SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Note 1. General
Nature of Business
We, together with our wholly owned subsidiaries, are engaged in developing, operating and monetizing websites that focus on specific niche industries, also known as vertical finder websites or finder sites. We currently are either developing finder sites, or providing marketing services on our existing finder sites, in the recreational sports, prefabricated home, and tattoo industries. We provide finder site services in three different sectors: media, technology, and marketing. All of our operations are conducted through our wholly-owned subsidiaries, each of which is incorporated or qualified to do business in the states in which it does so.
We specialize in connecting consumers with brands, products, and services through highly specific search-driven internet marketing finder sites. We develop and operate vertical finder websites in business-to-business and business-to-consumer markets. Our finder websites include content and resources that are relevant to an internet searcher’s specific query. From local merchants to national brands, we monetize internet search traffic through measurable lead generation, premium listings and highly targeted impression based advertising. Our methodology and technology are geared towards marketing to fragmented, disjointed, niche markets that are largely overlooked by our competitors, and we strive to build the number one or number two vertical finder website as defined by unique monthly visits in a given industry.
SearchCore, Inc. was formed on July 14, 2003 in the State of Nevada as Tora Technologies, Inc. On November 21, 2006, we changed our name to Makeup.com Limited, on January 29, 1010, we changed our name to LC Luxuries Limited, and on November 5, 2010, we changed our name to General Cannabis, Inc. On January 6, 2012, we changed our name to SearchCore, Inc.
Principal Services
Our core service is to connect consumers with brands, products and services via our finder sites. We specialize in creating, operating and monetizing vertical finder sites. We identify niche, fragmented and/or disjoined markets, and attempt to capitalize on those markets by incorporating our existing platform as it relates to technology, marketing, advertising and sales. We only pursue markets in which we anticipate we will be the among the top finder sites in any respective industry. This includes marketing and services in both the business-to-business and the business-to-consumer marketplaces. When a consumer or business utilizes one of our finder sites, they are searching primarily for specific products, related items, social engagement, and/or reviews. Initially, we may waive all or a portion of advertising or marketing fees to clients who subscribe with us and market their brand, product or service on our finder sites. Once a client has subscribed with us then we offer various marketing packages that serve to increase the exposure of their business and thus increase the likelihood of connecting more consumers with their brand, product or service. We charge a fee for these various services. The fee varies depending on the service we provide. We believe that the previous success of our first finder site will enable us to continue and expand into other markets we believe has high growth potential.
Our principal services are offered through the following wholly owned subsidiaries:
Sports Asylum, Inc.
VerticalCore Management, Inc.
VerticalCore Solutions, Inc.
VerticalCore Merchant, Inc.
Other Subsidiaries
We have four additional wholly-owned subsidiaries whose operations have been discontinued. These are
General Marketing Solutions, Inc.
,
General Merchant Solutions, Inc.
,
General Processing Corporation
, and
LV Luxuries Incorporated
(which operated as makeup.com). A
s of right now, we have no imminent or specific plans for any of these entities and they are held as corporations in good standing with no operations.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Recent Developments
Restructuring
A. On August 9, 2012, we entered into and closed a Global Securities Purchase Agreement and Secured Promissory Note with Keith Hoerling, an individual. Pursuant to the Global Agreement, we acquired Eleven Million Two Hundred Thousand (11,200,000) shares of common stock from Hoerling, in exchange for (A) the Hoerling Note which had a principal balance of One Million Six Hundred and Twenty Five Thousand Dollars ($1,625,000), to be paid in monthly payments beginning September 15, 2012 and ending on January 15, 2015, and (B) an additional amount of up to One Million Six Hundred and Twenty Five Thousand Dollars ($1,625,000), to be paid monthly beginning on September 15, 2012 and ending January 15, 2015, based on the monthly gross revenue of WeedMaps as more fully set forth in the Global Agreements.
Pursuant to the Global Agreement, Hoerling terminated all rights to consideration due from us (including cash and/or stock owed to Hoerling pursuant to agreements whereby we acquired WeedMaps, LLC).
All the Hoerling agreements were terminated in connection with the sale of WeedMaps Media, Inc.
B. On August 16, 2012, we entered into a Stock Purchase Agreement with Revyv, LLC to acquire Five Hundred Thousand (500,000) shares of our common stock for consideration of Sixty Seven Thousand Dollars ($67,000), payable in two installments, the first of which, for Forty Two Thousand Dollars ($42,000) was paid at closing, and the second of which, for Twenty Five Thousand Dollars ($25,000), was paid on January 10, 2013.
C. On August 1, 2012, we closed (A) a Global Securities Purchase, Consulting, and Resignation Agreement, Secured Promissory Note and Consulting Agreement by and among Justin Hartfield, an individual and WeedMaps Media, Inc., a Nevada corporation and our wholly-owned subsidiary, and (B) a Global Securities Purchase and Resignation Agreement and Secured Promissory Note by and among the Company, Douglas Francis, an individual and WeedMaps.
As consideration for the Global Agreements, the Notes were issued to Hartfield and Francis, individually. The Notes were secured by the shares of common stock sold to the Company by the Selling Parties, and each of them, pursuant to the Global Agreements. Pursuant to the Notes, beginning on September 5, 2012, we made monthly payments in the amount of $78,099.38 to each of the Selling Parties.
In addition to the Notes, as consideration for the Global Agreements, we agreed to pay to each of the Selling Parties up to One Million Six Hundred and Twenty Five Thousand Dollars ($1,625,000), to be paid in monthly payments beginning September 15, 2012, and ending January 15, 2015, based on the monthly gross revenue of WeedMaps as more fully set forth in the Global Agreements. We timely made the payments under these agreements until WeedMaps was sold on December 31, 2012.
Pursuant to the Global Agreements, the Selling Parties delivered letters of resignation as our employees, terminated all rights to consideration due from us (including cash and/or stock owed to Hartfield pursuant to agreements whereby we acquired WeedMaps, LLC) and Francis resigned his position as a member of our Board of Directors.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Pursuant to the Global Agreements, we purchased a total of Forty Million Seventy Two Thousand Two Hundred Eighty Nine (40,072,289) shares of our common stock from the Selling Parties, and terminated our obligation at the time to issue over 5 million more shares.
Pursuant to the Consulting Agreement, we were to pay Hartfield Five Thousand Dollars ($5,000) per month for a period of thirty (30) months for the services provided pursuant thereto.
All the Francis and Hartfield agreements were terminated in connection with the sale of WeedMaps Media, Inc.
D. The Global Agreement entered into with Keith Hoerling, taken together with the Global Agreements entered into with Justin Hartfield and Douglas Francis, collectively resulted in the termination of the following agreements:
i. our obligations under the earn-out provisions of that certain Agreement and Plan of Reorganization and Merger, dated November 19, 2010 (the “Reorganization Agreement”) by and among us and WeedMaps Media, Inc., a Nevada corporation (f/k/a Weedmaps, LLC, a Nevada limited liability company) (“WeedMaps”);
ii. Employment Agreement with Hartfield dated November 19, 2010;
iii. Employment Agreement with Hoerling dated November 19, 2010;
iv. Employment Agreement with Francis dated August 1, 2011;
iv. Secured Promissory Note issued to Justin Hartfield in the Principal Amount of $900,000 dated November 19, 2010 and due January 10, 2012;
v. First Amendment to Secured Promissory Note issued to Justin Hartfield dated February 22, 2011;
vi. Secured Promissory Note issued to Justin Hartfield in the Principal Amount of $900,000 dated November 19, 2010 and due January 10, 2013;
vii. Secured Promissory Note issued to Keith Hoerling in the Principal Amount of $900,000 dated November 19, 2010 and due January 10, 2012;
viii. First Amendment to Secured Promissory Note issued to Keith Hoerling dated February 22, 2011;
ix. Secured Promissory Note issued to Keith Hoerling in the Principal Amount of $900,000 dated November 19, 2010 and due January 10, 2013; and
x. Security Agreement dated November 19, 2010.
WeedMaps, LLC
On November 19, 2010, we entered into an Agreement and Plan of Reorganization and Merger pursuant to which we acquired 100% of the membership interests of WeedMaps, LLC, a Nevada limited liability company, which was merged with and into WeedMaps Media, Inc., our wholly-owned subsidiary at the time. Prior to the acquisition of WeedMaps, LLC, SearchCore, Inc. was deemed to be a non-operating public shell corporation with nominal net assets and WeedMaps, LLC was a private operating company
with significant operations. F
or accounting purposes the transaction was considered to be a reverse merger treated as a recapitalization of SearchCore where SearchCore was the surviving legal entity
and the accounting acquiree
, and WeedMaps, LLC was considered to be the accounting acquirer and
the legal acquiree
.
On December 31, 2012, WeedMaps Media, Inc. was sold to a third party.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Synergistic Resources, LLC
On December 3, 2010, we entered into a Reorganization and Asset Acquisition Agreement pursuant to which we acquired substantially all the assets of Synergistic Resources, LLC, a California limited liability company. The assets consisted primarily of the intellectual property and established marketing associated with the name Marijuana Medicine Evaluation Centers, including its website (
www.marijuanamedicine.com
), and the assignment of a Management Services Agreement pursuant to which we ultimately managed fourteen (14) medicinal cannabis medical clinics. This business was operated as General Health Solutions, Inc., and has since been discontinued.
Revyv, LLC
On January 11, 2011, we entered into a Reorganization and Asset Acquisition Agreement pursuant to which we acquired substantially all the assets of Revyv, LLC. The assets consisted primarily of the intellectual property associated with the name CannabisCenters, including its website (
www.cannabiscenters.com
), its related physician software and patient verification system, and numerous existing contracts.
This business was operated as General Marketing Solutions, Inc. and the assets were sold with WeedMaps Media, Inc. on December 31, 2012.
Marijuana.com
On November 18, 2011, we entered into a Domain Name Purchase Agreement with an unrelated party for the purchase of the domain name
www.marijuana.com
. On December 31, 2012, the domain name was sold with WeedMaps Media, Inc.
