park to include all advances to date and provide certain assets, including all internet domain names, websites and related assets as collateral. Repayment terms remain the same, and Park has to date not enforced the provision requiring repayment upon receipt of net proceeds from capital raising transactions.
On April 13, 2016, the Company agreed to amend the promissory note so as to make $564,000 in principal amount due under said Note interest bearing at the rate of 10% per annum. At December 31, 2016, the Company had accrued interest under this note of $56,555.
During the year ended December 31, 2016, Park advanced an aggregate of $594,050 to the Company for short-term capital needs. During this period the Company repaid $63,690 of its secured debt to Park. Park assigned $65,000 of debt owed to her by the Company to another investor who received a replacement note from the Company to evidence the debt. At December 31, 2016, the Company had a note payable to Park for these advances of $1,414,667 which is secured by the assets of the Company. Because this debt is payable on demand, the company has classified it as a current liability.
On May 11, 2016, Kae Park, a significant shareholder, assigned $65,000 of debt owed to her by the Company to an investor who is a significant shareholder. The investor received a one-year note from the Company to evidence the debt. Interest on the note is payable quarterly in an amount equal to a percentage of the Companys joint venture companys net revenues, up to fifty percent of the original face value. This interest will be payable only in the event that the joint venture company generates net revenues. See Note 4 Investment in Joint Venture.
The following table summarizes the Companys balance for these advances for the year ended December 31, 2016:
|
|
|
Amount due - December 31, 2015
|
$
|
949,307
|
Advances received from Park
|
|
594,050
|
Debt assigned to investor
|
|
(65,000)
|
Repayments made to Park
|
|
(63,690)
|
Balance due December 31, 2016
|
$
|
1,414,667
|
On June 23, 2014, the Company issued a $500,000 promissory note in conjunction with the purchase of approximately 7,500 cannabis-related internet domain names. The note originally bore interest at the rate of 3.25% per annum and the first $100,000 of which was payable upon the Companys receipt of an aggregate of $1,000,000 in funding (whether debt or equity). The remaining $400,000 is payable in thirty-six equal monthly installments, commencing on the fifteenth day following the first month the Company realizes at least $150,000 in gross revenue (see Note 15 - Commitments and Contingencies).
On July 25, 2014, the Company amended and restated its promissory note in the principal amount of $500,000 owing to Kae Yong Park (the Companys then majority shareholder) to provide that it would make the first $100,000 installment payment due under the Note on July 25, 2014 (earlier than required), in exchange for which Kae Yong Park agreed to waive all interest due over the term of the note. Thereafter, Kae Yong Park waived the requirement that the Company pay the $100,000 due under the Amended and Restated Note until August 25, 2014, at which time it was paid. The Company subsequently recaptured all previously recorded interest expense related to the note.
Between December 1, 2016 and December 30, 2016, the company received proceeds of $62,550 from a related party and significant shareholder for which a note was issued bearing 8% interest annually. The notes, as extended, mature on August 1, 2017 and are unsecured. At December 31, 2016, the company had accrued interest of $125 related to the notes.
F-13
NOTE 11 NOTES PAYABLE
Notes
On July 1, 2015, the Company entered into a seven (7) day loan agreement with two parties for aggregate proceeds of $34,900. The note bears interest at the rate of six percent (6%) annually. In addition to the loans, the Company issued an aggregate 349,000 shares of common stock valued at $26,016 and warrants to purchase an aggregate 100,000 shares of the Companys common stock at an exercise price of $0.25 per share valued at $6,898. The relative fair value of the shares and warrants associated with these notes have been recorded as debt discount to be amortized over the life of the loans. As of December 31, 2016, these notes have not yet been repaid and principal and interest totaling $38,032 is in default.
On August 10, 2015, the Company entered into a one hundred twenty (120) day loan agreement with an existing investor for aggregate proceeds of $45,000 (two installments of $22,500 each). The note bears interest at the rate of six percent (6%) annually and has a security interest over the domain www.jointlovers.com. As additional consideration for these loans, the Company issued an aggregate 1,200,000 shares of common stock valued at $38,918. The relative fair value of the shares associated with these notes have been recorded as debt discount to be amortized over the life of the loans). As of December 31, 2016, these notes have not yet been repaid and principal and interest totaling $48,325 is in default.
