UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 2
x | ANNUAL REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
o | TRANSITION REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
Commission file number 000-29929
LIVE CURRENT MEDIA INC. |
(Name of Small Business Issuer in its charter) |
Nevada | 88-0346310 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
375 Water Street, Suite 645, Vancouver, British Columbia | V6B 5C6 | |
(Address of principal executive offices) | (Zip Code) |
Issuer’s telephone number (604) 453-4870
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
None | N/A |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $0.001 par value |
(Title of Class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes T No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes T No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
T Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes T No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. As of June 30, 2008, the aggregate market value of the voting and non-voting common equity held by non-affiliates was $59,143,933.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of March 20, 2009 the registrant had 23,906,445 shares of common stock outstanding.
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).
EXPLANATORY NOTE
On June 18, 2009 we were advised by Ernst & Young, our independent registered public accounting firm, that the audit opinion dated March 24, 2009 on our December 31, 2008 and 2007 consolidated financial statements (the “Original Financial Statements”) could no longer be relied upon. We were further advised by Ernst & Young that there were errors in the Original Financial Statements. Based on the foregoing, C. Geoffrey Hampson, our Chief Executive Officer and Chief Financial Officer, concluded that the Original Financial Statements should no longer be relied upon. On September 11, 2009 we filed Amendment No. 1 to our Annual Report on Form 10-K, which was originally filed on March 31, 2009 (the “Original Report”) to disclose the restatement of our Original Financial Statements.
On October 7, 2009 we received a letter from the Securities and Exchange Commission relating to Amendment No. 1. The primary purpose of this amendment (“Amendment No. 2”) is to respond to the comment letter.
In Amendment No. 2, we have revised Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and Item 8, our consolidated financial statements, to respond to the comments made by the Securities and Exchange Commission. Aside from indicating in the column totals that the financial statements have been restated, in our consolidated statements of operations we have separated operating expenses from non-operating income (expenses). We have also indicated that our costs of goods sold exclude depreciation and amortization, and we have reclassified expenses related to Global Cricket Venture. We have revised Management’s Discussion and Analysis of Financial Condition and Results of Operations to reflect the changes to our financial statements. Finally, we have also revised Note 21 to our consolidated financial statements to provide additional disclosure regarding our restated statements of consolidated operations for the 2008 quarterly fiscal periods.
Amendment No. 2 includes information contained in the Original Report, and we have made no attempt in Amendment No. 2 to modify or update the disclosures presented in the Original Report, except as identified above. The disclosures in Amendment No. 2 continue to speak as of the date of the Original Report, and do not reflect events occurring after the filing of the Original Report. Accordingly, Amendment No. 2 should be read in conjunction with our other filings made with the Securities and Exchange Commission subsequent to the filing of the Original Report, including Amendment No. 1 and any other amendments to those filings. The filing of Amendment No. 2 shall not be deemed to be an admission that the Original Report, when made, included any untrue statement of a material fact or omitted to state a material fact necessary to make a statement not misleading.
i
CONTENTS
Page | ||
Forward-Looking Statements | iii | |
Part II | ||
Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 6 |
Item 8 | Financial Statements | 39 |
Part IV | ||
Item 15 | Exhibits | 39 |
Signatures and Certifications | 40 |
ii
Forward Looking Statements
This Amendment No. 2 to the Annual Report on Form 10-K of Live Current Media Inc. (“Live Current”, “the Company”, “we”, “us”, and “our”) for the year ended December 31, 2008 (the “Amendment”) contains “forward-looking” statements. Certain information contained or incorporated by reference in this Amendment, including the information set forth as to the future financial or operating performance of Live Current, constitutes “forward-looking statements”. These statements may be identified by their use of words like “plans”, “expect”, “aim”, “believe”, “projects”, “anticipate”, “intend”, “estimate”, “will”, “should”, “could”, “contemplate”, “target”, “continue”, “budget”, “may” and other similar expressions that indicate future events and trends. All statements, other than historical statements of fact, that address expectations or projections about the future, including statements about Live Current’s strategy for growth, product development, market position, expenditures and financial results, are forward-looking statements.
Forward-looking statements in this Amendment include but are not limited to statements regarding (1) expectation that revenue will increase during fiscal 2009; (2) expectation that our participant base will increase; (3) expectation of an increase in future operating expenses; (4) expectation that the expansion of our participant base will cause wages, marketing and promotional costs to increase; (5) expectation that working capital needs for fiscal 2009 will be funded through the equity capital markets and private financings; (6) expectation that an increase in our participant base will lead to hiring of additional employees or independent contractors; (7) expectation relating to the future developments of content, features, and services to be provided on the website; (8) uncertainty of utilizing deferred tax assets; and (9) expectation that inflation will not have a material impact on future operations.
These forward-looking statements involve a number of risks and uncertainties, including, but not limited to, the following: general economic conditions particularly as they relate to demand for Live Current’s products and services; changes in business strategy; competitive factors (including the introduction or enhancement of competitive services); pricing pressures; changes in operating expenses; fluctuation in foreign currency exchange rates; inability to attract or retain consulting, sales and/or development talent; changes in customer requirements; evolving industry standards; and other factors described in Live Current’s filings with the Securities and Exchange Commission. The results that Live Current achieves may differ materially from any forward-looking statements due to these risks and uncertainties. The forward-looking statements in this Amendment are subject to risks and uncertainties that could cause actual results to differ materially from the results expressed in or implied by the statements contained in this report.
The identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives requires the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and accordingly, no opinion is expressed on the achievability of those forward-looking statements. No assurance can be given that any of the assumptions relating to the forward-looking statements are accurate. All forward-looking statements are made as of the date of filing of this Amendment and Live Current disclaims any duty to update any such forward-looking statements.
The following discussion should be read in conjunction with our consolidated financial statements and their explanatory notes, which are included in this Amendment.
iii
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
You should read the following discussion of our financial condition and results of operations together with our consolidated financial statements and the notes to our consolidated financial statements included elsewhere in this report.
Restatement of Financial Statements
On June 18, 2009 we were advised by Ernst & Young, our independent registered public accounting firm, that the audit opinion dated March 24, 2009 on our December 31, 2008 consolidated financial statements (the “Original Financial Statements”) could no longer be relied upon. We were further advised by Ernst & Young that there were errors in the Original Financial Statements. Based on the foregoing, C. Geoffrey Hampson, our Chief Executive Officer and Chief Financial Officer, concluded that the Original Financial Statements should no longer be relied upon. These errors, which are described below, affected opening balances as at December 31, 2007 and the financial position, results of operations and cash flows for the years ended December 31, 2007 and 2008. Please also see Note 2 to our restated financial statements for the fiscal year ended December 31, 2008. The effect of the restatement on the Company’s unaudited quarterly financial information for the 2008 quarters is presented in Note 21 to the consolidated financial statements.
A. Deferred income tax liability related to indefinite life intangible assets:
The Company’s intangible assets, comprised of its domain names, have book values in excess of their tax values. The Original Financial Statements considered the taxable temporary differences associated with these indefinite life intangible assets in reducing the valuation allowance associated with loss carryforwards. This was an incorrect application of GAAP. A deferred tax liability should have been recognized for these taxable temporary differences. Correction of this error resulted in the recognition of a deferred tax liability of $206,370, $246,759, and $254,984 as at December 31, 2008, December 31, 2007, and January 1, 2007 respectively, and deferred income tax recoveries of $40,389 and $8,225 in the years ended December 31, 2008 and 2007, respectively.
B. Non-Controlling Interest:
The Company discovered an error in its continuity of non-controlling interest in our subsidiaries as at January 1, 2007, resulting in a $100,676 increase to the opening non-controlling interest liability and deficit.
The Company also determined that it should have recorded $66,692 of goodwill and an increase to non-controlling interest liability associated with our exchange of $3,000,000 of amounts due from our subsidiary for additional common stock in 2008. See Note 5 to our consolidated financial statements.
Prior to recognizing the non-controlling interest liabilities as described in the preceding two paragraphs, the non-controlling interest’s share of subsidiary losses in 2008 and 2007 was limited to the non-controlling interest liability. As a consequence of the above increases to non-controlling interest liabilities, the non-controlling interest’s share in subsidiary losses was increased by $75,748 and $91,890 in the years ended December 31, 2008 and 2007, respectively.
C. Management Compensation:
(i) The December 31, 2007 financial statements did not accrue $91,423 for two CDN$250,000 special bonuses to be paid on October 1, 2008 and October 1, 2009 to our former President and Chief Operating Officer pursuant to his employment agreement. These special bonuses were not discretionary, but would only be paid if he remained employed as an officer of the Company on the dates payable. On February 4, 2009, he resigned as our President and Chief Operating Officer and employee, effective January 31, 2009. There was no effect to the December 31, 2008 financial statements.
6
(ii) The December 31, 2008 financial statements did not accrue $119,045 for two CDN$100,000 special bonuses to be paid on January 1, 2009 and January 1, 2010 to our current President and Chief Corporate Development Officer pursuant to his employment agreement. These special bonuses are not discretionary, but will only be paid if he remains employed as an officer of the Company on the dates payable.
D. Estimated life of stock options:
The Company originally estimated the life of its stock options as equal to the vesting period for these options, 3 years. The estimated life should have been 3.375 years, resulting in decreases of $118,893 and $18,971 to our stock-based compensation expense in the years ended December 31, 2008 and 2007, respectively.
E. Other
(i) Expense accruals
The Company discovered an accrual and cutoff error in its recorded accounting fees, resulting in an overaccrual of accounts payable and accounting expense (included in Corporate General and Administrative expenses) of $19,521 and $63,750 in the years ended December 31, 2008 and 2007, respectively.
(ii) Gain on sale of domain name
The Company failed to record website development costs attributable to a domain name sold in 2008, reducing website development costs and gain on sale of domain names by $37,408 in the year ended December 31, 2008.
(iii) Miscellaneous Income
The Company discovered an immaterial error in miscellaneous income relating to periods prior to January 1, 2007, resulting in a $35,810 increase to opening deficit at January 1, 2007.
F. Classification of warrants issued in November 2008 private placement:
In November 2008, the Company raised $1,057,775 of cash by selling 1,627,344 units consisting of one share of the Company’s common stock and two warrants, each for the purchase of a half share of common stock. The offering price was $0.65 per unit. The estimated fair value of the warrants was $157,895 and was presented as equity in the Original Financial Statements. The warrants contained provisions which could require their redemption in cash in certain circumstances which may not all be within the Company’s control. The fair value of the warrants therefore should have been recorded as a liability, with future changes to fair value reported as either income or expense in the period in which the change in fair value occurs. There were no changes to the fair value of the warrants between the November 2008 issue date and December 31, 2008.
G. Shares issued in connection with the merger with Auctomatic:
(i) Valuation of shares issued as purchase consideration
The Auctomatic merger closed on May 22, 2008. The original estimate of the fair value of the share purchase consideration attributable to the acquisition was based on the trading value of the shares around March 25, 2008. However, the Merger Agreement had an adjustment provision regarding the number of shares to be issued, such that the shares should have been valued with reference to the May 22, 2008 closing date as opposed to the announcement date on March 25, 2008. Using the average share price around the closing date, an additional $110,746 should have been recorded as additional paid-in capital and goodwill.
7
(ii) Shares issued to Auctomatic founders
As part of the merger, the Company agreed to distribute 413,604 shares of its common stock payable on the first, second, and third anniversaries of the Closing Date (the “Distribution Date”) to the Auctomatic founders subject to their continuing employment with the Company or a subsidiary on each Distribution Date. These shares which were not accounted for in the Auctomatic purchase, also were not properly accounted for as compensation to the Auctomatic founders for their continued employment with the Company. The related stock-based compensation expense that should have been recorded in 2008 is $170,065.
H. Financial Statement Classification of Amounts Payable to the BCCI and IPL:
In order to provide clarity, we also classified separately on our consolidated balance sheets and consolidated statements of operations the $1,000,000 payable and expensed during the year ended December 31, 2008 to the BCCI and IPL.
I. Tax Impact:
None of the above adjustments gave rise to an increase or decrease in the Company’s tax position.
8
The following table illustrates the effect of the adjustments by financial statement line item in the Company’s consolidated balance sheets as of December 31, 2008:
December 31, 2008 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||||
ASSETS | |||||||||||||||
Current | |||||||||||||||
Cash and cash equivalents | $ | 1,832,520 | $ | - | $ | 1,832,520 | |||||||||
Accounts receivable (net of allowance for doubtful accounts of nil) | 93,582 | - | 93,582 | ||||||||||||
Prepaid expenses and deposits | 109,543 | - | 109,543 | ||||||||||||
Inventory | 74,082 | - | 74,082 | ||||||||||||
Current portion of receivable from sales-type lease | 23,423 | - | 23,423 | ||||||||||||
Total current assets | 2,133,150 | - | 2,133,150 | ||||||||||||
Long-term portion of receivable from sales-type lease | 23,423 | - | 23,423 | ||||||||||||
Deferred acquisition costs | - | - | - | ||||||||||||
Property & equipment | 1,042,851 | - | 1,042,851 | ||||||||||||
Website development costs | E(ii) | 392,799 | (37,408 | ) | 355,391 | ||||||||||
Intangible assets | 1,587,463 | - | 1,587,463 | ||||||||||||
Goodwill | B, G(i) | 2,428,602 | 177,438 | 2,606,040 | |||||||||||
Total Assets | $ | 7,608,288 | $ | 140,030 | $ | 7,748,318 | |||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||||
Current | |||||||||||||||
Accounts payable and accrued liabilities | E(i), H | $ | 4,131,264 | $ | (1,083,271 | ) | $ | 3,047,993 | |||||||
Amounts payable to the BCCI and IPL | H | - | 1,000,000 | 1,000,000 | |||||||||||
Bonuses payable | C(ii) | 235,650 | 119,045 | 354,695 | |||||||||||
Due to shareholders of Auctomatic | 789,799 | - | 789,799 | ||||||||||||
Deferred revenue | 120,456 | - | 120,456 | ||||||||||||
Current portion of deferred lease inducements | 20,138 | - | 20,138 | ||||||||||||
Total current liabilities | 5,297,307 | 35,774 | 5,333,081 | ||||||||||||
Deferred income tax | A | - | 206,370 | 206,370 | |||||||||||
Warrants | F | - | 157,895 | 157,895 | |||||||||||
Deferred lease inducements | 55,380 | - | 55,380 | ||||||||||||
Total Liabilities | 5,352,687 | 400,039 | 5,752,726 | ||||||||||||
STOCKHOLDERS' EQUITY | |||||||||||||||
Common Stock | 14,855 | - | 14,855 | ||||||||||||
