ITEM 1 - BUSINESS
Recent Developments
Expanding Our Focus on Manufactured Homes
We have expanded our focus in an attempt to create additional income streams from industries, such as the manufactured housing and the travel trailer industries, for whom we have created, or are creating, search engine finder sites. Our expansion in this direction to create additional revenue is the result of several developments over the past year. First, the number of competitors in the finder site space has increased, and the internet presence and capital that some of those companies have far exceed our capabilities. For example, Google has more prominently entered into the finder site space by displaying colored photographs and locations of business search results at the top of the page. As a result of the increase in competition, and some of the competition such as Google owning the search engines, we believe this will create a more challenging environment to generate revenue. The second reason we decided to expand our focus is that we believe we are uniquely qualified to leverage our technology and retail expertise, specifically in the manufactured housing industry, and to a lesser extent, the travel trailer industry. Our staff currently has over 125 years of combined manufactured home industry experience. We believe this experience will assist us in negotiating terms with factories, hiring top tier talent, and identifying retail center locations.
ManufacturedHomes.com Finder Site
Our vertical finder site, www.ManufacturedHomes.com, acts as an information marketplace which provides detailed, focused and relevant information specific to the manufactured home product or service that a consumer is searching. We focus on becoming a top ranked website on all major search engines within the manufactured housing industry. We acquire premium domains, develop relevant content and resources as it relates to the manufactured housing industry, and execute campaigns within search engines to capture traffic.
For consumers, www.ManufacturedHomes.com is designed to provide the technological means necessary to quickly search information in order to get their desired results. Our finder site aggregates detailed data and information about specific businesses and products, along with reviews by other consumers, all of which when taken together create content in a value-added, engaging experience.
For manufactured home factories and retail centers, www.ManufacturedHomes.com provides a simple means to outsource their internet traffic aggregation and online marketing advertising. Our finder site manages various internet marketing tactics on behalf of our clients including Search Engine Optimization (SEO) and Search Engine Management (SEM). This process helps to increase the ranking of the finder site which makes the site easily accessible to prospective consumers. In short, we assist business owners in the manufactured housing industry to focus on their core product or service while alleviating the technological challenges associated with search engine optimization. www.ManufacturedHomes.com helps to narrow down the target market to those individuals that are highly targeted for the manufactured home factory or retail center.
Manufactured Homes Retail Centers
We believe there are gains to be realized through leveraging our finder site technology and capitalizing on other opportunities in a specific industry. As a result, we are currently expanding our focus in the manufactured housing industry and looking to leverage ancillary opportunities that we have discovered within that industry. Specifically, we are currently concentrating on the manufactured home retail center sector of the industry. In February 2014 we opened our first retail center in Rhome, Texas. We anticipate opening additional retail centers in the midwest, southeast and southwest regions of the country. The retail centers are operated by our wholly owned subsidiary, Wisdom Homes Of America, Inc.
The strategic reasons for concentrating in a specific industry such as the manufacturing housing industry include our management’s experience in both technology and retail center management, our ability to utilize technology in an industry in which technology has, for the most part, been either absent or lagged other comparable industries, and our portfolio of premium domains specific to the industry. In addition, our staff is regularly in communication with manufactured home factories and retail centers across the country in order to introduce them to our proprietary CRM system and the features offered on our geo-targeted website www.ManufacturedHomes.com. As a result of our regular communication with nationwide retailers, we believe we will be able to target regional trends developing in the manufactured housing industry.
Other Domain Names
We currently own key domain names in the manufactured and modular housing industries, as well as the travel trailer industry. These domains include manufacturedhomes.com, modularhomes.com, traveltrailer.com, and toyhaulers.com. We anticipate utilizing domain names related to manufactured housing as referral sources and/or landing pages which will direct the consumer to www.ManufacturedHomes.com. We will utilize the domain names related to the modular housing and travel trailer industry when we launch these sites.
How We Generate Revenue
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. 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.
We also generate revenues from photo and video production of content (i.e. Content Production). Typically, Content Production that we create on behalf of our clients is considered an add-on or ancillary service which are then displayed on our websites.
Finally, we anticipate generating revenues through our manufactured home retail center Wisdom Homes Of America, Inc., which we started in January 2014. We anticipate opening and/or acquiring additional retail centers in 2014 and branding them under the name Wisdom Homes Of America, Inc. Our first center was opened in Rhome, Texas in February, 2014. We will purchase factory built houses and sell them to the end user. We also anticipate structuring the sale of used manufactured homes.
There are several ways in which we sell a manufactured house. The first is custom orders where a consumer will decide on the model of the house, and we will purchase the factory built home and have it transported to our client’s location. Our client will then pay us at the time of installation. On some occasions, the house will first be brought to our retail center for retrofitting. The second is where a client purchases an existing home from our retail center and has it transported to their property for installation. By the second quarter of 2014, we anticipate having a variety of model homes of various sizes, floor plans, features and prices. Our retail sales centers will generally be located on a main road or highway for high visibility. Model homes may be displayed in a residential setting with sidewalks and landscaping. Each sales center usually employs a manager and one to five salespersons. In addition our internal sources, we intend to use outside financing sources to finance our inventory. Our retail centers employ salespersons that are compensated through a combination of salary and commission.
ManufacturedHomes.com Subscribers
Our clients in the manufactured housing industry are businesses and merchants wishing to leverage the power of the Internet to connect their brand, product or service to their customers. One of the primary methods for us to convert clients to a “paying” status, or to become a subscriber, is to allow clients to list and have minimal exposure on our site without paying a fee. Historically, once a client is represented on our site with an icon or listing, then that client begins to experience increase traffic to their brand, product or service. As a result, the client typically desires to convert into a paying customer, increasing their exposure on our site, and increasing the traffic to their location. This model is often referred to as a “freemium” type model which allows our clients to try our services before they subscribe. Businesses can utilize our marketing services for a period of time to gain first-hand exposure to our finder sites’ capabilities. We then create a fee-based monthly subscription agreement with the business. As time goes on, we have the ability to introduce various add-on packages that increase our client’s exposure, driving even more customer traffic to their businesses. In addition to the basic traffic-based programs, ancillary add-on packages and services are also available. These additional services will vary by industry segment, but can be highly valuable to a business. For example, we offer businesses advertising packages that can include banner ads placed on our finder sites, emails, texts, special promotions and events, as well as photo and video production of content such as virtual tours of our client’s establishments and products, which are then displayed on www.ManufacturedHomes.com.
The terms for advertising on the site are typically month to month. In general, clients begin in a lower advertising tier and then move up advertising tiers as their exposure and associated foot traffic increase.
Regions and Geographic Areas
We typically market our services based on geographic regions. For example, for any given geographic region, we will typically have a listing results page on www.ManufacturedHomes.com that can display up to a certain number of subscriber locations and an unlimited amount of non-paying client listings. Subscribers, in most cases, are provided page one placement, meaning subscribers’ business listings will be among the first listings within the search results on our finder sites. At the end of a given month, if the subscriber count is above a certain number, then the respective regional listing page is typically divided into smaller regions, provided it does not detract from the user experience and in effect creating more revenue generating opportunities for us. In this fashion, the more subscribers we have within a given geographic region, the better and more relevant the information on our finder site becomes, the better value received by visitors to our finder sites, which then generates more page views, and the more sub-regions we create and thus more revenue generating opportunities for us.
Advertising Package Tiers
We have created advertising package tiers in order to more easily distinguish the different services we offer at different price points for www.ManufacturedHomes.com. 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 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 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 website (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.
ManufacturedHomes.com
In September 2013 we launched our beta site for www.ManufacturedHomes.com. The www.ManufacturedHomes.com revenue model follows a subscription-based approach, generating recurring monthly revenue from Standard Listings, lead generation and advertising. In particular, www.ManufacturedHomes.com has begun to generate revenues from fees we charge clients in which the clients advertise or list their location, products, and services on www.ManufacturedHomes.com. We also expect to generate revenues from advertising and content production in which we charge clients for placing ads for their related companies on our websites, which can include banner ads, emails, texts, special promotions and events, and for photo and video production services in which we charge clients for creating virtual tours of our client’s establishments and products, which are then displayed on www.ManufacturedHomes.com.
ModularHomes.com, Toyhaulers.com and Traveltrailer.com
ModularHomes.com, Traveltrailer.com and Toyhaulers.com are currently under development or are scheduled for development later this year. We anticipate all three sites revenue models will also follow a subscription-based approach, generating recurring monthly revenue for Standard and Premium Listings, lead generation and advertising. In particular, we also expect to generate revenues from advertising and content production in which we charge clients for placing ads for their related companies on these sites, which can include banner ads, emails, texts, special promotions and events, and for photo and video production services in which we charge clients for creating virtual tours of our client’s establishments and products, which are then displayed on the sites.
WeedMaps Media, Inc.
On November 19, 2010, we acquired WeedMaps, LLC, which was merged with and into WeedMaps Media, Inc., our wholly-owned subsidiary. Prior to the sale of WeedMaps Media, Inc., on December 31, 2012, our first finder site, www.weedmaps.com, focused primarily on dispensaries in the medicinal cannabis industry. We were never engaged in the growing, harvesting, cultivation, possession, or distribution of cannabis. Instead, we focused on developing our finder site technology and associated business model which could then be implement in a myriad of industries. We no longer have any clients related to the medicinal cannabis industry.
Corporate Information
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.
Our corporate headquarters are located at 26497 Rancho Parkway South, Lake Forest, California, 92630, and our telephone number is (855) 266-4663. Our website is www.searchcore.com. Information contained on our website is not incorporated into, and does not constitute any part of, this registration statement.
Description of Business
Our business service is to connect consumers with brands, products and services via our finder sites. We create, operate and monetize 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. Additionally, we are purchasing finder sites that may provide us with additional opportunities and streams of income. 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
Our services are offered through the following wholly owned subsidiaries:
Sportify, Inc.
VerticalCore Management, Inc.
VerticalCore Merchant, Inc.
VerticalCore Technologies, Inc.
VerticalCore Media, Inc.
Wisdom Homes of America, Inc.
Wisdom Financing of America, Inc., and
Wisdom Home Loans of America, Inc.
Other Subsidiaries
We have 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).
Currently, we have no imminent or specific plans for any of these entities and they are held as corporations in good standing with no operations.
Recent Acquisitions
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. For 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.
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.
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 January 15, 2015 and April 15, 2015. 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 November 1, 2015, and continuing on the first (1st) day of each month thereafter.
We do not anticipate that the rodeo or karate industry will be a major focus of our finders site business going forward.
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, and has been paid in full.
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, and has been paid in full.
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. The Carrillo note has been satisfied in full. The Pakulis note has been amended to provide for a payment of $37,500 on January 1, 2015 and the balance in 23 equal monthly installments beginning on February 1, 2015.
Sports Asylum, Inc. owns and operates the intellectual property associated with www.sportify.com, and represents our introduction into the recreational sports industry. On March 5, 2015, we changed the name of Sports Asylum, Inc. to Sportify, Inc. We do not anticipate that the recreational sports industry will be a major focus of our finders site business going forward.
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.
On February 5, 2014, we received a fully signed copy of a First Amendment to Management Agreement (the “First Amended Agreement”) dated as of January 27, 2014, pursuant to which Tattoo Interactive shall no longer have an obligation to reimburse us for any expenses or costs related to the Management Services as of January 1, 2014. The First Amended Agreement will automatically terminate on April 30, 2014 (the “Initial Term”) unless a separate written agreement is executed by the parties (if so extended, the “Extended Initial Term”). If the parties agree to an Extended Initial Term, the Management Agreement will automatically renew for successive one (1) year terms unless terminated in accordance with the terms set forth in the First Amended Agreement. During the Initial Term, pursuant to our revenue sharing agreement, we will pay Tattoo Interactive a minimum monthly payment of $15,000. During the Extended Initial Term, our minimum monthly payment will be $25,000.
We do not anticipate that the tattoo industry will be a major focus of our finders site business going forward.
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, which has been satisfied in full.
Recent Divestitures
On February 1, 2010, we sold the domain name www.makeup.com, its associated domain names and certain intellectual property rights associated with these domain names for $2,000,000, of which we paid $200,000 in fees related to the sale, which resulted in proceeds to us of $1,800,000. We were in the business of selling beauty products, such as makeup and perfume, on the internet through the makeup.com website.
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 payment 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 and 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 2013 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.
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.
Change in Business of the Company; Shell Status
The sale of WeedMaps resulted in a change in our client base. We continue in the internet search and marketing business. The sale completed our comprehensive exit as a finder and marketing site for our client base in the medicinal cannabis industry. Our continued business focus is and will be internet search, advertising, and operating finder sites in the recreational sports, prefabricated housing, tattoo, and other industries identified by our management as having high growth potential.
The sale of WeedMaps will not make us a shell company as defined under Rule 405 of the Exchange Act, as we will continue to operate material business segments currently owned and/or operated by us.
Recent 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 has 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.
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.
Intellectual Property
Our intellectual property portfolio is an important part of our business. We currently own over 150 Internet domain names. We use intellectual property law, that may include a combination of copyright, trade secret and confidentiality agreements to protect our intellectual property. Our employees and independent contractors are required to sign agreements acknowledging that all inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property, and assigning to us any ownership that they may claim in those works. Despite our precautions, it may be possible for third parties to obtain and use without consent intellectual property that we own. Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.
From time to time, we may encounter disputes over rights and obligations concerning intellectual property. While we believe that our product and service offerings do not infringe the intellectual property rights of any third party, we cannot assure you that we will prevail in any intellectual property dispute. If we do not prevail in such disputes, we may lose some or all of our intellectual property protection, be enjoined from further sales of the applications determined to infringe the rights of others, and/or be forced to pay substantial royalties to a third party.
Competition
We know that there is intense competition in the internet marketing industry. Our competition includes national search engines such as Google and Yahoo, local search engines, and traditional forms of advertising such as print, radio, and television. We also realize that, in each market we enter, there is a high probability that existing regional marketing companies will be performing similar services as us.
The following is a list of known competitive finder websites for manufactured homes:
Mobile Home Village (http://www.mhvillage.com/)
Manufactured Home Source (http://www.manufacturedhomesource.com/)
Mobile Home Bay (http://www.mhbay.com/)
Mobile Home (http://www.mobilehome.net/)
And also manufacturer websites, such as:
Clayton Homes (http://claytonhomes.com/)
Skyline Homes (http://skylinehomes.com/)
Nationwide Homes (http://nationwide-homes.com/)
Palm Harbor (http://www.palmharbor.com/)
Fleetwood Homes (http://www.fleetwoodhomes.com/)
Research and Development
Research and development expenses for our most recent fiscal year ended December 31, 2013, consisted mainly of compensation and overhead of research and development activities, namely coders and developers, and third party professional developer services firms performing research and development functions, such as coding. Research and development expenses for 2013 and 2012 were as follows:
Our Employees
As of the date hereof, we have eight full-time employees and/or contractors working in our office, one of which is an officer, six of which are engaged in marketing, publishing and development, and one of which is engaged in administrative functions.
