Notes to the Condensed Consolidated Financial Statements
March 31, 2013
Unaudited
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.
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 which have no operations and are dormant. These are
General Marketing Solutions, Inc.
,
General Merchant Solutions, Inc.
,
General Processing Corporation
, and
LV Luxuries Incorporated
(which operated as makeup.com). Currently, we have no imminent or specific plans for any of these entities and they are held as corporations in good standing.
Recent Developments
Traveltrailer.com
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.
Toyhaulers.com
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.
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.
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.
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.
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 three months ended March 31, 2013 and 2012 was $28,000 and $51,000, 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.
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 March 31, 2013 and December 31, 2012 are presented net of accumulated depreciation of $7,400 and $121,000, respectively.
Goodwill
In accordance with
Goodwill and Other Intangible Assets
, goodwill is defined as the excess of the purchase price over the fair value assigned to individual assets acquired and liabilities assumed and is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis in the Company's fourth fiscal quarter or more frequently if indicators of impairment exist. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of the Company's reporting units with each respective reporting unit's carrying amount, including goodwill. The fair value of reporting units is generally determined using the income approach. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, the second step of the goodwill impairment test is performed to determine the amount of any impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. No amortization is recorded for goodwill with indefinite useful life. No goodwill impairment was recognized during the three months ended March 31, 2013 and 2012, respectively.
Intangible Assets
In accordance with
Goodwill and Other Intangible Assets
, intangible assets that are determined not to have an indefinite useful life are subject to amortization. The Company amortizes intangible assets using the straight-line method over their estimated useful lives.
Impairment of Long-Lived and Intangible Assets
In accordance with
Accounting for the Impairment or Disposal of Long-Lived Assets
, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company assesses the recoverability of the long-lived and intangible assets by comparing the carrying amount to the estimated future undiscounted cash flow associated with the related assets. No impairment of intangible assets was recognized during the three months ended March 31, 2013 and 2012, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with the provisions of
Share-Based Payment
, which addresses the accounting for equity-based compensation and which requires that the cost of all equity-based compensation arrangements, be reflected in the financial statements over the vesting period based on the estimated fair value of the awards. During the three months ended March 31, 2013 and 2012, the Company had zero 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 transaction described in
Note 3. Equity Transactions
, we currently do not have or intend to initiate a share repurchase program.
Revenue Recognition
We recognize revenue in accordance with ASC 605, “
Revenue Recognition
,” 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 our previously owned finder site weedmaps.com and is the same revenue model we employ with our current finder sites. The revenue model follows a subscription-based approach, generating recurring monthly revenue from a variety of different package listings, lead generation and advertising.
Advertising Package Tiers –
For our finder sites we typically create advertising package tiers in order to more easily distinguish the different services we offer at different price points. The different advertising package tiers also makes it easy for our clients to distinguish which package tiers are premium and thus likely to generate more traffic to their brand, product or service. The range of prices we charge for each advertising package tier differs per each finder site, per region, and per each tier package. Each region is internally created by us based on geographic location, industry density and demographics.
Listing Revenue –
We generate revenues from fees we charge clients to advertise or list their location, products, and services on one or more of our finder websites. We recognize as revenue the fees we charge customers that advertise or list their related company on our websites.
For example, our listing packages typically are made up of two groups, Premium Listings and Standard Listings. The most important distinction between Premium Listings and Standard Listing packages is typically positioning on our finder websites. This distinction is important because the business that appears first in an internet search results list has an increased likelihood of a website visitor clicking on that business and thus “converting” the website visitor to a potential customer for our client. In general, being in the top section of the search results on any of our finder websites for a given geographical region is deemed preferable because of the increased conversion rates (or click-through rates). As a result, we charge a premium dollar amount for a Premium Listing so that the client is placed in the top section of search results for a given region.
Standard Listing Packages are basic packages which typically allow a customer to list their brand, product, or service on one or more of our finder sites with the capability to edit their listing. A Standard Listing also typically allows a customer to add photos, create a menu, and respond to customer reviews, for example.