Additional paid-in capital | 14,772,880 | (14,948 | ) | 14,757,932 | |||||||||||
Accumulated deficit | (12,532,134 | ) | (245,061 | ) | (12,777,195 | ) | |||||||||
Total Stockholders' Equity | 2,255,601 | (260,009 | ) | 1,995,592 | |||||||||||
Total Liabilities and Stockholders' Equity | $ | 7,608,288 | $ | 140,030 | $ | 7,748,318 |
9
The following table illustrates the effect of the adjustments by financial statement line item in the Company’s consolidated statements of operations as of December 31, 2008:
For the year ended December 31, 2008 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||||
SALES | $ | 9,364,833 | $ | - | $ | 9,364,833 | |||||||||
COSTS OF SALES (excluding depreciation and amortization as shown below) | 7,683,812 | - | 7,683,812 | ||||||||||||
GROSS PROFIT | 1,681,021 | - | 1,681,021 | ||||||||||||
OPERATING EXPENSES | |||||||||||||||
Amortization and depreciation | 253,141 | - | 253,141 | ||||||||||||
Amortization of website development costs | 58,640 | - | 58,640 | ||||||||||||
Corporate general and administrative | E(i) | 2,934,555 | (19,521 | ) | 2,915,034 | ||||||||||
ECommerce general and administrative | 567,980 | - | 567,980 | ||||||||||||
Management fees and employee salaries | C(i), C(ii), D, G(ii) | 5,719,934 | 78,794 | 5,798,728 | |||||||||||
Corporate marketing | 147,842 | - | 147,842 | ||||||||||||
ECommerce marketing | 766,393 | - | 766,393 | ||||||||||||
Other expenses | 708,804 | - | 708,804 | ||||||||||||
Total Operating Expenses | 11,157,289 | 59,273 | 11,216,562 | ||||||||||||
NON-OPERATING INCOME (EXPENSES) | |||||||||||||||
Global Cricket Venture expenses | H | (1,000,000 | ) | 1,000,000 | - | ||||||||||
Global Cricket Venture payments | H | - | (1,000,000 | ) | (1,000,000 | ) | |||||||||
Gain from sales and sales-type lease of domain names | E(ii) | 498,829 | (37,408 | ) | 461,421 | ||||||||||
Accretion interest expense | (96,700 | ) | - | (96,700 | ) | ||||||||||
Interest and investment income | 67,683 | - | 67,683 | ||||||||||||
Non-controlling interest | B | - | 75,478 | 75,478 | |||||||||||
Total Non-Operating Income (Expenses) | (530,188 | ) | 38,070 | (492,118 | ) | ||||||||||
NET LOSS BEFORE TAXES | (10,006,456 | ) | (21,203 | ) | (10,027,659 | ) | |||||||||
TAX EXPENSE | |||||||||||||||
Deferred tax recovery | A | - | (40,389 | ) | (40,389 | ) | |||||||||
NET LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD | $ | (10,006,456 | ) | $ | 19,186 | $ | (9,987,270 | ) | |||||||
BASIC AND DILUTED LOSS PER SHARE | $ | (0.46 | ) | 0.00 | $ | (0.46 | ) | ||||||||
WEIGHTED AVERAGE NUMBER OF COMMON | |||||||||||||||
SHARES OUTSTANDING - BASIC AND DILUTED | 21,937,179 | - | 21,937,179 |
10
The following table illustrates the effect of the adjustments by financial statement line item in the Company’s consolidated statements of cash flows as of December 31, 2008:
For the year Ended December 31, 2008 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||||
OPERATING ACTIVITIES | |||||||||||||||
Net loss for the period | $ | (10,006,456 | ) | $ | 19,186 | $ | (9,987,270 | ) | |||||||
Non-cash items included in net loss: | |||||||||||||||
Deferred tax recovery | A | - | (40,389 | ) | (40,389 | ) | |||||||||
Non-controlling interest | B | - | (75,478 | ) | (75,478 | ) | |||||||||
Gain from sales and sales-type lease of domain names | E(ii) | (498,829 | ) | 37,408 | (461,421 | ) | |||||||||
Accretion interest expense | 96,700 | - | 96,700 | ||||||||||||
Stock-based compensation | D, G(ii) | 2,111,354 | 51,172 | 2,162,526 | |||||||||||
Warrants issued | 45,500 | - | 45,500 | ||||||||||||
Issuance of common stock for services | 303,859 | - | 303,859 | ||||||||||||
Extinguishment of debt by issuance of common stock | 16,500 | - | 16,500 | ||||||||||||
Amortization and depreciation | 291,643 | - | 291,643 | ||||||||||||
Change in operating assets and liabilities: | |||||||||||||||
Accounts receivable | 45,348 | - | 45,348 | ||||||||||||
Prepaid expenses and deposits | 136,631 | - | 136,631 | ||||||||||||
Inventory | (74,082 | ) | - | (74,082 | ) | ||||||||||
Accounts payable and accrued liabilities | E(i), H | 2,615,835 | (1,019,521 | ) | 1,596,314 | ||||||||||
Amounts payable to the BCCI and IPL | H | - | 1,000,000 | 1,000,000 | |||||||||||
Bonuses payable | C(i), C(ii) | (5,640 | ) | 27,622 | 21,982 | ||||||||||
Deferred revenue | 67,377 | - | 67,377 | ||||||||||||
Cash flows used in operating activities | (4,854,260 | ) | - | (4,854,260 | ) | ||||||||||
INVESTING ACTIVITIES | |||||||||||||||
Proceeds from disposal of available for sale securities | - | - | - | ||||||||||||
Net proceeds from sale of domain name | 369,041 | - | 369,041 | ||||||||||||
Net proceeds from sales-type lease of domain name | 140,540 | - | 140,540 | ||||||||||||
Cash consideration for Auctomatic | (1,530,047 | ) | - | (1,530,047 | ) | ||||||||||
Purchases of property & equipment | (187,532 | ) | - | (187,532 | ) | ||||||||||
Website development costs | (451,439 | ) | - | (451,439 | ) | ||||||||||
Cash flows used in (from) investing activities | (1,659,437 | ) | - | (1,659,437 | ) | ||||||||||
FINANCING ACTIVITIES | |||||||||||||||
Proceeds from sale of common stock (net of share issue costs) | 970,972 | - | 970,972 | ||||||||||||
Cash flows from financing activities | 970,972 | - | 970,972 | ||||||||||||
Net increase (decrease) in cash and cash equivalents | (5,542,725 | ) | - | (5,542,725 | ) | ||||||||||
Cash and cash equivalents, beginning of year | 7,375,245 | - | 7,375,245 | ||||||||||||
Cash and cash equivalents, end of year | $ | 1,832,520 | $ | - | $ | 1,832,520 |
11
The following table illustrates the effect of the adjustments by financial statement line item in the Company’s consolidated balance sheets as of December 31, 2007:
As at December 31, 2007 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||||
ASSETS | |||||||||||||||
Current | |||||||||||||||
Cash and cash equivalents | $ | 7,375,245 | $ | - | $ | 7,375,245 | |||||||||
Accounts receivable (net of allowance for doubtful accounts of nil) | 138,930 | - | 138,930 | ||||||||||||
Prepaid expenses and deposits | 246,174 | - | 246,174 | ||||||||||||
Total current assets | 7,760,349 | - | 7,760,349 | ||||||||||||
Property & equipment | 175,797 | - | 175,797 | ||||||||||||
Intangible assets | 1,645,061 | - | 1,645,061 | ||||||||||||
Total Assets | $ | 9,581,207 | $ | - | $ | 9,581,207 | |||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||||
Current | |||||||||||||||
Accounts payable and accrued liabilities | E(i) | $ | 1,515,429 | $ | (63,750 | ) | $ | 1,451,679 | |||||||
Bonuses payable | C(i) | 241,290 | 91,423 | 332,713 | |||||||||||
Deferred revenue | 53,079 | - | 53,079 | ||||||||||||
Current portion of deferred lease inducements | 20,138 | - | 20,138 | ||||||||||||
Total current liabilities | 1,829,936 | 27,673 | 2,113,154 | ||||||||||||
- | |||||||||||||||
Non-controlling interest | B | - | 8,786 | 8,786 | |||||||||||
Deferred income tax | A | 246,759 | 246,759 | ||||||||||||
Deferred lease inducements | 75,518 | - | 75,518 | ||||||||||||
Total Liabilities | 1,905,454 | 283,218 | 2,188,672 | ||||||||||||
STOCKHOLDERS' EQUITY | |||||||||||||||
Common Stock | 12,456 | - | 12,456 | ||||||||||||
Additional paid-in capital | 10,188,975 | (18,971 | ) | 10,170,004 | |||||||||||
Accumulated deficit | (2,525,678 | ) | (264,247 | ) | (2,789,925 | ) | |||||||||
Total Stockholders' Equity | 7,675,753 | (283,218 | ) | 7,392,535 | |||||||||||
Total Liabilities and Stockholders' Equity | $ | 9,581,207 | $ | - | $ | 9,581,207 |
12
The following table illustrates the effect of the adjustments by financial statement line item in the Company’s consolidated statements of operations as of December 31, 2007:
Year Ended December 31, 2007 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||||
SALES | |||||||||||||||
Health and beauty eCommerce | $ | 8,092,707 | $ | - | $ | 8,092,707 | |||||||||
Other eCommerce | 485,199 | - | 485,199 | ||||||||||||
Domain name advertising | 449,613 | - | 449,613 | ||||||||||||
Miscellaneous income | E(iii) | 35,810 | (35,810 | ) | - | ||||||||||
Total Sales | 9,063,329 | (35,810 | ) | 9,027,519 | |||||||||||
COSTS OF SALES | |||||||||||||||
Health and Beauty eCommerce | 6,512,292 | - | 6,512,292 | ||||||||||||
Other eCommerce | 509,181 | - | 509,181 | ||||||||||||
Total Costs of Sales (excluding depreciation and amortization as shown below) | 7,021,473 | - | 7,021,473 | ||||||||||||
GROSS PROFIT | 2,041,856 | (35,810 | ) | 2,006,046 | |||||||||||
�� | |||||||||||||||
OPERATING EXPENSES | |||||||||||||||
Amortization and depreciation | 29,169 | - | 29,169 | ||||||||||||
Corporate general and administrative | E(i) | 686,921 | (63,750 | ) | 623,171 | ||||||||||
ECommerce general and administrative | 304,212 | - | 304,212 | ||||||||||||
Management fees and employee salaries | C(i), D | 1,981,051 | 72,452 | 2,053,503 | |||||||||||
ECommerce marketing | 817,101 | - | 817,101 | ||||||||||||
Other expenses | 637,730 | - | 637,730 | ||||||||||||
Total Operating Expenses | 4,456,184 | 8,702 | 4,464,886 | ||||||||||||
NON-OPERATING INCOME (EXPENSES) | |||||||||||||||
Interest and investment income | 119,574 | - | 119,574 | ||||||||||||
Gain on disposal of subsidiary of Frequenttraveler.com Inc. | 276,805 | - | 276,805 | ||||||||||||
Non-controlling interest | B | - | 91,890 | 91,890 | |||||||||||
Total Non-Operating Income (Expenses) | 396,379 | 91,890 | 488,269 | ||||||||||||
NET LOSS AND COMPREHENSIVE LOSS BEFORE TAXES | (2,017,949 | ) | 47,378 | (1,970,571 | ) | ||||||||||
TAX EXPENSE | |||||||||||||||
Deferred tax recovery | A | - | (8,225 | ) | (8,225 | ) | |||||||||
NET LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD | $ | (2,017,949 | ) | $ | 55,603 | $ | (1,962,346 | ) | |||||||
BASIC AND DILUTED LOSS PER SHARE | $ | (0.11 | ) | $ | 0.00 | $ | (0.10 | ) | |||||||
WEIGHTED AVERAGE NUMBER OF COMMON | |||||||||||||||
SHARES OUTSTANDING - BASIC AND DILUTED | 19,070,236 | - | 19,070,236 |
13
The following table illustrates the effect of the adjustments by financial statement line item in the Company’s consolidated statements of cash flows as of December 31, 2007:
For the year ended December 31, 2007 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||||
OPERATING ACTIVITIES | |||||||||||||||
Net loss for the period | $ | (2,017,949 | ) | $ | 55,603 | $ | (1,962,346 | ) | |||||||
Non-cash items included in net loss: | |||||||||||||||
Deferred tax recovery | A | - | (8,225 | ) | (8,225 | ) | |||||||||
Non-controlling interest | B | - | (91,890 | ) | (91,890 | ) | |||||||||
Stock-based compensation | D | 428,028 | (18,971 | ) | 409,057 | ||||||||||
Amortization and depreciation | 24,135 | - | 24,135 | ||||||||||||
Issuance of common stock for bonuses | 59,078 | - | 59,078 | ||||||||||||
Change in operating assets and liabilities: | |||||||||||||||
Accounts receivable | E(iii) | (117,724 | ) | 35,810 | (81,914 | ) | |||||||||
Prepaid expenses and deposits | (246,174 | ) | - | (246,174 | ) | ||||||||||
Accounts payable and accrued liabilities | E(i) | 523,574 | (63,750 | ) | 459,824 | ||||||||||
Bonuses payable | C(i) | 241,290 | 91,423 | 332,713 | |||||||||||
Deferred revenue | 53,079 | - | 53,079 | ||||||||||||
Deferred lease inducements | 100,690 | - | 100,690 | ||||||||||||
Cash flows used in operating activities | (951,973 | ) | - | (951,973 | ) | ||||||||||
INVESTING ACTIVITIES | |||||||||||||||
Proceeds from disposal of available for sale securities | 261,912 | - | 261,912 | ||||||||||||
Purchases of property & equipment | (159,934 | ) | - | (159,934 | ) | ||||||||||
Cash flows used in (from) investing activities | 101,978 | - | 101,978 | ||||||||||||
FINANCING ACTIVITIES | |||||||||||||||
Proceeds from restricted cash | 20,000 | - | 20,000 | ||||||||||||
Proceeds from sale of common stock (net of share issue costs) | 6,099,900 | - | 6,099,900 | ||||||||||||
Cash flows from financing activities | 6,119,900 | - | 6,119,900 | ||||||||||||
Net increase (decrease) in cash and cash equivalents | 5,269,905 | - | 5,269,905 | ||||||||||||
Cash and cash equivalents, beginning of year | 2,105,340 | - | 2,105,340 | ||||||||||||
Cash and cash equivalents, end of year | $ | 7,375,245 | $ | - | $ | 7,375,245 |
14
The following table illustrates the effect of the adjustments by financial statement line item in the Company’s consolidated statements of stockholders’ equity as of December 31, 2008 and December 31, 2007:
As previously reported | ||||||||||||||||||||||||||||||
Common stock | Additional Paid-in Capital | Accumulated Deficit | Total | Restatement Adjustment | As Restated Total | |||||||||||||||||||||||||
Reference | Number of Shares | Amount | ||||||||||||||||||||||||||||
Balance, December 31, 2006 | 17,836,339 | $ | 8,846 | $ | 3,605,579 | $ | (507,729 | ) | $ | 3,106,696 | $ | - | $ | 3,106,696 | ||||||||||||||||
Adjustment to opening accumulated deficit | A, B, E(iii) | - | - | - | - | - | (319,850 | ) | (319,850 | ) | ||||||||||||||||||||
Balance, December 31, 2006 | 17,836,339 | 8,846 | 3,605,579 | (507,729 | ) | 3,106,696 | (319,850 | ) | 2,786,846 | |||||||||||||||||||||
Issuance of 60,284 common shares at $0.98 per share in lieu of accrued bonuses to officers | 60,284 | 60 | 59,018 | 59,078 | - | 59,078 | ||||||||||||||||||||||||
Issuance of 1,000,000 common shares at $1.00 per share to CEO | 1,000,000 | 1,000 | 999,000 | 1,000,000 | - | 1,000,000 | ||||||||||||||||||||||||
Private Placement of 2,550,000 common shares at $2.00 per share | 2,550,000 | 2,550 | 5,097,450 | 5,100,000 | - | 5,100,000 | ||||||||||||||||||||||||
Share issue costs | - | (100 | ) | (100 | ) | - | (100 | ) | ||||||||||||||||||||||
Stock-based compensation | D | - | 428,028 | 428,028 | (18,971 | ) | 409,057 | |||||||||||||||||||||||
Net loss and comprehensive loss | A, B, C(i), D, E(i), E(iii) | - | (2,017,949 | ) | (2,017,949 | ) | 55,603 | (1,962,346 | ) | |||||||||||||||||||||
Balance, December 31, 2007 | 21,446,623 | 12,456 | 10,188,975 | (2,525,678 | ) | 7,675,753 | (283,218 | ) | 7,392,535 | |||||||||||||||||||||
Stock-based compensation | D, G(ii) | - | - | 2,111,354 | 2,111,354 | 51,172 | 2,162,526 | |||||||||||||||||||||||
Issuance of 586,403 common shares per the merger agreement with Auctomatic | G(i) | 586,403 | 586 | 1,137,533 | 1,138,119 | 110,746 | 1,248,865 | |||||||||||||||||||||||
Issuance of 33,000 common shares to investor relations firm | 33,000 | 33 | 85,649 | 85,682 | - | 85,682 | ||||||||||||||||||||||||
Issuance of 120,000 common shares to investor relations firm | 120,000 | 120 | 218,057 | 218,177 | - | 218,177 | ||||||||||||||||||||||||
Issuance of 50,000 warrants to investor relations firm | - | - | 45,500 | 45,500 | - | 45,500 | ||||||||||||||||||||||||
Cancellation of 300,000 common shares not distributed | (300,000 | ) | - | - | - | - | - | |||||||||||||||||||||||
Private Placement of 1,627,344 units at $0.65 per share | F | 1,627,344 | 1,627 | 1,056,148 | 1,057,775 | (157,895 | ) | 899,880 | ||||||||||||||||||||||
Share issue costs | - | - | (86,803 | ) | (86,803 | ) | - | (86,803 | ) | |||||||||||||||||||||
Extinguishment of accounts payable | 33,000 | 33 | 16,467 | 16,500 | - | 16,500 | ||||||||||||||||||||||||
Net loss and comprehensive loss | A - E(ii), G(ii) | (10,006,456 | ) | (10,006,456 | ) | 19,186 | (9,987,270 | ) | ||||||||||||||||||||||
Balance, December 31, 2008 | 23,546,370 | $ | 14,855 | $ | 14,772,880 | $ | (12,532,134 | ) | $ | 2,255,601 | $ | (260,009 | ) | $ | 1,995,592 |
15
Overview
We build consumer internet experiences around our large portfolio of domain names. We have developed content or commerce experiences across our core domain names. In addition, we own hundreds of non-core domain names that we may choose to develop, lease or sell in the future to raise funds in a non-dilutive manner. We generate revenues from this portfolio in two different ways; through the online sales of products (eCommerce) and through the sale of advertising. Almost all of our revenues earned in 2008 were generated from our main Health and Beauty website, Perfume.com. Through this website, we sell discount, brand name fragrances, skin care, and hair care products directly to consumers. We also generate revenues by selling online advertising space to advertisers or in partnership with third party advertising networks. However, in 2008, advertising accounted for less than 1% of total revenues.
In 2008, we began shipping our Perfume.com products to selected international markets. Until then, we shipped only to delivery addresses located in the United States. However, sales of products shipped to non-U.S. locations remain immaterial for the 2008 fiscal year and therefore are not disclosed separately.
The recent downturn in the global economy has significantly impacted the U.S. economy and consumer confidence. It remains a challenge for all retailers, including online retailers, to achieve sales growth with adequate gross margins. As a result of our dependence on the U.S. marketplace for sales, it is likely that the current recession will cause a negative impact to our results for at least the short-term.
We have also experienced significant challenges in raising capital through debt or share issuances. Financing opportunities have become more expensive and difficult to find. The steep decrease in our share price would cause any large financing through share issuance to significantly dilute our current shareholdings. As a result, management has decided to actively pursue the sale of some non-core domain names to raise much needed funds in order to avoid such dilution. We sold one domain name at the 2008 fiscal year end for CDN$500,000, and through March 31, 2009, we sold an additional two domain names for $1.65 million. We believe these sales are a testament to the inherent value of our domain name assets, and together with other cost-cutting measures, the proceeds will help meet our working capital needs and management’s strategy to achieve the goal of cash flow positive operations by the end of 2009.
In 2008, we had a significant net loss and significant cash outflows. As noted above, in late 2008 and early 2009, we instituted cost-cutting measures to better position our business in the coming years. Some of these measures included layoffs of staff, including our former President and COO, and the termination of consulting and investor relations contracts. In addition, our CEO has agreed to defer all of his salary indefinitely.