Organization Within the Last Five Years
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.
ITEM 1A.
ITEM 1A. - RISK FACTORS.
As a smaller reporting company we are not required to provide a statement of risk factors. Nonetheless, we are voluntarily providing risk factors herein.
Any investment in our common stock involves a high degree of risk. You should consider carefully the following information, together with the other information contained in this annual report, before you decide to buy our common stock. If one or more of the following events actually occurs, our business will suffer, and as a result our financial condition or results of operations will be adversely affected. In this case, the market price, if any, of our common stock could decline, and you could lose all or part of your investment in our common stock.
We face risks in developing our products and services and eventually bringing them to market. We also face risks that we will lose some, or all, of our market share in existing businesses to competition, or we risk that our business model becomes obsolete. The following risks are material risks that we face. If any of these risks occur, our business, our ability to achieve revenues, our operating results and our financial condition could be seriously harmed.
Risk Factors Related to the Business of the Company
We have a limited operating history and limited historical financial information upon which you may evaluate our performance.
You should consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, are in their early stages of operations. We may not successfully address all of the risks and uncertainties or successfully implement our existing and new products and services. If we fail to do so, it could materially harm our business and impair the value of our common stock, resulting in a loss to shareholders. Even if we accomplish these objectives, we may not generate the positive cash flows or profits we anticipate. We were incorporated in Nevada in 2003, and the vast majority of the business that we conducted in 2011 and 2012 was started or acquired in 2010. Now, the vast majority of that business has been sold, and our current business generates very little revenue. Unanticipated problems, expenses and delays are frequently encountered in establishing a new business and developing new products and services. These include, but are not limited to, inadequate funding, lack of consumer acceptance, competition, product development, the inability to employ or retain talent, inadequate sales and marketing, and regulatory concerns. The failure by us to meet any of these conditions would have a materially adverse effect upon us and may force us to reduce, curtail, or discontinue operations. No assurance can be given that we can or will ever be successful in our operations and operate profitably.
If we are unable to meet our future capital needs, we may be required to reduce or curtail operations, or shut down completely.
To date we have relied on cash flow from operations and the subsequent sale of our WeedMaps Media subsidiary to fund operations. On December 31, 2012, we sold WeedMaps Media, and we now have limited cash liquidity and capital resources. Our cash on hand as of December 31, 2012 was approximately $514,000. For the year ended December 31, 2012, our total revenue was approximately $16.4 million and our operating income was $4.2 million. However, the business that generated that income has been sold.
Our future capital requirements will depend on many factors, including our ability to market our products successfully, cash flow from operations, locating and retaining talent, and competing market developments. Our business model requires that we spend money (primarily on advertising and marketing) in order to generate revenue. Based on our current financial situation we may have difficulty continuing our operations at their current level, or at all, if we do not raise additional financing in the near future. Additionally, we would like to continue to acquire assets and operating businesses, which will likely require additional cash. Although we currently have no specific plans or arrangements for acquisitions or financing, we intend to raise funds through private placements, public offerings or other financings. Any equity financings would result in dilution to our then-existing stockholders. Sources of debt financing may result in higher interest expense. Any financing, if available, may be on unfavorable terms. If adequate funds are not obtained, we may be required to reduce, curtail, or discontinue operations. There is no assurance that our existing cash flow will be adequate to satisfy our existing operating expenses and capital requirements.
Because we face intense competition, we may not be able to operate profitably in our markets.
The market for the services that we offer is highly competitive. We may not have the resources, expertise or other competitive factors to compete successfully in the future. We expect to face additional competition from existing competitors and new market entrants in the future. Some of our competitors will have greater resources than we do. As a result, these competitors may be able to:
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develop and expand their product and service offerings more rapidly;
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adapt to new or emerging changes in customer requirements more quickly;
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take advantage of acquisition and other opportunities more readily; and
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devote greater resources to the marketing and sale of their products and adopt more aggressive pricing policies than we can. See “The Company - Competition.”
If we are unable to attract and retain key personnel, we may not be able to compete effectively in our market.
Our success will depend, in part, on our ability to attract and retain key management, including our technical experts and sales and marketing personnel. We attempt to enhance our management and technical expertise by recruiting qualified individuals who possess desired skills and experience in certain targeted areas. In the past, we have employed management from companies that we have acquired. Our inability to retain employees and attract and retain sufficient additional employees, and information technology, engineering and technical support resources, could have a material adverse effect on our business, financial condition, results of operations and cash flows. The loss of key personnel could limit our ability to develop and market our products.
Because our officers and directors control a large percentage of our common stock, they have the ability to influence matters affecting our shareholders.
Our officers and directors beneficially own over 57% of our outstanding common stock. As a result, they have the ability to influence matters affecting our shareholders, including the election of our directors, the acquisition or disposition of our assets, and the future issuance of our shares. Because they control such shares, investors may find it difficult to replace our directors and management if they disagree with the way our business is being operated. Because the influence by these insiders could result in management making decisions that are in the best interest of those insiders and not in the best interest of the investors, you may lose some or all of the value of your investment in our common stock. See “Principal Shareholders.”
Because our Chief Financial Officer does not provide his services to us on a full-time basis, he may not be able to devote a sufficient amount of time to our business operations or our reporting obligations pursuant to U.S. securities laws, which may cause our business to fail or cause non-compliance with our reporting obligations.
Munjit Johal, our Chief Financial Officer and a member of our Board of Directors, devotes approximately fifty percent (50%) of his time to our business. The remainder of his time is devoted to unrelated outside employment. Accordingly, he may not be able to devote sufficient time to the management of our business, as and when needed. While we do not believe there is a present conflict of interest with respect to Mr. Johal’s outside employment or the amount of time that he devotes to our business, it is possible that a conflict of interest could arise in the future. If a conflict of interest were to arise, it would be addressed by the remaining member or members of our Board of Directors.
We may not be able to effectively manage our growth and operations, which could materially and adversely affect our business.
We have, and may in the future, experience rapid growth and development in a relatively short period of time. The management of this growth will require, among other things, continued development of our financial and management controls and management information systems, stringent control of costs, increased marketing activities, the ability to attract and retain qualified management personnel and the training of new personnel. We may utilize outsourced resources, and hire additional personnel, in order to manage our expected growth and expansion. Failure to successfully manage our possible growth and development could have a material adverse effect on our business and the value of our common stock.
Our industry is experiencing rapid growth and consolidation that may cause us to lose key relationships and intensify competition.
The Internet marketing industry is undergoing rapid growth and substantial change. This has resulted in increasing consolidation and formation of strategic relationships. A cancellation of our relationship with any group with whom we have a current relationship, or any relationship we may form in the future, may have a negative impact on the company because it could limit our advertising exposure or the number of customers that use our websites. We make no assurance that any relationship we have established will continue.
Acquisitions or other consolidating transactions that don’t involve us could nevertheless harm us in a number of ways, including:
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we could lose strategic relationships if our strategic partners are acquired by or enter into relationships with a competitor (which could cause us to lose access to distribution, content, technology and other resources);
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the relationship between us and the strategic partner may deteriorate and cause an adverse effect on our business;
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we could lose customers if competitors or users of competing technologies consolidate with our current or potential customers; and
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our current competitors could become stronger, or new competitors could form, from consolidations.
Any of these events could put us at a competitive disadvantage, which could cause us to lose customers, revenue and market share. Consolidation could also force us to expend greater resources to meet new or additional competitive threats, which could also harm our operating results.
We rely on the continued reliable operation of third parties’ systems and networks and, if these systems and networks fail to operate or operate poorly, our business and operating results will be harmed.
Our operations are, in part, dependent upon the continued reliable operation of the information systems and networks of third parties. These include a variety of service providers including web browsers sites such as Google or MSN in which the majority of our customers locate us, internet and telephone providers or other communication providers such as for cell phone and texting. If these third parties do not provide reliable operation, our ability to service our customers will be impaired and our business, reputation and operating results could be harmed.
The Internet and our network are subject to security risks that could harm our business and reputation and expose us to litigation or liability.
Online commerce and communications depend on the ability to transmit confidential information and licensed intellectual property securely over private and public networks. Any compromise of our ability to transmit and store such information and data securely, and any costs associated with preventing or eliminating such problems, could damage our business, hurt our ability to distribute products and services and collect revenue, threaten the proprietary or confidential nature of our technology, harm our reputation, and expose us to litigation or liability. We also may be required to expend significant capital or other resources to protect against the threat of security breaches or hacker attacks or to alleviate problems caused by such breaches or attacks. Any successful attack or breach of our security could hurt consumer demand for our products and services, and expose us to consumer class action lawsuits and harm our business.
We may be unable to adequately protect our proprietary rights.
Our ability to compete partly depends on the superiority, uniqueness and value of our intellectual property and technology, including both internally developed technology and technology licensed from third parties. To the extent we are able to do so, in order to protect our proprietary rights, we will rely on a combination of trademark, copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions. Despite these efforts, any of the following occurrences may reduce the value of our intellectual property:
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our copyrights relating to our business may be challenged or invalidated;
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registered copyrights may not provide us with any competitive advantages;
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our efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology;
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our efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those we develop; or
•
another party may obtain a blocking patent and we would need to either obtain a license or design around the patent in order to continue to offer the contested feature or service in our products.
We may be forced to litigate to defend our intellectual property rights, or to defend against claims by third parties against us relating to intellectual property rights.
We may be forced to litigate to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of other parties’ proprietary rights. Any such litigation could be very costly and could distract our management from focusing on operating our business. The existence and/or outcome of any such litigation could harm our business.
Interpretation of existing laws that did not originally contemplate the Internet could harm our business and operating results.
The application of existing laws governing issues such as property ownership, copyright and other intellectual property issues to the Internet is not clear. Many of these laws were adopted before the advent of the Internet and do not address the unique issues associated with the Internet and related technologies. In many cases, the relationship of these laws to the Internet has not yet been interpreted. New interpretations of existing laws may increase our costs, require us to change business practices or otherwise harm our business.
It is not yet clear how laws designed to protect children that use the Internet may be interpreted, and such laws may apply to our business in ways that may harm our business.
The Child Online Protection Act and the Child Online Privacy Protection Act impose civil and criminal penalties on persons distributing material harmful to minors (e.g., obscene material) over the Internet to persons under the age of 17, or collecting personal information from children under the age of 13. We do not knowingly distribute harmful materials to minors or collect personal information from children under the age of 13. The manner in which these Acts may be interpreted and enforced cannot be fully determined, and future legislation similar to these Acts could subject us to potential liability if we were deemed to be non-compliant with such rules and regulations, which in turn could harm our business.
We may be subject to market risk and legal liability in connection with the data collection capabilities of our products and services.
Many of our products are interactive Internet applications that by their very nature require communication between a client and server to operate. To provide better consumer experiences and to operate effectively, our products send information to our servers. Many of the services we provide also require that a user provide certain information to us. We post an extensive privacy policy concerning the collection, use and disclosure of user data involved in interactions between our client and server products.
Because the business activities of some of our former customers was illegal under the Federal Controlled Substances Act, we may be deemed to have been aiding and abetting illegal activities through the services that we provided to those customers. As a result, we may be subject to enforcement actions by law enforcement authorities, which would materially and adversely affect our business.
Under United States federal law, and more specifically the Federal Controlled Substances Act, the possession, use, cultivation, and transfer of cannabis is illegal. Our WeedMaps Media, Inc. business provided services to customers that were engaged in the business of possession, use, cultivation, and/or transfer of cannabis. As a result, law enforcement authorities, in their attempt to regulate the illegal use of cannabis, may seek to bring an action or actions against us, including, but not limited, to a claim of aiding and abetting another’s criminal activities. The federal aiding and abetting statute provides that anyone who “commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.” 18 U.S.C. §2(a).
Our prior business, and specifically the advertisements we sold for activities that may be deemed to have been illegal under federal law, may be found to be in violation of this law, and the federal government could decide to bring an action against us. As a result of such an action, we may be forced to cease operations and our investors could lose their entire investment. Such an action would have a material negative effect on our business and operations.
Because we hold a promissory note secured by the domain name www.weedmaps.com, if the borrower defaults on the note, and we foreclose on the collateral, we could temporarily hold and operate assets in the medicinal cannabis industry, which may expose us to aiding and abetting risk.
On December 31, 2012, we sold our WeedMaps Media, Inc. subsidiary to a third party, and part of the purchase price was a secured promissory note in the principal amount of $3,000,000. That note is secured by the assets of WeedMaps Media, including the domain name and website www.weedmaps.com. If the obligated party on the note were to default, and we were to foreclose on the collateral, we would temporarily hold and operate certain assets that may be considered illegal. In such an event, we would continue to operate the assets in order to keep them viable, seek a buyer, and sell the assets. During this time, the assets would be considered held-for-sale by us. In addition, as per the secured promissory note, should the obligated party be forced to cease operations as a direct result of law enforcement actions, then the obligated party will not longer be responsible for the outstanding debt owed to us on the promissory note.
Because we were previously service providers to companies in the medicinal cannabis industry, we had and may continue to have a difficult time obtaining the various insurances that are desired to operate our business, which may expose us to additional risk and financial liabilities.
Insurance that is otherwise readily available, such as workers compensation, general liability, and directors and officers insurance, is more difficult for us to find, and more expensive, because we were service providers to companies in the medicinal cannabis industry. Thus far, we have been successful in finding such policies, however it is at a cost that is higher than other businesses. There are no guarantees that we will be able to find such insurances in the future, or that the cost will be affordable to us. If we are forced to go without such insurances, it may prevent us from entering into certain business sectors, may inhibit our growth, and may expose us to additional risk and financial liabilities.
Risks Related To Our Common Stock
Our common stock is listed for quotation on the OTCQX tier of the marketplace maintained by OTC Markets Group, Inc., which may make it more difficult for investors to resell their shares due to suitability requirements.
Our common stock is currently quoted on the OTCQX tier of the marketplace maintained by OTC Markets Group, Inc. Broker-dealers often decline to trade in over the counter stocks given the market for such securities are often limited, the stocks are more volatile, and the risk to investors is greater. These factors may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of their shares. This could cause our stock price to decline.
If we are unable to pay the costs associated with being a public, reporting company, we may not be able to continue trading on the OTCQX and/or we may be forced to discontinue operations.
We expect to have significant costs associated with being a public, reporting company, which may raise substantial doubt about our ability to continue trading on the OTCQX and/or continue as a going concern. These costs include compliance with the Sarbanes-Oxley Act of 2002, which will be difficult given the limited size of our management, and we will have to rely on outside consultants. Accounting controls, in particular, are difficult and can be expensive to comply with.
Our ability to continue trading on the OTCQX and/or continue as a going concern will depend on positive cash flow, if any, from future operations and on our ability to raise additional funds through equity or debt financing. If we are unable to achieve the necessary product sales or raise or obtain needed funding to cover the costs of operating as a public, reporting company, our common stock may be deleted from the OTCQX and/or we may be forced to discontinue operations.
We do not intend to pay dividends in the foreseeable future.