Advertising Revenue –
We generate revenues from fees we charge customers for placing ads for their related companies on our websites (i.e. Advertising Packages). Our Advertising Packages can include banner ads placed on our finder sites, emails, texts, special promotions, and events. All of our Advertising Packages are considered Ad Revenue pursuant to our revenue recognition policy.
Content Production Revenue –
We generate revenues from photo and video production of content which is displayed on our finder websites (i.e. Content Production). Typically, Content Production that we create on behalf of our clients is considered an add-on or ancillary service. We typically create video “virtual” tours of our client’s establishments and products, which are then displayed on our finder websites. We recognize as revenue the fees we charge customers for photo and video production services. All of our Content Production services are considered Content Production Revenue pursuant to our revenue recognition policy.
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.
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.
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.
Note 3. Equity Transactions
At March 31, 2013 the total number of shares of our common stock that were issued and outstanding was 38,027,967.
Treasury Share Retirements
During the quarter ended March 31, 2013, 42,581,596 shares of treasury stock were retired pursuant to terms of which we repurchased shares of our common stock, and which shares were held in escrow and were released pursuant to our sale of our finder site weedmaps.com during the year ended December 31, 2012.
Stock-based Compensation
On August 20, 2012, we approved the issuance of Twenty Thousand (20,000) shares of our common stock, restricted in accordance with Rule 144, to each then-member of our Board of Directors, namely James Pakulis, Bonnie Goldstein, and Munjit Johal, as a one-time bonus for serving as a Director. The shares were issued during the quarter ended March 31, 2013. 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.
Note 4. Asset Acquisitions
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.
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.
Title to the forgoing purchased domains remains in escrow, with full beneficial rights of use granted to us immediately, until the various notes are paid in full. The domain names
ToyHaulers.com, TravelTrailer.com and ModularHomes.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 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.
Note 5. Other Current Assets
At March 31, 2013, the Company had recorded a $1,200,000 note receivable which represented the current portion of a $3,000,000 note receivable pursuant to the sale of our finder site weedmaps.com. On December 11, 2012, we entered into an Agreement and Plan of Reorganization, pursuant to which we sold our finder site weedmaps.com. Pursuant to the terms of the sale and as partial consideration we received a Secured Promissory Note in the original principal amount of Three Million Dollars ($3,000,000). Pursuant to the Note we will receive (1) Two Hundred Fifty Thousand Dollars ($250,000) on January 15, 2013 (which payment date was extended to January 31, 2013), which payment we did receive; One Hundred Thousand Dollars ($100,000) each month beginning 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.
At March 31, 2013, the Company had recorded $130,000 in other prepaid expenses including $102,000 in prepaid insurance, $11,000 in prepaid fees and $17,000 in prepaid rent.
Note 6. 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 March 31, 2013 and December 31, 2012 consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
Property and Equipment
|
|
2013
|
|
|
2012
|
|
Furniture and Computer Equipment
|
|
$
|
21,872
|
|
|
$
|
11,310
|
|
Less: Accumulated Depreciation
|
|
|
(7,377
|
)
|
|
|
(6,192
|
)
|
Property and Equipment, net
|
|
$
|
14,495
|
|
|
$
|
5,118
|
|
For the three months and twelve months ended March 31, 2013 depreciation expense was $1,200. For the twelve months ended December 31, 2012, depreciation expense, including depreciation for assets sold with our finder site weedmaps.com, totaled $121,000.
Note 7. 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.