16
Annual Financial Data
The following selected financial data was derived from the Company’s audited consolidated financial statements as filed in this report. The information set forth below should be read in conjunction with the Company’s financial statements and related notes included elsewhere in this report.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2008 and 2007, (as restated)
(Expressed in U.S. dollars)
2008 (As Restated) | 2007 (As Restated) | |||||||
SALES | ||||||||
Health and beauty eCommerce | $ | 9,271,237 | $ | 8,092,707 | ||||
Other eCommerce | 455 | 485,199 | ||||||
Domain name advertising | 93,141 | 449,613 | ||||||
Miscellaneous income | - | - | ||||||
Total Sales | 9,364,833 | 9,027,519 | ||||||
COSTS OF SALES | ||||||||
Health and Beauty eCommerce | 7,683,432 | 6,512,292 | ||||||
Other eCommerce | 380 | 509,181 | ||||||
Total Costs of Sales (excluding depreciation and amortization as shown below) | 7,683,812 | 7,021,473 | ||||||
GROSS PROFIT | 1,681,021 | 2,006.046 | ||||||
OPERATING EXPENSES | ||||||||
Amortization and depreciation | 253,141 | 29,169 | ||||||
Amortization of website development costs | 58,640 | - | ||||||
Corporate general and administrative | 2,915,034 | 623,171 | ||||||
ECommerce general and administrative | 567,980 | 304,212 | ||||||
Management fees and employee salaries | 5,798,728 | 2,053,503 | ||||||
Corporate marketing | 147,842 | - | ||||||
ECommerce marketing | 766,393 | 817,101 | ||||||
Other expenses | 708,804 | 637,730 | ||||||
Total Operating Expenses | 11,216,562 | 4,464,886 | ||||||
NON-OPERATING INCOME (EXPENSES) | ||||||||
Global Cricket Venture payments | (1,000,000 | ) | ||||||
Gain from sales and sales-type lease of domain names | 461,421 | - | ||||||
Accretion interest expense | (96,700 | ) | - | |||||
Interest and investment income | 67,683 | 119,574 | ||||||
Gain on disposal of subsidiary of Frequenttraveler.com Inc. | - | 276,805 | ||||||
Non-controlling interest | 75,478 | 91,890 | ||||||
NET LOSS BEFORE TAXES | (10,027,659 | ) | (1,970,571 | ) | ||||
TAXES | ||||||||
Deferred tax recovery | (40,389 | ) | (8,225 | ) | ||||
NET LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD | $ | (9,987,270 | ) | $ | (1,962,346 | ) | ||
BASIC AND DILUTED LOSS PER SHARE | $ | (0.46 | ) | $ | (0.10 | ) | ||
WEIGHTED AVERAGE NUMBER OF COMMON | ||||||||
SHARES OUTSTANDING - BASIC AND DILUTED | 21,937,179 | 19,070,236 |
17
Results of Operations
Sales and Costs of Sales
Combined gross sales totalled $9,364,833 for the year ended December 31, 2008 as compared to $9,027,519 during the year ended December 31, 2007, a 3.7% overall increase. The 2007 total included $480,591 in sales related to the operations of FT, also referred to as FrequentTraveller, which we disposed of in November 2007. Without these revenues, 2007 total revenues were $8,546,928 and our combined gross sales in 2008 actually grew by over 9.5%. Health and Beauty eCommerce product sales represented 99.0% of total revenues in 2008, compared to 94.7% of total revenues in 2007.
During the year ended December 31, 2008, costs of sales overall increased to $7,683,812 as compared to costs of sales of $7,021,473 for the year ended December 31, 2007. The amounts incurred during the 2007 fiscal year included $506,588 of costs of sales relating to FT’s operations, therefore total costs of sales incurred during the 2007 fiscal year without this amount were $6,514,885. This resulted in an increase in costs of sales of 17.9% which is directly attributable to an increase in costs of sales with respect to the growth of our eCommerce business as discussed below.
For the 2008 fiscal year, gross margin was 18.0% compared to an overall gross margin of 22.2% in 2007. These decreases are due to a material decrease in online advertising revenues which have very high gross margins, as well as an increase in our efforts to generate significant sales growth by providing more aggressive discounts, coupons and promotions such as free shipping to customers.
Total revenues in Q4 of 2008 of $3,622,036 dropped by 7.8% due to a large decrease in our advertising revenues and miscellaneous income in this quarter compared to Q4 of 2007, without amounts relating to FT’s operations. Overall, Health and Beauty eCommerce product sales represented 99.5% of total revenues in Q4 of 2008, compared to 94.4% of total revenues in Q4 of 2007.
Costs of sales were $3,012,434 in Q4 of 2008 compared to $3,087,927 in Q4 of 2007, a decrease of 2.4% without costs of sales relating to FT’s operations. This decrease in costs of sales was primarily due to the slight decrease in sales in the quarter in our eCommerce business, as well as the inclusion of inventory on our balance sheet at the end of the fiscal year to reflect inventories in transit, which had been immaterial at the end of the 2007 fiscal year. Overall gross margin in Q4 of 2008 was 16.8% compared to a gross margin of 20.6% during Q4 of 2007, without taking into account the results from FT’s operations.
Health and Beauty (H&B) eCommerce Sales
Our Health and Beauty eCommerce sales result from the sale of fragrances, designer skin care and hair care products to customers at Perfume.com and Body.com. ECommerce monetization of Body.com ended in early 2008. Perfume.com accounted for nearly all of our eCommerce sales in 2007 and 2008 and we expect that this will continue in the short term.
The second half of 2008 presented great challenges for all retailers including eCommerce, due to the worldwide economic downturn. Despite these challenges, we were able to achieve significant revenue growth in our H&B eCommerce business compared to 2007. In addition to the decrease in overall demand, the holiday shopping season was compressed in 2008. This season begins around the U.S. Thanksgiving holiday, which was later in 2008 than in 2007, resulting in 5 fewer holiday shopping days. We believe that the continued increases in sales we have experienced in each quarter demonstrate the strong potential of this business segment. There is no certainty, however, that such results can be continued into the foreseeable future. Moreover, it is possible that due to the continued decline in economic conditions, there may be a further decrease in consumer spending on discretionary items. Such a decrease will likely adversely affect the revenues from Perfume.com over the short-term. All figures below exclude any results from Frequent Traveler’s operations during the 2007 fiscal year.
18
In a press release dated January 2, 2009, ComScore, Inc., a marketing research company that measures use of the Internet, indicated that eCommerce sales declined during the 2008 holiday season as compared to the 2007 holiday season, defined as November 1st to December 24th of each year. According to their research, online sales of "flowers, greetings and gifts", a category we believe comparable to Perfume.com’s business, declined by 7% over last year's holiday season.
In contrast to the performance of online sales trends as measured by ComScore Inc., we were able to maintain strong sales during the holiday season, resulting in relatively flat eCommerce sales from Perfume.com in Q4 of 2008 compared to Q4 of 2007.
In Q4 of 2008, the combined H&B retail sites generated sales of $3,604,003 compared to $3,705,635 in Q4 of 2007, a decrease of 2.7% year over year. This resulted in average sales of approximately $39,174 per day in Q4 of 2008 compared to $40,279 per day in Q4 of 2007. Cost of purchases and shipping totalled $3,012,606 in Q4 of 2008 compared to $3,085,334 in Q4 of 2007. This produced a gross margin of $591,397 or 16.4% in Q4 of 2008 compared to $620,301 or 16.7% in Q4 of 2007. H&B eCommerce sales in Q4 accounted for 38.9% of total 2008 annual eCommerce sales compared to 45.8% of total 2007 annual eCommerce sales.
During the fiscal year ended December 31, 2008, the combined H&B retail sites generated sales of $9,271,237 compared to $8,092,707 in 2007, or an average of $25,331 per day in 2008 compared to $22,172 per day in 2007. Costs of purchases and shipping in 2008 totalled $7,683,432 compared to $6,512,292 in 2007, resulting in gross margin of $1,587,805 or 17.1% in 2008 compared to $1,580,415 or 19.5% in 2007.
Comparable annual sales have increased by 14.6% while gross margins have decreased to 17.1% from 19.5%. This decrease in gross margin in 2008 was attributed to a significant rise in oil prices leading to increased shipping costs, as well as product discounting and free shipping promotions in 2008 to drive customer and revenue growth due to increasingly competitive market conditions. We continue to monitor our overall product offerings, discounts and promotions to increase, or at least maintain, these profit margins into 2009. While we plan to increase or maintain this profit margin, there is no certainty that such result can be achieved and sustained throughout the year or continue into the foreseeable future. We also intend to explore opportunities to introduce and implement a more robust supply chain capability which, if realized, should increase gross margins by the end of 2010.
Other eCommerce Sales
In Q1 of 2008, we ceased offering goods or services for sale on any of our websites other than Perfume.com and undertook to re-evaluate the business models around which these websites were built. As a result, these websites generated no revenue after the first quarter of the 2008 fiscal year. For the first half of 2009 we will continue to allocate our resources to the development of Perfume.com.
Not including the revenue earned from Perfume.com or from the operations of Frequent Traveler, during the 2008 fiscal year our eCommerce retail sites generated sales of $455 compared to $4,608 in 2007. Costs of sales in the 2008 fiscal year totaled $380 compared to $2,593 in 2007, resulting in gross margin of $75 or 16.5% in 2008 compared to $2,015 or 43.7% in 2007.
Annual results for the 2007 fiscal year included eCommerce service sales earned through our former subsidiary FT of $480,591 and costs of sales of $506,588, resulting in a negative gross margin of 5.4%. Effective November 12, 2007, we terminated our relationship with FT. Up to the termination date in Q4 of 2007, FT‘s operations generated sales of $18,317 and costs of sales of $102,505. This resulted in a negative gross margin in the period of $84,188 or negative 460%. During 2007, there was no requirement to record any non-controlling interest in the share of the loss in FT.
19
Advertising
In Q4 of 2008, we generated advertising revenues of $18,033 compared to $180,956 in Q4 of 2007, a decrease of 90.0%. We terminated our primary advertising contract in early 2008 because its restrictive conditions limited monetization in the medium and long term. Advertising revenues have decreased every quarter as a result. In Q4 of 2008, advertising accounted for less than 1% of total revenues. This is similar to every other quarter in 2008. However in Q4 of 2007, advertising revenues accounted for 4.6% of total revenues, excluding the results from FT’s operations. Advertising revenues are expected to continue to account for a small percentage of total revenues in 2009 as we investigate new monetization strategies and realign our opportunities to increase advertising options available on our domain properties.
Overall, during the 2008 fiscal year, advertising revenues of $93,141 were generated compared to $449,613 in 2007, a decrease of 79.3%. Advertising revenue had improved in 2007 primarily due to management’s decisions to focus on search engine optimization, restructure existing relationships and pursue new relationships with advertising vendors, and redesign the main operating websites to increase their visibility. However, as a result of the high costs required to maximize the monetization of our domain names, advertising revenues dropped in 2008. Management is now pursuing new opportunities to earn additional advertising revenues, and expects these revenues to increase to approximately 3% of total revenues in the short term.
Domain Name Leases and Sales
In 2008, we entered into one agreement for a sales-type lease of one of our domain names for CDN$200,000 and one agreement for an outright sale of another domain name for CDN$500,000. The net gain on the disposal of these two domain names was USD$461,421 as disclosed in the consolidated financial statements. In 2007, there were no sales or leases of any domain names.
We have announced our intention to sell six of our non-core but highly valuable dot.com domain names from our portfolio in order to provide additional working capital in a non-dilutive manner. We engaged the services of brokers to assist us with sales of our domain names. As a result of actively marketing some of our non-core domain name assets for sale, we successfully sold one domain name in December 2008, as well as two additional domain names through March 31, 2009. We continue to evaluate any interest we receive from domain name buyers, and continue to consider acquiring certain other domain names that would complement either our advertising or eCommerce businesses.
General and Administrative (G&A) Expenses
General and administrative expenses consist of costs for general and corporate functions, including facility fees, travel, telecommunications, investor relations, insurance, merchant charges, and professional fees.
Overall, during 2008, G&A expenses of $3,483,014, or 37.2% of total revenues, were incurred compared to $927,383, or 10.3% of total revenues, in 2007, an increase of 275.6%. This total includes corporate and eCommerce related general and administrative costs. We expect these expenses to decrease as a percentage of revenue in 2009 as the eCommerce business grows and as a result of our cost cutting measures and the termination of our involvement in cricket related activities.
Corporate general and administrative expenses of $2,915,034 have increased over the 2007 expenses of $623,171 by $2,291,863, or over 367%. This was primarily due to expenses incurred for investor relations services of approximately $347,000 in cash and common stock valued at approximately $366,000, costs of $381,143 related to our M&A activities that were expensed during the year, and $283,414 in increased rent and overhead due to our new offices, increased telecommunications for new staff and website related hosting costs, and increased travel and office expenses due to increased growth and strategic initiatives. Corporate general and administrative costs of $397,133 were incurred in activities related to our cricket venture, which the Company terminated in August 2009. The remainder of the increase in corporate general and administrative expenses was due to increases in legal fees of $267,160 and audit and accounting fees of $208,475 due to increased corporate activity and SEC filings, as well as the purchase of additional insurance policies and increased premium costs which combined was $40,165. In total, these expenses accounted for 31.1% of total revenues in 2008 and 6.9% of total revenues in 2007. We are implementing strategies in 2009 to decrease corporate G&A costs as a percentage of revenue in the future, however there is no certainty that our attempts will be successful.
20
As disclosed in Item V, we anticipate that we may incur additional legal expenses to comply with new disclosure and reporting requirements mandated by the British Columbia Securities Commission for companies listed on the OTC Bulletin Board with a presence in British Columbia. These regulations were effective as of September 15, 2008.
ECommerce general and administrative costs of $567,980 have increased over the 2007 expense of $304,212 by $263,768, or 86.7%. This was primarily a result of human resources costs of approximately $105,271 relating to our Perfume.com team which have been eliminated for 2009. In 2008, there were also increased travel expenses of $57,202, internet traffic and telecommunication charges of $18,814, IT consulting of $54,337 as well as $21,704 in increased merchant fees generated on increased sales. These expenses represented 6.1% of eCommerce sales in 2008 compared to 3.8% of eCommerce sales in 2007. We believe that these expense ratios are reasonable given the increasingly competitive environment for eCommerce sales and our continued focus on growing the eCommerce business throughout 2009. We expect to maintain eCommerce general and administrative costs below 10% of eCommerce sales.
Management Fees and Employee Salaries
In 2008, we incurred $5,798,728 in management fees and staff salaries compared to $2,053,503 in 2007. However, these amounts include items such as stock based compensation expense of $2,162,526 in 2008 and $409,057 in 2007, and bonuses accrued but unpaid of $354,695 in 2008 and $332,713 in 2007. Excluding these amounts, normalized management fees were $3,281,507 in 2008, representing an increase of 150.2% over normalized management fees of $1,311,733 in 2007. The addition of a new executive management team in late 2007 and early 2008, acquiring new senior employees through the Auctomatic merger, an expansion of the IT department, and the use of various consultants in our eCommerce business to help scale revenues, all contributed to a larger expense in 2008. The 2008 expense also included $973,679 in costs related to our involvement with the cricket venture, which we terminated in August of 2009. Normalized management fees and salaries represented 35.0% of total revenues in 2008 and 14.5% in 2007. Subsequent to the end of the 2008 fiscal year, our staffing requirements were restructured and a number of employees were laid off, including our former President and COO. After severance payments have been fully paid out, the reduced number of staff will contribute to a decrease in management fees and salaries as a percentage of revenue. We anticipate maintaining salary expense at approximately 20% of revenues.
Executive compensation in 2008 of $3,411,296 (2007 of $1,453,775) accounted for 58.8% (2007 – 70.1%) of the total management fees and employee salary expense. Excluding executive compensation, employee salaries increased by 298.1% due to the addition of personnel resources in both the H&B business and administrative support, as well as stock option grants which resulted in stock based compensation expense.
Marketing
We generate internet traffic through paid search, email and affiliate marketing. We pay marketing costs related to search and email in order to drive traffic to our various websites. We pay our affiliates sales commissions if they deliver traffic to Perfume.com that result in a successful sale. In the year ended December 31, 2008, total marketing expenses were $914,235, or 9.8% of total revenues, compared to $817,101, or 9.1% of total revenues, in 2007, an 11.9% increase year over year.
Expenses related to corporate activity, which we classify as corporate marketing expenditures, totalled $147,842 for 2008. These expenses consisted of $105,443 related to our cricket activities, and the remainder was due to costs related to public relations. There were no such costs in 2007.
ECommerce marketing expenses relate entirely to advertising costs incurred in our eCommerce business, particularly email advertising, search engine marketing, and affiliate marketing programs. In 2008, eCommerce marketing expenses of $766,393 decreased by 6.2% compared to $817,101 in 2007. These expenses decreased steadily during 2008 due to management’s decision to move key marketing efforts in-house, thereby eliminating agency expenses, as well as to take steps to increase the effectiveness of our search engine and email marketing campaigns for Perfume.com. We believe that customer acquisition is the key to accelerated growth, and deploying direct, measurable marketing vehicles like search, email, and affiliate marketing account for the largest part of these marketing expenditures.
21
In 2008 eCommerce marketing expenses were 8.3% of eCommerce sales, compared to 10.1% of eCommerce sales in 2007. This was largely due to expenses related to television advertising and internet search positioning during the 2007 holiday season, which we did not incur in 2008.
Organic search rankings for Perfume.com currently perform adequately. However, we believe when these results are complemented with targeted, paid keyword advertising at opportune times, it brings additional traffic to Perfume.com. We believe that the more strategic and measurable advertising expenditures implemented during the year were a contributing factor to increased revenues in 2008.
Marketing costs coincide with revenue growth and are expected to be in the range of 10% of gross product revenue. We have been able to maintain marketing costs below 10% of revenues while aggressively marketing our products and services.
Other Expenses
In 2008, we incurred various restructuring costs of $708,804. These included approximately $168,400 in severance payments and $25,700 in consulting fees for assistance with the transition of the new management team, both of which were paid to our former Chief Financial Officer, $317,100 in signing bonuses which were paid to our new Chief Corporate Development Officer and our new Vice President Finance, additional severance of $53,600 paid to one of our full time employees, $39,800 in costs related to changing the Company name and rebranding, $31,700 in valuation costs relating to the issuance of DHI common stock to the Company for the conversion of $3,000,000 in intercompany debt, and $27,300 in some final windup costs related to the disposition of Frequent Traveler in late 2007. This total also included $45,000 in financing costs related to our discussions with investment bankers to raise capital. Financing costs that were directly identifiable with the raising of our round of capital during the fourth quarter were charged to equity. However, the amounts included in “other expenses” are costs relating to transactions that are no longer being pursued, and therefore are no longer directly identifiable with the raising of capital and expensed during the quarter.