We do not intend to pay any dividends in the foreseeable future. We do not plan on making any cash distributions in the manner of a dividend or otherwise. Our Board presently intends to follow a policy of retaining earnings, if any.
We have the right to issue additional common stock and preferred stock without consent of stockholders. This would have the effect of diluting investors’ ownership and could decrease the value of their investment.
We have additional authorized, but unissued shares of our common stock that may be issued by us for any purpose without the consent or vote of our stockholders that would dilute stockholders’ percentage ownership of our company.
In addition, our certificate of incorporation authorizes the issuance of shares of preferred stock, the rights, preferences, designations and limitations of which may be set by the Board of Directors. Our certificate of incorporation has authorized issuance of up to 20,000,000 shares of preferred stock in the discretion of our Board. The shares of authorized but undesignated preferred stock may be issued upon filing of an amended certificate of incorporation and the payment of required fees; no further stockholder action is required. If issued, the rights, preferences, designations and limitations of such preferred stock would be set by our Board and could operate to the disadvantage of the outstanding common stock. Such terms could include, among others, preferences as to dividends and distributions on liquidation.
Our President and Chief Executive Officer can sell some of his stock, which may have a negative effect on our stock price and ability to raise additional capital, and may make it difficult for investors to sell their stock at any price.
James Pakulis, our President and Chief Executive Officer, is the owner of 25,967,290 shares of our common stock, representing over 57% of our total issued shares. Mr. Pakulis may be able to sell up to 1% of our outstanding stock (currently approximately 448,000 shares) every 90 days in the open market pursuant to Rule 144, which may have a negative effect on our stock price and may prevent us from obtaining additional capital. In addition, if Mr. Pakulis is selling his stock into the open market, it may make it difficult or impossible for investors to sell their stock at any price.
Our common stock is governed under The Securities Enforcement and Penny Stock Reform Act of 1990.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Securities and Exchange Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Such exceptions include any equity security listed on NASDAQ and any equity security issued by an issuer that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for three years, (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three years, or (iii) average annual revenue of at least $6,000,000, if such issuer has been in continuous operation for less than three years. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.
The forward looking statements contained in this annual report may prove incorrect.
This annual report contains certain forward-looking statements, including among others: (i) anticipated trends in our financial condition and results of operations; (ii) our business strategy for expanding distribution; and (iii) our ability to distinguish ourselves from our current and future competitors. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. In addition to the other risks described elsewhere in this “Risk Factors” discussion, important factors to consider in evaluating such forward-looking statements include: (i) changes to external competitive market factors or in our internal budgeting process which might impact trends in our results of operations; (ii) anticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the pharmaceutical industry; and (iv) various competitive factors that may prevent us from competing successfully in the marketplace. In light of these risks and uncertainties, many of which are described in greater detail elsewhere in this “Risk Factors” discussion, there can be no assurance that the events predicted in forward-looking statements contained in this annual report will, in fact, transpire.
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this annual report, including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation, and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or similar expressions. These statements are only predictions and involve known and unknown risks and uncertainties, including the risks outlined under “Risk Factors” and elsewhere in this annual report.
Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievement. We are not under any duty to update any of the forward-looking statements after the date of this annual report to conform these statements to actual results, unless required by law.
ITEM 1B
ITEM 1B - UNRESOLVED STAFF COMMENTS
This Item is not applicable to us as we are not an accelerated filer, a large accelerated filer, or a well-seasoned issuer; however, we are voluntarily disclosing that we have not received any written comments from the Commission staff regarding our periodic or current reports under the Securities Exchange Act of 1934.
ITEM 2
ITEM 2 - PROPERTIES
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.
During April 2013, we entered into a new lease at 3265 N Fort Apache Rd, Suite 110, Las Vegas, NV 89129. The office space is approximately 2,500 square feet. Pursuant to the terms of the lease, our rent is $2,500 per month for twelve (12) months.
During February 2014, we entered into a new lease at 4888 FM 2264, Rhome, TX. The parcel is approximately a 2-acre tract of land. Pursuant to the terms of the lease, our rent is $1,300 per month for 24 months.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
We are not a party to or otherwise involved in any legal proceedings.
In the ordinary course of business, we are from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of our management, other than as set forth herein, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.
ITEM 4
ITEM 4 - MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is quoted on the OTCQX tier of the marketplace maintained by OTC Markets Group, Inc. under the symbol “SRER.” Our stock has traded there since July 26, 2011, and traded prior to that on the Pink Sheets marketplace maintained by OTC Markets Group, Inc. Our common stock trades on a limited or sporadic basis and should not be deemed to constitute an established public trading market. There is no assurance that there will be liquidity in the common stock.
The following table sets forth the high and low transaction price for each quarter within the fiscal years ended December 31, 2013, 2012, and 2011, as provided by OTC Markets Group, Inc. The information reflects prices between dealers, and does not include retail markup, markdown, or commission, and may not represent actual transactions.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to a few exceptions which we do not meet. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.
Holders
As of March 12, 2014, there were 44,868,772 shares of our common stock issued and outstanding and held by 103 holders of record.
Dividend Policy
We have not paid any dividends on our common stock and do not expect to do so in the foreseeable future. We intend to apply our earnings, if any, in expanding our operations and related activities. The payment of cash dividends in the future will be at the discretion of the Board of Directors and will depend upon such factors as earnings levels, capital requirements, our financial condition and other factors deemed relevant by the Board of Directors.
Securities Authorized for Issuance under Equity Compensation Plans
We do not currently have a stock option or grant plan.
Recent Sales of Unregistered Securities
The following sales of equity securities by the Company occurred during the three month period ended December 31, 2013.
On October 25, 2013, we entered into a Securities Purchase Agreement with a third-party creditor pursuant to which we sold Three Hundred Ninety-Five Thousand Eight Hundred and Five (395,805) shares of our common stock, restricted in accordance with Rule 144, at a per-share purchase price of Sixteen and One-Half Cents ($0.165), for a total purchase price of Sixty-Five Thousand Three Hundred and Seven Dollars and Eighty-One Cents ($65,307.81). The Purchase Price was paid by full satisfaction of accounts payable owed to the creditor by the Company in the amount of Eleven Thousand One Hundred and Twenty-Five Dollars ($11,125), and in full satisfaction of a promissory note in the original principal amount of Fifty-Three Thousand Seven Hundred and Fifty Dollars ($53,750) entered into with the creditor on or about December 31, 2012. The principal and interest outstanding on the promissory note as of October 18, 2013 was Fifty-Four Thousand One Hundred Eighty-Two Dollars and Eighty-One Cents ($54,182.81). The purchase and sale of the shares closed on October 25, 2013.
The shares issued pursuant to the Securities Purchase Agreement were exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) promulgated thereunder. The Purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.
On December 12, 2013, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher a 8% Convertible Promissory Note in the original principal amount of $63,000 (the “Note”). The Note has a maturity date of September 16, 2014, and is convertible after 180 days into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 58% multiplied by the Market Price (representing a discount rate of 42%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means the closing bid price on the applicable day. The “Fixed Conversion Price” shall mean $0.00005. The shares of common stock issuable upon conversion of the Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The Note can be prepaid by us at a premium as follows: (a) between 31 and 60 days after issuance - 114% of the principal amount; (b) between 61 and 90 days after issuance - 120% of the principal amount; (c) between 91 and 120 days after issuance - 124% of the principal amount; (d) between 121 and 180 days after issuance - 130% of the principal amount. The purchase and sale of the Note closed on December 23, 2013, the date that the purchase price was delivered to us.
The issuance of the Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) thereof. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
As a smaller reporting company we are not required to provide the information required by this Item.
ITEM 7
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.
Although the forward-looking statements in this Annual Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.
Summary Overview
We, together with our wholly owned subsidiaries, are engaged in developing, operating and monetizing vertical finder websites in numerous industries. We currently are focusing our efforts primarily in the manufactured home industry because of the opportunities to expand our income stream, but during the prior year we also focused on the recreational sports and tattoo industries. We provide 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.
All of our revenue during the twelve months ended December 31, 2012 was generated by our then wholly-owned subsidiary, WeedMaps Media, Inc., which operated www.weedmaps.com as a finder website that aided consumers in finding medicinal cannabis dispensaries. The dispensaries paid a listing fee to WeedMaps Media in order to post their dispensary information on the website.
Effective on December 31, 2012, we sold WeedMaps Media, Inc.
Our Telemarketing Sales And Technology Platform
Our technology knowhow and our telemarketing sales are built around a clearly defined set of market criteria, a strong operating foundation, and a subscription-based revenue model.
A reported $37.3 billion was spent on online advertising during 2012 in the United States alone, and the amount is expected to continue to grow. Of the total U.S. market, paid search (like Google Adwords) represents the largest single portion at $17.6 billion. U.S online display ads (banners, video, pop-ups) continues to command $15 billion1. The current objective for online marketing and online advertising is to find a mechanism that can deliver a form of value to the consumer in return for engagement with a relevant marketer’s brand across multiple platforms (web, mobile, etc).
Our technology and telemarketing sales platform, however, accomplishes this goal by focusing on delivering value through our niche finder sites. Our sites add a richness and social interactivity to search and display advertising that we believe Google and others don’t match for specific industries or niche industry segments. While Google and others will most always be the catalyst for consumers, our finder sites intend to be the next click, with relevant content and resources specific to each niche. We focus on making the actual experience of engagement with our finder sites pleasing, ensuring that our finder sites provide value to the consumer to accomplish a task (say, in finding a tattoo artist) and on delivering a targeted segment to local businesses that they would otherwise not reach in a cost effective and timely manner.
Our technology and telemarketing sales platform has been built upon our proven track record. Differentiating factors of our business include:
·
Clear focus and strategic direction: scale the proven paid content model to specifically identified industry niches;
·
Valuable internet real estate in attractive industry verticals: ensure the portfolio is comprised of highly attractive pieces of internet real estate (i.e. premium domain names and supporting domain names) in underserved but large markets;
·
Highly experienced, in-house sales staff with proven consultative sales capabilities: having sales personnel that can manage, advise and consult with business owners;
·
State-of-the-art, multi-channel technology platform: depth of technical knowledge/ability to adapt and benefit from the ever evolving state of search and digital marketing technologies; and
·
Established culture that fosters client service, innovation and adaptability: individual accountability and innovation.
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1 http://www.emarketer.com/newsroom/index.php/google-display-ad-leader/
Our Plan Of Operation
We are currently focused on the manufactured home industry, but in the past year we also developed or marketed websites in the recreational sports and tattoo industries.
Our Process for Vertical Finder Site Development
We have a systematic approach to the development of our finder sites which allows us to budget our time and resources as we expand and manage our base of finder sites. We believe the timeframe and costs should decrease and then stabilize as a result of efficiently executing the full finder site development. For a finder site to reach scalability, with the fewest malfunctions which cause downtime, it is imperative that the site goes through its normal build life cycle. Additionally, we will evaluate the finder site to determine if there are opportunities for additional streams of income to the company.
Costs Of And Funding Our Vertical Finder Site Development
We currently have several finder sites under development. The costs associated with developing our finder sites include, but are not limited to, expenses for our programmers, coders, UI design and content creation. Our total monthly expense for development averages from $50,000 to $60,000 per month. To date, we have funded our development operations from cash on hand, the monthly $100,000 we receive pursuant to the sale of WeedMaps, which we will receive for at least the next year, the monthly $10,000 we receive pursuant to our agreement with Tattoo Interactive, which is scheduled to terminate in mid-2014, and to a lesser extent, the listing and advertising revenue we generated from Tattoo.com.
Status Of Each Of Our Finder Sites
Tattoo.com
On January 21, 2013, we entered into a Management Agreement with Tattoo Interactive, LLC pursuant to which we performed various marketing, promotion, and website management services with respect to the domain name known as www.tattoo.com. The Agreement had an initial term of 12 months and automatically renews for successive one-year terms unless terminated in accordance with its terms. In February 2014, its initial term was extended to April 30, 2014. Pursuant to the Agreement, we received twenty percent of all advertising revenue, and after the payment of the advertising revenue, we received sixty five percent of all remaining designated gross revenue. 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.
Prior to our entering into the Management Agreement with the owners of the domain name, the site was operational and had nominal revenue. We began generating revenue and signing subscription agreements with clients. The fees charged in the subscription agreements are month-to-month and range from $99 to $599. Unfortunately, revenues have not been as expected, and we do not anticipate renewing the Management Agreement.
ManufacturedHomes.com, ManufacturedHome.com and ManufacturedHouse.com
By building an interactive community of potential homebuyers, dealers, and manufacturers, we believe www.ManufacturedHomes.com will establish itself as the definitive go-to finder site for manufactured home purchasers, dealers, manufacturers and lenders.
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 $50,000, paid at closing. Further, 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 $130,000, paid at closing.
Manufactured Homes Retail Centers
We believe there are gains to be realized through leveraging our finder site technology and capitalizing on other opportunities in a specific industry. As a result, we are currently expanding our focus in the manufactured housing industry and looking to leverage ancillary opportunities that we have discovered within that industry. Specifically, we are currently concentrating on the manufactured home retail center sector of the industry. In February 2014 we opened our first retail center in Rhome, Texas. We anticipate opening additional retail centers in the midwest, southeast and southwest regions of the country. The retail centers are operated by our wholly owned subsidiary, Wisdom Homes Of America, Inc.
The strategic reasons for concentrating in a specific industry such as the manufacturing housing industry include our management’s experience in both technology and retail center management, our ability to utilize technology in an industry in which technology has, for the most part, been either absent or lagged other comparable industries, and our portfolio of premium domains specific to the industry. In addition, our staff is regularly in communication with manufactured home factories and retail centers across the country in order to introduce them to our proprietary CRM system and the features offered on our geo-targeted website www.manufacturedhomes.com. As a result of our regular communication with nationwide retailers, we believe we will be able to target regional trends developing in the manufactured housing industry.
Sportify.com
Sportify.com aims to become a social network designed for recreational sports enthusiasts. Our intent is for the site to enable users to source, schedule, review, connect and participate in up to 90 different recreational sports in a geographic area anywhere throughout the U.S.
On December 31, 2012, we entered into a Securities Purchase Agreement pursuant to which we purchased 100% of the issued and outstanding equity interests of Sports Asylum, Inc. which owns and operates the intellectual property associated with www.sportify.com, 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 $285,000 and (b) $215,000 represented by promissory notes. Sportify is expected to launch during the quarter ended June 30, 2013. We expect to begin generating nominal revenue during the quarter ended September 30, 2013 and meaningful revenues during the quarter ended March 31, 2014.
During the quarter ended December 31, 2013, we entered into a definitive plan to sell the assets related to Sportify.com which includes the web software, trademarks, nonpremium sports-related domain names and goodwill associated with our acquisition of Sports Asylum, Inc. Sports Asylum, Inc. owns and operates the intellectual property associated with www.sportify.com. Management decided to focus our efforts and resources to expanding our operations in the manufactured housing industry through our highly specific search-driven internet marketing finder site called www.ManufacturedHomes.com.