MMJMenu, LLC
On January 5, 2012, WeedMaps Media, Inc. acquired substantially all the assets of MMJMenu, LLC. The assets consist primarily of the intellectual property associated with MMJMENU, including its website (
www.mmjmenu.com
), point-of-sale software, a variety of related websites, and its customers. On December 31, 2012, the assets were sold with WeedMaps Media, Inc.
ManufacturedHome.com, ManufacturedHomes.com, ManufacturedHomes.net and ManufacturedHouse.com
On August 2, 2012, we entered into a Domain Name Purchase Agreement pursuant to which we purchased the domain names known as
www.manufacturedhome.com
and
www.manufacturedhouse.com
, for total consideration of Fifty Thousand Dollars ($50,000), paid at closing.
On August 16, 2012, we entered into a Domain Name Purchase Agreement pursuant to which we purchased the domain name known as
www.manufacturedhomes.com
, for total consideration of One Hundred Thirty Thousand Dollars ($130,000), paid at closing.
On October 25, 2012, we purchased the domain name known as
www.manufacturedhomes.net
,
for total consideration of Fourteen Thousand Dollars ($14,000), paid at closing.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Rodeo.com and Karate.com
On August 7, 2012, we entered into a Domain Name Purchase Agreement and a Non-Recourse Secured Promissory Note with Domain Holdings, Inc., an Alberta corporation, pursuant to which we purchased the domain names known as
www.rodeo.com
and
www.karate.com
, for total consideration of Five Hundred Thousand Dollars ($500,000), with the entire purchase price represented by the Note.
On October 25, 2012, we amended the Purchase Agreement and the Note. Pursuant to the terms of the amendments, we agreed to make payments of Fifty Thousand Dollars ($50,000) on each of August 15, 2012 and November 1, 2012, which we did. The balance of $400,000 is to be paid in eighteen (18) equal monthly installments of Twenty Two Thousand Two Hundred Twenty Two Dollars ($22,222) beginning June 1, 2013, and continuing on the first (1st) day of each month thereafter.
Additional Domain Names
On August 24, 2012, we entered into a Domain Names Purchase Agreement with High Level Technologies, Inc. pursuant to which we purchased 57 domain names as set forth in the Agreement, for total consideration of One Hundred Thousand Dollars ($100,000), paid at closing.
On February 22, 2013, we purchased the domain name known as
www.traveltrailer.com
. The purchase price was $50,000, payable $15,000 at closing and $5,000 per month over seven (7) consecutive months.
On February 27, 2013, we purchased the domain name known as
www.toyhaulers.com
. The purchase price was $30,000, payable $15,000 at closing and $2,500 per month over six (6) consecutive months.
Sports Asylum, Inc.
On December 31, 2012, we entered into a Securities Purchase Agreement by and among us, on the one hand, and Sports Asylum, Inc., a Nevada corporation, and its shareholders, Sabas Carrillo, an individual, and James Pakulis, an individual and one of our officers and directors, on the other hand. Pursuant to the agreement, upon the closing of the transaction, we purchased 100% of the issued and outstanding equity interests of Sports Asylum in exchange for (a) the cancellation of a previous Secured Promissory Note issued to Sports Asylum, entered into on or about August 22, 2012 and with an outstanding principal balance of Two Hundred Eighty Five Thousand Dollars ($285,000) and (b) Two Hundred Fifteen Thousand Dollars ($215,000) represented by promissory notes in the original principal amount of One Hundred Sixty One Thousand Two Hundred Fifty Dollars ($161,250) to Pakulis and Fifty Three Thousand Seven Hundred Fifty ($53,750) to Carrillo. The closing of the purchase took place on December 31, 2012.
Sports Asylum, Inc. owns and operates the intellectual property associated with
www.sportify.com
, and represents our introduction into the recreational sports industry.
Tattoo.com
On January 21, 2013, we entered into a Management Agreement with Tattoo Interactive, LLC pursuant to which we will perform various marketing, promotion, and website management services with respect to the domain name known as
www.tattoo.com
and the commercial website located at that domain. The Agreement has an initial term of twelve (12) months and shall automatically renew for successive one (1) year terms unless terminated in accordance with its terms. In the event we incur at least $25,000 in expenditures relating to the performance of the services in any single month, Tattoo Interactive shall pay us $10,000 as an expense-sharing allotment. Pursuant to the agreement, we will receive twenty percent (20%) of all advertising revenue (as defined therein), and after the payment of the advertising revenue, we will receive sixty five percent (65%) of all remaining designated gross revenue (as defined therein). We have a right of first refusal in the event Tattoo Interactive elects to sell the domain name, and in the event certain revenue goals, as set forth in the agreement, are satisfied, we will be granted certain equity interests in Tattoo Interactive.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Modularhomes.com
On January 25, 2013, we purchased the domain names known as
www.modularhomes.com
for total consideration of One Hundred Forty Thousand Dollars ($140,000), payable in down payment of Fifty Thousand Dollars ($50,000) and the balance over twelve (12) equal monthly payments.
Recent Divestitures
Sale of WeedMaps
On December 11, 2012, we entered into an Agreement and Plan of Reorganization by and among us and our wholly owned subsidiary, WeedMaps Media, Inc., a Nevada corporation, on the one hand, and RJM BV, a Dutch corporation, on the other hand. Pursuant to the Reorganization Agreement, upon the closing of the transaction, we sold WeedMaps to RJM in exchange for (a) Three Million Dollars ($3,000,000), represented by a secured promissory note, (b) the assumption by RJM of all of our various obligations to Douglas Francis, Justin Hartfield, and Keith Hoerling, and the assumption of our office lease in Newport Beach, California, and (c) Seven Hundred Fifty Thousand Dollars ($750,000) in cash (of which we withheld Five Hundred Thousand Dollars ($500,000) from WeedMaps at the closing) and Two Hundred Fifty Thousand Dollars ($250,000) of which was to be paid to us on January 15, 2013, before the due date was extended to January 31, 2013, which we did receive. The closing of the sale took place on December 31, 2012.
As partial consideration under the Reorganization Agreement, RJM delivered a Secured Promissory Note in the original principal amount of Three Million Dollars ($3,000,000). The Note is secured by certain assets according to the terms of a Pledge and Security Agreement, which assets include all of the assets of WeedMaps Media, including but not limited to the URL known as
www.weedmaps.com
. Pursuant to the Note RJM will make the following payments: (1) Two Hundred Fifty Thousand Dollars ($250,000) on January 15, 2013 (which payment date was extended to January 31, 2013), which payment we did receive; One Hundred Thousand Dollars ($100,000) each month beginning February 25, 2013 and continuing on the twenty fifth (25th) of each month thereafter for a total of twenty eight (28) months, which payments for February and March 2013 we did receive; and Sixteen Thousand Five Hundred Dollars ($16,500) on July 25, 2015. Interest shall accrue on the outstanding principal amount on an annual basis at a rate of One and One Hundredth Percent (1.01%).
As further consideration under the Reorganization Agreement, RJM delivered documents sufficient (i) to transfer all of the obligations that we owed to Justin Hartfield arising out of the Global Securities Purchase, Consulting, and Resignation Agreement by and between us, WeedMaps, and Hartfield dated as of July 31, 2012, to RJM and to release us from all said obligations thereunder; (ii) to transfer all of the obligations that we owed to Douglas Francis arising out of the Global Securities Purchase and Resignation Agreement by and between us, WeedMaps, and Francis dated as of July 31, 2012, to RJM and to release us from all said obligations thereunder; (iii) to transfer all of the obligations that we owed to Keith Hoerling arising out of the Global Securities Purchase Agreement by and between the Company, WeedMaps, and Hoerling dated August 14, 2012, to RJM and to release us from all said obligations thereunder; (iv) for RJM to assume all of our obligations under that certain Office Lease Agreement by and between us and Redstone Plaza, LLC dated January 17, 2011; and (v) for RJM to assume all of our obligations under certain additional material agreements set forth on Schedule 2.1.16 of the Reorganization Agreement.
As further consideration under the Reorganization Agreement, we, along with our President and Chief Executive Office James Pakulis, and Brad Nelms, an employee of SearchCore, entered into a Non-Competition Agreement whereby the bound parties agreed that they (i) will not disclose certain confidential information regarding the Business of WeedMaps; (ii) will not compete with the Business of WeedMaps; (iii) will not solicit, advise, provide or sell, directly or indirectly, any services or products of the same or similar nature to services or products of the Business of WeedMaps, to any client or prospective client of WeedMaps; (iv) will not solicit, request or otherwise attempt to induce or influence, directly or indirectly, any present client, distributor or supplier, or prospective client, distributor or supplier, of WeedMaps, to cancel, limit or postpone their business with WeedMaps, or otherwise take action which might be to the disadvantage of WeedMaps; and (v) will not hire or solicit for employment, directly or indirectly, or induce or actively attempt to influence, any employee, officer, director, agent, contractor or other business associate of WeedMaps (excluding employees prior to December 31, 2012), to terminate his or her employment or discontinue such person’s consultant, contractor or other business association with WeedMaps. The business of WeedMaps is defined in the Non-Competition Agreement as internet search and website operation for the medicinal cannabis industry.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Similarly, RJM, Douglas Francis, Justin Hartfield, and Keith Hoerling entered into a Non-Competition Agreement whereby they agreed not to compete with our business, described in the Non-Competition Agreement as internet search, internet advertising, and website operation for (a) the recreational sports industry, (b) the prefabricated housing industry, (c) the tattoo industry, and (d) other industries in which SearchCore and/or its affiliates operates, at the time of the Agreement or thereafter.
As further consideration under the Reorganization Agreement, we entered into an Assignment of Trademarks and an Assignment of Domain Names whereby we assigned certain trademarks and domain names to WeedMaps.
In the aggregate, the transactions represented by the Reorganization Agreement resulted in a reduction of over $8,000,000 in liabilities.
Sale of Certain Assets
On December 11, 2012, in connection with the transactions contemplated by the sale of WeedMaps Media, Inc., we entered into an Asset Purchase Agreement by and among us and our wholly owned subsidiary, General Marketing Solutions, Inc., a California corporation, on the one hand, and RJM, on the other hand, pursuant to which, upon the closing of the transaction, we sold certain assets (primarily those assets we acquired from Revyv, LLC in January 2011) to RJM for the sum of Ten Dollars ($10.00). The closing of the sale took place on December 31, 2012.