Intangible asset amounts at March 31, 2013 and December 31, 2012 are as follows:
|
|
March 31,
|
|
|
December 31,
|
|
Intangible Assets
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Domain names
|
|
$
|
1,030,903
|
|
|
$
|
805,643
|
|
Web software
|
|
|
429,503
|
|
|
|
429,503
|
|
Trademarks
|
|
|
1,000
|
|
|
|
1,000
|
|
Goodwill
|
|
|
59,060
|
|
|
|
59,060
|
|
Subtotal
|
|
$
|
1,520,466
|
|
|
$
|
1,295,206
|
|
Accumulated amortization
|
|
|
(35,792
|
)
|
|
|
—
|
|
Total intangible Assets
|
|
$
|
1,484,674
|
|
|
$
|
1,295,206
|
|
Intangible assets subject to amortization:
|
|
Amount
|
|
|
Useful life
|
|
|
Weighted-average amortization period
|
|
Web software
|
|
$
|
429,503
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets subject to amortization
|
|
$
|
429,503
|
|
|
|
|
|
|
|
3
|
|
Intangible assets not subject to amortization
|
|
Amount
|
|
Domain Names and trademarks
|
|
$
|
1,031,903
|
|
Goodwill
|
|
|
59,060
|
|
Total intangible assets not subject to amortization
|
|
$
|
1,090,963
|
|
Summary of our premium and non-premium domain names
|
|
Amount
|
|
Sportify.com
|
|
$
|
10,000
|
|
Karate.com and Rodeo.com
|
|
|
500,000
|
|
ToyHaulers.com
|
|
|
31,000
|
|
TravelTrailer.com
|
|
|
51,000
|
|
ModularHomes.com
|
|
|
141,000
|
|
Manufacturedhome.com and Manufacturedhouse.com
|
|
|
50,000
|
|
Manufacturedhomes.com
|
|
|
130,000
|
|
Manufacturedhomes.net
|
|
|
14,000
|
|
Various other non-premium domain names
|
|
|
104,000
|
|
|
|
|
|
|
Total premium and non premium domain names
|
|
$
|
1,031,000
|
|
Note 8. Other Assets
At March 31, 2013, the Company had recorded a $1,357,000 note receivable which represented the noncurrent portion of a $3,000,000 note receivable pursuant to the sale of our finder site weedmaps.com. See
Note 5. Other Current Assets
for more information on the sale of our finder site weedmaps.com.
The balance of other assets at March 31, 2013 including $8,000 in rent deposits.
Note 9. 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.
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 March 31, 2013 consists of a $180,000 note receivable.
Current liabilities – discontinued operations
at March 31, 2013 consists of $10,000 in accounts payable and $115,000 in notes payable plus $20,000 in accrued interest.
Note 10. Accounts Payable
Accounts payable at March 31, 2013 included amounts owed to certain vendors related to the ongoing normal course of the Company’s operations.
Note 11. Accrued Liabilities
Accrued liabilities at March 31, 2013 and December 31, 2012 are comprised of the following:
|
|
March 31,
|
|
|
December 31,
|
|
Accrued liabilities
|
|
2013
|
|
|
2012
|
|
Tax payable
|
|
$
|
2,094,000
|
|
|
$
|
2,144,000
|
|
Obligations on stock based compensation
|
|
|
—
|
|
|
|
27,000
|
|
Obligations on marketing agreements
|
|
|
27,000
|
|
|
|
27,000
|
|
Payroll liabilities
|
|
|
21,000
|
|
|
|
21,000
|
|
Obligations on insurance
|
|
|
77,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
2,219,000
|
|
|
$
|
2,219,000
|
|
Note 12. 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 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.
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.
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.
Below is a summary of our note payable amounts:
Notes payable - current portion
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Sportify
|
|
$
|
29,000
|
|
|
$
|
54,000
|
|
Rodeo.com/Karate.com promissory note
|
|
|
222,000
|
|
|
|
400,000
|
|
ToyHaulers.com
|
|
|
13,000
|
|
|
|
-
|
|
TravelTrailer.com
|
|
|
30,000
|
|
|
|
-
|
|
ModularHomes.com
|
|
|
75,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
369,000
|
|
|
$
|
454,000
|
|
Notes payable - noncurrent portion
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Sportify
|
|
$
|
25,000
|
|
|
$
|
-
|
|
Rodeo.com/Karate.com promissory note
|
|
|
178,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
203,000
|
|
|
$
|
-
|
|
Summary of all notes payable
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Sportify
|
|
$
|
54,000
|
|
|
$
|
54,000
|
|
Rodeo.com/Karate.com promissory note
|
|
|
400,000
|
|
|
|
400,000
|
|
ToyHaulers.com
|
|
|
13,000
|
|
|
|
-
|
|
TravelTrailer.com
|
|
|
30,000
|
|
|
|
-
|
|
ModularHomes.com
|
|
|
75,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
572,000
|
|
|
$
|
454,000
|
|
Note 13. Notes Payable– Related Party
Sportify Note
On December 31, 2012, we entered into a Securities Purchase Agreement by and among us, on the one hand, and Sports Asylum, Inc., a Nevada corporation, and its shareholders, Sabas Carrillo, 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.