In 2007, we incurred costs relating to restructuring and the recruiting and relocating costs associated with attracting the new management team. These costs included a $205,183 severance payment to our former Chief Executive Officer, $30,558 in consulting fees to our former Chief Executive Officer, a $205,183 signing bonus to our President and Chief Operating Officer, and $196,806 of general legal costs associated with the preparation of employment agreements, severance agreements and stock option agreements.
Non-Controlling Interest
As a result of the restatement of the Company’s financial statements, the effect of the non-controlling interest (“NCI”) carried forward from prior years resulted in a net effect to the NCI liability at the December 31, 2007 year end of $8,786. There was a $91,890 credit relating to the non-controlling interest on the consolidated statements of operations in 2007 and $75,478 in 2008. This credit was related to the benefit received by the minority shareholders due to conversion of debt owed to the parent company by the operating subsidiary DHI, into shares of DHI common stock that occurred in the first quarter of 2008. The continued losses of DHI have decreased the NCI liability to NIL at the end of the 2008 fiscal year end.
Global Cricket Venture Expenses
The Company has incurred costs of approximately $1.47 million relating to initial performance of its obligations under the MOUs with each of the BCCI and the IPL, and establishing Global Cricket Venture with NLB. These costs are related to, but are not limited to, expenditures for business development, product development, travel, consulting, and salaries. The costs have been reported as $397,133 of corporate general and administrative expenses, $973,679 of management fees and employee salaries, and $105,443 in corporate marketing expenses. The Company incurred no such costs during the 2007 fiscal year. An additional $1 million owing in aggregate to the BCCI and IPL for the October 1, 2008 minimum payments under the initial MOUs have also been accrued and expensed in 2008.
22
On or about October 1, 2008, the Company was scheduled to make payments to the BCCI and the IPL in the amounts of $625,000 and $375,000, respectively, in connection with Global Cricket Venture. The payments owed to the BCCI were renegotiated, although a formal amendment to the MOU had not been signed at December 31, 2008. The parties agreed that the October 1, 2008 payment would be decreased by $500,000, to $125,000, and that the payment of $750,000 that was due to be made on October 1, 2009 would be eliminated entirely. The amounts due to the IPL were not changed. Given that these renegotiated amounts had not yet been memorialized in writing, on October 1, 2008 we accrued and expensed the initial amounts owing to the BCCI of $625,000 and to the IPL of $375,000. All $2.47 million in costs were expensed during the year ended December 31, 2008 due to uncertainty regarding reimbursement of these costs by GCV.
On March 31, 2009, the Company and the BCCI jointly entered into a Termination Agreement, pursuant to which the BCCI Memorandum was terminated. On that same date, the Company, Global Cricket Venture and the BCCI, on behalf of the IPL, entered into a Novation Agreement (the “Novation”) with respect to the IPL Memorandum. Pursuant to the Novation, Global Cricket Venture was granted all of our rights, and assumed all of our obligations, under the IPL Memorandum. Global Cricket Venture also assumed the payments due to the BCCI through March 31, 2009 under the BCCI Memorandum, as they were modified.
As a result of the Novation,
· | Global Cricket Venture, a 50.05% owned subsidiary, rather than Live Current, is the party to the IPL Memorandum; |
· | the term of the IPL Memorandum was modified, so that it began on April 1, 2008 and will end on December 31, 2017; |
· | the minimum payment due on October 1, 2008 to the BCCI of $125,000, reduced from $625,000, and any other payments owed to the BCCI through March 31, 2009 were assumed by Global Cricket Venture and are to be paid on July 1, 2009. We will be fully released from these liabilities once Global Cricket Venture makes these payments; |
· | the minimum payment due on October 1, 2008 to the IPL of $375,000, and any other payments owed to the IPL through March 31, 2009 were assumed by Global Cricket Venture and are to be paid on July 1, 2009. We have been fully released from these liabilities; |
· | a right to terminate the IPL Memorandum due to a material breach or on the insolvency of either party was added; and |
· | the “Minimum Annual Fee Payment Schedule” (Schedule 2 to the IPL Memorandum) was revised. The first payment of $2,250,000 is due on July 1, 2009. |
In August 2009, GCV transferred and assigned to an unrelated third party (“CricketCo”) all of its rights, title, and interest in and to the original MOU with the IPL, as the original MOU was amended by the Novation Agreement that was signed on March 31, 2009. Pursuant to this agreement, CricketCo also agreed to assume and be liable for all past and future obligations and liabilities of GCV arising from the original MOU, as it was amended by the Novation. We have also agreed to sell the domain name cricket.com to a company related to CricketCo whereby we will sell the cricket.com domain name, along with the website, content, copyrights, trademarks, etc., for consideration of 4 equal payments of $250,000. The cricket.com domain name shall remain our property until all payments have been made. These two agreements will result in our full exit out of the Cricket business, pending any obligation we may have to pay to the BCCI and IPL if CricketCo fails to make the assumed payments, and with the exception of interim support services which we have agreed to provide for a period of six months. The Company cannot determine the financial impact of this transaction at this time.
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Liquidity and Capital Resources
We generate revenues from (i) the sale of third-party products over the Internet; (2) "pay-per-click" advertising; (3) selling advertising on media rich websites with relevant content; and (4) the sale or lease of domain name assets. However, during the 2008 fiscal year our revenues were not adequate to support our operations. In order to conserve cash, we paid certain service providers with shares of our common stock during the year, and we continue to explore opportunities to do so in 2009 as well.
In November 2008, we also raised $1,057,775 of cash by selling 1,627,344 units consisting of one share of our common stock and two warrants, each for the purchase of a half share of common stock. The offering price was $0.65 per unit.
As at December 31, 2008, current liabilities were in excess of current assets resulting in a working capital deficiency of $3,199,931 as compared to positive working capital of $5,902,740 at the fiscal year ending December 31, 2007. During the year ended December 31, 2008, we incurred a loss of $9,987,270 and a decrease in cash of $5,542,725, compared to net loss of $1,962,346 and an increase in cash of $5,269,905 for the year ended December 31, 2007. The net loss for 2008 included incorporation and start up expenses for the Global Cricket Venture of $1,476,255, which have been expensed in the year due to uncertainty regarding reimbursement of these costs by the GCV, and another $1,000,000 in payments due to the IPL and BCCI in the period. During 2008, we increased our accumulated deficit to $12,777,195 from $2,789,925 in 2007 and have stockholders’ equity of $1,995,592, primarily due to the net loss for the year, as well as various issuances of common shares.
The decrease in cash during the 2008 fiscal year includes cash outlays that are either unusual or non-operational in nature. During the year, cash outlays included amounts paid in connection with the acquisition of Auctomatic of $1.29 million, payments relating to Global Cricket Venture expenses incurred to perform under the MOUs with BCCI, IPL and NLB of $1.1 million, and other expenditures of $709,000 relating to changing the company’s name, rebranding and restructuring the management team. Without these expenditures, cash decreased due to operations by approximately $204,000 per month.
Operating Activities
Operating activities in 2008 resulted in cash outflows of $4,854,260 after adjustments for non-cash items, the most significant of which are the stock-based compensation expensed during the year of $2,162,526, the increase in accounts payable of $1,596,314 partially due to large accruals and unpaid invoices for goods and services at the end of 2008, and $1,000,000 in amounts due to the BCCI and IPL at year end.
Operating activities in 2007 resulted in cash outflows of $951,973 after adjustments for non-cash items, the most significant of which were the stock-based compensation expensed during the year of $409,057 and the increase in accounts payable of $459,824 partially due to increased legal and audit fees that did not exist at the 2006 year end, as well as accrued bonuses of $332,713.
Investing Activities
Investing activities in 2008 generated cash outflows of $1,659,437, primarily due to cash consideration and related acquisition costs of $1,530,047 related to the Auctomatic merger. We also invested $187,532 in the purchase of property and equipment, as well as approximately $451,000 in website development as we worked towards our pre-holiday launch of Perfume.com.
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Investing activities in 2007 generated cash inflows of $101,978, due to the sale of all “available for sale” securities and the purchase of approximately $160,000 of property and equipment, mostly consisting of leasehold improvements for our new office location.
Financing Activities
Financing activities in 2008 generated $970,972 of cash inflows due to the issuance of 1.6 million shares of common stock in connection with our November private placement.
Financing activities in 2007 generated $6,119,900 of cash inflows due primarily to the issuance of 1,000,000 shares of common stock to the new CEO in June 2007 and the issuance of common stock in the private offering that we undertook in September and October 2007, which raised approximately $5,100,000.
Future Operations
At the 2008 year end, we had a working capital deficiency, and for the past two fiscal years we have experienced substantial losses. We expect to continue to incur losses in the coming quarters even though costs have been reduced through lay-offs and restructuring. We may also seek to explore new business opportunities, including the partnering, building or acquisition of a distribution center or warehouse in the United States to enhance our fragrance fulfillment capability and improve gross margins. These acquisitions may require additional cash beyond what is currently available and such funds may be raised by future equity and/or debt financings, and through the sale of non-core domain name assets.
We are pursuing opportunities to increase cash flows, however there is no certainty that these opportunities will generate sufficient cash flows to support our activities in the future in view of changing market conditions. During the 2009 fiscal year, we expect to expend significant funds toward additional marketing costs, which we believe will translate into higher revenue growth, as well as to fund costs related to the Global Cricket Venture. There is no certainty that the profit margins we may generate going forward, as well as any successful raising of working capital, will be sufficient to offset the anticipated marketing costs, Global Cricket Venture costs, and other expenditures and may result in net cash outflow for the 2009 fiscal year.
We have actively curtailed some operations and growth activities in an effort to reduce costs and preserve cash on hand. We are also continuing to seek opportunities to sell selected domain names in order to address short term liquidity needs. As a result, we have entered into agreements with brokers to sell several of our non-core but highly valuable dot-com domain names from our portfolio of more than 800 domain names. One domain name was successfully sold on December 31, 2008 for CDN$500,000. Through to March 31, 2009, we sold an additional two domain names for proceeds of $1.65 million. We anticipate that further strategic sales of these domain names, if successful, will provide us with the required cash to meet our working capital needs, to fund cricket related expenditures, and to provide for general operating capital needs over the next 12 to 18 months. There can be no assurances that any future sales of domain names on terms acceptable to us will occur.
The consolidated financial statements have been prepared on a going concern basis which assumes that we will be able to realize assets and discharge liabilities in the normal course of business for the foreseeable future. Our ability to continue as a going-concern is in substantial doubt as it is dependent on continued financial support from our investors, our ability to sell additional non-core domain names, our ability to raise future debt or equity financings, and the attainment of profitable operations to meet our liabilities as they become payable. The outcome of our operations and fundraising efforts is dependent in part on factors and sources beyond our direct control that cannot be predicted with certainty. Access to future debt or equity financing is not assured and we may not be able to enter into arrangements with financing sources on acceptable terms, if at all. The financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts or classification of liabilities that might be necessary should we be unable to continue as a going concern.
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On or about October 1, 2008, we were scheduled to make a payment to the BCCI in the amount of $625,000 and a payment to the IPL in the amount of $375,000, in connection with the Global Cricket Venture MOUs. The payments owed to the BCCI were renegotiated, although a formal amendment to the MOU had not been signed at December 31, 2008. The parties agreed that the October 1, 2008 amount owing to the BCCI would be decreased to $125,000. In addition, the parties also agreed that the payment of $750,000 that will be due to the BCCI on October 1, 2009 would be eliminated entirely. Given that these renegotiated amounts had not yet been memorialized in writing, the original payments due to the BCCI and the IPL for the October 1, 2008 commitment have been accrued and expensed as Global Cricket Venture expenses. On March 31, 2009, the BCCI MOU was terminated and Global Cricket Venture assumed the obligations to make the payments owed to the BCCI and the IPL. These payments have not yet been made. Such payments may be subject to certain withholding or other taxes which we may be required to gross up pursuant to the terms of the MOU.
If at any time we are unable to make the required payments to the BCCI or the IPL, and no extension or renegotiation of the payment terms can be arranged, we may have to forfeit some or all of its rights to the cricket-related digital content and may be exposed to potential liability for defaulting on its payment. We cannot determine at this time the actual value of such rights, only that the loss of such rights would impact negatively upon the potential revenues from the Global Cricket Venture. In addition, if we are unable to make the required payments, we face potential claims for breach of contract, lack of performance and other damages which other parties to the MOU may seek to enforce against the Company. We do not concede that such claims would be enforceable or result in a recovery against the Company. If these events were to occur, such events would have a negative effect on our overall anticipated results of operations and performance. As noted above, in August 2009 GCV assigned the rights to the IPL MOU to CricketCo, which also assumed the liabilities owed to the BCCI and the IPL as set forth in the IPL MOU, as amended by the Novation that was signed on March 31, 2009.
We have no current plans to purchase any significant property and equipment.
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Restated Quarterly Financial Data (unaudited)
As a result of the restatement of our financial statements for the fiscal year ended December 31, 2008, our quarterly results have been adjusted as disclosed in the tables below. Detailed explanations for the adjusted items in each table are included following each table.
March 31, 2008 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||
ASSETS | |||||||||||||
Current | |||||||||||||
Cash and cash equivalents | $ | 4,905,745 | $ | - | $ | 4,905,745 | |||||||
Accounts receivable (net of allowance for doubtful accounts of nil) | 142,220 | - | 142,220 | ||||||||||
Prepaid expenses and deposits | 165,062 | - | 165,062 | ||||||||||
Current portion of receivable from sales-type lease | 140,540 | - | 140,540 | ||||||||||
Total current assets | 5,353,567 | - | 5,353,567 | ||||||||||
Long-term portion of receivable from sales-type lease | 23,423 | - | 23,423 | ||||||||||
Deferred acquisition costs | 121,265 | - | 121,265 | ||||||||||
Property & equipment | 314,600 | - | 314,600 | ||||||||||
Website development costs | 147,025 | - | 147,025 | ||||||||||
Intangible assets | 1,625,881 | - | 1,625,881 | ||||||||||
Goodwill | (i) | - | 66,692 | 66,692 | |||||||||
Total Assets | $ | 7,585,761 | $ | 66,692 | $ | 7,652,453 | |||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||
Current | |||||||||||||
Accounts payable and accrued liabilities | $ | 1,311,817 | $ | - | $ | 1,311,817 | |||||||
Bonuses payable | (ii), (iii) | - | 215,025 | 215,025 | |||||||||
Deferred revenue | 19,644 | - | 19,644 | ||||||||||
Current portion of deferred lease inducements | 20,138 | - | 20,138 | ||||||||||
Total current liabilities | 1,351,599 | 215,025 | 1,566,624 | ||||||||||
Non-controlling interest | (i) | - | 23,972 | 23,972 | |||||||||
Deferred income tax | (v) | - | 246,759 | 246,759 | |||||||||
Deferred lease inducements | 70,483 | - | 70,483 | ||||||||||
Total Liabilities | 1,422,082 | 485,756 | 1,907,838 | ||||||||||
STOCKHOLDERS' EQUITY | |||||||||||||
Common Stock | 12,456 | - | 12,456 | ||||||||||
Additional paid-in capital | (iv) | 10,671,119 | (57,394 | ) | 10,613,725 | ||||||||
Accumulated deficit | (i) to (vi) | (4,519,896 | ) | (361,670 | ) | (4,881,566 | ) | ||||||
Total Stockholders' Equity | 6,163,679 | (419,064 | ) | 5,744,615 | |||||||||
Total Liabilities and Stockholders' Equity | $ | 7,585,761 | $ | 66,692 | $ | 7,652,453 |
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For the quarter ended March 31, 2008 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||
SALES | $ | 1,848,479 | $ | - | $ | 1,848,479 | |||||||
COSTS OF SALES (excluding depreciation and amortization as shown below) | 1,486,062 | - | 1,486,062 | ||||||||||
GROSS PROFIT | 362,417 | - | 362,417 | ||||||||||
OPERATING EXPENSES | |||||||||||||
Amortization and depreciation | 15,266 | - | 15,266 | ||||||||||
Corporate general and administrative | (vi) | 486,087 | 63,750 | 549,837 | |||||||||
ECommerce general and administrative | 169,813 | - | 169,813 | ||||||||||
Management fees and employee salaries | (ii), (iii), (iv) | 1,090,671 | 85,179 | 1,175,850 | |||||||||
Corporate marketing | 26,459 | - | 26,459 | ||||||||||
ECommerce marketing | 149,187 | - | 149,187 | ||||||||||
Other expenses | 629,856 | - | 629,856 | ||||||||||
Total Operating Expenses | 2,567,339 | 148,929 | 2,716,268 | ||||||||||
NON-OPERATING INCOME (EXPENSES) | |||||||||||||
Gain from sales and sales-type lease of domain names | 168,206 | - | 168,206 | ||||||||||
Interest and investment income | 42,498 | - | 42,498 | ||||||||||
Non-controlling interest | (i) | - | 51,506 | 51,506 | |||||||||
Total Non-Operating Income (Expenses) | 210,704 | 51,506 | 262,210 | ||||||||||
NET LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD | $ | (1,994,218 | ) | $ | (97,423 | ) | $ | (2,091,641 | ) | ||||
BASIC AND DILUTED LOSS PER SHARE | $ | (0.10 | ) | (0.00 | ) | $ | (0.10 | ) | |||||
WEIGHTED AVERAGE NUMBER OF COMMON | |||||||||||||
SHARES OUTSTANDING - BASIC AND DILUTED | 19,970,334 | - | 19,970,334 |
(i) We recorded goodwill of $66,692 in relation to the debt conversion between our subsidiary, Domain Holdings Inc., and our parent company, Live Current Media Inc. as disclosed in Note 5. There was an increase to the NCI liability during the quarter of $15,186 and a gain to the minority interest included in Other Income and Expenses of $51,506. The carry forward effect of the NCI liability from December 31, 2007 was an increase of $8,786.
(ii) We recorded as an additional liability and compensation expense during the March 31, 2008 quarter $35,315 for bonuses of CDN $100,000 each that are to be paid to our President and Chief Corporate Development Officer on January 1, 2009 and on January 1, 2010.
(iii) We recorded as an additional liability and compensation expense during the March 31, 2008 quarter $88,287 for bonuses of CDN $250,000 each that were to be paid to our former President on October 1, 2008 and on October 1, 2009. There was also a carry forward effect to bonuses payable of an increase of $91,423 from December 31, 2007.