ModularHomes.com
Modular homes are similar to manufactured homes in that they are factory built. However, distinct from manufactured homes, modular home components are joined at the building site and are regulated in the same way as site-built homes. Currently, there are approximately 150 modular home manufacturing facilities in the United States. We intend for ModularHomes.com to serve as the de facto online destination for all constituents in this growing and regionally diverse industry. The Modular Home finder site will feature tools for both consumers and retailers from custom price quotes and a local site contractor finder to retailer and builder directories and profiles, including featured listings and advertising opportunities for retailers and builders.
On January 25, 2013, we purchased the domain name known as www.modularhomes.com for $140,000, payable in a down payment of $50,000 and the balance over twelve equal monthly payments. ModularHomes.com is currently under development and is expected to launch later this year. We expect to begin generating nominal revenues by the end of this year, and conditional on reaching a certain search ranking and number of monthly page views, begin generating meaningful revenues during the quarter ended June 30, 2015.
Karate.com and Rodeo.com
On August 7, 2012, we entered into a Domain Name Purchase Agreement and a Non-Recourse Secured Promissory Note pursuant to which we purchased the domain names known as www.rodeo.com and www.karate.com, for total consideration of $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 $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 equal monthly installments of $22,222 beginning June 1, 2013, and continuing on the first day of each month thereafter.
During the quarter ended December 31, 2013, we entered into a definitive plan to sell the premium domain names Karate.com and Rodeo.com. Management decided to focus our efforts and resources to expanding our operations in the manufactured housing industry through our highly specific search-driven internet marketing finder site called www.ManufacturedHomes.com.
Medicinal Cannabis Industry
Prior to the sale of our wholly-owned subsidiary, WeedMaps Media, Inc., on December 31, 2012, our first finder site, www.weedmaps.com, focused primarily on dispensaries in the medicinal cannabis industry. We were never engaged in the growing, harvesting, cultivation, possession, or distribution of cannabis. Instead, we focused on developing our finder site technology and associated business model which could then be implement in a myriad of industries. All of our discussion in this Management’s Discussion and Analysis for the twelve months ended December 31, 2012 and 2011 relates to our WeedMaps Media, Inc. business.
Discontinued Operations of General Health Solutions, Inc.
We terminated our management agreement resulting in the closure of General Health Solutions, Inc., which constituted our entire Medical Clinic Management segment. In February 2012, we committed to a definitive plan to terminate the management agreement and services associated with the agreement, which resulted in General Health Solutions, Inc., our Medical Clinic Management segment being reported as discontinued operations. We were fully divested of all management responsibilities as per the management agreement by the close of the first quarter of 2012, and all operations have ceased. For comparative purposes, all prior periods presented have been restated to reflect the reclassification of this segment to discontinued operations on a consistent basis.
Year Ended December 31, 2013 compared to the Year Ended December 31, 2012
Results of Operations
Revenue
Our sales, total revenue, total operating expenses and operating income for the year ended December 31, 2013, compared to the year ended December 31, 2012, were as follows:
The significant decrease in sales from $16,422,000 for the year ended December 31, 2012, to $606,000 for the year ended December 31, 2013, a decrease of 96%, is because we are no longer advertising in and providing listing services to the medicinal cannabis industry vertical as a result of our sale of our finder site weedmaps.com.
The decrease in total revenue for the year ended December 31, 2013 as compared to the year ended December 31, 2012, is a result of a decrease in the fees we charge for our listing packages and a decrease in the number of customers. The fee we charge for listing packages, in general, has decreased from the previous year primarily because we no longer advertise to and provide listing services to the medicinal cannabis industry vertical as a result of our sale of our finder site weedmaps.com. For example, during the year ended December 31, 2012 an average listing package would range from $5,000 to $10,000, as compared to the year ended December 31, 2013 where the average listing package was $5,000 per month for a manufactured home factory and $595 per month for a manufactured home dealership. We anticipate that, as traffic to and demand for our vertical finder websites increases, the average listing package price will increase, although we cannot be sure it will return to prior levels.
For the quarter ended December 31, 2013 as compared to the previous quarter ended September 30, 2013, we experienced an increase in our revenues of $95,000, from $191,000 for the quarter ended September 30, 2013, to $286,000 for the quarter ended December 31, 2013, an increase of 50%. The increase in revenue for the quarter ended December 31, 2013 as compared to the quarter ended September 30, 2013, is related to generating revenue from Tattoo.com and ManufacturedHomes.com. The growth in our subscribers from tattoo.com has not been as strong as we had hoped, and as a result, our revenue growth has not been at the pace we anticipated. As compared to the previous year, we have significantly fewer customers as a result of no longer having customers in the medical cannabis industry. During the year ended December 31, 2012, we experienced significant growth in the number of our customers in the medical cannabis industry, which was attributable to an increase in the number of dispensaries that purchased our listing packages and, to a lesser extent, because we started offering our listing packages in new states such as Washington, Oregon and Michigan, in addition to our then-existing offerings in California and Colorado.
Below is a summary presentation of the average number of clients during each of the years ended December 31, 2013 and 2012, as well as those outstanding at the end of each period:
Below is a summary presentation of the number of clients during each of the quarters ended 2013:
To date, the number of paying clients in the tattoo industry has been increasing in total; however, as was the case with our first finder site, weedmaps.com and our customer base in the medicinal cannabis industry, some of our customers in the tattoo industry as well as industries we will serve in the future have decided to terminate their advertising and listing services. The reasons for termination vary and include, but are not limited to, typical business cycles and/or internal business decisions made by our customers regarding their marketing and advertising budgets as it relates to the complex nature of their respective industry, less than an optimal number of customers being generated from the site, or site quality, which is primarily the responsibility of the URL owner.
Operating Expenses
Operating Expenses - Our operating expenses decreased significantly during the year ended December 31, 2013, as compared to the year ended December 31, 2012, because we are no longer advertising to and providing listing services to the medicinal cannabis industry vertical as a result of our sale of our finder site weedmaps.com. However, as we increase the number of customers that we have in the tattoo and manufactured home industries we expect that our operating expenses will begin to increase accordingly.
The decrease in operating expenses from $12,196,000 for the year ended December 31, 2012, to $3,455,000 for the year ended December 31, 2013, a decrease of 72%, is because we are no longer advertising to and providing listing services to the medicinal cannabis industry vertical as a result of the sale of our finder site weedmaps.com, which was offset slightly by our efforts to expand our operations in other industries during the year ended December 31, 2013. In particular, during the year ended December 31, 2013, we decreased the number of technology specialists for our research and development department, including the number of coders, programmers and engineers whose responsibilities included, but were not limited to, developing software and additional finder sites. This was accompanied by decreases in salaries and employee benefits, decreases in professional fees which included fees for legal and accounting work as well as expenses related to our Securities and Exchange Commission filings and for fees paid to consultants related to business development, investor relations, sales contract work, and decreases in general and administrative expenses.
Salaries And Employee Benefits - During the years ended December 31, 2013 and 2012, salaries and employee benefits were $1,086,000 and $5,578,000, respectively. The significant decrease in salaries and employee benefits during the year ended December 31, 2013, as compared to the year ended December 31, 2012, was primarily because we are no longer advertising to and providing listing services to the medicinal cannabis industry vertical as a result of the sale of our finder site weedmaps.com, which decreased our need for certain operations, employees and staff which resulted in decreases in associated salaries and employee benefits as well as decreases in general and administrative costs.
Professional Fees - During the year ended December 31, 2013 and 2012, professional fees were $1,483,000 and $2,757,000, respectively. This decrease during the year ended December 31, 2013 as compared to 2012 was a result of less spending for legal expenses related to us providing services to the medicinal cannabis industry and the unique legal circumstances of that industry and was also a result of less spending on accounting and legal fees related to our SEC filings, which was slightly offset by our efforts to expand our operations serving the tattoo and manufactured home industries as well as other industries in which we expect to operate in during the year ended 2013.
General And Administrative Expenses - During the year ended December 31, 2013 and 2012, general and administrative expenses were $408,000 and $1,440,000, respectively. The decrease in these expenses was primarily attributable to decreases in computer and internet expenses, spending on travel and on advertising expense, as well as significant decreases in insurances costs related to us no longer providing services to the medicinal cannabis industry and the unique legal circumstances of that industry which had previously increased our insurance costs.
Liquidity and Capital Resources
Our cash, current assets, intangible assets, total assets, current liabilities, and total liabilities as of December 31, 2013 and December 31, 2012 were as follows:
We had a decrease in cash of $421,000, from $514,000 at December 31, 2012 to $93,000 at December 31, 2013. This was because we sold our finder site weedmaps.com and thus we generated less revenue, and to a lesser extent, as a result of cash used in our recent acquisitions.
Our intangible assets at December 31, 2013 consisted of the domain names of www.ManufacturedHome.com, www.ManufacturedHomes.com, www.ManufacturedHouse.com, as well as the recently acquired domain names acquisitions www.ModularHomes.com, www.TravelTrailer.com and www.ToyHaulers.com.
Our current liabilities decreased by $105,000, from $2,694,000 at December 31, 2012 to $2,589,000 at December 31, 2013, primarily as a result of payments on notes payable related to our recent domain name acquisitions and a reduction in the amount we had recorded in federal and state taxes payable based on the loss carrybacks from losses during the year ended December 31, 2013, which were partially offset by an increase in notes payable (the Domain Capital and Asher current portions). At December 31, 2013 we had $1,196,000 in federal and state taxes payable recorded as a current liability which represent amounts due and payable for the years ended December 31, 2011 and 2012.
Our total long-term liabilities decreased by $307,000, from $1,083,000 at December 31, 2012 to $776,000 at December 31, 2013, in large part to a reduction in the amount we had recorded in deferred taxes liability based on the loss carrybacks from losses during the year ended December 31, 2013 and to an increase in notes payable (the Domain Capital noncurrent portion), which were offset in part by payments on notes payable.
Cash Requirements
We had approximately $93,000 in cash and cash equivalents as of December 31, 2013. Our net loss for the year ended December 31, 2013 was $1,696,000. We had a working capital deficit of approximately $1,177,000 at December 31, 2013. During the year ended December 31, 2013, our principal source of liquidity was cash generated from our then-current operations as well as payments we received pursuant to the sale of the finder site weedmaps.com which during the year ended December 31, 2013 totaled $1,350,000 and will continue for $100,000 a month for a total of seventeen (17) more months ($1,200,000 for the year ended December 31, 2014 and $515,500 for the year ended December 31, 2015), which are reflected in our statements of cash flows under the section changes in operating assets and liabilities: other assets). However, the growth in our subscribers from tattoo.com and manufacturedhomes.com has not been as strong as we had hoped, and as a result, our revenue growth has not been at the pace we anticipated. As a result of the foregoing, at our current burn rate, our cash on hand, together with the $100,000 per month that we will receive pursuant to the sale of our finder site weedmaps.com, is insufficient to cover our monthly expenses. We have had to, and will continue to, seek financing in the form of debt or stock sales to finance our operations until we reach break-even. We anticipate operating at break-even in the fourth quarter of 2014.
Sources and Uses of Cash
Operations
We had net cash used in operating activities of $457,000 for the year ended December 31, 2013, as compared to net cash from operating activities of $3.3 million for the year ended December 31, 2012. For the year ended December 31, 2013, the net cash used by operating activities consisted primarily of a net loss of $1,696,000 which included an $14,000 loss related to the discontinued operations of General Health Solutions, and a decrease in accounts payable and accrued liabilities of $639,000, an increase in prepaid expenses and deposits of $485,000, plus non-cash amortization and depreciation expense of $143,000 and $9,900, respectively. For the year ended December 31, 2012, the net cash provided by operating activities consisted primarily of net income of $15,264,000 (including discontinued operations), an increase in accounts payable and accrued liabilities of $1,316,000, a decrease in prepaid expenses and deposits of $326,000, and an increase in accounts receivable of $149,000, plus non-cash amortization and depreciation expense of $184,000 and $121,000, respectively.
Investments
We had net cash used in investing activities of $116,000 for the year ended December 31, 2013, as compared to $1,198,000 for the year ended December 31, 2012. For the year ended December 31, 2013, the net cash used in investing activities was primarily related to purchases of furniture, computers and other equipment of $31,000, plus purchases of intangible assets of $85,000. For the year ended December 31, 2012, the net cash from investment activities was primarily a result of purchases of furniture, computers and other equipment of $160,000, plus purchases of intangible assets of $1,039,000.
Financing
We had net cash from financing activities of $152,000 for the year ended December 31, 2013, as compared to net cash used in financing activities of $3,104,000 for the year ended December 31, 2012. For the year ended December 31, 2013, our net cash used in financing activities consisted solely of payments on notes payable related to our recent domain name acquisitions, offset by three convertible loans from a third-party in the aggregate amount of $138,500 and a leaseback accounted for as a note from a third party in the amount of $150,000. For the year ended December 31, 2012, our net cash used in financing activities consisted of payment on notes payable - related party related to the WeedMaps acquisition (reflected in our statements of cash flows under the section changes in operating assets and liabilities: other assets) and payments on notes payable related to the marijuana.com acquisition.
Debt Instruments, Guarantees, and Related Covenants
We have no disclosure required by this Item.
Critical Accounting Estimates
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 our 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 our 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 year ended December 31, 2013 and 2012, respectively.
Intangible Assets
In accordance with Goodwill and Other Intangible Assets, intangible assets that are determined not to have an indefinite useful life are subject to amortization. We amortize 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, we review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We assess 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 years ended December 31, 2013 and 2012. No impairment of long-lived assets was recognized during the years ended December 31, 2013 and 2012.
Contingent Consideration - Earn-outs
Contingent consideration, the earn-out provisions, which are classified as a liability, pursuant to ASC 805, are required to be re-measured 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 re-measured 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. As of December 31, 2012, all of our obligations pursuant to earn-out provisions were cancelled; therefore, there was no gain/loss on change in fair value of earn-out liability during the year ending December 31, 2013. For the year ended December 31, 2012, the total non-cash gain on change in fair value of earn-out liability that we recognized was $5,954,000.
Net Loss
For the year ended December 31, 2013 and 2012, we had a net loss of $1,696,000 and net income of $15,264,000, respectively. The net loss we experienced during the year ended December 31, 2013 was primarily because we are no longer advertising to and providing listing services to the medicinal cannabis industry vertical as a result of the sale of our finder site weedmaps.com, and also as a result of our efforts to expand our operations serving the tattoo and manufactured home industries as well as other industries in which we expect to operate in during the year ended 2013. The net income we experienced during the year ended December 31, 2012 is primarily attributed to the $5,954,000 non-cash gain on change in fair value of the earn-our liability and the 7,795,627 gain on sale of WeedMaps Media, Inc.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company we are not required to provide the information required by this Item.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of SearchCore, Inc.
Lake Forest, California
We have audited the accompanying consolidated financial statements of SearchCore, Inc. (Company) (a California corporation), which comprise the balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of income, retained earnings, and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SearchCore, Inc. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Dana Point, California
March 31, 2014
SEARCHCORE, INC.
Condensed Consolidated Balance Sheets (Audited)
The accompanying notes are an integral part of these condensed consolidated financial statements.