In connection with the Purchase Agreement, GMS entered into an Assignment of Domain Names whereby GMS assigned certain domain names to RJM.
Note 2. Basis Of Presentation And Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America.
Reclassifications
Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the consolidated results of operations or financial position for any years presented.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates are based on knowledge of current events and anticipated future events and accordingly, actual results may differ from those estimates.
Risks related to cash
The Company maintains cash in bank and deposit accounts, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.
Cash and Cash equivalents
The Company considers only highly liquid investments such as money market funds and commercial paper with maturities of 90 days or less at the date of their acquisition as cash and cash equivalents.
Fair Value of Financial Instruments
The accounting standards regarding disclosures about fair value of financial instruments defines financial instruments and required fair value disclosure of those instruments. This accounting standard defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. Receivables, investments, payables, short and long term debt and warrant liabilities qualified as financial instruments. Management believes the carrying amounts of receivables, payables and debt are a reasonable estimate of fair value because of the short period of time between the origination of such instruments, their expected realization, and if applicable, their stated interest rate is equivalent to interest rates currently available. The three levels are defined as follows:
Level 1
|
Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
Level 2
|
Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
|
Level 3
|
Inputs to the valuation methodology are unobservable and significant to the fair value.
|
The Company analyzes all financial instruments with features of both liabilities and equity under the accounting standards regarding accounting for certain financial instruments with characteristics of both liabilities and equity, accounting for derivative instruments and hedging activities, accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, and the accounting standard regarding determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. The accounting standard specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. This standard provides a two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for this accounting standard scope exception. All warrants issued by the Company are denominated in U.S. dollars.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Accounts Receivable
Accounts receivable are recorded at the invoice amount and do not bear interest.
Advertising Cost
The Company expenses advertising costs when incurred. Advertising expense for the years ended December 31, 2012 and 2011 was $298,000 and $714,000, respectively.
Allowance for Doubtful Accounts
Allowance for doubtful accounts is defined as a company's estimate of the amount of probable credit losses in the company's existing accounts receivable. The Company does not maintain an allowance for doubtful account based upon management’s review of the Company’s revenue structure whereby substantially all receivables are confirmed before they are booked as revenue. The Company reviews its allowance for doubtful accounts policy periodically. The Company does not have any off-balance-sheet exposure related to its customers.
Inventory
The Inventory balance at December 31, 2011 consisted of credit card terminals which were stated at the lower of cost (average) or market. We previously supplied dispensaries with credit card processing services. On October 31, 2011, General Merchant Solutions, our wholly owned subsidiary, discontinued all retail credit card processing operations. At December 31, 2012, we did not have any inventory.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the useful lives of the assets, generally from three to seven years. Including accumulated depreciation related to the assets sold with WeedMaps, property and equipment at December 31, 2012 and 2011 are presented net of accumulated depreciation of $121,000 and $71,000, respectively.
Goodwill
In accordance with
Goodwill and Other Intangible Assets
, goodwill is defined as the excess of the purchase price over the fair value assigned to individual assets acquired and liabilities assumed and is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis in the Company's fourth fiscal quarter or more frequently if indicators of impairment exist. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of the Company's reporting units with each respective reporting unit's carrying amount, including goodwill. The fair value of reporting units is generally determined using the income approach. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, the second step of the goodwill impairment test is performed to determine the amount of any impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. No amortization is recorded for goodwill with indefinite useful life. No goodwill impairment was recognized during the twelve months ended December 31, 2012 and 2011, respectively.
Intangible Assets
In accordance with
Goodwill and Other Intangible Assets
, intangible assets that are determined not to have an indefinite useful life are subject to amortization. The Company amortizes intangible assets using the straight-line method over their estimated useful lives.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Impairment of Long-Lived and Intangible Assets
In accordance with
Accounting for the Impairment or Disposal of Long-Lived Assets
, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company assesses the recoverability of the long-lived and intangible assets by comparing the carrying amount to the estimated future undiscounted cash flow associated with the related assets. No impairment of intangible assets was recognized during the twelve months ended December 31, 2012 and 2011, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with the provisions of
Share-Based Payment
, which addresses the accounting for equity-based compensation and which requires that the cost of all equity-based compensation arrangements, be reflected in the financial statements over the vesting period based on the estimated fair value of the awards. During the twelve months ended December 31, 2012 and 2011, the Company had $210,000 and zero, respectively, in stock-based compensation expense related to issuances of shares of the Company’s common stock to consultants.
Treasury Stock
We account for treasury stock using the cost method and include treasury stock as a component of shareholders’ equity. Other than the share purchases described in
Note 3. Equity Transactions
, we currently do not have or intend to initiate a share repurchase program.
Contingent Consideration – Earn-outs
Contingent consideration, the earn-out provisions, which are classified as a liability, pursuant to ASC 805, are required to be remeasured to fair value at each reporting date and any changes in fair value subsequent to the acquisition date are recognized in earnings which could cause a material impact to, and volatility in, our operating results. The primary inputs in determining the fair value of the earn-outs that are remeasured to fair value are the quoted price of the underlying shares of our common stock and the probabilities for the three different scenarios in determining the likelihood of common share payouts.
Revenue Recognition
We recognize revenue in accordance with ASC 605, “
Revenue Recognition
,” we recognize as revenue the fees we charge customers as referenced below because persuasive evidence of an arrangement exists, the fees we charge are substantially fixed or determinable during the period that we provide the services, we and our customers understand the specific nature and terms of the agreed upon transactions, collectability is reasonable assured and services have been rendered.
The Company and its wholly owned subsidiaries recognize revenue as follows:
We generate revenue through attracting internet and mobile searchers to our internet properties. The users then frequent our clients who pay us a fee to list on our site.
Our Internet properties generate revenues from merchants and advertisers within the industry verticals served. This is the revenue model we employed with WeedMaps.com and is the same revenue model we employ with our current finder sites. The revenue model follows a subscription-based approach, generating recurring monthly revenue from a variety of different package listings, lead generation and advertising.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Advertising Package Tiers –
For our finder sites we typically create advertising package tiers in order to more easily distinguish the different services we offer at different price points. The different advertising package tiers also makes it easy for our clients to distinguish which package tiers are premium and thus likely to generate more traffic to their brand, product or service. The range of prices we charge for each advertising package tier differs per each finder site, per region, and per each tier package. Each region is internally created by us based on geographic location, industry density and demographics.
Listing Revenue –
We generate revenues from fees we charge clients to advertise or list their location, products, and services on one or more of our finder websites. We recognize as revenue the fees we charge customers that advertise or list their related company on our websites.
For example, our listing packages typically are made up of two groups, Premium Listings and Standard Listings. The most important distinction between Premium Listings and Standard Listing packages is typically positioning on our finder websites. This distinction is important because the business that appears first in an internet search results list has an increased likelihood of a website visitor clicking on that business and thus “converting” the website visitor to a potential customer for our client. In general, being in the top section of the search results on any of our finder websites for a given geographical region is deemed preferable because of the increased conversion rates (or click-through rates). As a result, we charge a premium dollar amount for a Premium Listing so that the client is placed in the top section of search results for a given region.
Standard Listing Packages are basic packages which typically allow a customer to list their brand, product, or service on one or more of our finder sites with the capability to edit their listing. A Standard Listing also typically allows a customer to add photos, create a menu, and respond to customer reviews, for example.
Advertising Revenue –
We generate revenues from fees we charge customers for placing ads for their related companies on our websites (i.e. Advertising Packages). Our Advertising Packages can include banner ads placed on our finder sites, emails, texts, special promotions, and events. All of our Advertising Packages are considered Ad Revenue pursuant to our revenue recognition policy.
Content Production Revenue –
We generate revenues from photo and video production of content which is displayed on our finder websites (i.e. Content Production). Typically, Content Production that we create on behalf of our clients is considered an add-on or ancillary service. We typically create video “virtual” tours of our client’s establishments and products, which are then displayed on our finder websites. We recognize as revenue the fees we charge customers for photo and video production services. All of our Content Production services are considered Content Production Revenue pursuant to our revenue recognition policy.
Income Taxes
The Company follows
Accounting for Income Taxes
that requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between the income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently due plus deferred taxes.
The charge for taxation is based on the results for the year as adjusted for items that are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized.
Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also recorded in equity.
Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Uncertain tax positions
The Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being sustained. The Company classifies income tax-related interest and penalties as interest expense and SGA expense, respectively, on the Consolidated Statement of Operations.
Recent Accounting Pronouncements
FASB issued an accounting standards update amending ASC 220 to improve the comparability, consistency and transparency of reporting of comprehensive income. It amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU No. 2011-05 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. In December 2011, FASB issued ASU 2011-12. ASU 2011-12 indefinitely deferred the provisions of ASU 2011-05 requiring the presentation of reclassification adjustments on the face of the financial statements for items reclassified from other comprehensive income to net income. The adoption of this standard did not have a material impact on our financial statements.
FASB issued an accounting standards update amending ASC 820, which is effective for interim and annual periods beginning after December 31, 2011, to achieve common fair value measurement and disclosure requirements between GAAP and IFRS. This amendment changes the wording used to describe fair value and requires additional disclosures. The adoption of this amendment did not have a material impact on our financial statements.
In September 2011, the FASB issued an amendment to an existing accounting standard, which provides an option to perform a qualitative assessment to determine whether further impairment testing on goodwill is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this standard did not have a material impact on our financial statements.
Subsequent Events
During May 2009 and February 2010, the FASB issued new authoritative pronouncement regarding recognized and non-recognized subsequent events. This guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The Company adopted this guidance and it had no impact on the Company’s results of operations or financial position.
Other Recently Issued, but Not Yet Effective Accounting Pronouncements
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Note 3. Equity Transactions
At December 31, 2012 the total number of shares of our common stock that were issued and outstanding was 37,967,967 which included 80,549,563 of common stock less 42,581,596 of treasury stock. Pursuant to terms of which we repurchased shares of our common stock, 51,272,289 shares held in escrow are released monthly on a pro-rata basis as we make payments on the promissory notes related to their purchase.