(iv) We revised our assumptions relating to the estimated life of stock options we have granted. The revised estimated life of 3.375 years resulted in a decrease to our stock based compensation expense of $38,423 and a corresponding decrease to Additional paid-in capital during the quarter. There was also a carry forward effect to Additional paid-in capital from December 31, 2007 of a decrease of $18,971.
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(v) We accrued and expensed deferred taxes relating to an estimated potential future tax liability on future gains on sales of our domain name intangible assets. The carry forward effect to Current Liabilities was an increase of $246,759, with a corresponding increase in Opening Accumulated Deficit.
(vi) We recorded additional Corporate General and Administrative expenses of $63,750 during the quarter for the accrual of audit fees that were reversed out of the year ended December 31, 2007 and recorded in the first quarter of 2008.
June 30, 2008 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||
ASSETS | |||||||||||||
Current | |||||||||||||
Cash and cash equivalents | $ | 1,897,940 | $ | - | $ | 1,897,940 | |||||||
Accounts receivable (net of allowance for doubtful accounts of nil) | 131,898 | - | 131,898 | ||||||||||
AR from GCV | 733,539 | - | 733,539 | ||||||||||
Prepaid expenses and deposits | 310,726 | - | 310,726 | ||||||||||
Current portion of receivable from sales-type lease | 98,378 | - | 98,378 | ||||||||||
Total current assets | 3,172,481 | - | 3,172,481 | ||||||||||
Long-term portion of receivable from sales-type lease | 23,423 | - | 23,423 | ||||||||||
Property & equipment | 1,225,440 | - | 1,225,440 | ||||||||||
Website development costs | 276,030 | - | 276,030 | ||||||||||
Intangible assets | 1,625,881 | - | 1,625,881 | ||||||||||
Goodwill | (i), (ii), (iii) | 2,417,296 | 177,438 | 2,594,734 | |||||||||
Total Assets | $ | 8,740,551 | $ | 177,438 | $ | 8,917,989 | |||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||
Current | |||||||||||||
Accounts payable and accrued liabilities | $ | 1,518,222 | $ | - | $ | 1,518,222 | |||||||
Bonuses payable | (i), (ii), (v), (vi) | 333,442 | 340,276 | 673,718 | |||||||||
Due to shareholders of Auctomatic | 781,117 | - | 781,117 | ||||||||||
Deferred revenue | 15,787 | - | 15,787 | ||||||||||
Current portion of deferred lease inducements | 20,138 | - | 20,138 | ||||||||||
Total current liabilities | 2,668,706 | 340,276 | 3,008,982 | ||||||||||
Non-controlling interest | - | - | - | ||||||||||
Deferred income tax | (i) | - | 246,759 | 246,759 | |||||||||
Deferred lease inducements | 65,449 | - | 65,449 | ||||||||||
Total Liabilities | 2,734,155 | 587,035 | 3,321,190 | ||||||||||
STOCKHOLDERS' EQUITY | |||||||||||||
Common Stock | 13,087 | - | 13,087 | ||||||||||
Additional paid-in capital | (i), (iii), (iv), (vii) | 12,483,794 | 52,765 | 12,536,559 | |||||||||
Accumulated deficit | (i) to (vii) | (6,490,485 | ) | (462,362 | ) | (6,952,847 | ) | ||||||
Total Stockholders' Equity | 6,006,396 | (409,597 | ) | 5,596,799 | |||||||||
Total Liabilities and Stockholders' Equity | $ | 8,740,551 | $ | 177,438 | $ | 8,917,989 |
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For the quarter ended June 30, 2008 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||
SALES | $ | 1,935,454 | $ | - | $ | 1,935,454 | |||||||
COSTS OF SALES (excluding depreciation and amortization as shown below) | 1,578,886 | - | 1,578,886 | ||||||||||
GROSS PROFIT | 356,568 | - | 356,568 | ||||||||||
OPERATING EXPENSES | |||||||||||||
Amortization and depreciation | 43,888 | - | 43,888 | ||||||||||
Corporate general and administrative | 591,169 | - | 591,169 | ||||||||||
ECommerce general and administrative | 100,495 | - | 100,495 | ||||||||||
Management fees and employee salaries | (iv), (v), (vi), (vii) | 1,479,782 | 124,664 | 1,604,446 | |||||||||
Corporate marketing | 20,243 | - | 20,243 | ||||||||||
ECommerce marketing | 129,885 | - | 129,885 | ||||||||||
Other expenses | 33,691 | - | 33,691 | ||||||||||
Total Operating Expenses | 2,399,153 | 124,664 | 2,523,817 | ||||||||||
NON-OPERATING INCOME (EXPENSES) | |||||||||||||
Interest and investment income | 16,680 | - | 16,680 | ||||||||||
Non-controlling interest | (i), (ii) | - | 23,972 | 23,972 | |||||||||
Total Non-Operating Income (Expenses) | 16,680 | 23,972 | 40,652 | ||||||||||
NET LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD | $ | (2,025,905 | ) | $ | (100,692 | ) | $ | (2,126,597 | ) | ||||
BASIC AND DILUTED LOSS PER SHARE | $ | (0.10 | ) | (0.00 | ) | $ | (0.10 | ) | |||||
WEIGHTED AVERAGE NUMBER OF COMMON | |||||||||||||
SHARES OUTSTANDING - BASIC AND DILUTED | 20,832,026 | - | 20,832,026 |
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For the six months ended June 30, 2008 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||
SALES | $ | 3,783,933 | $ | - | $ | 3,783,933 | |||||||
COSTS OF SALES (excluding depreciation and amortization as shown below) | 3,064,948 | - | 3,064,948 | ||||||||||
GROSS PROFIT | 718,985 | - | 718,985 | ||||||||||
OPERATING EXPENSES | |||||||||||||
Amortization and depreciation | 59,154 | - | 59,154 | ||||||||||
Corporate general and administrative | (i) | 1,039,065 | 63,750 | 1,102,815 | |||||||||
ECommerce general and administrative | 270,308 | - | 270,308 | ||||||||||
Management fees and employee salaries | (iv), (v), (vi), (vii) | 2,553,328 | 209,843 | 2,763,171 | |||||||||
Corporate marketing | 46,702 | - | 46,702 | ||||||||||
ECommerce marketing | 279,072 | - | 279,072 | ||||||||||
Other expenses | 663,547 | - | 663,547 | ||||||||||
Total Operating Expenses | 4,911,176 | 273,593 | 5,184,769 | ||||||||||
NON-OPERATING INCOME (EXPENSES) | |||||||||||||
Gain from sales and sales-type lease of domain names | 168,206 | - | 168,206 | ||||||||||
Interest and investment income | 59,178 | - | 59,178 | ||||||||||
Non-controlling interest | (i), (ii) | - | 75,478 | 75,478 | |||||||||
Total Non-Operating Income (Expenses) | 227,384 | 75,478 | 302,862 | ||||||||||
NET LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD | $ | (3,964,807 | ) | $ | (198,115 | ) | $ | (4,162,922 | ) | ||||
BASIC AND DILUTED LOSS PER SHARE | $ | (0.19 | ) | (0.01 | ) | $ | (0.20 | ) | |||||
WEIGHTED AVERAGE NUMBER OF COMMON | |||||||||||||
SHARES OUTSTANDING - BASIC AND DILUTED | 20,832,026 | - | 20,832,026 |
(i) Refer to carry forward effects of the prior quarter.
(ii) We recorded goodwill of $66,692 in relation to the debt conversion between our subsidiary, Domain Holdings Inc., and our parent company, Live Current Media Inc., as disclosed in Note 5. There was a decrease to the NCI liability during the quarter of $8,786 resulting in a balance at quarter end of the NCI liability of NIL. There was also a gain to the minority interest included in Other Income and Expenses in the quarter of $23,972.
(iii) Related to the acquisition of Auctomatic, we adjusted our purchase price allocation to reflect an additional $110,746 of goodwill acquired in the acquisition. The corresponding increase was recorded to Additional paid-in capital.
(iv) Also related to the acquisition of Auctomatic, we recorded as an expense the portion of the fair value of 413,604 shares of our common stock which were to be issued to the founders of Entity Inc. (“Auctomatic”) based on the period of service these individuals provided to us, computed in relation to the period of service required for the individuals to become entitled to the shares under FAS 123(R). The related stock based compensation expense in the June 30, 2008 quarter is $45,326, and the corresponding amount increased Additional paid-in capital during the quarter.
(v) We recorded as an additional liability and compensation expense during the June 30, 2008 quarter $35,786 for bonuses of CDN $100,000 each that are to be paid to our President and Chief Corporate Development Officer on January 1, 2009 and on January 1, 2010.
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(vi) We recorded as an additional liability and compensation expense during the June 30, 2008 quarter $89,465 for bonuses of CDN $250,000 each that were to be paid to our former President on October 1, 2008 and on October 1, 2009.
(vii) We revised our assumptions relating to the estimated life of stock options that we have granted. The revised estimated life of 3.375 years resulted in a decrease to our stock based compensation expense of $45,913 and a corresponding decrease to Additional paid-in capital during the quarter.
September 30, 2008 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||
ASSETS | |||||||||||||
Current | |||||||||||||
Cash and cash equivalents | $ | 802,744 | $ | - | $ | 802,744 | |||||||
Accounts receivable (net of allowance for doubtful accounts of nil) | 67,577 | - | 67,577 | ||||||||||
Prepaid expenses and deposits | 101,042 | - | 101,042 | ||||||||||
Current portion of receivable from sales-type lease | 23,423 | - | 23,423 | ||||||||||
Total current assets | 994,786 | - | 994,786 | ||||||||||
Long-term portion of receivable from sales-type lease | 23,423 | - | 23,423 | ||||||||||
Deferred financing costs | 106,055 | - | 106,055 | ||||||||||
Deferred acquisition costs | 320,264 | - | 320,264 | ||||||||||
Property & equipment | 1,135,130 | - | 1,135,130 | ||||||||||
Website development costs | 351,199 | - | 351,199 | ||||||||||
Intangible assets | 1,625,881 | - | 1,625,881 | ||||||||||
Goodwill | (i) | 2,428,602 | 177,438 | 2,606,040 | |||||||||
Total Assets | $ | 6,985,340 | $ | 177,438 | $ | 7,162,778 | |||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||
Current | |||||||||||||
Accounts payable and accrued liabilities | $ | 2,004,416 | $ | - | $ | 2,004,416 | |||||||
Bonuses payable | (i), (iii), (iv) | 489,960 | 449,096 | 939,056 | |||||||||
Due to shareholders of Auctomatic | 749,699 | - | 749,699 | ||||||||||
Deferred revenue | 12,371 | - | 12,371 | ||||||||||
Current portion of deferred lease inducements | 20,138 | - | 20,138 | ||||||||||
Total current liabilities | 3,276,584 | 449,096 | 3,725,680 | ||||||||||
Deferred income tax | (i) | - | 246,759 | 246,759 | |||||||||
Deferred lease inducements | 60,414 | - | 60,414 | ||||||||||
Total Liabilities | 3,336,998 | 695,855 | 4,032,853 | ||||||||||
STOCKHOLDERS' EQUITY | |||||||||||||
Common Stock | 13,150 | - | 13,150 | ||||||||||
Additional paid-in capital | (i), (ii), (v) | 13,175,885 | 150,502 | 13,326,387 | |||||||||
Accumulated deficit | (i) to (v) | (9,540,693 | ) | (668,919 | ) | (10,209,612 | ) | ||||||
Total Stockholders' Equity | 3,648,342 | (518,417 | ) | 3,129,925 | |||||||||
Total Liabilities and Stockholders' Equity | $ | 6,985,340 | $ | 177,438 | $ | 7,162,778 |
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For the quarter ended September 30, 2008 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||
SALES | $ | 1,954,684 | $ | - | $ | 1,954,684 | |||||||
COSTS OF SALES (excluding depreciation and amortization as shown below) | 1,602,249 | - | 1,602,249 | ||||||||||
GROSS PROFIT | 352,435 | - | 352,435 | ||||||||||
OPERATING EXPENSES | |||||||||||||
Amortization and depreciation | 96,707 | - | 96,707 | ||||||||||
Amortization of website development costs | 29,143 | - | 29,143 | ||||||||||
Corporate general and administrative | 1,014,145 | - | 1,014,145 | ||||||||||
ECommerce general and administrative | 114,973 | - | 114,973 | ||||||||||
Management fees and employee salaries | (ii), (iii), (iv), (v) | 1,964,479 | 206,557 | 2,171,036 | |||||||||
Corporate marketing | 14,449 | - | 14,449 | ||||||||||
ECommerce marketing | 99,412 | - | 99,412 | ||||||||||
Other expenses | 20,000 | - | 20,000 | ||||||||||
Total Operating Expenses | 3,353,308 | 206,557 | 3,559,865 | ||||||||||
NON-OPERATING INCOME (EXPENSES) | |||||||||||||
Accretion interest expense | (56,600 | ) | - | (56,600 | ) | ||||||||
Interest and investment income | 7,266 | - | 7,266 | ||||||||||
Total Non-Operating Income (Expenses) | (49,334 | ) | - | (49,334 | ) | ||||||||
�� | |||||||||||||
NET LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD | $ | (3,050,207 | ) | $ | (206,557 | ) | $ | (3,256,764 | ) | ||||
BASIC AND DILUTED LOSS PER SHARE | $ | (0.14 | ) | (0.01 | ) | $ | (0.15 | ) | |||||
WEIGHTED AVERAGE NUMBER OF COMMON | |||||||||||||
SHARES OUTSTANDING - BASIC AND DILUTED | 21,625,005 | - | 21,625,005 |
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For the nine months ended September 30, 2008 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||
SALES | $ | 5,738,616 | $ | - | $ | 5,738,616 | |||||||
COSTS OF SALES (excluding depreciation and amortization as shown below) | 4,667,197 | - | 4,667,197 | ||||||||||
GROSS PROFIT | 1,071,419 | - | 1,071,419 | ||||||||||
OPERATING EXPENSES | |||||||||||||
Amortization and depreciation | 155,861 | - | 155,861 | ||||||||||
Amortization of website development costs | 29,143 | - | 29,143 | ||||||||||
Corporate general and administrative | (i) | 2,053,210 | 63,750 | 2,116,960 | |||||||||
ECommerce general and administrative | 385,281 | - | 385,281 | ||||||||||
Management fees and employee salaries | (ii), (iii), (iv), (v) | 4,517,807 | 416,400 | 4,934,207 | |||||||||
Corporate marketing | 61,151 | - | 61,151 | ||||||||||
ECommerce marketing | 378,484 | - | 378,484 | ||||||||||
Other expenses | 683,547 | - | 683,547 | ||||||||||
Total Operating Expenses | 8,264,484 | 480,150 | 8,744,634 | ||||||||||
NON-OPERATING INCOME (EXPENSES) | |||||||||||||
Gain from sales and sales-type lease of domain names | 168,206 | - | 168,206 | ||||||||||
Accretion interest expense | (56,600 | ) | - | (56,600 | ) | ||||||||
Interest and investment income | 66,444 | - | 66,444 | ||||||||||
Non-controlling interest | (i) | - | 75,478 | 75,478 | |||||||||
Total Non-Operating Income (Expenses) | 178,050 | 75,478 | 253,528 | ||||||||||
NET LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD | $ | (7,015,015 | ) | $ | (404,672 | ) | $ | (7,419,687 | ) | ||||
BASIC AND DILUTED LOSS PER SHARE | $ | (0.32 | ) | (0.02 | ) | $ | (0.34 | ) | |||||
WEIGHTED AVERAGE NUMBER OF COMMON | |||||||||||||
SHARES OUTSTANDING - BASIC AND DILUTED | 21,625,005 | - | 21,625,005 |
(i) | Refer to carry forward effects of the prior quarter. |
(ii) | Also related to the acquisition of Auctomatic, we recorded as an expense the portion of the fair value of 413,604 shares of our common stock which were to be issued to the founders of Entity Inc. (“Auctomatic”) based on the period of service these individuals provided to us, computed in relation to the period of service required for the individuals to become entitled to the shares under FAS 123(R). The related stock based compensation expense in the September 30, 2008 quarter is $104,251, and the corresponding amount increased Additional paid-in capital during the quarter. |
(iii) | We recorded as an additional liability and compensation expense during the September 30, 2008 quarter $31,091 for bonuses of CDN $100,000 each that are to be paid to our President and Chief Corporate Development Officer on January 1, 2009 and on January 1, 2010. |
(iv) | We recorded as an additional liability and compensation expense during the September 30, 2008 quarter $77,729 for bonuses of CDN $250,000 each that were to be paid to our former President on October 1, 2008 and on October 1, 2009. |
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(v) | We revised our assumptions relating to the estimated life of stock options that we have granted. The revised estimated life of 3.375 years resulted in a decrease to our stock based compensation expense of $6,514 and a corresponding decrease to Additional paid-in capital during the quarter. |
Off-Balance Sheet Arrangements
As of December 31, 2008, we did not have any off-balance sheet arrangements, including any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do have off-balance sheet commitments as disclosed in the notes to our consolidated financial statements. We do not engage in trading activities involving non-exchange traded contracts.
Application of Critical Accounting Policies
Our consolidated financial statements and accompanying notes are prepared in accordance with United States generally accepted accounting principles. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our consolidated financial statements is critical to an understanding of our operating results and financial position.
Going Concern
Our consolidated financial statements have been prepared on a going concern basis which assumes that we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future. We have generated a consolidated net loss of $9,987,270 and realized a negative cash flow from operating activities of $4,854,260 for the year ended December 31, 2008. At this date, we had a working capital deficiency of $3,199,931, as compared to positive working capital of $5,902,740 at December 31, 2007. At December 31, 2008 we had an accumulated deficit of $12,777,195, as compared to an accumulated deficit of $2,789,925 at December 31, 2007. Stockholders equity was $1,995,592 at December 31, 2008, as compared to stockholders equity of $7,392,535 at December 31, 2007.
