NOTES TO FINANCIAL STATEMENTS
December 31, 2017
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 Company’s issued and outstanding common stock, and, as a result, became its parent company. On June 25, 2014, the Company completed the acquisition of approximately 7,500 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 15 - Related Party Transactions.
The Company’s 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 Company’s major product categories: a monthly listing in one or more of the Company’s online directories, paid advertising in one or more of the Company’s online directories and leasing to customers one or more internet domain names for the customer’s exclusive use.
In May 2017, we signed a non-binding memorandum of terms to acquire Crush Mobile. On August 8, 2017, we entered into a definitive agreement to acquire all the outstanding membership interests of Crush Mobile, LLC, which was amended by Amendment No. 1 dated January 4, 2018 (as amended, the “Agreement”). As reported in our form 8-K filed with the SEC on January 10, 2018, the Crush acquisition was closed January 8, 2018. Accordingly, Crush’s operations are not included in the financial statements of the company as of December 31, 2017. Under the terms of the Agreement, we acquired all the outstanding membership interests of Crush Mobile, in exchange for an aggregate of approximately 8 million shares of common stock, plus $80,000 in cash, payable within one year of closing. We also agreed to piggy-back registration rights with respect to the shares of common stock issuable to the sellers in connection with the acquisition. In connection with Amendment No. 1 to the Agreement, the parties waived the condition that the Company complete a funding of at least $500,000.
Crush Mobile’s assets consist primarily of trademarks, domain names, mobile dating applications and related software and intellectual property. Crush Mobile, with approximately nine hundred thousand members, has developed a group of dating sites with a presence in the Latino, Israeli and African American communities. Crush will also be incorporating Northsight’s "Joint Lovers" dating app, which concentrates on the Cannabis space, into its dating applications suite.
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 Company’s operations are subject to significant risk and uncertainties including financial, operational, technological, regulatory and other risks, including the potential risk of business failure.
F-6
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, 2017 and 2016, 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.
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 with the company’s common stock.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable represent 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 recorded a full allowance of $34,204 against its receivable balance due to the uncertainty of its collectability, which was then written off in 2017.
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
|
F-7
Investment in joint Venture
The Company’s 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 Company’s accounts are not reflected within the Company’s Balance Sheets and Statements of Operations; however, the Company’s share of the earnings or losses of the Investee Company is reflected as a gain or loss on the Company’s investment. Additionally, under the equity method of accounting, the Company’s 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 Company’s Statements of Operations. As of December 31, 2017, the Company has abandoned the joint venture company.
When the Company’s carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company’s 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.
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 asset's 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 Company’s 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 adds 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.
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, 2017 and 2016.
F-8
Fair Value of Financial Instruments
The fair values of the Company’s 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, 2017 and 2016.
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.
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 11,355,285 warrants as of December 31, 2017 and 2016, 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 Company’s financial statements upon adoption
NOTE 3 – LIQUIDITY/GOING CONCERN
The Company has accumulated losses of $21,926,295 and has had sustained negative cash flows from operating activities since inception (May 2008). These factors raise substantial doubt about the Company’s 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, 2017, the Company raised aggregate gross proceeds of $635,049 in capital through the issuance of notes payable and $25,000 through the issuance of common stock. 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 is developing an online dating service around the URL, www.jointlovers.com. The Company and TW own 60% and 40% respectively of equity of the joint venture company.
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 sought damages in the amount of $128,000 plus interest.
F-9
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.
On July 17, 2017, the Company and Tumbleweed settled the litigation relating to the joint venture. As part of the settlement, Tumbleweed converted its $100,000 convertible note and it’s $85,000 joint venture investment into shares of company common stock at a rate of $.10 per share, resulting in a net loss on settlement of $30,750. The warrants issuable to Tumbleweed and the company were cancelled. The parties released each other from all claims related to the joint venture. Following the settlement, the Company wrote down its investment in the joint venture to zero and abandoned the joint venture.