The below purchases of shares of our common stock (Treasury Stock) were accounted for using the cost method and we include the treasury stock as a component of our shareholders’ equity. In aggregate, we purchased 51,772,289 shares of our common stock, reducing the number of our total shares of common stock outstanding to 37,567,967.
Further, pursuant to the terms of which we purchased 500,000 shares of our common stock, 186,567 shares held in escrow were scheduled to be released on January 10, 2013 upon final payment of the associated promissory note, which payment was made and which shares have been released from escrow.
Share Purchases from Hartfield, Hoerling and Francis
During August 2012, we closed (A) a Global Securities Purchase, Consulting, and Resignation Agreement (the "Hartfield Agreement"), Secured Promissory Note (the " Hartfield Note") and Consulting Agreement (the "Consulting Agreement") by and among Justin Hartfield, an individual ("Hartfield") and WeedMaps Media, Inc., a Nevada corporation and our wholly-owned subsidiary ("WeedMaps"), (B) a Global Securities Purchase Agreement (the "Hoerling Agreement") and Secured Promissory Note (the "Hoerling Note") by and among us, Keith Hoerling, an individual ("Hoerling") and WeedMaps and (C) a Global Securities Purchase and Resignation Agreement (the "Francis Agreement", collectively with the Hartfield and Hoerling Agreements, the "Global Agreements") and Secured Promissory Note (the "Francis Note", collectively with the Hartfield and Hoerling Notes, the "Notes") by and among us, Douglas Francis, an individual ("Francis", collectively with Hartfield and Hoerling, the “Selling Parties”) and WeedMaps. Pursuant to the Global Agreements, Hartfield and Francis have delivered letters of resignation as our employees. Mr. Hoerling will remain employed by us as our Chief Technology Officer. Mr. Francis has resigned his position as a member of our Board of Directors. Further, pursuant to the Global Agreements, the Selling Parties have terminated all rights to consideration due from us (including cash and/or stock owed to Hartfield and Hoerling pursuant to agreements whereby we acquired WeedMaps, LLC). Pursuant to the Global Agreements, we purchased a total of 51,272,289 shares of our common stock from the Selling Parties.
As consideration for the Global Agreements, the Notes were issued to Hartfield, Hoerling and Francis, individually. The Notes are secured by the shares of common stock sold to the Company by the Selling Parties, and each of them, pursuant to the Global Agreements. Pursuant to the Notes, beginning in September 2012, we began making monthly payments in the amount of $78,099.38 to each of the Selling Parties. The original aggregate amount of the Notes was $4,875,000.
In addition to the Notes, as consideration for the Global Agreements, we agreed to pay to each of the Selling Parties up to $1,625,000, to be paid in monthly payments beginning in September 2012, and ending in January 2015, based on the monthly gross revenue of WeedMaps as more fully set forth in the Global Agreements (the “Revenue Share Liability”). The original aggregate amount of the Revenue Share Liability was $4,875,000.
Pursuant to the Consulting Agreement, we will pay Hartfield Five Thousand Dollars ($5,000) per month for a period of 30 months for the services provided pursuant thereto.
See
Note 4. Sale of WeedMaps
for information on our sale of WeedMaps pursuant to which The Notes, the Revenue Share and the Consulting Agreement were cancelled on December 31, 2012.
Share Purchases from Revyv, LLC
On August 16, 2012, we entered into a Stock Purchase Agreement with Revyv, LLC to acquire 500,000 shares of our common stock for consideration of $67,000 of which $42,000 was paid at closing and by issuing a $25,000 promissory note due January 10, 2013, which payment was made during January 2013.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Stock-based Compensation
On August 20, 2012, we approved the issuance of Twenty Thousand (20,000) shares of our common stock, restricted in accordance with Rule 144, to each then-member of our Board of Directors, namely James Pakulis, Bonnie Goldstein, and Munjit Johal, as a one-time bonus for serving as a Director. The issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, the shareholders were accredited, and there was no solicitation in connection with the offering and sale.
On November 5, 2012, we issued 250,000 shares of our common stock to one shareholder for services rendered from July 1, 2012 through September 30, 2012 and was accounted for as an expense during the quarter ended September 30, 2012. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investor was accredited and had access to information necessary to make an investment decision. The shares were restricted securities as described in Rule 144 pursuant to the Securities Act of 1933.
On November 15, 2012, we issued an aggregate of One Hundred Fifty Thousand (150,000) shares of our common stock to three individuals or their controlled entities for services rendered. One of the individuals was Munjit Johal, a member of our Board of Directors, who received 50,000 shares. The issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, the shareholders were accredited, and there was no solicitation in connection with the offering and sale.
MMJMenu, LLC
On January 5, 2012, WeedMaps acquired substantially all the assets of MMJMenu, LLC (“MMJ”). As consideration for the purchase we issued an aggregate of Two Hundred Thousand (200,000) shares of our common stock to MMJ or its assigns. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investor was accredited and had access to information necessary to make an investment decision. The shares were restricted securities as described in Rule 144 pursuant to the Securities Act of 1933.
Note 4. Sale of WeedMaps
On December 11, 2012, we entered into an Agreement and Plan of Reorganization (the “Reorganization Agreement”) by and among us and our wholly owned subsidiary, WeedMaps Media, Inc., a Nevada corporation (“WeedMaps”), on the one hand, and RJM BV, a Dutch corporation (“RJM”), on the other hand. Pursuant to the Reorganization Agreement, upon the closing of the transaction, we sold WeedMaps to RJM in exchange for (a) Three Million Dollars ($3,000,000), represented by a secured promissory note, (b) the assumption by RJM of various of our obligations to Douglas Francis, Justin Hartfield, and Keith Hoerling, and the assumption of our office lease in Newport Beach, California, and (c) Seven Hundred Fifty Thousand Dollars ($750,000) in cash (of which we withheld Five Hundred Thousand Dollars ($500,000) from WeedMaps at the closing and Two Hundred Fifty Thousand Dollars ($250,000) of which will be paid to us on January 15, 2013). The closing of the sale took place on December 31, 2012.
As partial consideration under the Reorganization Agreement, RJM delivered a Secured Promissory Note in the original principal amount of Three Million Dollars ($3,000,000) (the “Note”). The Note is secured by certain assets according to the terms of a Pledge and Security Agreement (the “Security Agreement”), which assets include all of the assets of WeedMaps, including but not limited to the URL known as www.weedmaps.com. Pursuant to the Note RJM will make the following payments: (1) Two Hundred Fifty Thousand Dollars ($250,000) on January 15, 2013; One Hundred Thousand Dollars ($100,000) each month beginning February 25, 2013 and continuing on the twenty fifth (25th) of each month thereafter for a total of twenty eight (28) months; and Sixteen Thousand Five Hundred Dollars ($16,500) on July 25, 2015. Interest shall accrue on the outstanding principal amount on an annual basis at a rate of One and One Hundredth Percent (1.01%).
As further consideration under the Reorganization Agreement, RJM delivered documents sufficient (i) to transfer all of the obligations that we owed to Justin Hartfield arising out of the Global Securities Purchase, Consulting, and Resignation Agreement by and between us, WeedMaps, and Hartfield dated as of July 31, 2012, to RJM and to release us from all said obligations thereunder (the “Hartfield Assignment and Assumption Agreement”); (ii) to transfer all of the obligations that we owed to Douglas Francis arising out of the Global Securities Purchase and Resignation Agreement by and between us, WeedMaps, and Francis dated as of July 31, 2012, to RJM and to release us from all said obligations thereunder (the “Francis Assignment and Assumption Agreement”); (iii) to transfer all of the obligations that we owed to Keith Hoerling arising out of the Global Securities Purchase Agreement by and between the Company, WeedMaps, and Hoerling dated August 14, 2012, to RJM and to release us from all said obligations thereunder (the “Hoerling Assignment and Assumption Agreement”); (iv) for RJM to assume all of our obligations under that certain Office Lease Agreement by and between us and Redstone Plaza, LLC dated January 17, 2011 (the “Lease Assumption Agreement”); and (v) for RJM to assume all of our obligations under certain additional material agreements set forth on Schedule 2.1.16 of the Reorganization Agreement (the “Agreement Assumption”).
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
As further consideration under the Reorganization Agreement, we, along with our President and Chief Executive Office James Pakulis, and Brad Nelms, entered into a Non-Competition Agreement (the “Seller Non-Competition Agreement”) whereby the bound parties agreed that they (i) will not disclose certain confidential information regarding the Business of WeedMaps; (ii) will not compete with the Business of WeedMaps; (iii) will not solicit, advise, provide or sell, directly or indirectly, any services or products of the same or similar nature to services or products of the Business of WeedMaps, to any client or prospective client of WeedMaps; (iv) will not solicit, request or otherwise attempt to induce or influence, directly or indirectly, any present client, distributor or supplier, or prospective client, distributor or supplier, of WeedMaps, to cancel, limit or postpone their business with WeedMaps, or otherwise take action which might be to the disadvantage of WeedMaps; and (v) will not hire or solicit for employment, directly or indirectly, or induce or actively attempt to influence, any employee, officer, director, agent, contractor or other business associate of WeedMaps (excluding employees prior to December 31, 2012), to terminate his or her employment or discontinue such person’s consultant, contractor or other business association with WeedMaps. The business of WeedMaps is defined in the Seller Non-Competition Agreement as Internet search and website operation for the medicinal cannabis industry.
Similar to the Seller Non-Competition Agreement, RJM, Douglas Francis, Justin Hartfield, and Keith Hoerling entered into a Non-Competition Agreement (the “Buyer Non-Competition Agreement”) whereby they agreed not to compete with our business, described in the Buyer Non-Competition Agreement as internet search, internet advertising, and website operation for (a) the tattoo industry, (b) the manufactured housing industry, (c) the recreational sports industry, and (d) other industries in which SearchCore and/or its affiliates operates, at the time of the Agreement or thereafter.