SEARCHCORE, INC.
Condensed Consolidated Statements of Operations (Audited)
The accompanying notes are an integral part of these condensed consolidated financial statements.
SEARCHCORE, INC.
Condensed Consolidated Statements of Cash Flows (Audited)
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
SEARCHCORE, INC.
Notes to the Condensed Consolidated Financial Statements
December 31, 2013
Audited
Note 1. General
Nature of Business
We, together with our wholly owned subsidiaries, are engaged in developing, operating and monetizing websites that focus on specific industries, also known as vertical finder websites or finder sites. We currently are either developing finder sites, or providing marketing services on our existing finder sites, in the prefabricated home and tattoo industries. We provide finder site services in three different sectors: media, technology, and marketing. All of our operations are conducted through our wholly-owned subsidiaries, each of which is incorporated or qualified to do business in the states in which it does so.
SearchCore, Inc. was formed on July 14, 2003 in the State of Nevada as Tora Technologies, Inc. On November 21, 2006, we changed our name to Makeup.com Limited, on January 29, 1010, we changed our name to LC Luxuries Limited, and on November 5, 2010, we changed our name to General Cannabis, Inc. On January 6, 2012, we changed our name to SearchCore, Inc.
Principal Services
Our business service is to connect consumers with brands, products and services via our finder sites. We specialize in creating, operating and monetizing vertical finder sites. We identify niche, fragmented and/or disjoined markets, and attempt to capitalize on those markets by incorporating our existing platform as it relates to technology, marketing, advertising and sales. We only pursue markets in which we anticipate we will be the among the top finder sites in any respective industry. This includes marketing and services in both the business-to-business and the business-to-consumer marketplaces. When a consumer or business utilizes one of our finder sites, they are searching primarily for specific products, related items, social engagement, and/or reviews. Initially, we may waive all or a portion of advertising or marketing fees to clients who subscribe with us and market their brand, product or service on our finder sites. Once a client has subscribed with us then we offer various marketing packages that serve to increase the exposure of their business and thus increase the likelihood of connecting more consumers with their brand, product or service. We charge a fee for these various services. The fee varies depending on the service we provide. We believe that the previous success of our first finder site will enable us to continue and expand into other markets we believe has high growth potential.
Our principal services are offered through the following wholly owned subsidiaries:
Sports Asylum, Inc.
VerticalCore Management, Inc.
VerticalCore Merchant, Inc.
VerticalCore Media, Inc.
VerticalCore Technologies, Inc.
Wisdom Homes of America, Inc.
Wisdome Home Loans of America, Inc.
Other Subsidiaries
We have three (3) additional wholly-owned subsidiaries which have no operations and are dormant. These are General Marketing Solutions, Inc., General Processing Corporation, and LV Luxuries Incorporated (which operated as makeup.com). Currently, we have no imminent or specific plans for any of these entities and they are held as corporations in good standing.
Recent Developments
Expanding Our Focus on Manufactured Homes
We have expanded our focus in an attempt to create additional income streams from industries, such as the manufactured housing and the travel trailer industries, for whom we have created, or are creating, search engine finder sites. Our expansion in this direction to create additional revenue is the result of several developments over the past year. First, the number of competitors in the finder site space has increased, and the internet presence and capital that some of those companies have far exceed our capabilities. For example, Google has more prominently entered into the finder site space by displaying colored photographs and locations of business search results at the top of the page. As a result of the increase in competition, and some of the competition such as Google owning the search engines, we believe this will create a more challenging environment to generate revenue. The second reason we decided to expand our focus is that we believe we are uniquely qualified to leverage our technology and retail expertise, specifically in the manufactured housing industry, and to a lesser extent, the travel trailer industry. Our staff currently has over 125 years of combined manufactured home industry experience. We believe this experience will assist us in negotiating terms with factories, hiring top tier talent, and identifying retail center locations.
ManufacturedHomes.com Finder Site
Our vertical finder site, www.ManufacturedHomes.com, acts as an information marketplace which provides detailed, focused and relevant information specific to the manufactured home product or service that a consumer is searching. We focus on becoming a top ranked website on all major search engines within the manufactured housing industry. We acquire premium domains, develop relevant content and resources as it relates to the manufactured housing industry, and execute campaigns within search engines to capture traffic.
For consumers, www.ManufacturedHomes.com is designed to provide the technological means necessary to quickly search information in order to get their desired results. Our finder site aggregates detailed data and information about specific businesses and products, along with reviews by other consumers, all of which when taken together create content in a value-added, engaging experience.
For manufactured home factories and retail centers, www.ManufacturedHomes.com provides a simple means to outsource their internet traffic aggregation and online marketing advertising. Our finder site manages various internet marketing tactics on behalf of our clients including Search Engine Optimization (SEO) and Search Engine Management (SEM). This process helps to increase the ranking of the finder site which makes the site easily accessible to prospective consumers. In short, we assist business owners in the manufactured housing industry to focus on their core product or service while alleviating the technological challenges associated with search engine optimization. www.ManufacturedHomes.com helps to narrow down the target market to those individuals that are highly targeted for the manufactured home factory or retail center.
Manufactured Homes Retail Centers
We believe there are gains to be realized through leveraging our finder site technology and capitalizing on other opportunities in a specific industry. As a result, we are currently expanding our focus in the manufactured housing industry and looking to leverage ancillary opportunities that we have discovered within that industry. Specifically, we are currently concentrating on the manufactured home retail center sector of the industry. In February 2014 we opened our first retail center in Rhome, Texas. We anticipate opening additional retail centers in the midwest, southeast and southwest regions of the country. The retail centers are operated by our wholly owned subsidiary, Wisdom Homes Of America, Inc.
The strategic reasons for concentrating in a specific industry such as the manufacturing housing industry include our management’s experience in both technology and retail center management, our ability to utilize technology in an industry in which technology has, for the most part, been either absent or lagged other comparable industries, and our portfolio of premium domains specific to the industry. In addition, our staff is regularly in communication with manufactured home factories and retail centers across the country in order to introduce them to our proprietary CRM system and the features offered on our geo-targeted website www.manufacturedhomes.com. As a result of our regular communication with nationwide retailers, we believe we will be able to target regional trends developing in the manufactured housing industry.
Note 2. Basis Of Presentation And Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP).
Reclassifications
Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the consolidated results of operations or financial position for any years presented.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates are based on knowledge of current events and anticipated future events and accordingly, actual results may differ from those estimates.
Risks related to cash
The Company maintains cash in bank and deposit accounts, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.
Cash and Cash equivalents
The Company considers only highly liquid investments such as money market funds and commercial paper with maturities of 90 days or less at the date of their acquisition as cash and cash equivalents.
Fair Value of Financial Instruments
The accounting standards regarding disclosures about fair value of financial instruments defines financial instruments and required fair value disclosure of those instruments. This accounting standard defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. Receivables, investments, payables, short and long term debt and warrant liabilities qualified as financial instruments. Management believes the carrying amounts of receivables, payables and debt are a reasonable estimate of fair value because of the short period of time between the origination of such instruments, their expected realization, and if applicable, their stated interest rate is equivalent to interest rates currently available. The three levels are defined as follows:
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 twelve months ended December 31, 2013 and 2012 was $73,000 and $298,000, respectively.
Allowance for Doubtful Accounts
Allowance for doubtful accounts is defined as a company's estimate of the amount of probable credit losses in the company's existing accounts receivable. The Company does not maintain an allowance for doubtful accounts based upon management’s review of the Company’s revenue structure whereby substantially all receivables are confirmed before they are booked as revenue. The Company reviews its allowance for doubtful accounts policy periodically. The Company does not have any off-balance-sheet exposure related to its customers.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the useful lives of the assets, generally from three to seven years. Property and equipment at December 31, 2013 and December 31, 2012 are presented net of accumulated depreciation of $16,000 and $121,000, respectively.
Goodwill
In accordance with Goodwill and Other Intangible Assets, goodwill is defined as the excess of the purchase price over the fair value assigned to individual assets acquired and liabilities assumed and is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis in the Company's fourth fiscal quarter or more frequently if indicators of impairment exist. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of the Company's reporting units with each respective reporting unit's carrying amount, including goodwill. The fair value of reporting units is generally determined using the income approach. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, the second step of the goodwill impairment test is performed to determine the amount of any impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. No amortization is recorded for goodwill with indefinite useful life. No goodwill impairment was recognized during the twelve months ended December 31, 2013 and 2012, respectively.
Intangible Assets
In accordance with Goodwill and Other Intangible Assets, intangible assets that are determined not to have an indefinite useful life are subject to amortization. The Company amortizes intangible assets using the straight-line method over their estimated useful lives.
Impairment of Long-Lived and Intangible Assets
In accordance with Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company assesses the recoverability of the long-lived and intangible assets by comparing the carrying amount to the estimated future undiscounted cash flow associated with the related assets. No impairment of intangible assets was recognized during the twelve months ended December 31, 2013 and 2012, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with the provisions of Share-Based Payment, which addresses the accounting for equity-based compensation and which requires that the cost of all equity-based compensation arrangements, be reflected in the financial statements over the vesting period based on the estimated fair value of the awards. During the twelve months ended December 31, 2013 and 2012, the Company had $230,000 and $210,000, respectively, in stock-based compensation expense related to issuances of shares of the Company’s common stock to consultants.
Treasury Stock
We account for treasury stock using the cost method and include treasury stock as a component of shareholders’ equity. Other than the share transaction described in Note 3. Equity Transactions, we currently do not have or intend to initiate a share repurchase program.
Revenue Recognition
We recognize revenue in accordance with ASC 605, “Revenue Recognition,” by recognizing as revenue the fees we charge customers as referenced below because persuasive evidence of an arrangement exists, the fees we charge are substantially fixed or determinable during the period that we provide the services, we and our customers understand the specific nature and terms of the agreed upon transactions, collectability is reasonable assured and services have been rendered.
The Company and its wholly owned subsidiaries recognize revenue as follows:
We generate revenue through attracting internet and mobile searchers to our internet properties. The users then frequent our clients who pay us a fee to list on our site.
Our Internet properties generate revenues from merchants and advertisers within the industry verticals served. This is the revenue model we employed with our previously owned finder site weedmaps.com and is the same revenue model we employ with our current finder sites. The revenue model follows a subscription-based approach, generating recurring monthly revenue from a variety of different package listings, lead generation and advertising.
Advertising Package Tiers - For our finder sites we typically create advertising package tiers in order to more easily distinguish the different services we offer at different price points. The different advertising package tiers also makes it easy for our clients to distinguish which package tiers are premium and thus likely to generate more traffic to their brand, product or service. The range of prices we charge for each advertising package tier differs per each finder site, per region, and per each tier package. Each region is internally created by us based on geographic location, industry density and demographics.
Listing Revenue - We generate revenues from fees we charge clients to advertise or list their location, products, and services on one or more of our finder websites. We recognize as revenue the fees we charge customers that advertise or list their related company on our websites.
For example, our listing packages typically are made up of two groups, Premium Listings and Standard Listings. The most important distinction between Premium Listings and Standard Listing packages is typically positioning on our finder websites. This distinction is important because the business that appears first in an internet search results list has an increased likelihood of a website visitor clicking on that business and thus “converting” the website visitor to a potential customer for our client. In general, being in the top section of the search results on any of our finder websites for a given geographical region is deemed preferable because of the increased conversion rates (or click-through rates). As a result, we charge a premium dollar amount for a Premium Listing so that the client is placed in the top section of search results for a given region.
Standard Listing Packages are basic packages which typically allow a customer to list their brand, product, or service on one or more of our finder sites with the capability to edit their listing. A Standard Listing also typically allows a customer to add photos, create a menu, and respond to customer reviews, for example.
Advertising Revenue - We generate revenues from fees we charge customers for placing ads for their related companies on our websites (i.e. Advertising Packages). Our Advertising Packages can include banner ads placed on our finder sites, emails, texts, special promotions, and events. All of our Advertising Packages are considered Ad Revenue pursuant to our revenue recognition policy.
Content Production Revenue - We generate revenues from photo and video production of content which is displayed on our finder websites (i.e. Content Production). Typically, Content Production that we create on behalf of our clients is considered an add-on or ancillary service. We typically create video “virtual” tours of our client’s establishments and products, which are then displayed on our finder websites. We recognize as revenue the fees we charge customers for photo and video production services. All of our Content Production services are considered Content Production Revenue pursuant to our revenue recognition policy.
Manufactured Home Retail Centers - we anticipate generating revenues through our manufactured home retail center Wisdom Homes Of America, Inc., which we started in January 2014. We anticipate opening and/or acquiring additional retail centers in 2014 and branding them under the name Wisdom Homes Of America, Inc. Our first center was opened in Rhome, Texas in February, 2014. We will purchase factory built houses and sell them to the end user. We also anticipate structuring the sale of used manufactured homes.
Income Taxes
The Company follows Accounting for Income Taxes which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between the income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently due plus deferred taxes.
The charge for taxation is based on the results for the year as adjusted for items that are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect to temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent it is probable that taxable profit will be available against which deductible temporary differences can be utilized.
Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also recorded in equity.
Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.
Uncertain tax positions
The Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50% likely of being ultimately realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being sustained. The Company classifies income tax-related interest and penalties as interest expense and SGA expense, respectively, on the Consolidated Statement of Operations.
Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board, or FASB, issued an accounting standards update to require disclosure of information about the effect of rights of offset with certain financial instruments on an entity’s financial position. In January 2013, the FASB issued an accounting standards update that clarifies the aforementioned offsetting disclosure requirements. The disclosure requirements are only applicable to rights of offset of certain derivative instruments, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with standards set forth by the FASB Codification subject to master netting arrangements or similar agreements. Adoption of this standard had no significant impact on the Company’s consolidated financial statements.
In February 2013, the FASB issued an accounting standards update that requires presentation for reclassification adjustments from accumulated other comprehensive income into net income in a single note or on the face of the financial statements. The Company has adopted the amendments in this standard effective in the first quarter of 2013. The adoption of this standard had an immaterial effect on the Company’s consolidated financial statements and as such, the required presentation is not included herein.
In July 2013, the FASB issued an accounting standards update that specifies that unrecognized tax benefits should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. When a net operating loss carryforward, a similar tax loss or tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes or the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this accounting standards update is not expected to have significant impact on the Company’s consolidated financial statements.
FASB issued an accounting standards update amending ASC 220 to improve the comparability, consistency and transparency of reporting of comprehensive income. It amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU No. 2011-05 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. In December 2011, FASB issued ASU 2011-12. ASU 2011-12 indefinitely deferred the provisions of ASU 2011-05 requiring the presentation of reclassification adjustments on the face of the financial statements for items reclassified from other comprehensive income to net income. The adoption of this standard did not have a material impact on our financial statements.
FASB issued an accounting standards update amending ASC 820, which is effective for interim and annual periods beginning after December 31, 2011, to achieve common fair value measurement and disclosure requirements between GAAP and IFRS. This amendment changes the wording used to describe fair value and requires additional disclosures. The adoption of this amendment did not have a material impact on our financial statements.