Summary balance sheet information on the joint venture for at December 31, 2017 and 2016 is as follows:
|
December 31,
|
|
December 31,
|
|
2017
|
|
2016
|
|
|
|
|
|
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, 2017 and 2016 is as follows:
|
For the Years Ended
|
|
December 31,
2017
|
|
December 31,
2016
|
|
(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)
|
F-10
NOTE 5 – WEB DEVELOPMENT COSTS AND DOMAIN NAMES ASSETS
In accordance with ASC 350-50, during the years ended December 31, 2017 and 2016, 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 $8,941 and $25,184 which is included in general and administrative expenses during the years ended December 31, 2017 and 2016, 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 $72,366during the years ended December 31, 2017 and 2016, respectively.
|
|
As of December 31, 2017
|
|
As of December 31, 2016
|
|
Amortization Period
|
Web development costs
|
|
$
|
311,912
|
|
$
|
311,912
|
|
5 years
|
Less: recapture of costs
|
|
|
-
|
|
|
-
|
|
|
Less: accumulated depreciation
|
|
|
(207,315)
|
|
|
(134,949)
|
|
|
|
|
$
|
104,597
|
|
$
|
176,963
|
|
|
NOTE 6 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2017 and 2016:
|
|
As of December 31, 2016
|
|
As of December 31, 2015
|
|
Estimated Useful Life
|
Furniture and equipment
|
|
$
|
12,438
|
|
$
|
12,438
|
|
3 years
|
Total
|
|
|
12,438
|
|
|
12,438
|
|
|
Less: accumulated depreciation
|
|
|
(12,438)
|
|
|
(9,763)
|
|
|
|
|
$
|
-
|
|
$
|
2,675
|
|
|
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 $2,675 and $4,146 during the years ended December 31, 2017 and 2016, respectively.
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES RELATED PARTY
At December 31, 2017, the Company had a balance in related party accounts payable and accrued expenses of $878,400 which consisted of the following:
Party Name:
|
Relationship:
|
|
|
Amount
|
Howard Baer
|
Spouse of significant shareholder
|
Consulting fees
|
$
|
355,500
|
Howard Baer
|
Spouse of significant shareholder
|
Accrued Interest
|
|
112,955
|
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
|
|
166,976
|
John Lemak
|
Significant shareholder
|
Interest
|
|
6,503
|
|
|
|
$
|
878,400
|
NOTE 8 – 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 Company’s 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.
F-11
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, 2017, the Company had accrued interest under this note of $112,955.
During the year ended December 31, 2017, Park advanced an aggregate of $62,750 to the Company for short-term capital needs. During this period the Company repaid $43,550 of its secured debt to Park and recaptured $141,510 worth of payroll expenses for Park’s use of Company personnel. Amounts recaptured for the use of Company personnel have been treated as repayments on the Company’s Statements of Cash Flows. At December 31, 2017, the Company had a note payable to Park for these advances of $1,292,357 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.
The following table summarizes the Company’s balance for these advances for the year ended December 31, 2017:
Amount due - December 31, 2016
|
$
|
1,414,667
|
Advances received from Park
|
|
62,750
|
Recapture of Company expenses
|
|
(141,510)
|
Repayments made to Park
|
|
(43,550)
|
Balance due – December 31, 2017
|
$
|
1,292,357
|
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 Company’s 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 11 - 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 Company’s 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 March 16, 2017, the Company received aggregate proceeds of $101,299 from John Lemak, an affiliate of Sandor Capital, a related party and significant shareholder, for which notes were issued bearing 8% interest annually. On April 1, 2017, the Company issued a note for $102,465 consisting of $101,000 in principal and $1,465 in accrued interest for the previous notes. The $299 forgiven as part of the note restructure was recorded as a gain on extinguishment of debt. The note is non-interest bearing, matures on June 30, 2018, as amended, and is unsecured.
Between December 15, 2016 and January 13, 2017, the Company received aggregate proceeds of $41,550 from Sandor Capital, a related party and significant shareholder, for which notes were issued bearing 8% interest annually. On April 1, 2017, the Company issued a note for $42,374 consisting of $41,550 in principal and $824 in accrued interest for the previous notes. The note is non-interest bearing, matures on June 30, 2018, as amended, and is unsecured.
On April 1, 2017, the company renegotiated a $65,000 note to Sandor Capital, a related party and significant shareholder, with interest tied to the performance of its joint venture agreement into a new $71,097 note. The note is non-interest bearing, matures on June 30, 2018, as amended, and is unsecured. At the time of the refinance, the joint venture had not produced positive income, so no interest was due on the note. The $6,097 consideration given on the new note was recorded as a loss on extinguishment of debt.