Convertible Notes
On February 29, 2016, in conjunction with its joint venture agreement (see Note 4 Investment in Joint Venture), the Company entered an agreement to issue three $50,000, one year convertible notes. These notes are convertible into shares of the Companys stock at a price of $0.20 per share or a total of 250,000 shares each Interest on the note is payable quarterly in an amount equal to a percentage of the Companys joint venture companys net revenues, up to fifty percent of the original face value This interest will be payable only in the event that the joint venture company generates net revenues. Concurrent with this agreement, the Company issued the first of these convertible notes. On April 8, 2016, the Company issued the second of these convertible notes. As December 31, 2016, the proceeds from the third note investment of $50,000 had not been received.
Dilutive shares associated with convertible notes outstanding at December 31, 2016 is as follows:
|
|
|
|
|
|
|
Principal
|
|
Shares
|
Note dated February 29, 2016, convertible at $0.20 per share
|
$
|
50,000
|
|
|
250,000
|
Note dated April 8, 2016, convertible at $0.20 per share
|
|
50,000
|
|
|
250,000
|
Total Dilutive shares December 31, 2016
|
$
|
100,000
|
|
|
500,000
|
The following table summarizes the Companys notes and convertible notes payable for the year ended December 31, 2016:
|
|
|
|
|
|
|
Notes
|
|
Convertible Notes
|
Balance December 31, 2015
|
$
|
79,900
|
|
$
|
-
|
Note proceeds received
|
|
-
|
|
|
100,000
|
Repayments on notes
|
|
-
|
|
|
-
|
Balance December 31, 2016
|
$
|
79,900
|
|
$
|
100,000
|
NOTE 12 - EQUITY
Between January 5 and October 26, 2015, the Company sold 2,781,285 shares of its common stock for $484,500 in gross cash proceeds. The Company incurred a finders fees of $34,950, which the company has satisfied as follows: $18,500 in cash, $16,450 through the issuance of 69,100 shares of common stock.
On February 12, 2015, the Company issued 3,000 shares of its common stock valued at $750 as an advertising incentive, the value of which has been recorded against revenue in the Companys statements of operations.
Between July 1 and August 10, 2015, the Company issued an aggregate 1,549,000 shares of its common stock valued at $64,934 in conjunction with debt agreements.
F-14
Between August 20 and November 30, 2015, the Company issued an aggregate 1,440,000 shares of its common stock valued at $502,800 for services pursuant to multiple contracts.
On January 1 and April 1, 2015, the Company issued 250,000 shares of common stock valued at $252,500 and $230,000, respectively, to its then Chief Executive Officer, John Bluher, pursuant to his employment letter.
On July 15, 2015, the Company issued 1,000,000 shares of its common stock valued at $800,000 to its then Chief Executive Officer, William Lupo, pursuant to his employment letter. Upon Mr. Lupos resignation on September 15, 2015, a separation agreement was signed in which he agreed to return 500,000 of these shares to the Company. The Company subsequently received the shares on November 19, 2015.
On July 1, 2015, the Company issued 100,000 shares of its common stock valued at $131,000 as consideration for an exclusive option to acquire the web portal LaMarihuana.com, subject to satisfaction of conditions.
On September 16, 2015, in conjunction with John Bluhers resignation as President, the Company issued 1,600,000 shares of its common stock, valued at $208,000, as payment in full of all amounts due Mr. Bluher under his employment letter.
On October 9, 2015, the Company issued 200,000 shares of common stock valued at $20,000 as settlement of a contract dispute.
During the year ended December 31, 2015, without admitting any responsibility, the Company agreed in principle to issue 400,000 shares of common stock valued at $62,000 as settlement of legal proceedings, the value of which is included in Subscription payable on the Companys Balance Sheet at December 31, 2015, pending execution of a definitive agreement. The Settlement Agreement was executed in November, 2016 and the 400,000 shares were issued.
On March 30, 2016, the Company issued 75,000 shares of common stock as settlement of a contract obligation to a vendor valued at $7,500.