In September 2011, the FASB issued an amendment to an existing accounting standard, which provides an option to perform a qualitative assessment to determine whether further impairment testing on goodwill is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this standard did not have a material impact on our financial statements.
During May 2009 and February 2010, the FASB issued a new authoritative pronouncement regarding recognized and non-recognized subsequent events. This guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The adoption of this guidance had no impact on our results of operations or financial position.
Other Recently Issued, but Not Yet Effective Accounting Pronouncements
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
Note 3. Equity Transactions
At December 31, 2013 the total number of shares of our common stock that were issued and outstanding was 39,368,772.
Treasury Share Retirements
During the quarter ended March 31, 2013, 42,581,596 shares of treasury stock were retired pursuant to an agreement whereby we repurchased shares of our common stock, which were held in escrow and released pursuant to the sale of our finder site weedmaps.com during the year ended December 31, 2012.
Stock-based Compensation
On August 20, 2012, we approved the issuance of Twenty Thousand (20,000) shares of our common stock, restricted in accordance with Rule 144, to each then-member of our Board of Directors, namely James Pakulis, Bonnie Goldstein, and Munjit Johal, as a one-time bonus for serving as a director. The shares were issued during the quarter ended March 31, 2013.
On July 15, 2013, we issued an aggregate of 945,000 shares of our common stock, restricted in accordance with Rule 144, to seven (7) existing shareholders, who had previously purchased shares from us, as consideration under a Stock Issuance and Release Agreement (the “Release”) we entered into with each of them. The Release was the resolution of discussions with the investors regarding our efforts in pursuing an S-1 registration statement. One of the shareholders that had previously purchased shares from us was James Pakulis, our Chief Executive Officer; he was issued 150,000 shares pursuant to the Release.
On October 25, 2013, we entered into a Securities Purchase Agreement with a third-party creditor pursuant to which we sold 67,424 shares of our common stock, restricted in accordance with Rule 144, at a per-share purchase price of $0.165, for a total purchase price of $11,125. The Purchase Price was paid in full satisfaction of accounts payable owed to the creditor by the Company.
Common Stock Issuances
On December 31, 2012, we entered into a Securities Purchase Agreement by and among us, on the one hand, and Sports Asylum, Inc., a Nevada corporation, and its shareholders, Sabas Carrillo (“Carrillo”), an individual, and James Pakulis (“Pakulis”), an individual and one of our officers and directors, on the other hand. Pursuant to the agreement, upon the closing of the transaction, we purchased 100% of the issued and outstanding equity interests of Sports Asylum in exchange for (a) the cancellation of a previous Secured Promissory Note issued to Sports Asylum, entered into on or about August 22, 2012 and with an outstanding principal balance of Two Hundred Eighty Five Thousand Dollars ($285,000) and (b) Two Hundred Fifteen Thousand Dollars ($215,000) represented by promissory notes in the original principal amount of One Hundred Sixty One Thousand Two Hundred Fifty Dollars ($161,250) to Pakulis and Fifty Three Thousand Seven Hundred Fifty ($53,750) to Carrillo. The closing of the purchase took place on December 31, 2012. On July 11, 2013, we entered into a First Amendment to Promissory Note with each of Pakulis and Carrillo to extend the date that we will begin making payments thereunder from June 30, 2013 to September 30, 2013, and extended the maturity date of the notes by a corresponding three (3) months. On October 25, 2013, we entered into a Securities Purchase Agreement with Carrillo pursuant to which we sold 328,381 shares of our common stock, restricted in accordance with Rule 144, for a total purchase price of $54,182.81. The Purchase Price was paid in full satisfaction of the promissory note in the original principal amount of $53,750.
Note 4. Other Current Assets
At December 31, 2013, the Company had recorded a $1,200,000 note receivable which represented the current portion of a $3,000,000 note receivable pursuant to the sale of our finder site weedmaps.com. On December 11, 2012, we entered into an Agreement and Plan of Reorganization, pursuant to which we sold our finder site weedmaps.com. Pursuant to the terms of the sale and as partial consideration we received a Secured Promissory Note in the original principal amount of Three Million Dollars ($3,000,000). Pursuant to the Note we will receive (1) Two Hundred Fifty Thousand Dollars ($250,000) on January 15, 2013 (which payment date was extended to January 31, 2013), which payment we did receive; One Hundred Thousand Dollars ($100,000) each month beginning on February 25, 2013 and continuing on the twenty fifth (25th) of each month thereafter for a total of twenty eight (28) months, which payments for February through December 2013 we did receive; and Sixteen Thousand Five Hundred Dollars ($16,500) on July 25, 2015.
At December 31, 2013, the Company had recorded $15,000 in prepaid filing fees, $5,200 in deposits, and $17,200 in prepaid insurance.
Note 5. Property And Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the useful lives of the assets, generally from three to seven years. Property and equipment at December 31, 2013 and December 31, 2012 consist of the following:
For the twelve months ended December 31, 2013 depreciation expense was $10,000. For the twelve months ended December 31, 2012, depreciation expense, including depreciation for assets sold with our finder site weedmaps.com, totaled $121,000.
Note 6. Intangible Assets
Intangible assets consist of a suite of domain names. The domain names have been determined to have an indefinite useful life based primarily on the renewability of the domain name. Intangible assets with an indefinite life are not subject to amortization, but will be subject to periodic evaluation for impairment.
Intangible asset amounts at December 31, 2013 and December 31, 2012 are as follows:
See Note 8. Discontinued Operations for a discussion regarding the web software, trademarks and goodwill related to Sportify.com.
Note 7. Other Assets
At December 31, 2013, the Company had recorded a $473,000 note receivable which represented the noncurrent portion of a $3,000,000 note receivable we received pursuant to the sale of our finder site weedmaps.com. See Note 4. Other Current Assets for more information on the sale of our finder site weedmaps.com.
The balance of other assets at December 31, 2013 included $11,000 in rent deposits and $84,000 in deferred tax assets.
Note 8. Discontinued Operations
Sports Asylum, Inc.
During the quarter ended December 31, 2013, we entered into a definitive plan to sell the assets related to Sportify.com which includes the web software, trademarks, nonpremium sports-related domain names and goodwill associated with our acquisition of Sports Asylum, Inc. Sports Asylum, Inc. owns and operates the intellectual property associated with www.sportify.com. We entered into a definitive plan to sell the assets related to Sportify because during the quarter ended December 31, 2013, management decided to focus the Company’s efforts and resources to expanding our operations in the manufactured housing industry through our highly specific search-driven internet marketing finder site called ManufacturedHomes.com. At December 31, 2013 we have reclassed the assets, which have a net book value of $456,000 which amount is comprised of $100,000 in sports related nonpremium domain names, $10,000 in Sportify.com premium domain name, $1,000 in trademarks, $59,000 in goodwill, $430,000 in web software and $143,000 in accumulated amortization, to discontinued operations. At December 31, 2013, the $456,000 in net assets is recorded as Other assets - discontinued operations. The Sports Asylum assets are being held for sale and as of the filing of this report, a buyer has been identified and we are currently in negotiations.
Karate.com and Rodeo.com
During the quarter ended December 31, 2013, we entered into a definitive plan to sell the premium domain names Karate.com and Rodeo.com. We entered into a definitive plan to sell the Karate.com and Rodeo.com because during the quarter ended December 31, 2013, management decided to focus the Company’s efforts and resources to expanding our operations in the manufactured housing industry through our highly specific search-driven internet marketing finder site called ManufacturedHomes.com. At December 31, 2013 we have reclassed Karate.com and Rodeo.com, which have a net book value of $100,000 which amount is comprised of $500,000 in domain names and $400,000 in debt, to discontinued operations. At December 31, 2013, the $500,000 in domain names is recorded as Other assets - discontinued operations and the $400,000 in debt is recorded as Noncurrent liabilities - discontinued operations. Karate.com and Rodeo.com are being held for sale and as of the filing of this report, a buyer has been identified and we are currently in negotiations.
General Health Solutions, Inc.
We discontinued the operations of General Health Solutions, Inc., which constitutes our entire Medical Clinic Management segment. We discontinued the operations of General Health Solutions because of increasing costs associated with managing the clinics and the recent increased competition in the medicinal cannabis clinic industry. A major factor in the success of managing the medicinal cannabis clinics is running successful online Pay Per Click (“PPC”) advertising campaigns. In PPC campaigns targeting is key, and factors that determine the pricing pertaining to certain key words depend heavily on the number of advertisers bidding on those certain key words. Taken together, i) our increasing success with our technology in our Marketing and Media Segment and ii) the increasing costs of PPC campaigns coupled with the increasing number of sole-practitioner doctors now offering medicinal cannabis recommendation letters as part of their medical practice offerings, which places downward pressure on pricing, led us to decide to discontinue the operations of General Health Solutions, which composes our entire Medical Clinic Management Segment and focus our efforts instead on our technology in our Marketing and Media Segment.
During February 2012, we committed to a definitive plan to terminate the Management Agreement (“Agreement”) and services associated with the Agreement, which resulted in General Health Solutions, Inc., our Medical Clinic Management segment being reported as discontinued operations. For comparative purposes, all prior periods presented have been restated to reflect the reclassification of this segment to discontinued operations on a consistent basis. Following the closure of the clinics during the first quarter 2012, we do not expect any continuing cash flows from discontinued operations.
The assets and liabilities of our discontinued operations related to General Health Solutions at December 31, 2013 consists of $10,000 in accounts payable and $107,000 in notes payable plus $44,000 in accrued interest recorded as Current liabilities - discontinued operations.
Note 9. Accounts Payable
Accounts payable at December 31, 2013 included amounts owed to certain vendors related to the ongoing normal course of the Company’s operations.
Note 10. Accrued Liabilities
Accrued liabilities at December 31, 2013 and December 31, 2012 are comprised of the following:
At December 31, 2013 we had $1,342,000 in federal and state taxes payable which represent amounts due and payable for the years ended December 31, 2011 and 2012.
Note 11. Notes Payable
On December 31, 2012, we entered into a Securities Purchase Agreement by and among us, on the one hand, and Sports Asylum, Inc., a Nevada corporation, and its shareholders, Sabas Carrillo (“Carrillo”), an individual, and James Pakulis (“Pakulis”), an individual and one of our officers and directors, on the other hand. Pursuant to the agreement, upon the closing of the transaction, we purchased 100% of the issued and outstanding equity interests of Sports Asylum in exchange for (a) the cancellation of a previous Secured Promissory Note issued to Sports Asylum, entered into on or about August 22, 2012 and with an outstanding principal balance of Two Hundred Eighty Five Thousand Dollars ($285,000) and (b) Two Hundred Fifteen Thousand Dollars ($215,000) represented by promissory notes in the original principal amount of One Hundred Sixty One Thousand Two Hundred Fifty Dollars ($161,250) to Pakulis and Fifty Three Thousand Seven Hundred Fifty Dollars ($53,750) to Carrillo. The closing of the purchase took place on December 31, 2012. On July 11, 2013, we entered into a First Amendment to Promissory Note with each of Pakulis and Carrillo to extend the date that we will begin making payments thereunder from June 30, 2013 to September 30, 2013, and extended the maturity date of the notes by a corresponding three months. On November 8, 2013, effective as of September 30, 2013, we entered into a Second Amendment to Promissory Note with each of Pakulis and Carrillo to extend the date that we will begin making payments thereunder from September 30, 2013 to December 31, 2013, and extended the maturity date of the notes by a corresponding three months. On March 19, 2014, effective as of December 31, 2013, we entered into a Third Amendment to Promissory Note with Pakulis to extend the date that we will begin making payments thereunder from December 31, 2013 to January 1, 2015, and extended the maturity date of the notes by a corresponding twelve months. On October 25, 2013, we entered into a Securities Purchase Agreement with Carrillo pursuant to which we sold 328,381 shares of our common stock, restricted in accordance with Rule 144, for a total purchase price of $54,183. The Purchase Price was paid in full satisfaction of the promissory note in the original principal amount of $53,750.
On February 27, 2013, we purchased the domain name know as www.toyhaulers.com. The purchase price was $30,000, payable $15,000 at closing and $2,500 per month over six (6) consecutive months. During the year ended December 31, 2013, the remaining balance outstanding was paid.
On February 22, 2013, we purchased the domain name know as www.traveltrailer.com. The purchase price was $50,000, payable $15,000 at closing and $5,000 per month over seven (7) consecutive months. During the year ended December 31, 2013, the remaining balance outstanding was paid.
On January 25, 2013, we purchased the domain name known as www.modularhomes.com for total consideration of One Hundred Forty Thousand Dollars ($140,000), payable in a down payment of Fifty Thousand Dollars ($50,000) and the balance over twelve (12) equal monthly payments. On July 12, 2013, we modified our remaining payment obligation by increasing the purchase price by $6,000 and extending the payment terms as follows: $2,000 on July 15, 2013 and on the first of each month for five (5) subsequent months, followed by ten (10) monthly payments of $5,460 beginning January 1, 2014. During the year ended December 31, 2013, the remaining balance outstanding was paid.
On August 9, 2013, we entered into a sale-leaseback agreement with Domain Capital, LLC, pursuant to which we transferred our interest in the following domains to Domain Capital in exchange for One Hundred and Fifty-Thousand Dollars ($150,000.00): www.manufacturedhome.com, www.manufacturedhomes.com, www.manufacturedhouse.com, www.manufacturedhomes.net, www.modularhomes.com, www.traveltrailer.com, and www.toyhaulers.com (the Domains). That same day, we entered into a Lease Agreement with Domain Capital, pursuant to which we are leasing the Domains at a cost of Five Thousand One Hundred and Ninety-Nine Dollars and Eighty Cents ($5,199.80) per month. The initial term of the Lease Agreement is thirty-six (36) months, and the sum of the lease payments due over the initial term are equal to the consideration we received for the Domains (i.e., $150,000.00) plus interest of 15%. The transactions closed on August 15, 2013, the date that the purchase price was delivered to us. At the termination of the Lease Agreement, pursuant to the terms of a Buyback Agreement, we can exercise an option to re-purchase the Domains for a total purchase price of one dollar ($1.00), assuming we are not in default under the Lease Agreement at that time. The proceeds we received from Domain Capital were used to satisfy outstanding debts related to our acquisition of the following three domains, with the balance allocated to working capital: www.modularhomes.com, www.traveltrailer.com, and www.toyhaulers.com.
On June 10, 2013, July 11, 2013, August 22, 2013 and December 12, 2013, respectively, we entered into Securities Purchase Agreements with Asher Enterprises, Inc., pursuant to which we sold to Asher 8% Convertible Promissory Notes in the original principal amounts of $53,000, $53,000, $32,500 and $63,000, respectively (the “Notes”). The Notes have maturity dates of March 12, 2014, April 15, 2014, May 27, 2014 and September 16, 2014, respectively, and are convertible after one hundred and eighty (180) days into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 58% multiplied by the Market Price (representing a discount rate of 42%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means the closing bid price on the applicable day. The “Fixed Conversion Price” shall mean $0.00005. The shares of common stock issuable upon conversion of the Notes will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The Notes can be prepaid by us at a premium as follows: (a) between 31 and 60 days after issuance - 114% of the principal amount; (b) between 61 and 90 days after issuance - 120% of the principal amount; (c) between 91 and 120 days after issuance - 124% of the principal amount; (d) between 121 and 180 days after issuance - 130% of the principal amount. The purchase and sale of the Notes closed on June 14, 2013, July 16, 2013, August 28, 2013, and December 23, 2013, respectively, the dates that the purchase price was delivered to us. The issuance of the Notes was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.