Between May 1, 2017 and June 29, 2017, the Company received aggregate proceeds of $140,000 from John Lemak, an affiliate of Sandor Capital, a related party and significant shareholder, for which notes were issued bearing 8% interest annually. On April 1, 2017, the Company issued a note for $140,000 to restructure the previous notes. The note is non-interest bearing, matures on June 30, 2018 as amended, and is secured by certain domain names and websites owned by the Company.
F-12
Between August 1, 2017 and September 28, 2017, the Company received aggregate proceeds of $182,000 from John Lemak, an affiliate of Sandor Capital, a related party and significant shareholder, for which several notes were issued bearing 8% interest annually. The notes are non-interest bearing, mature on June 30, 2018, as amended, and secured by certain of the company’s domain name and websites.
Between October 1, 2017 and December 22, 2017, the Company received aggregate proceeds of $170,000 from John Lemak, an affiliate of Sandor Capital, a related party and significant shareholder, for which several notes were issued bearing 8% interest annually. The notes are non-interest bearing, mature on June 30, 2018, as amended, and are secured by certain of the company’s domain name and websites.
NOTE 9 – 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 Company’s 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, 2017, these notes have not yet been repaid and principal and interest totaling $40,126 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, 2017, these notes have not yet been repaid and principal and interest totaling $51,025 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 Company’s stock at a price of $0.20 per share or a total of 250,000 shares each, of which only two were issued for a total of $100,000. Interest on the note is payable quarterly in an amount equal to a percentage of the Company’s joint venture company’s 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.
On July 17, 2017, the Company entered into a settlement agreement with Tumbleweed wherein it was agreed that Tumbleweed would convert its notes into common stock at the rate of $0.10 per share. The Company recognized a gain on settlement from the conversions of $29,600 based on the stock price of $0.0704 on July 17, 2017.
The following table summarizes the Company’s notes and convertible notes payable for the year ended December 31, 2017:
|
Notes
|
|
Convertible Notes
|
Balance – December 31, 2016
|
$
|
196,433
|
|
$
|
100,000
|
Note proceeds received
|
|
-
|
|
|
-
|
Settlement of note
|
|
(116,533)
|
|
|
(100,000)
|
Repayments on notes
|
|
-
|
|
|
-
|
Balance –December 31, 2017
|
$
|
79,900
|
|
$
|
-
|
F-13
NOTE 10 - EQUITY
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.
On January 20, 2017, the Company issued 400,000 previously accrued shares of the Company’s commons stock as settlement of its lawsuit with Lee Ori.
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.
Between June 5 and June 29, 2017, the Company issued a total of 1,631,660 shares of the Company’s common stock as settlement for an aggregate $163,166 in payables to an “accredited investor” within the meaning of Rule 502 of Regulation D under the Securities Act of 1933, as amended. The Company recognized an aggregate gain of $76,617 on these settlements.
On July 17, 2017, the Company issued an aggregate 1,850,000 shares of the Company’s common stock in connection with the settlement of its lawsuit with Tumbleweed Holdings resulting in a net loss on settlement of $30,750.
On December 21, 2017, the Company issued 3,000,000 shares of its common stock, valued at $300,000 or $0.10 per share, as payment in for a consulting contract. The Company recorded this issuance as a prepaid expense to be amortized over the contract’s twelve month term.
On December 22, 2017, we sold 300,000 shares of common stock in a private transaction at a per share price of $.05, for gross proceeds of $15,000, to an “accredited investor” within the meaning of Rule 502 of Regulation D under the Securities Act of 1933, as amended.
NOTE 11 – STOCK WARRANTS
On February 29, 2016, we sold $150,000 of convertible notes and warrants to purchase 4.9% of our issued and outstanding stock, in connection with our Joint venture agreement with Tumbleweed Holdings, Inc., as disclosed in our Form 8-K Current Report filed with the SEC on March 2, 2016. The warrant to purchase Company common stock has an exercise price of $0.08 per share, a three-year term and a cashless exercise right.
On February 29, 2016, in conjunction with the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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.
October 16, 2017, The Company issued Sandor Capital, a significant shareholder and related party, warrants to purchase an aggregate of 7 million shares of common stock at an exercise price of $.05 per share for a term of three years, warrants to purchase an aggregate of 1,130,285 shares of common stock at an exercise price of $.10 per share for a term of three years and warrants to purchase an aggregate of 2 million shares of common stock at an exercise price of $.05 per share for a term of three years. These warrants were valued at $480,195 using the black –Scholes binary model and we fully vested upon issue.