Our ability to continue as a going-concern is in substantial doubt as it is dependent on a number of factors including, but not limited to, the receipt of continued financial support from our investors, our ability to sell additional non-core domain names, our ability to raise equity or debt financing as we need it, and whether we will be able to use our securities to meet certain of our liabilities as they become payable. The outcome of these matters is dependant on factors outside of our control and cannot be predicted at this time.
Our financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts or classification of liabilities that might be necessary if we were unable to continue as a going concern.
Principles of Consolidation
Our consolidated financial statements include our accounts as well as those of our subsidiaries. The comparative figures for the 2007 fiscal year include our 50.4% interest in Frequent Traveler (from January 1, 2007 until the sale of our controlling interest in Frequent Traveler on November 12, 2007). All significant intercompany balances and transactions are eliminated on consolidation.
Business Combinations
On the acquisition of a subsidiary, the purchase method of accounting is used whereby the purchase consideration is allocated to the identifiable assets and liabilities on the basis of fair value at the date of acquisition. We consider critical estimates involved in determining any amount of goodwill, and test for impairment of such goodwill as disclosed in our Goodwill accounting policy below.
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Revenue Recognition
Revenues and associated costs of goods sold, from the on-line sales of products, which currently consist primarily of fragrances and other beauty products, are recorded upon delivery of products and determination that collection is reasonably assured. We record inventory as an asset for items in transit as title does not pass until received by the customer. All associated shipping and handling costs are recorded as cost of goods sold upon delivery of products.
Web advertising revenue consists primarily of commissions earned from the referral of visitors from our sites to other parties. The amount and collectibility of these referral commissions is subject to uncertainty; accordingly, revenues are recognized when the amount can be determined and collectibility can be reasonably assured. In accordance with Emerging Issues Task Force (“EITF”) 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent we record web advertising revenue on a gross basis.
Until the disposal of our shares in FrequentTraveler.com Inc. on November 12, 2007, revenues from the sales of travel products, including tours, airfares and hotel reservations, where we acted as the merchant of record and had inventory risk, were recorded on a gross basis. Customer deposits received prior to ticket issuance or 30-days prior to travel were recorded as deferred revenue. Where we did not act as the merchant of record and had no inventory risk, revenues were recorded at the net amounts, without any associated cost of revenue in accordance with EITF 99-19. See also Note 5 to our consolidated financial statements.
Gains from the sale of domain names, whose carrying values are recorded as intangible assets, consists primarily of funds earned for the transfer of rights to domain names that are currently in our control. Revenues have been recognized when the sale agreement is signed and the collectibility of the proceeds is reasonably assured. In 2008, there was a sale of a geo-domain name for net proceeds of $369,041. Collectibility of the amounts owing on this sale are reasonably assured and therefore accounted for as a sale in the period the transaction occurred. There were no sales of domain names during 2007.
Gains from the sales-type leases of domain names, whose carrying values are recorded as intangible assets, consists primarily of funds earned over a period of time for the transfer of rights to domain names that are currently in our control. Collectibility of these revenues is reasonably assured and therefore accounted for as a sales-type lease in the period the transaction occurs. See also Note 12 to our consolidated financial statements.
Stock-Based Compensation
During the third quarter of 2007, the Company implemented the following new critical accounting policy related to our stock-based compensation. Beginning July 1, 2007, we began accounting for stock options under the provisions of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“FAS 123(R)”), which requires the recognition of the fair value of stock-based compensation. Under the fair value recognition provisions for FAS 123(R),stock-based compensation cost is estimated at the grant date based on the fair value of the awards expected to vest and is recognized as expense ratably over the requisite service period of the award. We have used the Black-Scholes valuation model to estimate fair value of our stock-based awards which require various assumptions including estimating price volatility and expected life. Our computation of expected volatility is based on a combination of historic and market-based implied volatility. In addition, we consider many factors when estimating expected life, including types of awards and historical experience. If any of these assumptions used in the Black-Scholes valuation model change significantly, stock-based compensation expense may differ materially in the future from what is recorded in the current period.
In August 2007, our Board of Directors approved an Incentive Stock Incentive Plan to make available 5,000,000 shares of common stock for the grant of stock options, including incentive stock options. Incentive stock options may be granted to our employees, officers, directors, consultants, independent contractors and advisors, provided such consultants, independent contractors and advisors render bona-fide services not in connection with the offer and sale of securities in a capital-raising transaction or promotion of our securities. See also Note 11 to our consolidated financial statements.
We account for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FAS No. 123(R) and the conclusions reached by the EITF in Issue No. 96-18. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by EITF 96-18.
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Inventory
Inventory is recorded at the lower of cost or market using the first-in first-out (FIFO) method. We maintain little or no inventory of perfume which is shipped from the supplier directly to the customer. The inventory on hand as at December 31, 2008 is recorded at cost of $74,082 and represents inventory in transit from the supplier to the customer.
Website development costs
We have adopted the provisions of EITF No. 00-2, Accounting for Web Site Development Costs, whereby costs incurred in the preliminary project phase are expensed as incurred; costs incurred in the application development phase are capitalized; and costs incurred in the post-implementation operating phase are expensed as incurred. Website development costs are stated at cost less accumulated amortization and are amortized using the straight-line method over its estimated useful life. Upgrades and enhancements are capitalized if they result in added functionality which enables the software to perform tasks it was previously incapable of performing.
Intangible Assets
We have adopted the provision of the FAS No. 142, Goodwill and Intangible Assets, which revises the accounting for purchased goodwill and intangible assets. Under FAS No. 142, intangible assets with indefinite lives are no longer amortized and are tested for impairment annually. The determination of any impairment would include a comparison of estimated future operating cash flows anticipated during the remaining life with the net carrying value of the asset as well as a comparison of the fair value to its book value.
Our intangible assets, which consist of our portfolio of generic domain names, have been determined to have an indefinite life and as a result are not amortized. Management has determined that there is no impairment of the carrying value of intangible assets at December 31, 2008.
Goodwill
Goodwill represents the excess of acquisition cost over the fair value of the net assets of acquired entities. In accordance with FAS No. 142, Accounting for Goodwill and Other Intangible Assets. we are required to assess the carrying value of goodwill annually or whenever circumstances indicate that a decline in value may have occurred, utilizing a fair value approach at the reporting unit level. A reporting unit is the operating segment, or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management.
The goodwill impairment test is a two-step impairment test. In the first step, we compared the fair value of each reporting unit to its carrying value. We determine the fair value of our reporting units using a discounted cash flow approach. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step in order to determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. The activities in the second step include valuing the tangible and intangible assets and liabilities of the impaired reporting unit based on their fair value and determining the fair value of the impaired reporting unit’s goodwill based upon the residual of the summed identified tangible and intangible assets and liabilities.
The fair value of the Perfume.com reporting unit exceeded the carrying value of the assigned net assets, therefore no further testing was required and an impairment charge was not required.
Non-Controlling Interest
Our consolidated financial statements include the accounts of DHI (and its subsidiaries). All intercompany accounts and transactions have been eliminated upon consolidation. We record non-controlling interest which reflects the 1.8% portion of the earnings of DHI and its subsidiaries allocable to the holders of the minority interest.
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Income Taxes
During the first quarter of 2007, we adopted the following new critical accounting policy related to income tax. Beginning on January 1, 2007, we began accounting for income tax under the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We and our subsidiaries are subject to U.S. federal income tax and Canadian income tax, as well as income tax of multiple state and local jurisdictions. Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. Our evaluation was performed for the tax years ended December 31, 2002, 2003, 2004, 2005, 2006, 2007 and 2008, the tax years which remain subject to examination by major tax jurisdictions as of December 31, 2008. We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. We classified these assessments in our financial statements as selling, general and administrative expense.
Recent Accounting Pronouncements
FAS 162
In May, 2008, the FASB issued FAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not expect that this Statement will result in a change in current practice.
FAS 161
In March 2008, the FASB issued FAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FAS No. 133. FAS No. 161 is intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance and cash flows. Entities are required to provide enhanced disclosures about: how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for under FAS No. 133 and its related interpretations; and how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. FAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, which, for us, would be the fiscal year beginning January 1, 2009. We are currently assessing the impact of FAS No. 161 on our financial position and results of operations.
FSP FAS 142-3
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). The intent of FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other applicable accounting literature. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, which, for us, would be the fiscal year beginning January 1, 2009. We are currently assessing the impact of FSP FAS 142-3 on our financial position and results of operations.
FAS 141R
In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations ("141R"). FAS No. 141R significantly changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, pre-acquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under FAS No. 141R, changes in an acquired entity's deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. This standard will change accounting treatment for business combinations on a prospective basis. FAS No. 141R is effective for fiscal years beginning after December 15, 2008, which, for us, would be the fiscal year beginning January 1, 2009. We are currently assessing the impact of FAS No. 141R on our financial position and results of operations.
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FAS 160
In December 2007, the FASB issued FAS No. 160 Noncontrolling Interests in Consolidated Financial Statements, and simultaneously revised FAS 141 Business Combinations. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, which, for us, would be the fiscal year beginning January 1, 2009. An entity may not adopt the policy before the transitional date. We are currently assessing the impact of FAS No. 160 and the revision of FAS 141 on our financial position and results of operations.
FAS 159
In February 2007, the FASB issued FAS 159, “Fair Value Option for Financial Assets and Financial Liabilities,” which allows an irrevocable option, the Fair Value Option, to carry eligible financial assets and liabilities at fair value. The election is made on an instrument-by-instrument basis. Changes in fair value for these instruments are recorded in earnings. The objective of FAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.
We adopted FAS 159 in 2008. The adoption did not have a material effect on our financial results.
FAS 157
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This standard does not require any new fair value measurements.
In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2, which delays the effective date of FAS No. 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis, which for us would be the fiscal year beginning January 1, 2009.
In 2008, we adopted FAS 157 for financial assets and liabilities recognized at fair value on a recurring basis. The adoption did not have a material effect on our financial results. The disclosures required by FAS 157 for financial assets and liabilities measured at fair value on a recurring basis as at December 31, 2008 are included in Note 4.
We will apply the requirements of FAS 157 for fair value measurements of financial and nonfinancial assets and liabilities not valued on a recurring basis in 2009. We are currently evaluating the effect of this application on our financial reporting and disclosures.
In October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active, which clarifies the application of FAS 157 in determining the fair value of a financial asset when the market for that asset is not active. FSP FAS 157-3 is effective as of the issuance date and has not affected the valuation of our financial assets.
Item 8. Financial Statements.
The Company's Amended and Restated Consolidated Financial Statements for the years ended December 31, 2008 and 2007 are listed in this report on page F-1.
EXHIBIT INDEX
Number | Description | |
31 | Certification Pursuant to Rule 13a-14(a)/15d-14(a) - Chief Executive Officer and Principal Financial Officer | |
32 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002 — Chief Executive Officer and Principal Financial Officer |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LIVE CURRENT MEDIA INC. | |||
By: | /s/ C. Geoffrey Hampson | ||
Name: C. Geoffrey Hampson | |||
Title: Chief Executive Officer, Principal Financial Officer and Chairman | |||
Dated: October 26, 2009 |
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LIVE CURRENT MEDIA INC.
(formerly COMMUNICATE.COM INC.)
AMENDED AND RESTATED
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | F-2 |
AMENDED AND RESTATED CONSOLIDATED BALANCE SHEETS | F-3 |
AMENDED AND RESTATED CONSOLIDATED STATEMENTS OF OPERATIONS | F-4 |
AMENDED AND RESTATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | F-5 |
AMENDED AND RESTATED CONSOLIDATED STATEMENTS OF CASH FLOWS | F-6 |
NOTES TO THE AMENDED AND RESTATED CONSOLIDATED FINANCIAL STATEMENTS | F-7 |
F-1
Report of Independent Registered Accounting Firm
We have audited the accompanying amended and restated consolidated balance sheets of Live Current Media Inc. as of December 31, 2008 and 2007, and the related amended and restated consolidated statements of operations, stockholder’s equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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 financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Live Current Media Inc. at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows of the years then ended in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company's recurring net losses raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 2 to the consolidated financial statements, the December 31, 2008 and 2007 consolidated financial statements have been restated to correct errors in accounting for business combinations and consolidations, compensation, warrants issued, deferred taxes and accrued expenses.
Vancouver, Canada | /s/ Ernst & Young LLP |
September 10, 2009 | Chartered Accountants |
F-2
LIVE CURRENT MEDIA INC. | ||||||||
(formerly COMMUNICATE.COM INC.) | ||||||||
AMENDED AND RESTATED CONSOLIDATED BALANCE SHEETS | ||||||||
Expressed In U.S. Dollars | ||||||||
(Going Concern - See Note 1) | ||||||||
As restated - Note 2 | ||||||||
As at December 31 | 2008 | 2007 | ||||||
(As Restated) | (As Restated) | |||||||
ASSETS | ||||||||
Current | ||||||||
Cash and cash equivalents | $ | 1,832,520 | $ | 7,375,245 | ||||
Accounts receivable (net of allowance for doubtful accounts of nil) | 93,582 | 138,930 | ||||||
Prepaid expenses and deposits | 109,543 | 246,174 | ||||||
Inventory | 74,082 | - | ||||||
Current portion of receivable from sales-type lease (Note 12) | 23,423 | - | ||||||
Total current assets | 2,133,150 | 7,760,349 | ||||||
Long-term portion of receivable from sales-type lease (Note 12) | 23,423 | - | ||||||
Property & equipment (Note 8) | 1,042,851 | 175,797 | ||||||
Website development costs (Note 9) | 355,391 | - | ||||||
Intangible assets | 1,587,463 | 1,645,061 | ||||||
Goodwill (Note 7) | 2,606,040 | - | ||||||
Total Assets | $ | 7,748,318 | $ | 9,581,207 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current | ||||||||
Accounts payable and accrued liabilities | $ | 3,047,993 | $ | 1,451,679 | ||||
Amounts payable to the BCCI and IPL (Note 6) | 1,000,000 | - | ||||||
Bonuses payable | 354,695 | 332,713 | ||||||
Due to shareholders of Auctomatic (Note 7) | 789,799 | - | ||||||
Deferred revenue | 120,456 | 53,079 | ||||||
Current portion of deferred lease inducements (Note 10) | 20,138 | 20,138 | ||||||
Total current liabilities | 5,333,081 | 1,857,609 | ||||||
Non-controlling interest (Note 5) | - | 8,786 | ||||||
Deferred income tax (Note 14) | 206,370 | 246,759 | ||||||
Warrants (Note 11e) | 157,895 | - | ||||||
Deferred lease inducements (Note 10) | 55,380 | 75,518 | ||||||
Total Liabilities | 5,752,726 | 2,188,672 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Common Stock (Note 11) | ||||||||
Authorized: 50,000,000 common shares, $0.001 par value | ||||||||
Issued and outstanding: | ||||||||
23,546,370 common shares (December 31, 2007 - 21,446,623) | 14,855 | 12,456 | ||||||
Additional paid-in capital | 14,757,932 | 10,170,004 | ||||||
Accumulated deficit | (12,777,195 | ) | (2,789,925 | ) | ||||
Total Stockholders' Equity | 1,995,592 | 7,392,535 | ||||||
Total Liabilities and Stockholders' Equity | $ | 7,748,318 | $ | 9,581,207 | ||||
Commitments and Contingency (Notes 16 and 17) | ||||||||
Subsequent Events (Note 19) | ||||||||
See accompanying notes to consolidated financial statements |
/s/ James P. Taylor | /s/ Mark Benham |
James P. Taylor, Director | Mark Benham, Director |
F-3
LIVE CURRENT MEDIA INC. | ||||||||
(formerly COMMUNICATE.COM INC) | ||||||||
AMENDED AND RESTATED CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||
Expressed In U.S. Dollars | ||||||||
As restated - Note 2 | ||||||||
Years Ended December 31 | 2008 | 2007 | ||||||
(As Restated) | (As Restated) | |||||||
SALES | ||||||||
Health and beauty eCommerce | $ | 9,271,237 | $ | 8,092,707 | ||||
Other eCommerce | 455 | 485,199 | ||||||
Domain name advertising | 93,141 | 449,613 | ||||||
Total Sales | 9,364,833 | 9,027,519 | ||||||
COSTS OF SALES | ||||||||
Health and Beauty eCommerce | 7,683,432 | 6,512,292 | ||||||
Other eCommerce | 380 | 509,181 | ||||||
Total Costs of Sales (excluding depreciation and amortization as shown below) | 7,683,812 | 7,021,473 | ||||||
GROSS PROFIT | 1,681,021 | 2,006,046 | ||||||
OPERATING EXPENSES | ||||||||
Amortization and depreciation | 253,141 | 29,169 | ||||||