As further consideration under the Reorganization Agreement, we entered into an Assignment of Trademarks (“Trademark Assignment”) and an Assignment of Domain Names (“Domain Assignment”) whereby we assigned certain trademarks and domain names to WeedMaps.
Sale of Certain Assets
On December 11, 2012, in connection with the transactions contemplated by the Reorganization Agreement, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) by and among us and our wholly owned subsidiary, General Marketing Solutions, Inc., a California corporation (“GMS”), on the one hand, and RJM, on the other hand, pursuant to which, upon the closing of the transaction, we sold certain assets to RJM for the sum of Ten Dollars ($10.00). The closing of the sale took place on December 31, 2012.
In connection with the Purchase Agreement, GMS entered into an Assignment of Domain Names (the “GMS Domain Assignment”) whereby GMS assigned certain domain names to RJM.
Consideration Transferred
The sale price of WeedMaps was approximately $11.7 million. The sale price was determined based on the value of the Secured Promissory Note in the original principal amount of $3 million, $750,000 in cash, and the assumption by RJM of approximately $8 million in debt obligations we owed to Messrs. Hartfield, Francis and Hoerling.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Summary of Transaction
The following table summarizes the total sale price of $11,696,000:
Promissory note
|
|
$
|
3,000,000
|
|
Cash payment
|
|
|
750,000
|
|
Obligations to Messrs. Hartfield, Francis and Hoerling
|
|
|
7,946,000
|
|
Total consideration
|
|
$
|
11,696,000
|
|
The following table summarizes the net assets sold:
WeedMaps net assets
|
|
$
|
2,526,000
|
|
General Marketing net assets
|
|
|
1,071,000
|
|
Assets related to assumption of lease
|
|
|
303,000
|
|
Net Assets
|
|
$
|
3,900,000
|
|
The following table summarizes the disposition with a total gain on sale of $7,796,000:
Total consideration
|
|
$
|
11,696,000
|
|
Net assets sold
|
|
|
(3,900,000
|
)
|
Gain on sale
|
|
$
|
7,796,000
|
|
Pursuant to ASC 205-20-55: A discontinued operation arises upon the complete or near-complete disposal of a component of an entity. A component comprises (a) operations, and (b) cash flows, that can be clearly distinguished from those of the remainder of the entity and may be (1) a reportable segment, (2) a reporting unit, or (3) an asset group, provided that:
·
|
The operations and cash flows of the component have been or will be eliminated from the entity's ongoing operations, and
|
·
|
The entity will have no significant continuing involvement in the component after disposition.
|
The evaluation that should be made is (1) whether or not the operations and cash flows of a disposed component have been eliminated from the entity's ongoing operations, and (2) whether the types of continuing involvement in the operations of the disposed component are deemed significant.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
The evaluation of whether operations and cash flows have been eliminated depends on whether:
(1) operations will continue and cash flows are expected to be generated; and
(2) the cash flows, based on their nature and significance, are considered direct or indirect.
If continuing direct cash flows are not eliminated, the component's operations should not be presented as a discontinued operation. Generally, direct cash flows are those associated with revenue-producing and cost-generating activities of a disposed component. Revenue-producing cash inflows and cost-generating cash outflows should be considered direct if, after the disposal transaction, they are expected to be recognized by the ongoing entity as a result of: (1) migration from the disposed component; and (2) the continuation of activities between such entity and the disposed component.
If expected continuing cash inflows and outflows are considered direct, an evaluation of their significance should be based on a comparison of the ongoing entity's expected continuing cash flows after the disposal transaction and the cash flows that would have been expected to be generated by the disposed component had the disposal transaction not taken place. If continuing cash flows are deemed direct, the results of operations of the disposal component should not be reported as a discontinued operation.
Pursuant to ASC 360-10-40: A gain or loss not previously recognized that results from the sale of a long-lived asset (disposal group) shall be recognized at the date of sale.
Our core revenue-generating asset is the combination of our finder site technology and telemarketing component which we developed and refined over the past two years. We have retained direct cash flows from this component resulting from the migration of our finder site technology and telemarketing component from the medicinal cannabis finders’ site industry to other industries we currently operate in, such as the tattoo finders’s site and manufactured homes finder’s site industries. Our finder site technology and telemarketing component and operations were not sold and is now being implemented across several different domain names and industries. As such, we expect to continue to generate revenue from this component.
As of the current date, this component is significant to our company, because it is our main method of generating revenues as we apply our finder site technology and telemarketing component to other domain names and industries; in short, it is how we currently generate revenue and how we intend to generate revenue with our other finder sites we currently have in development.
As a result of the foregoing analysis, the cash flows from this component were not eliminated and the component's operations were not presented as a discontinued operation. The Company recognized a gain on the sale of the disposal group at the date of the sale.
Note 5. Business Combinations
Sportify.com
On December 31, 2012, we entered into a Securities Purchase Agreement (the “Agreement”) by and among us, on the one hand, and Sports Asylum, Inc., a Nevada corporation (“SPORTIFY”), and its shareholders, Sabas Carrillo, an individual (“Carrillo”) and James Pakulis, an individual (“Pakulis” and, together with Carrillo, the “Shareholders”), on the other hand. Pursuant to the Agreement, upon the closing of the transaction, we purchased 100% of the issued and outstanding equity interests of SPORTIFY (the “Shares”) in exchange for (a) the cancellation of a previous Secured Promissory Note, entered into on or about August 22, 2012 and with an outstanding principal balance of Two Hundred Eighty Five Thousand Dollars ($285,000) and (b) Two Hundred Fifteen Thousand Dollars ($215,000) represented by Promissory Notes to the Shareholders in the original principal amount of One Hundred Sixty One Thousand Two Hundred Fifty Dollars ($161,250) to Pakulis and Fifty Three Thousand Seven Hundred Fifty ($53,750) to Carrillo. The closing of the sale took place on December 31, 2012.
Sports Asylum, Inc. owns and operates the intellectual property associated with www.sportify.com, our introduction into the recreational sports industry.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
The significance test pursuant to Rule 8-04(b) of Regulation S-X was used to determine that the acquisition of SPORTIFY was not significant to our financial statements for the fiscal year ended December 31, 2011 and as such, the financial statements of SPORTIFY were not required pursuant to Rule 3-05(b)(2)(i) and Rule 8-04(c)(1).
The following table summarizes the acquisition with a total purchase price of $501,163:
Sportify web software
|
|
$
|
429,503
|
|
Trademark
|
|
|
1,000
|
|
Goodwill
|
|
|
59,060
|
|
Domain name
|
|
|
10,041
|
|
Cash
|
|
|
1,559
|
|
Total purchase price
|
|
$
|
501,163
|
|
The Sportify web software will be amortized over a period of 3 years.
MMJMenu, LLC
On January 5, 2012, WeedMaps Media, Inc. acquired substantially all the assets of MMJMenu, LLC (“MMJ”) including its website (www.mmjmenu.com). MMJ is a dispensary point-of-service and collective management software system that gives customers inventory tracking, patient management and a point-of-sales system. The MMJMenu is being integrated with WeedMaps, so that our customers can have their inventory updated in real-time on their respective WeedMaps.com listing page. The acquisition of MMJ was accounted for in accordance with the authoritative literature described in ASC 805-10 Business Combinations. Pursuant to ASC 805-10 Business Combinations only the acquisition method may be applied to account for a business combination. As consideration for the purchase we issued an aggregate of Two Hundred Thousand (200,000) shares of our common stock to MMJ or its assigns. The total purchase price was $262,000 which was based on the price of the underlying common stock, $1.31, as quoted on the OTC Markets on January 5, 2012, the date of the acquisition. Effective on January 4, 2012, we entered into an at-will employment agreement with each of Justin Weidmann and Alex Weidmann, each of which are members of MMJMenu, LLC. The compensation due to each is $10,000 per month.
The Significance test pursuant to Rule 8-04(b) of Regulation S-X was used to determine that the acquisition of MMJMenu, LLC was not significant to our financial statements for the fiscal year ended December 31, 2011 and as such, the financial statements of MMJ were not required pursuant to Rule 3-05(b)(2)(i) and Rule 8-04(c)(1).
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
The following table summarizes the acquisition with a total purchase price of $262,000:
Domains
|
|
$
|
1,950
|
|
Software
|
|
|
340,560
|
|
Total assets acquired
|
|
$
|
342,510
|
|
Earn-out provision
|
|
|
(80,510
|
)
|
Total purchase price
|
|
$
|
262,000
|
|
The Software was to be amortized over a period of five years. On December 31, 2012, the MMJMenu assets were sold with WeedMaps Media, Inc. Please see
Note 4. Sale Of WeedMaps
for more information on the sale of the MMJMenu assets.
Earn out provisions, MMJ
Pursuant to the earn out provisions of the MMJMenu Purchase Agreement, in year one following the acquisition of MMJ each of the Sellers will be eligible to earn and be issued 50,000 shares of the Company’s common stock, if the gross revenues of SearchCore for the fiscal year ended December 31, 2012 are at least 50% higher than they were for the fiscal year ended December 31, 2011. Further, in year two following the acquisition of MMJ each of the Sellers will be eligible to earn and be issued 50,000 shares of the Company’s common stock, if the gross revenues of SearchCore for the fiscal year ended December 31, 2013 are at least 50% higher than they were for the fiscal year ended December 31, 2012.
The Company accounts for Contingent Consideration according to FASB ASC 805
Business Combinations
. Contingent consideration typically represents the acquirer's obligation to transfer additional assets or equity interests to the former owners of the acquiree if specified future events occur or conditions are met. FASB ASC 805 requires that contingent consideration be recognized at acquisition-date fair value as part of the consideration transferred in the transaction. FASB ASC 805 uses the fair value definition in
Fair Value Measurements
, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As defined in FASB ASC 805, contingent consideration is (i) an obligation of the acquirer to transfer additional assets or equity interests to the former owners of an acquiree as part of the exchange for control of the acquiree if specified future events occur or conditions are met or (ii) the right of the acquirer to the return of previously transferred consideration if specified conditions are met.