F-14
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
|
|
|
196.57%
|
Expected term:
|
|
|
3 years
|
Risk free interest rate
|
|
|
1.68%
|
A summary of the Company’s warrant activity for the year ended December 31, 2017 is as follows:
|
Number of
Warrants
|
|
Weighted Average
Exercise Price
|
Outstanding – December 31, 2016
|
|
17,755,603
|
|
$
|
0.08
|
Granted
|
|
10,130,285
|
|
|
0.06
|
Exercised/settled
|
|
-
|
|
|
-
|
Cancelled
|
|
(6,239,603)
|
|
|
0.10
|
Expired
|
|
(10,291,000)
|
|
|
0.05
|
Balance as December 31, 2017
|
|
11,355,285
|
|
$
|
0.05
|
The Company’s outstanding warrants at December 31, 2017 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
|
|
|
|
11,355,285
|
|
|
2.54
|
|
$
|
0.06
|
|
|
11,355,285
|
|
$
|
0.06
|
|
|
117,000
|
The weighted average fair value per warrant issued during the year ended December 31, 2017 was $0.06.
NOTE 12 – 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, 2017 and 2016, 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, 2017 and 2016, respectively:
|
|
As of
December 31,
2017
|
|
As of
December 31,
2016
|
Warrants (exercise price $0.05 - $0.25/share)
|
|
|
11,355,285
|
|
|
17,755,603
|
Convertible debt (exercise price $0.20/share)
|
|
|
-
|
|
|
500,000
|
|
|
|
11,355,285
|
|
|
18,255,603
|
F-15
NOTE 13 – 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 Company’s gross revenues are in excess of $150,000 (see Note 15 - 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 Company’s 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 Company’s 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.
In May 2017, we signed a non-binding memorandum of terms to acquire Crush Mobile, LLC. On August 8, 2017, the company entered into a definitive agreement to acquire all the outstanding membership interests of Crush Mobile. Under the terms of the Agreement, the company will acquire all the outstanding membership interests of Crush Mobile, in exchange for an aggregate of approximately 8 million shares of common stock, plus $80,000 in cash payable in one year. The Company also agreed to piggy-back registration rights with respect to the shares of common stock issuable to the sellers in connection with the acquisition. See Note 16 – Subsequent Events
NOTE 14 – 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, 2017 and 2016, the Company had net operating loss (“NOL”) carry-forwards for federal and state income purposes approximating $6,259,106 and $5,633,041, 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, 2017 and 2016 is summarized as follows:
Income Tax Footnote
|
|
12/31/2017
|
|
12/31/2016
|
Cumulative NOL
|
$
|
(6,295,106)
|
$
|
(5,633,041)
|
|
|
|
|
|
Deferred Tax assets:
|
|
|
|
|
(34% Federal, 7% Avg. Corp. Rate)
|
|
|
|
|
Net operating loss carry forwards
|
|
(8,982,765)
|
|
(8,473,442)
|
Stock/options issued for services
|
|
5,512,650
|
|
5,312,555
|
Stock/options issued for release
|
|
415,621
|
|
415,621
|
Depreciation and amortization
|
|
124,065
|
|
93,322
|
Impairment expense
|
|
144,913
|
|
144,913
|
Unrealized losses on investment
|
|
206,399
|
|
199,287
|
Valuation allowance
|
|
2,579,177
|
|
2,307,744
|
|
$
|
-
|
$
|
-
|
The Company has taken a 100% valuation allowance against the deferred asset attributable to the NOL carry-forwards of approximately $2,579,177 and $2,307,744 at December 31, 2017 and 2016, respectively, due to the uncertainty of realizing the future tax benefits. The increase in valuation allowance of approximately $271,000 is primarily attributable to the Company’s net operating loss during the year ended December 31, 2017.
F-16
The components of the income tax provision for the years ended December 31, 2016 and 2015 are as follows:
|
|
2017
|
|
2016
|
Book income (loss) from operations
|
$
|
(509,323)
|
$
|
(804,932)
|
Stock/options issued for services
|
|
200,095
|
|
42,031
|
Stock/options issued for release
|
|
-
|
|
-
|
Depreciation and amortization
|
|
30,743
|
|
31,345
|
Unrealized losses on investment
|
|
7,112
|
|
199,287
|
Change in valuation allowance
|
|
271,375
|
|
532,269
|
|
$
|
-
|
$
|
-
|
NOTE 15 – RELATED PARTY TRANSACTIONS
We are headquartered in Scottsdale, Arizona where we rented space from Howard R. Baer, the spouse of a significant shareholder until July 2017. We previously rented space form Kuboo, Inc., our former parent company. During the year ended December 31, 2017 we incurred related party rent expense of $69,000.