Amortization of website development costs (Note 9) | 58,640 | - | ||||||
Corporate general and administrative | 2,915,034 | 623,171 | ||||||
ECommerce general and administrative | 567,980 | 304,212 | ||||||
Management fees and employee salaries | 5,798,728 | 2,053,503 | ||||||
Corporate marketing | 147,842 | - | ||||||
ECommerce marketing | 766,393 | 817,101 | ||||||
Other expenses (Note 13) | 708,804 | 637,730 | ||||||
Total Operating Expenses | 11,216,562 | 4,464,886 | ||||||
NON-OPERATING INCOME (EXPENSES) | ||||||||
Global Cricket Venture payments (Note 6) | (1,000,000 | ) | - | |||||
Gain from sales and sales-type lease of domain names (Note 12) | 461,421 | - | ||||||
Accretion interest expense (Note 7) | (96,700 | ) | - | |||||
Interest and investment income | 67,683 | 119,574 | ||||||
Gain on disposal of Frequenttraveler.com Inc. (Note 5) | - | 276,805 | ||||||
Non-controlling interest (Note 5) | 75,478 | 91,890 | ||||||
Total Non-Operating Income (Expenses) | (492,118 | ) | 488,269 | |||||
NET LOSS BEFORE TAXES | (10,027,659 | ) | (1,970,571 | ) | ||||
TAXES | ||||||||
Deferred tax recovery (Note 14) | (40,389 | ) | (8,225 | ) | ||||
NET LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD | $ | (9,987,270 | ) | $ | (1,962,346 | ) | ||
BASIC AND DILUTED LOSS PER SHARE | $ | (0.46 | ) | $ | (0.10 | ) | ||
WEIGHTED AVERAGE NUMBER OF COMMON | ||||||||
SHARES OUTSTANDING - BASIC AND DILUTED | 21,937,179 | 19,070,236 | ||||||
See accompanying notes to consolidated financial statements |
F-4
LIVE CURRENT MEDIA INC. | ||||||||||||||||||||
(formerly COMMUNICATE.COM INC) | ||||||||||||||||||||
AMENDED AND RESTATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | ||||||||||||||||||||
Expressed In U.S. Dollars | ||||||||||||||||||||
As restated - Note 2 | ||||||||||||||||||||
Common stock | Additional Paid-in Capital | Accumulated Deficit | Total | |||||||||||||||||
Number of Shares | Amount | |||||||||||||||||||
Balance, December 31, 2006 (as originally stated) | 17,836,339 | $ | 8,846 | $ | 3,605,579 | $ | (507,729 | ) | $ | 3,106,696 | ||||||||||
Adjustment to opening accumulated deficit (Note 2) | - | - | - | (319,850 | ) | (319,850 | ) | |||||||||||||
Balance, December 31, 2006 (as restated) | 17,836,339 | 8,846 | 3,605,579 | (827,579 | ) | 2,786,846 | ||||||||||||||
Issuance of 60,284 common shares at $0.98 per share in lieu of accrued bonuses to officers | 60,284 | 60 | 59,018 | 59,078 | ||||||||||||||||
Issuance of 1,000,000 common shares at $1.00 per share to CEO | 1,000,000 | 1,000 | 999,000 | 1,000,000 | ||||||||||||||||
Private Placement of 2,550,000 common shares at $2.00 per share | 2,550,000 | 2,550 | 5,097,450 | 5,100,000 | ||||||||||||||||
Share issue costs | - | (100 | ) | (100 | ) | |||||||||||||||
Stock-based compensation (Note 11d) | - | 409,057 | 409,057 | |||||||||||||||||
Net loss and comprehensive loss | - | (1,962,346 | ) | (1,962,346 | ) | |||||||||||||||
Balance, December 31, 2007 (as restated) | 21,446,623 | 12,456 | 10,170,004 | (2,789,925 | ) | 7,392,535 | ||||||||||||||
Stock-based compensation (Note 11d) | - | - | 2,162,526 | 2,162,526 | ||||||||||||||||
Issuance of 586,403 common shares per the merger agreement with Auctomatic (Note 7) | 586,403 | 586 | 1,248,279 | 1,248,865 | ||||||||||||||||
Issuance of 33,000 common shares to investor relations firm (Note 11b) | 33,000 | 33 | 85,649 | 85,682 | ||||||||||||||||
Issuance of 120,000 common shares to investor relations firm (Note 11b) | 120,000 | 120 | 218,057 | 218,177 | ||||||||||||||||
Issuance of 50,000 warrants to investor relations firm (Note 11e) | - | - | 45,500 | 45,500 | ||||||||||||||||
Cancellation of 300,000 common shares not distributed (Note 11b) | (300,000 | ) | - | - | - | |||||||||||||||
Private Placement of 1,627,344 units at $0.65 per share (Note 11b) | 1,627,344 | 1,627 | 898,253 | 899,880 | ||||||||||||||||
Share issue costs (Note 11b) | - | - | (86,803 | ) | (86,803 | ) | ||||||||||||||
Extinguishment of accounts payable (Note 11b) | 33,000 | 33 | 16,467 | 16,500 | ||||||||||||||||
Net loss and comprehensive loss | (9,987,270 | ) | (9,987,270 | ) | ||||||||||||||||
Balance, December 31, 2008 (as restated) | 23,546,370 | $ | 14,855 | $ | 14,757,932 | $ | (12,777,195 | ) | $ | 1,995,592 | ||||||||||
See accompanying notes to consolidated financial statements |
F-5
LIVE CURRENT MEDIA INC. | ||||||||
(formerly COMMUNICATE.COM INC) | ||||||||
AMENDED AND RESTATED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
Expressed In U.S. Dollars | ||||||||
As restated - Note 2 | ||||||||
Years Ended December 31 | 2008 | 2007 | ||||||
(As Restated) | (As Restated) | |||||||
OPERATING ACTIVITIES | ||||||||
Net loss for the period | $ | (9,987,270 | ) | $ | (1,962,346 | ) | ||
Non-cash items included in net loss: | ||||||||
Deferred tax recovery | (40,389 | ) | (8,225 | ) | ||||
Non-controlling interest | (75,478 | ) | (91,890 | ) | ||||
Gain from sales and sales-type lease of domain names | (461,421 | ) | - | |||||
Accretion interest expense | 96,700 | - | ||||||
Stock-based compensation | 2,162,526 | 409,057 | ||||||
Warrants issued | 45,500 | - | ||||||
Issuance of common stock for services (Note 11b) | 303,859 | - | ||||||
Extinguishment of debt by issuance of common stock (Note 11b) | 16,500 | - | ||||||
Amortization and depreciation | 291,643 | 24,135 | ||||||
Issuance of common stock for bonuses (Note 11b) | - | 59,078 | ||||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable | 45,348 | (81,914 | ) | |||||
Prepaid expenses and deposits | 136,631 | (246,174 | ) | |||||
Inventory | (74,082 | ) | - | |||||
Accounts payable and accrued liabilities | 1,596,314 | 459,824 | ||||||
Amounts payable to the BCCI and IPL | 1,000,000 | - | ||||||
Bonuses payable | 21,982 | 332,713 | ||||||
Deferred revenue | 67,377 | 53,079 | ||||||
Deferred lease inducements | - | 100,690 | ||||||
Cash flows used in operating activities | (4,854,260 | ) | (951,973 | ) | ||||
INVESTING ACTIVITIES | ||||||||
Proceeds from disposal of available for sale securities | - | 261,912 | ||||||
Net proceeds from sale of domain name | 369,041 | - | ||||||
Net proceeds from sales-type lease of domain name | 140,540 | - | ||||||
Cash consideration for Auctomatic (Note 7) | (1,530,047 | ) | - | |||||
Purchases of property & equipment | (187,532 | ) | (159,934 | ) | ||||
Website development costs (Note 9) | (451,439 | ) | - | |||||
Cash flows used in (from) investing activities | (1,659,437 | ) | 101,978 | |||||
FINANCING ACTIVITIES | ||||||||
Proceeds from restricted cash | - | 20,000 | ||||||
Proceeds from sale of common stock (net of share issue costs) | 970,972 | 6,099,900 | ||||||
Cash flows from financing activities | 970,972 | 6,119,900 | ||||||
Net increase (decrease) in cash and cash equivalents | (5,542,725 | ) | 5,269,905 | |||||
Cash and cash equivalents, beginning of year | 7,375,245 | 2,105,340 | ||||||
Cash and cash equivalents, end of year | $ | 1,832,520 | $ | 7,375,245 | ||||
See accompanying notes to consolidated financial statements |
SUPPLEMENTAL INFORMATION
2008 | 2007 | |||||||
Cash paid during the year for: | ||||||||
Interest | $ | - | $ | - | ||||
Income taxes | $ | 6,944 | $ | - |
F-6
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nature of business
Live Current Media Inc. (the “Company”) was incorporated under the laws of the State of Nevada on October 10, 1995 under the name “Troyden Corporation” and changed its name on August 21, 2000 from Troyden Corporation to “Communicate.com Inc.”. On May 30, 2008, the Company changed its name from Communicate.com Inc. to Live Current Media Inc. after obtaining formal shareholder approval to do so at the Annual General Meeting in May 2008.
The Company’s principal operating subsidiary, Domain Holdings Inc. (“DHI”), was incorporated under the laws of British Columbia on July 4, 1994 under the name “IMEDIAT Digital Creations Inc.”. On April 14, 1999, IMEDIAT Digital Creations, Inc. changed its name to “Communicate.com Inc.” and was redomiciled from British Columbia to the jurisdiction of Alberta. On April 5, 2002, Communicate.com Inc. changed its name to Domain Holdings Inc. DHI has 62,635,383 shares of common stock currently issued and outstanding. 61,478,225 shares, or approximately 98.2% of the outstanding shares, are held by Live Current.
Through its majority-owned subsidiary, Domain Holdings, Inc. (“DHI”), the Company builds consumer Internet experiences around its large portfolio of domain names. DHI’s current business strategy is to develop or to seek partners to develop its domain names to include content, commerce and community applications. At December 31, 2008, DHI was actively developing websites on two domain names; one that provides e-commerce for fragrance and other health and beauty products, and another that will be a media rich consumer experience on a sports related website where the revenue model is based on paid advertising and sales of digital content and merchandise. DHI develops content and sells advertising services on other domains held for future development. Refer to Note 19.
On March 13, 2008, the Company incorporated a wholly owned subsidiary in the state of Delaware, Communicate.com Delaware, Inc. (“Delaware”). The new subsidiary has been incorporated in relation to the Auctomatic transaction. Refer to Note 7.
The Company’s other subsidiary, DHI, owns 100% of 0778229 B.C. Ltd. (“Importers”), Acadia Management Corp. (“Acadia”), and a dormant company 612793 B.C. Ltd. (“612793”). Acadia’s assets and liabilities were assigned to DHI in October 2008, and that company was dissolved and struck from the registrar of British Columbia on January 21, 2009.
On August 8, 2008, the Company also formed a wholly-owned subsidiary in Singapore, LCM Cricket Ventures Pte. Ltd. (“LCM Cricket Ventures”). This company holds 50.05% of Global Cricket Venture Pte. Ltd. (“Global Cricket Venture” or “GCV”).
As at December 31, 2006, the Company owned 50.4% of the outstanding shares in FrequentTraveller.com Inc. (“FT”), a Nevada private company incorporated on October 29, 2002. FT was a full service travel agency that catered to Internet-based customers seeking tours and other travel services. On November 12, 2007, the Company disposed of its controlling interest in FT and at the end of 2007 no longer had any ownership in FT. Refer to Note 5.
Basis of presentation
The consolidated financial statements are presented in United States dollars and are prepared in accordance with accounting principles generally accepted in the United States.
Going Concern
The consolidated financial statements have been prepared on a going concern basis which assumes that the Company will be able to realize assets and discharge liabilities in the normal course of business for the foreseeable future. The Company has generated a consolidated net loss of $9,987,270 and realized a negative cash flow from operating activities of $4,854,260 for the year ended December 31, 2008. There is an accumulated deficit of $12,777,195 (December 31, 2007 - $2,789,925) and a working capital deficiency of $3,199,931 at December 31, 2008.
The Company's ability to continue as a going-concern is in substantial doubt as it is dependent on the continued financial support from its investors, the ability of the Company to raise equity financing and the attainment of profitable operations and further share issuances to meet the Company's liabilities as they become payable. The outcome of these matters is dependant on factors outside of the Company’s control and cannot be predicted at this time. Refer to Note 19.
F-7
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION (continued)
Going Concern (continued)
The accompanying consolidated financial statements have been prepared on a going concern basis which assumes that the Company will be able to realize assets and discharge liabilities in the normal course of business for the foreseeable future. These financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts or classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company has established a plan to continue its current business operations and overcome its financial difficulties. The Company expects to achieve an improved financial position and enhanced liquidity by establishing and carrying out a plan of recovery as follows:
1. | Auctomatic payment deferrals: Under the terms of the acquisition agreement to purchase Entity Inc. (also referred to as Auctomatic), the Company was obligated to make $800,000 in cash payments in May 2009. Refer to Note 7. The Company has negotiated an agreement with the majority of the Entity shareholders to convert more than half of this payable into a convertible interest bearing note with a nine month term. The payment due date is May 2010. |
2. | Payment of Obligations with Common Stock: The Company intends to continue to ask certain vendors if they will agree to accept the Company’s common stock in lieu of cash as payment for outstanding obligations. During the first nine months of 2009, the Company has succeeded in reaching four such agreements as payment of approximately $396,000. |
3. | Global Cricket Venture: In August 2009, the Company reached an agreement with an unrelated third party (“CricketCo”), whereby CricketCo agreed to assume and be liable for all past and future obligations and liabilities of GCV arising from the original MOU, as it was amended by the Novation. The Company has also agreed to sell the domain name cricket.com to CricketCo, along with the website, content, copyrights, trademarks, etc., for consideration of four equal payments of $250,000. The cricket.com domain name shall remain the property of the Company until all payments have been made. Refer to Note 19. |
4. | Reduction in employees and 100% deferral of CEO salary: Since December 31, 2008, the Company has reduced the number of its employees by 50%. This included termination of the Company’s former President. All severance payments will be paid by June 2010. |
In addition, members of senior management agreed to forgo 2008 bonuses, staff bonuses were not granted for 2008, and effective January 30th 2009, the Company’s CEO has agreed to defer 100% of his salary and bonus for an indefinite period of time and to convert such deferred salary into shares of the Company’s common stock at the end of 2009. |
5. | Management Focus: Management has decided to focus on the business that is currently producing divisional profits: Perfume.com. This business continues to have the potential to grow dramatically and to produce profits in the short term with minimal investment. |
6. | Supply Chain Management: In spring 2010, the Company plans to begin a process of transitioning from the legacy supply chain process which involved using multiple third party drop shippers where gross margins were 19-21% to a Third Party Logistics (“3PL”) process whereby the Company purchases the inventory and has a 3PL provider store, pick and pack the perfume that has been ordered by Perfume.com customers. This change in supply chain management will require a minimal investment in inventory but should result in a much healthier margin for those SKU’s shipped directly. |
7. | Domain Name sales: Management entered into arrangements to sell or lease eight of the Company’s non-core domain name assets, including Cricket.com, as a non-dilutive way to raise working capital. These transactions have raised nearly $4 million since the fourth quarter of 2008. See Note 19. |
F-8
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 2 – RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
The Company determined that its original consolidated financial statements for the years ended December 31, 2008 and 2007, filed on March 31, 2009 (the “Original Financial Statements”) contained errors. These errors, which are described below, affected opening balances as at December 31, 2007 and the financial position, results of operations and cash flows for the years ended December 31, 2007 and 2008.
A. Deferred income tax liability related to indefinite life intangible assets:
The Company’s intangible assets, comprised of its domain names, have book values in excess of their tax values. The Original Financial Statements considered the taxable temporary differences associated with these indefinite life intangible assets in reducing the valuation allowance associated with its loss carryforwards. This was an incorrect application of GAAP. A deferred tax liability should have been recognized for these taxable temporary differences. Correction of this error resulted in the recognition of a deferred tax liability of $206,370, $246,759, and $254,984 as at December 31, 2008, December 31, 2007, and January 1, 2007 respectively, and deferred income tax recoveries of $40,389 and $8,225 in the years ended December 31, 2008 and 2007, respectively.
B. Non-Controlling Interest:
The Company discovered an error in its continuity of non-controlling interest in its subsidiaries as at January 1, 2007, resulting in a $100,676 increase to the opening non-controlling interest liability and deficit.
The Company also determined that it should have recorded $66,692 of goodwill and an increase to non-controlling interest liability associated with the exchange of $3,000,000 of amounts due from a subsidiary for additional common stock in 2008. See Note 5.
Prior to recognizing the non-controlling interest liabilities described in the preceding two paragraphs, the non-controlling interest’s share of subsidiary losses in 2008 and 2007 was limited to the non-controlling interest liability. As a consequence of the above increases to non-controlling interest liabilities, the non-controlling interest’s share in subsidiary losses was increased by $75,748 and $91,890 in the years ended December 31, 2008 and 2007, respectively.
C. Management Compensation:
(i) The December 31, 2007 financial statements did not accrue $91,423 for two CDN$250,000 special bonuses to be paid on October 1, 2008 and October 1, 2009 to the Company’s former President and Chief Operating Officer pursuant to his employment agreement. These special bonuses were not discretionary, but would only be paid if he remained employed as an officer of the Company on the dates payable. On February 4, 2009, he resigned as the Company’s President and Chief Operating Officer and employee, effective January 31, 2009. There was no effect to the December 31, 2008 financial statements.
(ii) The December 31, 2008 financial statements did not accrue for $119,045 for two CDN$100,000 special bonuses to be paid on January 1, 2009 and January 1, 2010 to the Company’s current President and Chief Corporate Development Officer pursuant to his employment agreement. These special bonuses are not discretionary, but will only be paid if he remained employed as an officer of the Company on the dates payable.
D. Estimated life of stock options:
The Company originally estimated the life of its stock options as equal to the vesting period for these options, 3 years. The estimated life should have been 3.375 years, resulting in decreases of $118,893 and $18,971 to the Company’s stock-based compensation expense in the years ended December 31, 2008 and 2007, respectively.
F-9
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 2 – RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (continued)
E. Other
(i) | Expense accruals |
The Company discovered an accrual and cutoff error in its recorded accounting fees, resulting in an overaccrual of accounts payable and accounting expense (included in Corporate General and Administrative expenses) of $19,521 and $63,750 in the years ended December 31, 2008 and 2007, respectively.
(ii) | Gain on sale of domain name |
The Company failed to record website development costs attributable to a domain name sold in 2008, reducing website development costs and gain on sale of domain names by $37,408 in the year ended December 31, 2008.
(iii) | Miscellaneous Income |
The Company discovered an immaterial error in miscellaneous income relating to periods prior to January 1, 2007, resulting in a $35,810 increase to opening deficit at January 1, 2007.
F. Classification of warrants issued in November 2008 private placement:
In November 2008, the Company raised $1,057,775 of cash by selling 1,627,344 units consisting of one share of the Company’s common stock and two warrants, each for the purchase of a half share of common stock. The offering price was $0.65 per unit. The estimated fair value of the warrants was $157,895 and was presented as equity in the Original Financial Statements. The warrants contained provisions which could require their redemption in cash in certain circumstances which may not all be within the Company’s control. The fair value of the warrants therefore should have been recorded as a liability, with future changes to fair value reported as either income or expense in the period in which the change in fair value occurs. There were no changes to the fair value of the warrants between the November 2008 issue date and December 31, 2008.