Accordingly, the Company valued the Earn-out Provisions based on an analysis using a cash flow model (a "decision tree") to determine the Expected Earn-Out Payment, which model determined that the aggregate Expected Earn-out Payment was $104,800 and the present value of the contingent consideration liability was $80,510. The Company thus recognized at the acquisition date an $80,510 Earn-out Provisions Liability amount associated with the Earn-out Provisions as part of the consideration transferred in the MMJMenu Purchase Agreement.
The probabilities for the two different scenarios in determining the likelihood of payouts related to the earn-out provisions, as well as the discount rate used in our calculations were based on internal Company projections which were vetted by senior management. Below is a summary presentation of the earn-outs on January 5, 2012, the date of the acquisition:
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Year one of the cash flow model:
Scenarios
|
# of Shares Earn-Out
|
Probability
|
Probability-Weighted Shares
|
|
|
|
|
Upside
|
50,000
|
85%
|
42,500
|
Gross Revenue 50% higher than previous year
|
|
|
|
|
|
|
|
Base
|
0
|
15%
|
0
|
Gross Revenue not 50% higher than previous year
|
|
|
|
|
Expected Earn-Out Shares
|
42,500
|
|
|
|
|
|
$/Share
|
|
$1.31
|
|
|
|
|
|
rate
|
|
20%
|
|
nper
|
|
1.00
|
|
pmt
|
|
$-
|
|
fv
|
|
$55,675
|
|
|
|
|
|
PV factor at 20% for 12 months
|
0.83333
|
|
|
|
|
|
Fair Value of Liability
|
$46,396
|
Year two of the cash flow model:
Scenarios
|
# of Shares Earn-Out
|
Probability
|
Probability-Weighted Shares
|
|
|
|
|
Upside
|
50,000
|
75%
|
37,500
|
Gross Revenue 50% higher than previous year
|
|
|
|
|
|
|
|
Base
|
0
|
25%
|
0
|
Gross Revenue not 50% higher than previous year
|
|
|
|
|
Expected Earn-Out Shares
|
37,500
|
|
|
|
|
|
$/Share
|
|
$1.31
|
|
|
|
|
|
rate
|
|
20%
|
|
nper
|
|
2.00
|
|
pmt
|
|
$-
|
|
fv
|
|
$49,125
|
|
|
|
|
|
PV factor at 20% for 24 months
|
0.69444
|
|
|
|
|
|
Fair Value of Liability
|
$34,115
|
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
See
Note 16. Cancellation of the Earn-Out Provisions
for a summary presentation of the change in earn-out liabilities.
See
Note 4. Sale of WeedMaps
for a discussion on the sale of the MMJMenu assets.
Note 6. Other Current Assets
At December 31, 2012, the Company had recorded $1,350,000 note receivable which represented the current portion of a $3,000,000 note receivable pursuant to the sale of WeedMaps. See
Note 4. Sale of WeedMaps.
At December 31, 2012, the Company had recorded $124,000 in other prepaid expenses such as legal, accounting and marketing services with third party firms, which terms are from one to two years and are amortized on a straight-line basis over the term of the respective agreement, $4,000 in payroll and commission advances to employees and consultants, $30,000 in prepaid insurance, and $35,000 in prepaid rent.
Note 7. Property And Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the useful lives of the assets, generally from three to seven years. Property and equipment at December 31, 2012 and December 31, 2011 consist of the following:
|
December 31,
|
|
December 31,
|
|
Property and Equipment
|
2012
|
|
2011
|
|
Furniture and Computer Equipment
|
|
$
|
11,310
|
|
|
$
|
501,336
|
|
Less: Accumulated Depreciation
|
|
|
(6,192
|
)
|
|
|
(71,295
|
)
|
Property and Equipment, net
|
|
$
|
5,118
|
|
|
$
|
430,041
|
|
For the twelve months ended December 31, 2012 and 2011, depreciation expense, including depreciation for assets sold with WeedMaps, totaled approximately $121,000 and $71,000, respectively.
Note 8. Intangible Assets
Intangible assets consist of a suite of domain names, web software and goodwill associated with our recent acquisitions.
The domain names have been determined to have an indefinite useful life based primarily on the renewability of the domain name. Intangible assets with an indefinite life are not subject to amortization, but will be subject to periodic evaluation for impairment.
Rodeo.com and Karate.com
- On August 7, 2012, we entered into a Domain Name Purchase Agreement and a Non-Recourse Secured Promissory Note (the "Note") with Domain Holdings, Inc., an Alberta corporation, pursuant to which we purchased the domain names www.rodeo.com and www.karate.com (the "Purchased Domains"), for total consideration of $500,000, all represented by the Note. Pursuant to the terms of the Note, we made payments of $50,000 on each of August 15, 2012 and November 1, 2012, with the balance to be paid in 18 equal monthly installments of $22,222 beginning June 1, 2013, and continuing on the 1st of each month thereafter. Title to the Purchased Domains shall remains in escrow, with full beneficial rights of use granted to us immediately, until the Note is paid in full. The domain names www.rodeo.com and www.karate.com are considered premium domain names for a variety of reasons, including, but not limited to, their level of monthly page views, unique visitors, search engine optimization results, industry strength, sales value history, market potential, linguistical viability, brand recognition and recall value. The domain names rodeo.com and karate.com have an indefinite life subject to annual renewal fees of approximately $10 per year. We fully intend and believe that we will have the financial wherewithal to renew the domain names indefinitely. The domain names have worldwide recognition and presumably will be able to generate advertising revenue regardless of the stability and/or stage of their respective industries in the United States. We believe the domain names will maintain their value principally because of there broad worldwide appeal. As a result, at this point in time, we believe that the domain names have an indefinite useful life. Consequently, we currently are not aware of any legal, regulatory, or contractual provisions that would limit our use of the domain name or our ability to renew it as needed.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Manufacturedhome.com, Manufacturedhouse.com, ManufacturedHomes.net and Manufacturehomes.com
- During August 2012, we purchased the domain names www.manufacturedhome.com and www.manufacturedhouse.com for total consideration of $50,000 which was paid at closing, and we purchased the domain name www.manufacturedhomes.com for total consideration of $130,000 which was paid at closing. On October 25, 2012, we purchased the domain name known as
www.manufacturedhomes.net
,
for total consideration of Fourteen Thousand Dollars ($14,000), paid at closing. The domain names are considered premium domain names for a variety of reasons, including, but not limited to, their level of monthly page views, unique visitors, search engine optimization results, industry strength, sales value history, market potential, linguistical viability, brand recognition and recall value. The domain names have an indefinite life subject to annual renewal fees of approximately $10 per year. We fully intend and believe that we will have the financial wherewithal to renew the domain names indefinitely. The domain names have worldwide recognition and presumably will be able to generate advertising revenue regardless of the stability and/or stage of their respective industries in the United States. We believe the domain names will maintain their value principally because of there broad worldwide appeal. As a result, at this point in time, we believe that the domain names have an indefinite useful life. Consequently, we currently are not aware of any legal, regulatory, or contractual provisions that would limit our use of the domain name or our ability to renew it as needed.
On August 24, 2012, we entered into a Domain Name Purchase Agreement with High Level Technologies, Inc., pursuant to which we purchased 57 domain names which among others include sports related domain names like allsportsrules.com, mapmysport.com, sportsasylum.com, and domain names related to the manufactured home industry like manufacturedhomelots.com, manufacturedlots.com and prefabhomelots.com, for total consideration of $100,000 which was paid at closing. The domain names are considered premium domain names for a variety of reasons, including, but not limited to, their level of monthly page views, unique visitors, search engine optimization results, industry strength, sales value history, market potential, linguistical viability, brand recognition and recall value. The domain names have an indefinite life subject to annual renewal fees of approximately $10 per year. We fully intend and believe that we will have the financial wherewithal to renew the domain names indefinitely. The domain names have worldwide recognition and presumably will be able to generate advertising revenue regardless of the stability and/or stage of their respective industries in the United States. We believe the domain names will maintain their value principally because of there broad worldwide appeal. As a result, at this point in time, we believe that the domain names have an indefinite useful life. Consequently, we currently are not aware of any legal, regulatory, or contractual provisions that would limit our use of the domain name or our ability to renew it as needed.
Marijuana.com
- Please see
Note 4. Sale of WeedMaps
for information on the sale of WeedMaps, which included the domain name marijuana.com. Pursuant to the Marijuana.com Purchase Agreement, during the Revenue Obligation Period (69 months during which were making payments on the promissory note), the Seller shall be entitled to two text links on marijuana.com, as well as two banner ads (of average size based on the site) that are static (non rotational) (the “Advertising Rights”). The Seller was responsible for providing all necessary graphics and text, which were subject to final approval by us in our sole discretion. The fair value of the Advertising Rights were determined to be $47,886 over the Revenue Obligation Period based upon an analysis composed of twelve comparable websites and the average ad rates they charge for banner ads and text links which average monthly rates were $249.50 for banner ads and $97.50 for text links. We recorded a $47,886 Advertising Rights intangible asset associated with the Advertising Rights which was to be amortized over the term of the Revenue Obligation Period (beginning in January 2012—the month we took possession of the domain name). See
Note 4. Sale of WeedMaps
for a discussion on the sale of the Marijuana.com assets.