On December 6, 2013, we repaid the promissory note to Asher Enterprises, Inc. that, on June 10, 2013, we entered into in connection with a Securities Purchase Agreement, pursuant to which we sold to Asher a 8% Convertible Promissory Note in the original principal amount of $53,000 (the “Note”). We repaid the entire principal balance of the Note, plus accrued interest and a prepayment premium, in the amount of Seventy Thousand Nine Hundred Thirty Two Dollars and Eighty Eight Cents ($70,932.88).
On January 3, 2014, we repaid the promissory note to Asher Enterprises, Inc. that, on July 11, 2013, we entered into in connection with a Securities Purchase Agreement, pursuant to which we sold to Asher a 8% Convertible Promissory Note in the original principal amount of $53,000 (the “Note”). We repaid the entire principal balance of the Note, plus accrued interest and a prepayment premium, in the amount of Seventy Thousand Eight Hundred Thirty Nine Dollars and Ninety Four Cents ($70,839.94).
Below is a summary of our note payable amounts:
Note 12. Notes Payable- Related Party
Sportify Note
On December 31, 2012, we entered into a Securities Purchase Agreement by and among us, on the one hand, and Sports Asylum, Inc., a Nevada corporation, and its shareholders, Sabas Carrillo (“Carrillo”), an individual, and James Pakulis (“Pakulis”), an individual and one of our officers and directors, on the other hand. Pursuant to the agreement, upon the closing of the transaction, we purchased 100% of the issued and outstanding equity interests of Sports Asylum in exchange for (a) the cancellation of a previous Secured Promissory Note issued to Sports Asylum, entered into on or about August 22, 2012 and with an outstanding principal balance of Two Hundred Eighty Five Thousand Dollars ($285,000) and (b) Two Hundred Fifteen Thousand Dollars ($215,000) represented by promissory notes in the original principal amount of One Hundred Sixty One Thousand Two Hundred Fifty Dollars ($161,250) to Pakulis and Fifty Three Thousand Seven Hundred Fifty Dollars ($53,750) to Carrillo. The closing of the purchase took place on December 31, 2012. On July 11, 2013, we entered into a First Amendment to Promissory Note with each of Pakulis and Carrillo to extend the date that we will begin making payments thereunder from June 30, 2013 to September 30, 2013, and extended the maturity date of the notes by a corresponding three months. On November 8, 2013, effective as of September 30, 2013, we entered into a Second Amendment to Promissory Note with each of Pakulis and Carrillo to extend the date that we will begin making payments thereunder from September 30, 2013 to December 31, 2013, and extended the maturity date of the notes by a corresponding three months. On March 19, 2014, effective as of December 31, 2013, we entered into a Third Amendment to Promissory Note with Pakulis to extend the date that we will begin making payments thereunder from December 31, 2013 to January 1, 2015, and extended the maturity date of the notes by a corresponding twelve months.
Below is a summary of our note payable - related party amounts:
Note 13. Other Long Term Accrued Liabilities
At December 31, 2013, we had a balance of $118,750 in noncurrent tax payable.
Note 14. Income Per Common Share
Income per common share is based on the weighted average number of common shares outstanding. The Company complies with Earnings Per Share, which requires dual presentation of basic and diluted earnings per share on the face of the statements of operations. Basic per share earnings or loss excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted-average common shares outstanding for the period. Diluted per share earnings or loss reflect the potential dilution that could occur if convertible preferred stock or debentures, options and warrants were to be exercised or converted or otherwise result in the issuance of common stock that is then shared in the earnings of the entity.
As of December 31, 2013, there were 250,000 common stock purchase warrants outstanding that were not included in the computation of diluted EPS because to do so would have been antidilutive for the period presented.
Note 15. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Significant components of the Company's tax provisions and deferred tax assets as of December 31, 2013 and December 31, 2012 are as follows:
The components of tax provision:
The total tax provision is $1,391,250 of which $1,400,250 corresponds to current operations and $9,000 (tax benefit) corresponds to discontinued operations.
The components of deferred tax asset:
For the years ended December 31, 2013 and 2012, a reconciliation of the federal statutory tax rate to the Company's effective tax rate is as follows:
The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible. The amount of deferred tax assets considered realizable could change if future taxable income is realized. At December 31, 2013 and December 31, 2012, the Company had U.S. federal tax net operating loss carryforwards (“NOLs”) of approximately $664,000 and $1.5 million, respectively, which begin to expire in 2021. At December 31, 2013 and December 31, 2012, the Company had State NOLs of $2.25 million and zero, respectively. The NOLs are subject to limitations under IRC Section 382 of the Internal Revenue Code (“Section 382”).
Note 16. Related Party Transactions
All material intercompany transactions have been eliminated upon consolidation of our entities. During the twelve months ended December 31, 2013, cash transfers, equity and accounts between the Company and its subsidiaries have been eliminated upon consolidation.
On August 20, 2012, we approved the issuance of Twenty Thousand (20,000) shares of our common stock, restricted in accordance with Rule 144, to each then-member of our Board of Directors, namely James Pakulis, Bonnie Goldstein, and Munjit Johal, as a one-time bonus for serving as a director. The shares were issued during the quarter ended March 31, 2013.
On July 15, 2013, we issued an aggregate of 945,000 shares of our common stock, restricted in accordance with Rule 144, to seven (7) existing shareholders, who had previously purchased shares from us, as consideration under a Stock Issuance and Release Agreement (the “Release”) we entered into with each of them. The Release was the resolution of discussions with the investors regarding our efforts in pursuing an S-1 registration statement. One of the shareholders that had previously purchased shares from us was James Pakulis, our Chief Executive Officer; he was issued 150,000 shares pursuant to the Release.
See Note 12. Notes Payable- Related Party for information regarding a Securities Purchase Agreement we entered into on December 31, 2012, with Sports Asylum, Inc., a Nevada corporation, and its shareholders, Sabas Carrillo, an individual, and James Pakulis, an individual and one of our officers and directors.
Note 17. Commitments And Contingencies
Our executive offices are located in Lake Forest, California, at 26497 Rancho Parkway South, Lake Forest, CA 92630. Our office space is approximately 7,000 square feet and is shared with Miracle Housing, Inc., a business controlled by one of our employees, Brad Nelms. Our rent, pursuant to a verbal agreement with Miracle Housing, is $8,000 per month and covers exactly all of the obligations of Miracle Housing under its primary lease. The Company is confident that this commercial space will provide adequate space to meet our needs and provide for future growth.
During April 2013, we entered into a new lease at 3265 N Fort Apache Rd, Suite 110, Las Vegas, NV 89129. The office space is approximately 2,500 square feet. Pursuant to the terms of the lease, our rent is $2,500 per month for twelve (12) months.
Set forth below is a summary of our current obligations as of December 31, 2013 comprised exclusively of the rental lease obligations to make future payments due by the period indicated below:
Note 18. Warrants
As of December 31, 2013, there were 250,000 common stock purchase warrants outstanding. The following table summarizes information about common stock warrants outstanding at December 31, 2013.
Note 19. Subsequent Events
The Company evaluated its December 31, 2013 financial statements for subsequent events through March 27, 2014, the date the financial statements were available to be issued.
On January 3, 2014, we repaid the promissory note to Asher Enterprises, Inc. that, on July 11, 2013, we entered into in connection with a Securities Purchase Agreement, pursuant to which we sold to Asher a 8% Convertible Promissory Note in the original principal amount of $53,000 (the “Note”). We repaid the entire principal balance of the Note, plus accrued interest and a prepayment premium, in the amount of Seventy Thousand Eight Hundred Thirty Nine Dollars and Ninety Four Cents ($70,839.94).
On January 6, 2014, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher a 8% Convertible Promissory Note in the original principal amount of $63,000 (the “Note”). The Note has a maturity date of October 8, 2014, and is convertible after 180 days into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 58% multiplied by the Market Price (representing a discount rate of 42%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means the closing bid price on the applicable day. The “Fixed Conversion Price” shall mean $0.00005. The shares of common stock issuable upon conversion of the Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The Note can be prepaid by us at a premium as follows: (a) between 31 and 60 days after issuance - 114% of the principal amount; (b) between 61 and 90 days after issuance - 120% of the principal amount; (c) between 91 and 120 days after issuance - 124% of the principal amount; (d) between 121 and 180 days after issuance - 130% of the principal amount. The purchase and sale of the Note closed on January 10, 2014, the date that the purchase price was delivered to us.
On January 21, 2013, we entered into a Management Agreement with Tattoo Interactive, LLC (the “Management Agreement”), pursuant to which we will perform various marketing, promotion, and website management services with respect to the domain name known as www.tattoo.comand the commercial website located at that domain (the “Management Services”). The agreement has an initial term of twelve (12) months and shall automatically renew for successive one (1) year terms unless terminated in accordance with its terms. In the event we incur at least $25,000 in expenditures relating to the performance of the services in any single month, Tattoo Interactive shall pay us $10,000 as an expense-sharing allotment. Pursuant to the agreement, we will receive twenty percent (20%) of all advertising revenue (as defined therein), and after the payment of the advertising revenue (as defined therein), we will receive sixty five percent (65%) of all remaining designated gross revenue (as defined therein). We have a right of first refusal in the event Tattoo Interactive elects to sell the domain name, and in the event certain revenue goals, as set forth in the agreement, are satisfied, we will be granted certain equity interests in Tattoo Interactive.
On February 5, 2014, we received a fully signed copy of a First Amendment to Management Agreement (the “First Amended Agreement”) dated as of January 27, 2014, pursuant to which Tattoo Interactive shall no longer have an obligation to reimburse us for any expenses or costs related to the Management Services as of January 1, 2014. The First Amended Agreement will automatically terminate on April 30, 2014 (the “Initial Term”) unless a separate written agreement is executed by the parties (if so extended, the “Extended Initial Term”). If the parties agree to an Extended Initial Term, the Management Agreement will automatically renew for successive one (1) year terms unless terminated in accordance with the terms set forth in the First Amended Agreement. During the Initial Term, pursuant to our revenue sharing agreement, we will pay Tattoo Interactive a minimum monthly payment of $15,000. During the Extended Initial Term, our minimum monthly payment will be $25,000.
On February 24, 2014, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher a 8% Convertible Promissory Note in the original principal amount of $53,000 (the “Note”). The Note has a maturity date of November 26, 2014, and is convertible after 180 days into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 58% multiplied by the Market Price (representing a discount rate of 42%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means the closing bid price on the applicable day. The “Fixed Conversion Price” shall mean $0.00005. The shares of common stock issuable upon conversion of the Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The Note can be prepaid by us at a premium as follows: (a) between 0 and 30 days after issuance - 109% of the principal amount; (b) between 31 and 60 days after issuance - 114% of the principal amount; (c) between 61 and 90 days after issuance - 120% of the principal amount; (d) between 91 and 120 days after issuance - 124% of the principal amount; (e) between 121 and 180 days after issuance - 130% of the principal amount. The purchase and sale of the Note closed on February 28, 2014, the date that the purchase price was delivered to us.
On February 28, 2014, we issued a total of five million five hundred thousand (5,500,000) shares of our common stock, restricted in accordance with Rule 144, to a total of five (5) individuals and entities who had rendered services to us prior to December 31, 2013. These shares were used to satisfy an aggregate debt of Four Hundred and Forty Thousand Dollars ($440,000) owed to service providers.
During February 2014, we entered into a new lease at 4888 FM 2264, Rhome, TX. The parcel is approximately a 2-acre tract of land. Pursuant to the terms of the lease, our rent is $1,300 per month for 24 months.
On March 28, 2014, we entered into, with a third party investor, a 20% convertible secured promissory note with a maturity date of April 28, 2015 and in the principal amount of $100,000 (the Note), which is convertible into the Companys common stock at $0.08 per share and which is collateralized by up to $15,000 on a monthly basis by the $100,000 in monthly payments which we receive pursuant to our sale of WeedMaps Media, Inc. if not paid in full within six months of the date of the Note. Furthermore, as further collateral, we agreed to place 1,250,000 shares of our common stock into escrow.
On March 28, 2014, we entered into, with a third party investor, a 20% convertible secured promissory note with a maturity date of April 26, 2015 and in the principal amount of $100,000 (the Note), which is convertible into the Companys common stock at $0.08 per share and which is collateralized by up to $15,000 on a monthly basis by the $100,000 in monthly payments which we receive pursuant to our sale of WeedMaps Media, Inc. if not paid in full within six months of the date of the Note. Furthermore, as further collateral, we agreed to place 1,250,000 shares of our common stock into escrow. Finally, as an incentive to the third party investor to enter into the Note, we agreed to issue 300,000 shares of the Companys common stock.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There are no events required to be disclosed under this Item.
ITEM 9A
ITEM 9A - CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of December 31, 2013, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2013, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described in Item 4(b).
Our principal executive officers do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive officers have determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
(b) Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, as amended, as a process designed by, or under the supervision of, our principal executive and principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States and includes those policies and procedures that:
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and any disposition of our assets;
·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, Management identified the following two material weaknesses that have caused management to conclude that, as of December 31, 2013, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:
1. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act as of the year ending June 30, 2012. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
2. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
3. Effective controls over the control environment were not maintained. Specifically, a formally adopted written code of business conduct and ethics that governs our employees, officers, and directors was not in place. Additionally, management has not developed and effectively communicated to our employees its accounting policies and procedures. This has resulted in inconsistent practices. Further, our Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.
To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
(c) Remediation of Material Weaknesses
To remediate the material weakness in our documentation, evaluation and testing of internal controls we plan to engage a third-party firm to assist us in remedying this material weakness once resources become available.
We intend to remedy our material weakness with regard to insufficient segregation of duties by hiring additional employees in order to segregate duties in a manner that establishes effective internal controls once resources become available.
(d) Changes in Internal Control over Financial Reporting
No change in our system of internal control over financial reporting occurred during the period covered by this report, the fiscal year ended December 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B
ITEM 9B - OTHER INFORMATION
There are no events required to be disclosed by the Item.
PART III
ITEM 10
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The following table sets forth the names, ages, and biographical information of each of our current directors and executive officers, and the positions with us held by each person, and the date such person became a director or executive officer. Our executive officers are elected annually by the Board of Directors. The directors serve one-year terms until their successors are elected. The executive officers serve terms of one year or until their death, resignation or removal by the Board of Directors. Family relationships among any of the directors and officers are described below.