Below is a summary of our note payable – related party amounts:
Notes payable - related party
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Current portion
|
|
$
|
86,000
|
|
|
$
|
161,000
|
|
Noncurrent portion
|
|
|
76,000
|
|
|
|
-
|
|
|
|
$
|
162,000
|
|
|
$
|
161,000
|
|
Note 14. Other Long Term Accrued Liabilities
At March 31, 2013, we had a balance of $683,000 in deferred tax liability.
Note 15. 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 March 31, 2013, 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 16. 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 March 31, 2013 and December 31, 2012 are as follows:
The components of tax provision:
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
1,184,225
|
|
State
|
|
|
-
|
|
|
|
285,075
|
|
|
|
|
-
|
|
|
|
1,469,300
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(218,000
|
)
|
|
|
895,000
|
|
State
|
|
|
(37,000
|
)
|
|
|
186,000
|
|
|
|
|
(255,000
|
)
|
|
|
1,081,000
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
255,000
|
|
|
|
(68,000
|
)
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
$
|
-
|
|
|
$
|
2,482,300
|
|
The total tax provision is zero.
The components of deferred tax asset:
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
State taxes
|
|
$
|
129,000
|
|
|
$
|
129,000
|
|
Net operating losses
|
|
|
530,000
|
|
|
|
434,000
|
|
Accruals and other
|
|
|
8,000
|
|
|
|
8,000
|
|
|
|
|
667,000
|
|
|
|
571,000
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
Installment gain
|
|
|
(1,036,000
|
)
|
|
|
(1,195,000
|
)
|
|
|
|
(369,000
|
)
|
|
|
(624,000
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(627,000
|
)
|
|
|
(372,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets/(liabilities)
|
|
$
|
(996,000
|
)
|
|
$
|
(996,000
|
)
|
The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible. The amount of deferred tax assets considered realizable could change if future taxable income is realized. At March 31, 2013 and December 31, 2012, the Company had U.S. federal tax net operating loss carryforwards (“NOLs”) of approximately $1.5 million and $1.3 million, respectively, which begin to expire in 2021. At March 31, 2013 and December 31, 2012, the Company had State NOLs of $240,000 and zero, respectively. The NOLs are subject to limitations under IRC Section 382 of the Internal Revenue Code (“Section 382”).
Note 17. Related Party Transactions
All material intercompany transactions have been eliminated upon consolidation of our entities. During the three months ended March 31, 2013, cash transfers, equity and accounts between the Company and its subsidiaries have been eliminated upon consolidation.
Note 18. Commitment And Contingencies
Our executive offices are located in Lake Forest, California, at 26497 Rancho Parkway South, Lake Forest, CA 92630. Our office space is approximately 7,000 square feet 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.
Set forth below is a summary of our current obligations as of March 31, 2013 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
|
|
$
|
72,000
|
|
|
$
|
8,000
|
|
2014
|
|
$
|
96,000
|
|
|
$
|
8,000
|
|
Note 19. Warrants
As of March 31, 2013, there were outstanding 250,000 common stock purchase warrants. The following table summarizes information about common stock warrants outstanding at March 31, 2013.
Outstanding
|
|
Exercisable
|
|
|
Number
Outstanding
|
|
Weighted Average
Remaining Contractual Life (years)
|
|
Weighted Exercise
Price Average
|
|
Number
Exercisable
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4
|
|
250,000
|
|
|
1.62
|
|
$
|
4
|
|
250,000
|
|
$
|
4
|
|
Note 20. Subsequent Events
The Company evaluated its March 31, 2013 financial statements for subsequent events through May 14, 2013, the date the financial statements were available to be issued and had no subsequent events to disclose.