Intangible asset amounts at December 31, 2012 and December 31, 2011 are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
Intangible Assets
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Domain names
|
|
$
|
805,643
|
|
|
$
|
4,364,119
|
|
Web software
|
|
|
429,503
|
|
|
|
501,343
|
|
Trademarks
|
|
|
1,000
|
|
|
|
—
|
|
Goodwill
|
|
|
59,060
|
|
|
|
486,403
|
|
Subtotal
|
|
$
|
1,295,206
|
|
|
$
|
5,351,865
|
|
Accumulated amortization
|
|
|
—
|
|
|
|
—
|
|
Total intangible Assets
|
|
$
|
1,295,206
|
|
|
$
|
5,351,865
|
|
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Intangible assets subject to amortization:
|
|
Amount
|
|
|
Useful life
|
|
|
Weighted-average amortization period
|
|
Advertising rights
|
|
$
|
429,503
|
|
|
|
3
|
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets subject to amortization
|
|
$
|
429,503
|
|
|
|
|
|
|
|
3.00
|
|
Intangible assets not subject to amortization
|
|
Amount
|
|
Domain Names and trademarks
|
|
$
|
806,643
|
|
Goodwill
|
|
|
59,060
|
|
Total intangible assets not subject to amortization
|
|
$
|
865,703
|
|
Intangible assets acquisitions, and disposals as a result of the sale of WeedMaps during the year ended December 31, 2012 are summarized in the following table:
Asset Description
|
|
Balance
December 31,
2011
|
|
|
General
Marketing
|
|
|
WeedMaps
|
|
|
SearchCore
|
|
|
Sportify
|
|
|
|
|
Trademarks
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
Domain Names
|
|
|
114,119
|
|
|
|
(18,500
|
)
|
|
|
(84,419
|
)
|
|
|
784,402
|
|
|
|
10,041
|
|
|
|
805,643
|
|
Domain Name - Marijuana.com
|
|
|
4,250,000
|
|
|
|
-
|
|
|
|
(4,250,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Web Software
|
|
|
501,343
|
|
|
|
(501,343
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
429,503
|
|
|
|
429,503
|
|
Goodwill
|
|
|
486,403
|
|
|
|
(486,403
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
59,060
|
|
|
|
59,060
|
|
Total intangible Assets
|
|
$
|
5,351,865
|
|
|
$
|
(1,006,246
|
)
|
|
$
|
(4,334,419
|
)
|
|
$
|
784,402
|
|
|
$
|
499,604
|
|
|
$
|
1,296,206
|
|
Note 9. Other Assets
At December 31, 2012, the Company had recorded $1,650,000 note receivable which represented the noncurrent portion of a $3,000,000 note receivable pursuant to the sale of WeedMaps. See
Note 4. Sale of WeedMaps.
The balance of other assets at December 31, 2012 includes $8,000 in rent deposits.
Note 10. Discontinued Operations
General Health Solutions, Inc.
We discontinued the operations of General Health Solutions, Inc., which constitutes our entire Medical Clinic Management segment. We discontinued the operations of General Health Solutions because of increasing costs associated with managing the clinics and the recent increased competition in the medicinal cannabis clinic industry. A major factor in the success of managing the medicinal cannabis clinics is running successful online Pay Per Click (“PPC”) advertising campaigns. In PPC campaigns targeting is key, and factors that determine the pricing pertaining to certain key words depend heavily on the number of advertisers bidding on those certain key words. Taken together, i) our increasing success with our technology in our Marketing and Media Segment and ii) the increasing costs of PPC campaigns coupled with the increasing number of sole-practitioner doctors now offering medicinal cannabis recommendation letters as part of their medical practice offerings which places downward pressure on pricing, led us to decide to discontinue the operations of General Health Solutions, which composes our entire Medical Clinic Management Segment, and focus our efforts instead on our technology in our Marketing and Media Segment.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
During February 2012, we committed to a definitive plan to terminate the Management Agreement (“Agreement”) and services associated with the Agreement, which resulted in General Health Solutions, Inc., our Medical Clinic Management segment being reported as discontinued operations. For comparative purposes, all prior periods presented have been restated to reflect the reclassification of this segment to discontinued operations on a consistent basis.
General Health Solutions comprised the entirety of our Medical Clinic Management segment and as such, the entire segment was reported in discontinued operations. Following the closure of the clinics during the first quarter 2012, we do not expect any continuing cash flows from discontinued operations.
The assets and liabilities of our discontinued operations are as follows:
Current assets – discontinued operations
at December 31, 2012 consists of $180,000 note receivable.
Current liabilities – discontinued operations
at December 31, 2012 consists of $10,000 in accounts payable and $130,000 in notes payable.
Note 11. Accounts Payable
Accounts payable at December 31, 2012 included amounts owed to certain vendors related to the ongoing normal course of the Company’s operations.
Note 12. Accrued Liabilities
Accrued liabilities at December 31, 2012 and December 31, 2011 are comprised of the following:
|
|
December 31,
|
|
|
December 31,
|
|
Accrued liabilities
|
|
2012
|
|
|
2011
|
|
Tax payable
|
|
$
|
2,144,000
|
|
|
$
|
361,000
|
|
Obligations on stock based compensation
|
|
|
27,000
|
|
|
|
—
|
|
Payroll liabilities
|
|
|
21,000
|
|
|
|
166,000
|
|
Obligations on marketing agreements
|
|
|
27,000
|
|
|
|
42,000
|
|
Deferred rent
|
|
|
—
|
|
|
|
183,000
|
|
Interest
|
|
|
—
|
|
|
|
7,000
|
|
Total accrued liabilities
|
|
$
|
2,219,000
|
|
|
$
|
759,000
|
|
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Note 13. Notes Payable
On August 7, 2012, we entered into a Domain Name Purchase Agreement and a Non-Recourse Secured Promissory Note (the "Note") with Domain Holdings, Inc., an Alberta corporation, pursuant to which we purchased the domain names www.rodeo.com and www.karate.com (the "Purchased Domains"), for total consideration of $500,000, all represented by the Note. Pursuant to the terms of the Note, we made payments of $50,000 on each of August 15, 2012 and November 1, 2012, with the balance to be paid in 18 equal monthly installments of $22,222 beginning June 1, 2013, and continuing on the 1st of each month thereafter. Title to the Purchased Domains shall remains in escrow, with full beneficial rights of use granted to us immediately, until the Note is paid in full.
On December 31, 2012, we entered into a Securities Purchase Agreement by and among us, on the one hand, and Sports Asylum, Inc., a Nevada corporation, and its shareholders, Sabas Carrillo, an individual, and James Pakulis, an individual and one of our officers and directors, on the other hand. Pursuant to the agreement, upon the closing of the transaction, we purchased 100% of the issued and outstanding equity interests of Sports Asylum in exchange for (a) the cancellation of a previous Secured Promissory Note issued to Sports Asylum, entered into on or about August 22, 2012 and with an outstanding principal balance of Two Hundred Eighty Five Thousand Dollars ($285,000) and (b) Two Hundred Fifteen Thousand Dollars ($215,000) represented by promissory notes in the original principal amount of One Hundred Sixty One Thousand Two Hundred Fifty Dollars ($161,250) to Pakulis and Fifty Three Thousand Seven Hundred Fifty ($53,750) to Carrillo. The closing of the purchase took place on December 31, 2012.
On November 18, 2011, pursuant to our acquisition of the domain name marijuana.com, we issued a Non-Recourse Secured Promissory Note with a principal amount of $4,150,000, payable over sixty-nine (69) consecutive months beginning on January 18, 2012. See
Note 4. Sale of WeedMaps
for a discussion on the sale of the Marijuana.com assets.
Below is a summary of the note payable related to the marijuana.com domain name acquisition:
Marijuana.com Notes Payable
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
Current portion
|
|
$
|
-
|
|
|
$
|
708,901
|
|
Long term portion
|
|
|
-
|
|
|
|
3,416,099
|
|
|
|
$
|
-
|
|
|
$
|
4,125,000
|
|
Below is a summary of our note payable amounts:
Notes payable
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
Marijuana.com promissory note
|
|
$
|
-
|
|
|
$
|
4,125,000
|
|
Rodeo.com/Karate.com promissory note
|
|
|
400,000
|
|
|
|
-
|
|
Sportify promissory note
|
|
|
53,750
|
|
|
|
-
|
|
|
|
$
|
453,750
|
|
|
$
|
4,125,000
|
|
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Note 14. Notes Payable– Related Party
Cancellation of the Promissory Notes to Hartfield, Hoerling and Francis
During August 2012, we closed (A) a Global Securities Purchase, Consulting, and Resignation Agreement (the "Hartfield Agreement"), Secured Promissory Note (the " Hartfield Note") and Consulting Agreement (the "Consulting Agreement") by and among Justin Hartfield, an individual ("Hartfield") and WeedMaps Media, Inc., a Nevada corporation and our wholly-owned subsidiary ("WeedMaps"), (B) a Global Securities Purchase Agreement (the "Hoerling Agreement") and Secured Promissory Note (the "Hoerling Note") by and among the Company, Keith Hoerling, an individual ("Hoerling") and WeedMaps and (C) a Global Securities Purchase and Resignation Agreement (the "Francis Agreement", collectively with the Hartfield and Hoerling Agreements, the "Global Agreements") and Secured Promissory Note (the "Francis Note", collectively with the Hartfield and Hoerling Notes, the "Notes") by and among the Company, Douglas Francis, an individual ("Francis") and WeedMaps. As consideration for the Global Agreements, the Notes were issued to Hartfield, Hoerling and Francis (the " Selling Parties"), individually. The Notes are secured by the shares of common stock sold to the Company by the Selling Parties, and each of them, pursuant to the Global Agreements. Pursuant to the Notes, beginning in September 2012, we began making monthly payments in the amount of $78,099.38 to each of the Selling Parties. The aggregate amount of the Notes is $4,875,000. See
Note 4. Sale of WeedMaps
for a discussion on the sale of WeedMaps and the cancellation of all obligations to Messrs.
Hartfield, Hoerling and Francis
.
Sportify Note
On December 31, 2012, we entered into a Securities Purchase Agreement by and among us, on the one hand, and Sports Asylum, Inc., a Nevada corporation, and its shareholders, Sabas Carrillo, an individual, and James Pakulis, an individual and one of our officers and directors, on the other hand. Pursuant to the agreement, upon the closing of the transaction, we purchased 100% of the issued and outstanding equity interests of Sports Asylum in exchange for (a) the cancellation of a previous Secured Promissory Note issued to Sports Asylum, entered into on or about August 22, 2012 and with an outstanding principal balance of Two Hundred Eighty Five Thousand Dollars ($285,000) and (b) Two Hundred Fifteen Thousand Dollars ($215,000) represented by promissory notes in the original principal amount of One Hundred Sixty One Thousand Two Hundred Fifty Dollars ($161,250) to Pakulis and Fifty Three Thousand Seven Hundred Fifty ($53,750) to Carrillo. The closing of the purchase took place on December 31, 2012. At December 31, 2012, we recorded $161,250 promissory note owed to Mr. Pakulis, one of our officers, as a note payable – related party.