James Pakulis, age 50, has been one of our directors since August 2010, our Chief Executive Officer since November 2010, and our Chairman of the Board since January 2011. He served as our Chairman of the Board, President and COO from August 2010 to November 2010. Mr. Pakulis was an advisor to Synergistic Resources, LLC from January 2010 until the time we acquired its assets in December 2010. Mr. Pakulis was made a director at the time he acquired control of the company in August 2010.
Mr. Pakulis has three decades of experience working with entrepreneurial companies in a variety of emerging and high-growth sectors including internet, finance, real estate, and health care. He has extensive experience in all aspects of corporate management for both public and private enterprises, including strategy development and execution, operations, mergers and acquisitions, real estate transactions, finance/accounting, legal and human resources. Mr. Pakulis is a skilled leader, negotiator and consensus builder.
Mr. Pakulis has played a key leadership role for us in both defining strategy and guiding operational execution. He was instrumental in building our highly successful medicinal cannabis finders website, which became the largest in the industry before it was sold in late 2012. Leveraging the technology platform, sales team and marketing services expertise from that initial finder site, Mr. Pakulis has successfully transitioned SearchCore into a diversified internet marketing services company through the acquisition and integration of a portfolio of premium domain names in attractive verticals including recreational sports, manufactured homes, rodeo, karate and tattoo.
Prior to joining SearchCore, Mr. Pakulis was an advisor to Synergistic Resources, LLC, an outsourced healthcare clinic management company whose assets we acquired in December 2010. In this role, Mr. Pakulis was responsible for defining Synergistic Resources’ business expansion strategy and plans. He also oversaw the reorganization of its customer service department and upgraded its accounting and legal functions.
From 2003 to 2009, Mr. Pakulis was President of Pacific West Funding Corporation, a real estate financing firm headquartered in Utah, where he oversaw operations, finance, accounting, legal and compliance. He also structured non-residential real estate transactions and sourced financing for real estate development projects.
From 1990 to 1995, Mr. Pakulis played a key role in corporate development and business expansion for CliniCorp, a publicly traded company, providing outsourced clinic management and operations services to healthcare clinics. During his tenure at CliniCorp, he was involved in a number of acquisitions that drove the firm’s successful expansion in California, New Mexico, Colorado and Arizona. Mr. Pakulis was also instrumental in managing CliniCorp’s transition from a fee for service to a managed health care model.
Mr. Pakulis received his BA degree in English from the Ohio State University in 1987.
Munjit Johal, age 58, has been a director and our Chief Financial Officer since October 20, 2006. Additionally, Mr. Johal serves as the Controller of High Tower Capital, Inc., where he has served since January 2007. Prior to that, Mr. Johal was the Chief Financial Officer of Secured Diversified Investment, Ltd from 2002 to January 2009 and Davi Skin, Inc. from March 2007 to May 2010. Since 1990, Mr. Johal has served as a financial officer of various companies including Pacific Heritage Bank as Executive Vice President. From 1981 to 1987 Mr. Johal was a Senior Analytical Manager for Office of Thrift Supervision, Department of the Treasury (formerly Federal Home Loan Bank Board, the 11th District). Mr. Johal oversaw a staff of seventeen people and was responsible for, among other things, monitoring banking activities and enforcement actions for lending institutions and holding companies valued at $500 million or less. Mr. Johal’s skill set at researching, reviewing, analyzing, managing and overseeing entities from a financial prospective has provided SearchCore (formerly General Cannabis, Inc.) with valuable direction and guidance as it relates to our reporting procedures. Mr. Johal’s extensive financial expertise has also played a material role in providing management and the Board of Directors of SearchCore with sound financial counsel as it relates to analyzing potential acquisition targets. In addition, Mr. Johal’s regulatory experience and other prior experience with public companies and banks as a compliance officer, in addition to being a CFO, is beneficial to the company with respect to internal controls, disclosures, and complying with necessary regulatory requirements.
In total, Mr. Johal has over 28 years of broad experience in banking, accounting, finance, and management in the private and public sector. Mr. Johal earned his MBA from the University of San Francisco in 1980. He received his BS degree in History from the University of California, Los Angeles, in 1978.
Family Relationships
There are no family relationships among any of our officers, directors, or greater-than-10% shareholders.
Other Directorships; Director Independence
Other than as set forth above, none of our officers and directors is a director of any company with a class of securities registered pursuant to section 12 of the Exchange Act or subject to the requirements of section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.
For purposes of determining director independence, we have applied the definitions set out in NASDAQ Rule 5605(a)(2). The OTCQX on which shares of common stock are quoted does not have any director independence requirements. The NASDAQ definition of “Independent Officer” means a person other than an Executive Officer or employee of the Company or any other individual having a relationship which, in the opinion of the Company's Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
According to the NASDAQ definition, we do not have any independent directors.
Committees
We do not currently have an audit committee or an audit committee financial expert, nor do we have any other committees of the Board of Directors.
Involvement in Certain Legal Proceedings
None of our officers or directors has, in the past ten years, filed bankruptcy, been convicted in a criminal proceeding or is named in a pending criminal proceeding, been the subject of any order, judgment, or decree of any court permanently or temporarily enjoining him from any securities activities, or any other disclosable event required by Item 401(f) of Regulation S-K.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers and persons who own more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
To the Company’s knowledge, the following is a list of individuals that have not filed, or filed late, a report reflecting a change in ownership as required pursuant to Section 16(a) of the Securities Act of 1934:
Board Meetings
During the fiscal year ended December 31, 2013, the Board of Directors did not hold any formal meetings but took action by unanimous written consent on several occasions.
Code of Ethics
We have not adopted a written code of ethics, primarily because we believe and understand that our officers and directors adhere to and follow ethical standards without the necessity of a written policy.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information with respect to compensation earned by our Chief Executive Officer, President, and Chief Financial Officer for the fiscal years ended December 31, 2013 and 2012.
(1)
Mr. Pakulis' annual salary, beginning in December 2010, is $360,000. In August 2012, Mr. Pakulis was issued 20,000 shares of our common stock as a one-time bonus for his service as a director. During the year ended December 31, 2012, Mr. Pakulis was paid a bonus $370,000. During the year ended December 31, 2013, Mr. Pakulis was paid $36,026 in salary. On July 15, 2013, we issued an aggregate of 150,000 shares of our common stock, restricted in accordance with Rule 144, to James Pakulis, our Chief Executive Officer along with six (6) other existing shareholders, who had previously purchased shares from us, as consideration under a Stock Issuance and Release Agreement (the “Release”) we entered into with each of them. The Release was the resolution of discussions with the investors regarding our efforts in pursuing an S-1 registration statement.
(2)
Mr. Francis' annual consulting compensation, beginning in December 2010, was $360,000. Effective August 1, 2011, he entered into an employment agreement and his consulting agreement was terminated. During 2011 and prior to Termination of the Consulting Agreement on August 1, 2011, Mr. Francis received a total of $150,000 in payments pursuant to the Consulting Agreement. Mr. Francis is no longer entitled to the $1,800,000 as a result of the Termination of the Consulting Agreement. During the year ended December 31, 2011, we awarded a discretionary bonus to Mr. Francis’s in the amount of $518,000 which was based on his critical role in identifying, negotiating and completing key acquisitions, materially increasing corporate revenue, and overseeing the expansion of our core branding in the marketplace.
(3)
Mr. Johal receives $4,000 per month, beginning in December 2010, for his services as Chief Financial Officer. At December 31, 2010 the $4,000 represents accrued amounts due to Mr. Johal. During 2012, Mr. Johal was issued 70,000 shares of our common stock as a one-time bonus for his service as a director.
Narrative Disclosure to Summary Compensation Table
Employment Agreements
We currently have a written employment agreement with James Pakulis. All of our executives are at-will employees or consultants whose compensation is set forth in the Summary Compensation Table below.
On August 1, 2011, we entered into an at-will Employment Agreement with James Pakulis, our Chief Executive Officer and Chairman of our Board of Directors. Mr. Pakulis’ employment is effective as of August 1, 2011. Under the terms of the agreement, his compensation is thirty thousand dollars ($30,000) per month. In the event of termination of the agreement for a reason other than for cause, Mr. Pakulis will be entitled to severance equal to eighteen (18) months of compensation.
Director Compensation
During the year ended December 31, 2013, none of the member of our Board of Directors received compensation for his or her service as a director. During the year ended December 31, 2012, James Pakulis and our then-director, Bonni Goldstein, each received 20,000 shares of our common stock as a one-time bonus for service as a director and Munjit Johal received 70,000 shares of our common stock as a one-time bonus for service as a director. As of December 31, 2012, 20,000 shares of our common stock remained to be issued to each of our directors. For the years ended December 31, 2011 and 2010, none of the members of our Board of Directors received compensation for his or her service as a director. We do not currently have an established policy to provide compensation to members of our Board of Directors for their services in that capacity. We intend to develop such a policy in the near future.
Outstanding Equity Awards at Fiscal Year-End
We do not currently have a stock option or grant plan.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 12, 2014, certain information with respect to our equity securities owned of record or beneficially by (i) each Officer and Director; (ii) each person who owns beneficially more than 5% of each class of our outstanding equity securities; and (iii) all Directors and Executive Officers as a group.
(1)
Unless indicated otherwise, the address of the shareholder is c/o SearchCore, Inc., 26497 Rancho Parkway South, Lake Forest, CA 92630.
(2)
Unless otherwise indicated, based on 44,868,772 shares of common stock issued and outstanding. Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for the purposes of computing the percentage of any other person.
(3)
Indicates one of our officers or directors.
(4)
25,782,290 of the shares held by Mr. Pakulis are held of record by R.H. Daignault Law Corporation, In Trust, pursuant to an escrow agreement between them and the parties who assigned certain debts to Pakulis prior to its conversion into the shares. Mr. Pakulis maintains investment control, including the power of disposition and voting, over the shares.
(5)
ComputerAde, LLC’s address is: 425 Avalon Park, 1000-212, Orlando, FL 32828.
The issuer is not aware of any person who owns of record, or is known to own beneficially, five percent or more of the outstanding securities of any class of the issuer, other than as set forth above. There are no classes of stock other than as set forth above.
There are no current arrangements which will result in a change in control.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Persons, Promoters and Certain Control Persons
Stock Issuances
On November 15, 2012, we issued an aggregate of One Hundred Fifty Thousand (150,000) shares of our common stock, restricted in accordance with Rule 144, 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.
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.
On July 15, 2013, we issued an aggregate of 945,000 shares of our common stock, restricted in accordance with Rule 144, to seven (7) existing shareholders, who had previously purchased shares from us, as consideration under a Stock Issuance and Release Agreement (the “Release”) we entered into with each of them. The Release was the resolution of discussions with the investors regarding our efforts in pursuing an S-1 registration statement. One of the shareholders that had previously purchased shares from us was James Pakulis, our Chief Executive Officer; he was issued 150,000 shares pursuant to the Release.
Office Share
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.
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. On March 5, 2015, we changed the name of Sports Asylum, Inc. to Sportify, Inc.
On July 11, 2013, we entered into a First Amendment to Promissory Note with each of Pakulis and Carrillo to extend the date that we will begin making payments thereunder from June 30, 2013, to September 30, 2013, and extending the maturity date of the notes by a corresponding three (3) months. On October 25, 2013, Carrillo converted the $53,750 outstanding balance of his note, plus $11,125 in accounts receivable for services rendered, into 395,805 shares of our common stock. On March 19, 2014, effective December 31, 2013, we amended the Pakulis note to provide for a payment of $37,500 on January 1, 2015 and the balance in 23 equal monthly installments beginning on February 1, 2015.
Employment Agreements
We currently have a written employment agreement with James Pakulis. All of our executives are at-will employees or consultants whose compensation is set forth in the Summary Compensation Table below.
On August 1, 2011, we entered into an at-will Employment Agreement with James Pakulis, our Chief Executive Officer and Chairman of our Board of Directors. Mr. Pakulis’ employment is effective as of August 1, 2011. Under the terms of the agreement, his compensation is thirty thousand dollars ($30,000) per month. In the event of termination of the agreement for a reason other than for cause, Mr. Pakulis will be entitled to severance equal to eighteen (18) months of compensation.
Director Independence
Other than as set forth above, none of our officers and directors is a director of any company with a class of securities registered pursuant to section 12 of the Exchange Act or subject to the requirements of section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.
For purposes of determining director independence, we have applied the definitions set out in NASDAQ Rule 5605(a)(2). The OTCQX on which shares of common stock are quoted does not have any director independence requirements. The NASDAQ definition of “Independent Officer” means a person other than an Executive Officer or employee of the Company or any other individual having a relationship which, in the opinion of the Company's Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
According to the NASDAQ definition, we do not have any independent directors.
ITEM 14
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
The aggregate fees billed for the years ended December 31, 2013 and 2012 for professional services rendered by the principal accountant for the audit of our annual financial statements and review of the financial statements included in our Form 10-K or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were $37,500 and $45,250, respectively.
Audit - Related Fees
The aggregate fees billed in the fiscal years ended December 31, 2013 and 2012 for professional services rendered by the principal accountant for the review of the financial statements for the quarterly periods ended March 31, June 30, and September 30, of each year, and for the issuance of consents, were $21,750 and $21,750, respectively.
Tax Fees
The aggregate fees billed in the fiscal years ended December 31, 2013 and 2012 for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning work were $15,000 and $9,765 , respectively
All Other Fees
None.
Of the fees described above for the years ended December 31, 2013 and 2012, all were approved by the entire Board of Directors.
PART IV
ITEM 15
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following financial statements are filed as part of this report:
(a)(2) Financial Statement Schedules
We do not have any financial statement schedules required to be supplied under this Item.
(a)(3) Exhibits
Refer to (b) below.
(b) Exhibits
(1)
Incorporated by reference from our Registration Statement on Form 10 dated January 29, 2013 and filed with the Commission on January 30, 2013.
(2)
Incorporated by reference from our First Amended Registration Statement on Form 10/A dated March 27, 2013 and filed with the Commission on March 28, 2013.
(3)
Incorporated by reference from our Current Report on Form 8-K dated and filed with the Commission on June 20, 2013.
(4)
Incorporated by reference from our Current Report on Form 8-K dated July 11, 2013, and filed with the Commission on July 15, 2013.
(5)
Incorporated by reference from our Current Report on Form 8-K dated July 11, 2013, and filed with the Commission on July 17, 2013.
(6)
Incorporated by reference from our Current Report on Form 8-K dated August 14, 2013, and filed with the Commission on August 19, 2013.
(7)
Incorporated by reference from our Current Report on Form 8-K dated August 28, 2013, and filed with the Commission on August 30, 2013.
(8)
Incorporated by reference from our Quarterly Report on Form 10-Q dated November 12, 2013 and filed with the Commission on November 13, 2013.
(9)
Incorporated by reference from our Current Report on Form 8-K dated and filed with the Commission on December 24, 2013.
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: March 31, 2014
/s/ James Pakulis
By:
James Pakulis
Its:
Chief Executive Officer and Director
Dated: March 31, 2014
/s/ Munjit Johal
By:
Munjit Johal
Its:
Chief Financial Officer and Principal Accounting Officer and Director