NOTE 13 STOCK WARRANTS
On May 15, 2015, the Company entered into an agreement to grant to a lender a two year warrant to purchase 2,000,000 shares of the Companys stock at $0.05 per share in conjunction with a sixty-day loan taken out by the Companys then majority shareholder, Kae Yong Park, and her spouse, Howard Baer; a significant portion of these loan proceeds were advanced by Park/Baer to the Company to fund operations. The note to Park and Baer commenced on May 15th with an initial term of sixty days with an automatic thirty-day extension, if not paid in full by the maturity date. The Company had agreed that, if the note were automatically extended, it would grant an additional warrant to purchase 1,000,000 shares of the Companys stock (on the same terms as the original warrant) as consideration for the extension. On July 15, 2015, the Company issued an additional 1,000,000 warrants in consideration for the thirty-day extension. On August 5, 2015, October 3, 2015 and December 5, 2015 the Company issued three additional warrants, respectively, to purchase 2,000,000 shares of common stock, in each case as consideration for additional sixty (60) day extensions on the debt agreement. These warrants have been expensed as interest.
The Company applied fair value accounting for all warrants issued. The fair value of each warrant granted is estimated on the date of grant using the Black-Scholes option-pricing model. The fair value at the commitment date for the above warrants were based upon the following management assumptions:
On July 1, 2015, the Company issued three year warrants to purchase 100,000 shares of the Companys common stock at an exercise price of $0.25 per share in conjunction with debt agreements (see Note 11 Notes Payable).
Between September 29, 2015 and October 27, 2015, the Company issued two year warrants to purchase an aggregate 1,130,285 shares of the Companys common stock, at an exercise price of $0.25 per share, in conjunction with equity sales.
On October 21, 2015, the Company issued two year warrants to John Hollister, Interim CEO, to purchase 500,000 shares of the Companys common stock at an exercise price of $0.09 per share in conjunction with his employment contract. These warrants were valued at $32,250 using the Black-Scholes pricing model and were fully vested upon issuance.
On December 31, 2015, the Company issued two year warrants to John Hollister, Interim CEO, to purchase 375,000 shares of the Companys common stock at an exercise price of $0.09 per share in conjunction with his employment contract. These warrants were valued at $19,906 using the Black-Scholes pricing model and were fully vested upon issuance.
F-15
On February 29, 2016, in conjunction with the Companys joint venture agreement (see Note 4 Investment in Joint Venture), the company agreed to issue a warrant to purchase 5,525,318 shares of the Companys common stock at an exercise price of $0.08 per share. These warrants were valued at $475,751 using the Black-Scholes pricing model, were fully vested upon issuance and have a cashless exercise provision.
On March 31, 2016, the Company issued two year warrants to John Hollister, Interim CEO, to purchase 375,000 shares of the Companys common stock at an exercise price of $0.09 per share in conjunction with his employment contract. These warrants were valued at $33,236 using the Black-Scholes pricing model and were fully vested upon issuance.
On June 30, 2016, the Company issued two year warrants to John Hollister, Interim CEO, to purchase 375,000 shares of the Companys common stock at an exercise price of $0.09 per share in conjunction with his employment contract. These warrants were valued at $29,720 using the Black-Scholes pricing model and were fully vested upon issuance.
On September 30, 2016, the Company issued two year warrants to John Hollister, Interim CEO, to purchase 375,000 shares of the Companys common stock at an exercise price of $0.09 per share in conjunction with his employment contract. These warrants were valued at $39,638 using the Black-Scholes pricing model and were fully vested upon issuance.
The Company has applied fair value accounting for all warrants issued. The fair value of each warrant granted is estimated on the date of grant using the Black-Scholes option-pricing model. The fair value at the commitment date for the above warrants were based upon the following management assumptions:
|
|
|
|
|
|
Commitment Date
|
Expected dividends
|
|
|
0%
|
Expected volatility
|
|
|
163% - 177%
|
Expected term:
|
|
|
2 - 3 years
|
Risk free interest rate
|
|
|
0.55% 1.06%
|
A summary of the Companys warrant activity for the year ended December 31, 2016 is as follows:
|
|
|
|
|
|
|
Number of
Warrants
|
|
Weighted Average
Exercise Price
|
Outstanding December 31, 2015
|
|
11,105,285
|
|
$
|
0.08
|
Granted
|
|
6,650,318
|
|
|
0.08
|
Exercised/settled
|
|
-
|
|
|
-
|
Balance as December 31, 2016
|
|
17,755,603
|
|
$
|
0.08
|
The Companys outstanding warrants at December 31, 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding
|
|
Warrants Exercisable
|
Exercise Price Range
|
|
Number
Outstanding
|
|
Weighted Average
Remaining
Contractual Life (in
years)
|
|
Weighted Average
Exercise Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise Price
|
|
Intrinsic Value
|
$0.05 - $0.25
|
|
|
|
17,755,603
|
|
|
1.2
|
|
$
|
0.08
|
|
|
17,755,603
|
|
$
|
0.08
|
|
|
1,208,468
|
The weighted average fair value per warrant issued during the year ended December 31, 2016 was $0.09.