Note 15. Other Long Term Accrued Liabilities
At December 31, 2012, we had a balance of $683,000 in deferred tax liability.
Note 16. Cancellation of the Earn-out Provisions
See
Note 3. Equity Transactions
for a description the Global Agreements by and among Messrs. Hartfield and Hoerling and us, pursuant to which we purchased a total of 51,272,289 shares of our common stock and whereby they have terminated all rights to consideration due from us (including cash and/or stock owed to Hartfield and Hoerling pursuant to agreements whereby we acquired WeedMaps, LLC). As a result of the Global Agreements, the WeedMaps Earn-Outs were cancelled during August 2012. The below description includes the cancellation of the WeedMaps Earn-outs. See also
Note 4. Sale of WeedMaps
for a discussion on the sale of WeedMaps and the cancellation of all remaining earn-outs on December 31, 2012.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Summary of changes in total earn-outs during the twelve months ended December 31, 2012:
MMJMenu earn-outs August 2012
|
|
$
|
(80,510
|
)
|
Issuance of WeedMaps Earn-out shares August 2012
|
|
|
9,120,000
|
|
Gain on change in fair value of WeedMaps earn-out liability August 2012
|
|
|
5,909,946
|
|
Gain on change in fair value of MMJMenu earn-out liability at September 30, 2012
|
|
|
44,084
|
|
Cancellation of MMJMenu earn-outs December 31, 2012
|
|
|
36,426
|
|
Cancellation of WeedMaps earn-outs August 9, 2012
|
|
|
3,537,054
|
|
Total change in earn-outs during the twelve months ended December 31, 2012
|
|
|
18,567,000
|
|
Earn-outs at December 31, 2011
|
|
|
(18,567,000
|
)
|
Earn-outs at December 31, 2012
|
|
$
|
-
|
|
The cumulative non-cash gain on change in fair value of the WeedMaps and MMJMenu earn-out was $5,954,000.
Note 17. Income Per Common Share
Income per common share is based on the weighted average number of common shares outstanding. The Company complies with
Earnings Per Share
, which requires dual presentation of basic and diluted earnings per share on the face of the statements of operations. Basic per share earnings or loss excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted-average common shares outstanding for the period. Diluted per share earnings or loss reflect the potential dilution that could occur if convertible preferred stock or debentures, options and warrants were to be exercised or converted or otherwise result in the issuance of common stock that is then shared in the earnings of the entity.
As of December 31, 2012, there were outstanding 250,000 common stock purchase warrants that were not included in the computation of diluted EPS because to do so would have been antidilutive for the period presented.
Note 18. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Significant components of the Company's tax provision and deferred tax assets as of December 31, 2012 and December 31, 2011 are as follows:
The components of tax provision:
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
1,184,225
|
|
|
$
|
268,000
|
|
State
|
|
|
285,075
|
|
|
|
31,700
|
|
|
|
|
1,469,300
|
|
|
|
299,700
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
895,000
|
|
|
|
(16,000
|
)
|
State
|
|
|
186,000
|
|
|
|
19,000
|
|
|
|
|
1,081,000
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(68,000
|
)
|
|
|
(20,000
|
)
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
$
|
2,482,300
|
|
|
$
|
282,700
|
|
The total tax provision is $2,482,000 of which $2,557,000 corresponds to current operations and $74,000 (tax benefit) corresponds to discontinued operations.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
The components of deferred tax asset:
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
State taxes
|
|
$
|
129,000
|
|
|
$
|
40,000
|
|
Net operating losses
|
|
|
434,000
|
|
|
|
468,000
|
|
Accruals and other
|
|
|
8,000
|
|
|
|
97,000
|
|
|
|
|
571,000
|
|
|
|
605,000
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Installment gain
|
|
|
(1,195,000
|
)
|
|
|
(148,000
|
)
|
|
|
|
(624,000
|
)
|
|
|
457,000
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(372,000
|
)
|
|
|
(440,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets/(liabilities)
|
|
$
|
(996,000
|
)
|
|
$
|
17,000
|
|
For the years ended December 31, 2012 and 2011, a reconciliation of the federal statutory tax rate to the Company's effective tax rate is as follows:
Effective Tax Rate
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
Federal statutory
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State and local, net of federal
|
|
|
2.65
|
%
|
|
|
-4.87
|
%
|
Permanent items
|
|
|
-20.60
|
%
|
|
|
-36.49
|
%
|
Installment gain
|
|
|
-2.62
|
%
|
|
|
0.00
|
%
|
Return to provision
|
|
|
0.56
|
%
|
|
|
-1.82
|
%
|
Change in Valuation allowance
|
|
|
-0.14
|
%
|
|
|
-0.59
|
%
|
|
|
|
|
|
|
|
|
|
Total effective tax rate
|
|
|
13.87
|
%
|
|
|
-9.77
|
%
|
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the Company's income for the quarter ended December 31, 2012, the Company has provided a valuation allowance in the amount of $372,000 against our future net operating losses. The amount of deferred tax assets considered realizable could change if future taxable income is realized.
At December 31, 2012 and December 31, 2011, the Company had U.S. federal tax net operating loss carryforwards (“NOLs”) of approximately $1.3 million and $1.4 million, respectively, which begin to expire in 2021. We do not have any State NOLs. The NOLs are subject to limitations under IRC Section 382 of the Internal Revenue Code (“Section 382”).
As discussed in
Note 4. Sale of WeedMaps
, at the time of the sale, which closed on December 31, 2012, we generated a tax gain and recognized the related deferred tax liability based on the $750,000 cash payment. The promissory note related to the sale of WeedMaps structure allowed the Company to defer the resulting tax liability until 2013 and 2014, the dates for which we receive payments on the promissory note.
Earn-out Provisions, WeedMaps Tax Effects
- The WeedMaps acquisition was a tax-free reorganization and as such, the tax effect of the earn-outs is recorded as a permanent difference between the carrying amount of the earn-out liability for financial reporting purposes and the amount used for tax purposes.
Note 19. Related Party Transactions
All material intercompany transactions have been eliminated upon consolidation of our entities. During the twelve months ended December 31, 2012, cash transfers, equity and accounts between the Company and its subsidiaries have been eliminated upon consolidation.
Note 20. Commitment And Contingencies
On January 27, 2011, the Company entered into a commercial lease agreement for approximately 20,332 square feet of office space in Newport Beach, California. The lease expires on January 31, 2014 and requires monthly payments of $39,647. See also
Note 4. Sale of WeedMaps
for a discussion on the sale of WeedMaps and the associated assumption of our lease. At December 31, 2012, we no longer had any obligations under this lease.
Our executive offices are located in Lake Forest, California, at 26497 Rancho Parkway South, Lake Forest, CA 92630. Our office space is approximately 7,000 square feet that is shared with Miracle Housing, Inc., a business controlled by one of our employees, Brad Nelms. Our rent, pursuant to a verbal agreement with Miracle Housing, is $8,000 per month and covers exactly all of the obligations of Miracle Housing under its primary lease. The Company is confident that this commercial space will provide adequate space to meet our needs and provide for future growth.
SEARCHCORE, INC.
(Formally General Cannabis, Inc.)
Notes to the Condensed Consolidated Financial Statements
December 31, 2012
Audited
Set forth below is a summary of our current obligations as of December 31, 2012 comprised exclusively of a rental lease obligation to make future payments due by the period indicated below:
Office share payments
|
|
Minimum
Payments
|
|
|
Monthly
Base Rent
|
|
2013
|
|
$
|
96,000
|
|
|
$
|
8,000
|
|
2014
|
|
$
|
96,000
|
|
|
$
|
8,000
|
|
Note 21. Warrants
As of December 31, 2012, there were outstanding 250,000 common stock purchase warrants. The following table summarizes information about common stock warrants outstanding at December 31, 2012.
Outstanding
|
|
|
Exercisable
|
|
Exercise
Price
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
|
Weighted
Exercise
Price Average
|
|
|
Number Exercisable
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4
|
|
|
|
250,000
|
|
|
|
1.87
|
|
|
$
|
4
|
|
|
|
250,000
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4
|
|
|
|
250,000
|
|
|
|
1.87
|
|
|
$
|
4
|
|
|
|
250,000
|
|
|
$
|
4
|
|
Note 22. Subsequent Events
The Company evaluated its December 31, 2012 financial statements for subsequent events through March 29, 2013, the date the financial statements were available to be issued.
ToyHaulers.com
On February 27, 2013, we purchased the domain name know as www.toyhaulers.com. The purchase price was $30,000, payable $15,000 at closing and $2,500 per month over 6 consecutive months.
TravelTrailer.com
On February 22, 2013, we purchased the domain name know as www.traveltrailer.com. The purchase price was $50,000, payable $15,000 at closing and $5,000 per month over 7 consecutive months.
Tattoo.com
On January 21, 2013, we entered into a Management Agreement with Tattoo Interactive, LLC pursuant to which we will perform various marketing, promotion, and website management services with respect to the domain name known as www.tattoo.com and the commercial website located at that domain. The agreement has an initial term of twelve (12) months and shall automatically renew for successive one (1) year terms unless terminated in accordance with its terms. In the event we incur at least $25,000 in expenditures relating to the performance of the services in any single month, Tattoo Interactive shall pay us $10,000 as an expense-sharing allotment. Pursuant to the agreement, we will receive twenty percent (20%) of all advertising revenue (as defined therein), and after the payment of the advertising revenue, we will receive sixty five percent (65%) of all remaining designated gross revenue (as defined therein). We have a right of first refusal in the event Tattoo Interactive elects to sell the domain name, and in the event certain revenue goals, as set forth in the agreement, are satisfied, we will be granted certain equity interests in Tattoo Interactive.
ModularHomes.com
On January 25, 2013, we purchased the domain names known as www.modularhomes.com for total consideration of One Hundred Forty Thousand Dollars ($140,000), payable in down payment of Fifty Thousand Dollars ($50,000) and the balance over twelve (12) equal monthly payments.