During the year ended December 31, 2017, Kae Yong Park, a significant shareholder, advanced an aggregate of $62,750 to the Company for short-term capital needs. During this period the Company repaid $43,550 of its secured debt to Park and recaptured $141,510 worth of payroll expenses for Park’s use of Company personnel. Amounts recaptured for the use of Company personnel have been treated as repayments on the Company’s Statements of Cash Flows. At December 31, 2017, the Company had a note payable to Park for these advances of $1,292,357 which is secured by the assets of the Company.
During the year ended December 31, 2017, the Company incurred expenses of $180,000 related to its consulting contract with Howard Baer, the spouse of Kae Yong Park, a significant shareholder.
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, 2017, the Company has accrued interest owed under this agreement of $112,955.
During the year ended December 31, 2017, the Company received aggregate proceeds of $572,299 from Sandor Capital, a related party and significant shareholder and John Lemak, its affiliate, for which notes were issued. The notes, as extended, mature June 30, 2018 with some being secured and others unsecured. At December 31, 2017, the Company had accrued interest of $6,503 related to the notes.
NOTE 16 – 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, 2017, Kae Yong Park, a significant shareholder, and her spouse, Howard R. Baer, have made additional advances to the Company of $70,500, have received repayments of $7,000 leaving a balance due of $1,355,857 at April 2, 2018. These advances are secured by certain Company assets, including all of its internet domain names, websites and related assets. Of the $52,000 advanced in 2018, the $50,000 advanced on March 29, 2018 is secured by the company’s interest in Crush Mobile, bears interest at 8% and is payable on June 30, 2018.
Since December 31, 2017, John S. Lemak, a significant shareholder, has made additional advances to the Company of $65,000 leaving a balance due of $772,936 at April 2, 2018. These advances generally bear interest at the rate of 8% and are secured by certain Company assets, including certain of its internet domain names, websites and related assets. Of the $65,000 advanced in 2018, the $25,000 advanced on March 29, 2018 is secured by the company’s interest in Crush Mobile (pari passu with Park/Baer), bears interest at 8% and is payable on June 30, 2018.
Notes Payable
On January 10, 2018, the Company issued a convertible promissory note in the principal amount of $100,000 for a purchase price of $90,000.
F-17
Equity Transactions
On January 10, 2018, the Company issued 106,500 shares of the Company’s commons stock to a vendor as settlement of a payable balance of $5,219.
On January 8, 2018, the Company issued 300,000 shares of the Company’s commons stock valued at $23,400 as a commitment fee to a prospective investor.
On January 8, 2018, the Company issued an aggregate 7,904,000 shares of the Company’s common stock in connection with the closing of the Crush Mobile acquisition described below.
As of January 8, 2018, the Company owed 500,000 shares of the Company’s common stock to Tumbleweed Holdings pursuant to their prior settlement agreement.
On February 16, 2018, the Company issued 500,000 shares of the Company’s common stock pursuant to a consulting contract.
Business Acquisition
In May 2017, we signed a non-binding memorandum of terms to acquire Crush Mobile. On August 8, 2017, the company entered into a definitive agreement to acquire all the outstanding membership interests of Crush Mobile, LLC, which was amended by Amendment No. 1 dated January 4, 2018 (as amended, the “Agreement”). As reported in the Company’s form 8-K filed with the SEC on January 10, 2018, the Crush acquisition was closed January 8, 2018. Under the terms of the Agreement, the company acquired all the outstanding membership interests of Crush Mobile, in exchange for an aggregate of approximately 8 million shares of common stock, plus $80,000 in cash, payable within one year of closing. The Company also agreed to piggy-back registration rights with respect to the shares of common stock issuable to the sellers in connection with the acquisition. Effective February 1, 2018, the company has engaged Crush Mobile current CEO, Sonya Kreizman, and Yosi Shemesh, as consultants. Ms. Kreizman and Mr. Shemesh will be paid $7,000 and $6,500 per month, respectively for their services.
F-18