F-16
NOTE 14 EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period.
Since the Company reflected a net loss for the years ended December 31, 2016 and 2015, respectively, the effect of considering any common stock equivalents, if exercisable, would have been anti-dilutive. Therefore, a separate computation of diluted earnings (loss) per share is not presented.
The Company has the following common stock equivalents at December 31, 2016 and 2015, respectively:
|
|
|
|
|
|
|
|
|
As of
December 31,
2016
|
|
As of
December 31,
2015
|
Warrants (exercise price $0.05 - $0.25/share)
|
|
|
17,755,603
|
|
|
11,105,285
|
Convertible debt (exercise price $0.20/share)
|
|
|
500,000
|
|
|
-
|
|
|
|
18,255,603
|
|
|
11,105,285
|
NOTE 15 COMMITMENTS AND CONTINGENCIES
In May 2014, The Company entered into an asset purchase agreement that requires the Company to pay a monthly royalty equal to six percent of gross monthly revenues over $150,000. The royalty payment is payable for a period of thirty-six months from and after the first month in which the Companys gross revenues are in excess of $150,000 (see Note 17 - Related Party Transactions).
On June 23, 2014, the Company issued a $500,000 promissory note in conjunction with the purchase of approximately 7,500 cannabis-related internet domain names. The original note bore interest at the rate of 3.25% per annum and was payable as follows: upon the Companys receipt of an aggregate of $1,000,000 in funding (whether debt or equity), $100,000 was required to be paid. The remaining $400,000 is payable in thirty-six equal monthly installments, commencing on the fifteenth day following the first month the Company realizes at least $150,000 in gross revenue.
On July 25, 2014, the Company amended and restated its promissory note in the principal amount of $500,000 owing to Kae Yong Park (the Companys then majority shareholder) to provide that it would make the first $100,000 installment payment due under the Note on July 25, 2014 (earlier than required), in exchange for which Kae Yong Park agreed to waive all interest due over the term of the note. Thereafter, Kae Yong Park waived the requirement that the Company pay the $100,000 due under the Amended and Restated Note until August 25, 2014, at which time it was paid.
On August 7, 2015, Lee Ori (Plaintiff) instituted a legal action in Missouri against us, Wealthcorp, LLC, Winterwalk Capital, LLC, Christopher S. Walkup (Walkup), Marshall P. Winters and Paradigm Healthcare Solutions, LLC. The complaint alleged that (i) Walkup represented to the Plaintiff that he had the right to subscribe to shares of our common stock at a per share price of $.25 and (ii) that Walkup was the Companys agent and individually and in such alleged agency capacity offered to sell Plaintiff an aggregate of 1,075,000 shares of company common stock for a total purchase price of $425,000. The Complaint alleges that we are liable to the Plaintiff for the acts and omissions of Walkup, based on the allegation that he was our agent. The complaint seeks from us and Walkup (1) 1,075,000 shares of our common stock and (2) money damages in the amount of $425,000.
Without admitting any responsibility, the Company and the Plaintiff have settled the matter. Under the settlement agreement, the Company agreed to issue 400,000 restricted shares of common stock valued at $62,000 to the Plaintiff as consideration for the settlement. These shares are being issued after the date of these financial statements. In addition, the Company has agreed to issue an additional 275,000 shares as liquidated damages if it breaches a certain material representation to be included in the settlement agreement. The Company will value these if and when the shares become issuable.
On August 15, 2016, the Company instituted a legal action in Arizona against, Tumbleweed Holdings Inc., (TW). The complaint alleged that (i) TW breached the joint venture agreement by failing to fund the remaining $15,000 due to the joint venture company by April 29, 2016, (ii) TW breached the joint venture agreement by failing to fund the last $50,000 convertible note due to the Company by April 29, 2016, and (iii) TW breached the joint venture agreement by failing to fund their respective 40% of development expense in excess of the initial $100,000. The Company seeks damages in the amount of $128,000 plus interest.
F-17
On September 22, 2016, Tumbleweed Holdings Inc., instituted a counterclaim in Arizona in response to the above legal action. The complaint alleged that (i) The Company breached the joint venture agreement by failing to leverage relationships and failing to provide budgeting and accounting records, (ii) the Company breached implied covenant of good faith and fair dealing by enticing TW into making significant contributions and then failing to perform under the agreement, (iii) the Company was unjustly enriched by having use of funds contributed by TW, (iv) the Company converted funds contributed by TW into its own assets, and (v) the Company has not provided accounting for all funds received by TW. TW seeks damages in the amount to be determined at trial. The Company believes these claims are without merit and intends to vigorously defend itself against them.
NOTE 16 INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due. Deferred taxes relate to differences between the basis of assets and liabilities for financial and income tax reporting which will be either taxable or deductible when the assets or liabilities are recovered or settled.
At December 31, 2016 and 2015, the Company had net operating loss (NOL) carry-forwards for federal and state income purposes approximating $5,434,137 and $4,333,812, respectively. These losses are available for future years and expire through 2034. Pursuant to Internal Revenue Code Section 382, utilization of these losses may be severely or completely limited due to more than 50% ownership changes in 2014, 2011 and 2010.
The deferred tax asset at December 31, 2016 and 2015 is summarized as follows:
|
|
|
|
|
Income Tax Footnote
|
|
12/31/2016
|
|
12/31/2015
|
Cumulative NOL
|
$
|
(5633,041)
|
$
|
(4,333,812)
|
|
|
|
|
|
Deferred Tax assets:
|
|
|
|
|
(34% Federal, 7% Avg. Corp. Rate)
|
|
|
|
|
Net operating loss carry forwards
|
|
(8,473,442)
|
|
(7,668,510)
|
Stock/options issued for services
|
|
5,312,555
|
|
5,270,524
|
Stock/options issued for release
|
|
415,621
|
|
415,621
|
Depreciation and amortization
|
|
93,322
|
|
61,977
|
Impairment expense
|
|
144,913
|
|
144,913
|
Unrealized losses on investment
|
|
199,287
|
|
-
|
Valuation allowance
|
|
2,307,744
|
|
1,775,475
|
|
$
|
-
|
$
|
-
|
The Company has taken a 100% valuation allowance against the deferred asset attributable to the NOL carry-forwards of approximately $2,307,744 and $1,775,000 at December 31, 2016 and 2015, respectively, due to the uncertainty of realizing the future tax benefits. The increase in valuation allowance of approximately $532,000 is primarily attributable to the Companys net operating loss during the year ended December 31, 2016.
The components of the income tax provision for the years ended December 31, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
2016
|
|
2015
|
Book income (loss) from operations
|
$
|
(804,932)
|
$
|
(3,268,362)
|
Stock/options issued for services
|
|
42,031
|
|
2,355,856
|
Stock/options issued for release
|
|
-
|
|
33,594
|
Depreciation and amortization
|
|
31,345
|
|
56,765
|
Unrealized losses on investment
|
|
199,287
|
|
-
|
Change in valuation allowance
|
|
532,269
|
|
822,147
|
|
$
|
-
|
$
|
-
|
F-18
NOTE 17 RELATED PARTY TRANSACTIONS
Effective May 2, 2014, the Company entered into an asset purchase agreement with Kae Park (the Seller), who became a related party upon the closing of the acquisition, which occurred on June 23, 2014.
Under this agreement, the Company agreed to acquire approximately 7,500 cannabis related Internet domain names, in exchange for which, the Company:
(a)
Issued to the Seller on the closing date 78.5 million shares of the Companys restricted common stock which represented approximately 81% of the Companys issued and outstanding common stock upon the closing;
(b)
Issued to the Seller a promissory note in the principal amount of $500,000. The note originally bore interest at the rate of 3.25% per annum and was payable as follows: upon the Companys receipt of an aggregate of $1,000,000 in funding (whether debt or equity), $100,000 was to be paid, and the Company was required to pay the remaining balance of $400,000 in thirty-six equal monthly installments, commencing on the fifteenth day following the first month the Company realizes at least $150,000 in gross revenue; and
(c)
Is obligated to pay a monthly royalty to the Seller equal to the product of (i) six percent (6%) and (ii) the excess of the Companys gross monthly revenue over $150,000 (Royalty Payment). The Royalty Payment is payable for a period of thirty-six months from and after the first month in which the Company has gross revenues in excess of $150,000.
On July 25, 2014, the Company amended and restated the promissory note to provide that it would make the first $100,000 installment payment due under the Note on July 25, 2014 (earlier than required), in exchange for which Kae Yong Park agreed to waive all interest due over the term of the note. Thereafter, Kae Yong Park waived the requirement that the Company pay the $100,000 due under the Amended and Restated Note, until August 25, 2014, at which point such $100,000 was paid.
In addition, the Seller was required to provide such consulting services as the Company may require during the twelve-month period following the closing of the acquisition. In consideration for these services, the Company was required to pay the Seller $9,500 per month, for a period of twelve months, commencing on the closing date and, on the first of each month thereafter.
We are headquartered in Scottsdale, Arizona where we rent space from Kuboo Inc. our former parent company and a significant shareholder. Currently, the Company is renting approximately 6,100 square feet of space on a month-to-month basis. The monthly rent for this facility is $11,500. During the year ended December 31, 2016 the company incurred expenses payable to Kuboo, Inc. of $138,000 for rent and allocated rent expenses of $3,600 to the Joint Venture Company.
During the year ended December 31, 2016, Kae Yong Park, a significant shareholder, and her spouse, Howard Baer, advanced an aggregate of $594,050 to the Company for short-term capital needs. During this period, the Company also repaid $63,690 of its secured debt to Park. Additionally, on May 11, 2016, Park assigned $65,000 of debt owed to her by the Company to another investor for which the Company issued the investor a one-year replacement note for $65,000. At December 31, 2016, the Company had a note payable to Park for these advances of $1,414,667 which is secured by the assets of the Company.
During the year ended December 31, 2016, the Company incurred expenses of $180,000 related to its consulting contract with Howard Baer, the spouse of Kae Yong Park, a significant shareholder.
During the year ended December 31, 2016, the Company received funds related to its joint venture of $85,000 and spent cash on behalf of its joint venture totaling $147,261. During this period, the Companys 60% share of the joint ventures expenses were $127,356. The remaining $34,204 is due from the Joint Venture Company, and is included in advances related party.
On April 13, 2016, the Company agreed to amend the promissory note with Kae Yong Park and Howard R. Baer so as to make $564,000 in principal amount due under said Note interest bearing at the rate of 10% per annum, effective January 1, 2016. The remaining principal is non-interest bearing. At December 31, 2016, the Company has accrued interest owed under this agreement of $56,555.
F-19
NOTE 18 SUBSEQUENT EVENTS
We have evaluated all events that occurred after the balance sheet date through the date when our financial statements were issued to determine if they must be reported. Management has determined that other than as disclosed below, there were no additional reportable subsequent events to be disclosed.
Capital Activity
Since December 31, 2016, Kae Yong Park, a significant shareholder, and her spouse, Howard R. Baer, have made additional advances to the Company of $36,400, have received repayments of $7,550, and have credited $35,938 against the amount due them, in exchange for the use of Company personnel, leaving a balance due of $1,407,579 at April 17, 2017. These advances are secured by certain Company assets, including all of its internet domain names, websites and related assets, non-interest bearing and payable on demand.
Equity Transactions
On January 10, 2017, the Company issued 400,000 previously accrued shares of the Companys commons stock as settlement of its lawsuit with Lee Ori (see Note 15 Commitments and Contingencies).
On April 10, 2017, we sold 1,000,000 shares of common stock in a private transaction at a per share price of $.025, for gross proceeds of $25,000, to an accredited investor within the meaning of Rule 502 of Regulation D under the Securities Act of 1933, as amended.
F-20