G. Shares issued in connection with the merger with Auctomatic:
(i) | Valuation of shares issued as purchase consideration |
The Auctomatic merger closed on May 22, 2008. The original estimate of the fair value of the share purchase consideration attributable to the acquisition was based on the trading value of the shares around March 25, 2008. However, the Merger Agreement had an adjustment provision regarding the number of shares to be issued, such that the shares should have been valued with reference to the May 22, 2008 closing date as opposed to the announcement date on March 25, 2008. Using the average share price around the closing date, an additional $110,746 should have been recorded as additional paid-in capital and goodwill.
(ii) | Shares issued to Auctomatic founders |
As part of the merger, the Company agreed to distribute 413,604 shares of its common stock payable on the first, second, and third anniversaries of the Closing Date (the “Distribution Date”) to the Auctomatic founders subject to their continuing employment with the Company or a subsidiary on each Distribution Date. These shares which were not accounted for in the Auctomatic purchase, also were not properly accounted for as compensation to the Auctomatic founders for their continued employment with the Company. The related stock-based compensation expense that should have been recorded in 2008 is $170,065.
H. Financial Statement Classification of Amounts Payable to the BCCI and IPL:
In order to provide clarity, the Company also classified separately on its consolidated balance sheets and consolidated statements of operations the $1,000,000 payable and expensed during the year ended December 31, 2008 to the BCCI and IPL.
F-10
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 2 – RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (continued)
I. Tax Impact:
None of the above adjustments gave rise to an increase or decrease in the Company’s tax position.
The following table illustrates the effect of the adjustments by financial statement line item in the Company’s consolidated balance sheets as of December 31, 2008:
December 31, 2008 | Reference | As previously reported | Restatement adjustment | As restated | ||||||||||||
ASSETS | ||||||||||||||||
Current | ||||||||||||||||
Cash and cash equivalents | $ | 1,832,520 | $ | - | $ | 1,832,520 | ||||||||||
Accounts receivable (net of allowance for doubtful accounts of nil) | 93,582 | - | 93,582 | |||||||||||||
Prepaid expenses and deposits | 109,543 | - | 109,543 | |||||||||||||
Inventory | 74,082 | - | 74,082 | |||||||||||||
Current portion of receivable from sales-type lease | 23,423 | - | 23,423 | |||||||||||||
Total current assets | 2,133,150 | - | 2,133,150 | |||||||||||||
Long-term portion of receivable from sales-type lease | 23,423 | - | 23,423 | |||||||||||||
Deferred acquisition costs | - | - | - | |||||||||||||
Property & equipment | 1,042,851 | - | 1,042,851 | |||||||||||||
Website development costs | E(ii) | 392,799 | (37,408 | ) | 355,391 | |||||||||||
Intangible assets | 1,587,463 | - | 1,587,463 | |||||||||||||
Goodwill | B, G(i) | 2,428,602 | 177,438 | 2,606,040 | ||||||||||||
Total Assets | $ | 7,608,288 | $ | 140,030 | $ | 7,748,318 | ||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current | ||||||||||||||||
Accounts payable and accrued liabilities | E(i), H | $ | 4,131,264 | $ | (1,083,271 | ) | $ | 3,047,993 | ||||||||
Amounts payable to the BCCI and IPL | H | - | 1,000,000 | 1,000,000 | ||||||||||||
Bonuses payable | C(ii) | 235,650 | 119,045 | 354,695 | ||||||||||||
Due to shareholders of Auctomatic | 789,799 | - | 789,799 | |||||||||||||
Deferred revenue | 120,456 | - | 120,456 | |||||||||||||
Current portion of deferred lease inducements | 20,138 | - | 20,138 | |||||||||||||
Total current liabilities | 5,297,307 | 35,774 | 5,333,081 | |||||||||||||
Deferred income tax | A | - | 206,370 | 206,370 | ||||||||||||
Warrants | F | - | 157,895 | 157,895 | ||||||||||||
Deferred lease inducements | 55,380 | - | 55,380 | |||||||||||||
Total Liabilities | 5,352,687 | 400,039 | 5,752,726 | |||||||||||||
STOCKHOLDERS' EQUITY | ||||||||||||||||
Common Stock | 14,855 | - | 14,855 | |||||||||||||
Additional paid-in capital | 14,772,880 | (14,948 | ) | 14,757,932 | ||||||||||||
Accumulated deficit | (12,532,134 | ) | (245,061 | ) | (12,777,195 | ) | ||||||||||
Total Stockholders' Equity | 2,255,601 | (260,009 | ) | 1,995,592 | ||||||||||||
Total Liabilities and Stockholders' Equity | $ | 7,608,288 | $ | 140,030 | $ | 7,748,318 |
F-11
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 2 – RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table illustrates the effect of the adjustments by financial statement line item in the Company’s consolidated statements of operations as of December 31, 2008:
For the year ended December 31, 2008 | Reference | As previously reported | Restatement adjustment | As restated | ||||||||||||
SALES | $ | 9,364,833 | $ | - | $ | 9,364,833 | ||||||||||
COSTS OF SALES (excluding depreciation and amortization as shown below) | 7,683,812 | - | 7,683,812 | |||||||||||||
GROSS PROFIT | 1,681,021 | - | 1,681,021 | |||||||||||||
OPERATING EXPENSES | ||||||||||||||||
Amortization and depreciation | 253,141 | - | 253,141 | |||||||||||||
Amortization of website development costs | 58,640 | - | 58,640 | |||||||||||||
Corporate general and administrative | E(i) | 2,934,555 | (19,521 | ) | 2,915,034 | |||||||||||
ECommerce general and administrative | 567,980 | - | 567,980 | |||||||||||||
Management fees and employee salaries | C(i), C(ii), D, G(ii) | 5,719,934 | 78,794 | 5,798,728 | ||||||||||||
Corporate marketing | 147,842 | - | 147,842 | |||||||||||||
ECommerce marketing | 766,393 | - | 766,393 | |||||||||||||
Other expenses | 708,804 | - | 708,804 | |||||||||||||
Total Operating Expenses | 11,157,289 | 59,273 | 11,216,562 | |||||||||||||
NON-OPERATING INCOME (EXPENSES) | ||||||||||||||||
Global Cricket Venture expenses | H | (1,000,000 | ) | 1,000,000 | - | |||||||||||
Global Cricket Venture payments | H | - | (1,000,000 | ) | (1,000,000 | ) | ||||||||||
Gain from sales and sales-type lease of domain names | E(ii) | 498,829 | (37,408 | ) | 461,421 | |||||||||||
Accretion interest expense | (96,700 | ) | - | (96,700 | ) | |||||||||||
Interest and investment income | 67,683 | - | 67,683 | |||||||||||||
Non-controlling interest | B | - | 75,478 | 75,478 | ||||||||||||
Total Non-Operating Income (Expenses) | (530,188 | ) | 38,070 | (492,118 | ) | |||||||||||
NET LOSS BEFORE TAXES | (10,006,456 | ) | (21,203 | ) | (10,027,659 | ) | ||||||||||
TAX EXPENSE | ||||||||||||||||
Deferred tax recovery | A | - | (40,389 | ) | (40,389 | ) | ||||||||||
NET LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD | $ | (10,006,456 | ) | $ | 19,186 | $ | (9,987,270 | ) | ||||||||
BASIC AND DILUTED LOSS PER SHARE | $ | (0.46 | ) | 0.00 | $ | (0.46 | ) | |||||||||
WEIGHTED AVERAGE NUMBER OF COMMON | ||||||||||||||||
SHARES OUTSTANDING - BASIC AND DILUTED | 21,937,179 | - | 21,937,179 |
F-12
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 2 – RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table illustrates the effect of the adjustments by financial statement line item in the Company’s consolidated statements of cash flows as of December 31, 2008:
For the year Ended December 31, 2008 | Reference | As previously reported | Restatement adjustment | As restated | ||||||||||||
OPERATING ACTIVITIES | ||||||||||||||||
Net loss for the period | $ | (10,006,456 | ) | $ | 19,186 | $ | (9,987,270 | ) | ||||||||
Non-cash items included in net loss: | ||||||||||||||||
Deferred tax recovery | A | - | (40,389 | ) | (40,389 | ) | ||||||||||
Non-controlling interest | B | - | (75,478 | ) | (75,478 | ) | ||||||||||
Gain from sales and sales-type lease of domain names | E(ii) | (498,829 | ) | 37,408 | (461,421 | ) | ||||||||||
Accretion interest expense | 96,700 | - | 96,700 | |||||||||||||
Stock-based compensation | D, G(ii) | 2,111,354 | 51,172 | 2,162,526 | ||||||||||||
Warrants issued | 45,500 | - | 45,500 | |||||||||||||
Issuance of common stock for services | 303,859 | - | 303,859 | |||||||||||||
Extinguishment of debt by issuance of common stock | 16,500 | - | 16,500 | |||||||||||||
Amortization and depreciation | 291,643 | - | 291,643 | |||||||||||||
Change in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | 45,348 | - | 45,348 | |||||||||||||
Prepaid expenses and deposits | 136,631 | - | 136,631 | |||||||||||||
Inventory | (74,082 | ) | - | (74,082 | ) | |||||||||||
Accounts payable and accrued liabilities | E(i), H | 2,615,835 | (1,019,521 | ) | 1,596,314 | |||||||||||
Amounts payable to the BCCI and IPL | H | - | 1,000,000 | 1,000,000 | ||||||||||||
Bonuses payable | C(i), C(ii) | (5,640 | ) | 27,622 | 21,982 | |||||||||||
Deferred revenue | 67,377 | - | 67,377 | |||||||||||||
Cash flows used in operating activities | (4,854,260 | ) | - | (4,854,260 | ) | |||||||||||
INVESTING ACTIVITIES | ||||||||||||||||
Proceeds from disposal of available for sale securities | - | - | - | |||||||||||||
Net proceeds from sale of domain name | 369,041 | - | 369,041 | |||||||||||||
Net proceeds from sales-type lease of domain name | 140,540 | - | 140,540 | |||||||||||||
Cash consideration for Auctomatic | (1,530,047 | ) | - | (1,530,047 | ) | |||||||||||
Purchases of property & equipment | (187,532 | ) | - | (187,532 | ) | |||||||||||
Website development costs | (451,439 | ) | - | (451,439 | ) | |||||||||||
Cash flows used in (from) investing activities | (1,659,437 | ) | - | (1,659,437 | ) | |||||||||||
FINANCING ACTIVITIES | ||||||||||||||||
Proceeds from sale of common stock (net of share issue costs) | 970,972 | - | 970,972 | |||||||||||||
Cash flows from financing activities | 970,972 | - | 970,972 | |||||||||||||
Net increase (decrease) in cash and cash equivalents | (5,542,725 | ) | - | (5,542,725 | ) | |||||||||||
Cash and cash equivalents, beginning of year | 7,375,245 | - | 7,375,245 | |||||||||||||
Cash and cash equivalents, end of year | $ | 1,832,520 | $ | - | $ | 1,832,520 |
F-13
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 2 – RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table illustrates the effect of the adjustments by financial statement line item in the Company’s consolidated balance sheets as of December 31, 2007:
As at December 31, 2007 | Reference | As previously reported | Restatement adjustment | As restated | ||||||||||||
ASSETS | ||||||||||||||||
Current | ||||||||||||||||
Cash and cash equivalents | $ | 7,375,245 | $ | - | $ | 7,375,245 | ||||||||||
Accounts receivable (net of allowance for doubtful accounts of nil) | 138,930 | - | 138,930 | |||||||||||||
Prepaid expenses and deposits | 246,174 | - | 246,174 | |||||||||||||
Total current assets | 7,760,349 | - | 7,760,349 | |||||||||||||
Property & equipment | 175,797 | - | 175,797 | |||||||||||||
Intangible assets | 1,645,061 | - | 1,645,061 | |||||||||||||
Total Assets | $ | 9,581,207 | $ | - | $ | 9,581,207 | ||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current | ||||||||||||||||
Accounts payable and accrued liabilities | E(i) | $ | 1,515,429 | $ | (63,750 | ) | $ | 1,451,679 | ||||||||
Bonuses payable | C(i) | 241,290 | 91,423 | 332,713 | ||||||||||||
Deferred revenue | 53,079 | - | 53,079 | |||||||||||||
Current portion of deferred lease inducements | 20,138 | - | 20,138 | |||||||||||||
Total current liabilities | 1,829,936 | 27,673 | 2,113,154 | |||||||||||||
- | ||||||||||||||||
Non-controlling interest | B | - | 8,786 | 8,786 | ||||||||||||
Deferred income tax | A | 246,759 | 246,759 | |||||||||||||
Deferred lease inducements | 75,518 | - | 75,518 | |||||||||||||
Total Liabilities | 1,905,454 | 283,218 | 2,188,672 | |||||||||||||
STOCKHOLDERS' EQUITY | ||||||||||||||||
Common Stock | 12,456 | - | 12,456 | |||||||||||||
Additional paid-in capital | 10,188,975 | (18,971 | ) | 10,170,004 | ||||||||||||
Accumulated deficit | (2,525,678 | ) | (264,247 | ) | (2,789,925 | ) | ||||||||||
Total Stockholders' Equity | 7,675,753 | (283,218 | ) | 7,392,535 | ||||||||||||
Total Liabilities and Stockholders' Equity | $ | 9,581,207 | $ | - | $ | 9,581,207 |
F-14
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 2 – RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table illustrates the effect of the adjustments by financial statement line item in the Company’s consolidated statements of operations as of December 31, 2007:
Year Ended December 31, 2007 | Reference | As previously reported | Restatement adjustment | As restated | ||||||||||||
SALES | ||||||||||||||||
Health and beauty eCommerce | $ | 8,092,707 | $ | - | $ | 8,092,707 | ||||||||||
Other eCommerce | 485,199 | - | 485,199 | |||||||||||||
Domain name advertising | 449,613 | - | 449,613 | |||||||||||||
Miscellaneous income | E(iii) | 35,810 | (35,810 | ) | - | |||||||||||
Total Sales | 9,063,329 | (35,810 | ) | 9,027,519 | ||||||||||||
COSTS OF SALES | ||||||||||||||||
Health and Beauty eCommerce | 6,512,292 | - | 6,512,292 | |||||||||||||
Other eCommerce | 509,181 | - | 509,181 | |||||||||||||
Total Costs of Sales (excluding depreciation and amortization as shown below) | 7,021,473 | - | 7,021,473 | |||||||||||||
GROSS PROFIT | 2,041,856 | (35,810 | ) | 2,006,046 | ||||||||||||
OPERATING EXPENSES | ||||||||||||||||
Amortization and depreciation | 29,169 | - | 29,169 | |||||||||||||
Corporate general and administrative | E(i) | 686,921 | (63,750 | ) | 623,171 | |||||||||||
ECommerce general and administrative | 304,212 | - | 304,212 | |||||||||||||
Management fees and employee salaries | C(i), D | 1,981,051 | 72,452 | 2,053,503 | ||||||||||||
ECommerce marketing | 817,101 | - | 817,101 | |||||||||||||
Other expenses | 637,730 | - | 637,730 | |||||||||||||
Total Operating Expenses | 4,456,184 | 8,702 | 4,464,886 | |||||||||||||
NON-OPERATING INCOME (EXPENSES) | ||||||||||||||||
Interest and investment income | 119,574 | - | 119,574 | |||||||||||||
Gain on disposal of subsidiary of Frequenttraveler.com Inc. | 276,805 | - | 276,805 | |||||||||||||
Non-controlling interest | B | - | 91,890 | 91,890 | ||||||||||||
Total Non-Operating Income (Expenses) | 396,379 | 91,890 | 488,269 | |||||||||||||
NET LOSS AND COMPREHENSIVE LOSS BEFORE TAXES | (2,017,949 | ) | 47,378 | (1,970,571 | ) | |||||||||||
TAX EXPENSE | ||||||||||||||||
Deferred tax recovery | A | - | (8,225 | ) | (8,225 | ) | ||||||||||
NET LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD | $ | (2,017,949 | ) | $ | 55,603 | $ | (1,962,346 | ) | ||||||||
BASIC AND DILUTED LOSS PER SHARE | $ | (0.11 | ) | $ | 0.00 | $ | (0.10 | ) | ||||||||
WEIGHTED AVERAGE NUMBER OF COMMON | ||||||||||||||||
SHARES OUTSTANDING - BASIC AND DILUTED | 19,070,236 | - | 19,070,236 |
F-15
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 2 – RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table illustrates the effect of the adjustments by financial statement line item in the Company’s consolidated statements of cash flows as of December 31, 2007:
For the year ended December 31, 2007 | Reference | As previously reported | Restatement adjustment | As restated | ||||||||||||
OPERATING ACTIVITIES | ||||||||||||||||
Net loss for the period | $ | (2,017,949 | ) | $ | 55,603 | $ | (1,962,346 | ) | ||||||||
Non-cash items included in net loss: | ||||||||||||||||
Deferred tax recovery | A | - | (8,225 | ) | (8,225 | ) | ||||||||||
Non-controlling interest | B | - | (91,890 | ) | (91,890 | ) | ||||||||||
Stock-based compensation | D | 428,028 | (18,971 | ) | 409,057 | |||||||||||
Amortization and depreciation | 24,135 | - | 24,135 | |||||||||||||
Issuance of common stock for bonuses | 59,078 | - | 59,078 | |||||||||||||
Change in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | E(iii) | (117,724 | ) | 35,810 | (81,914 | ) | ||||||||||
Prepaid expenses and deposits | (246,174 | ) | - | (246,174 | ) | |||||||||||
Accounts payable and accrued liabilities | E(i) | 523,574 | (63,750 | ) | 459,824 | |||||||||||
Bonuses payable | C(i) | 241,290 | 91,423 | 332,713 | ||||||||||||
Deferred revenue | 53,079 | - | 53,079 | |||||||||||||
Deferred lease inducements | 100,690 | - | 100,690 | |||||||||||||
Cash flows used in operating activities | (951,973 | ) | - | (951,973 | ) | |||||||||||
INVESTING ACTIVITIES | ||||||||||||||||
Proceeds from disposal of available for sale securities | 261,912 | - | 261,912 | |||||||||||||
Purchases of property & equipment | (159,934 | ) | - | (159,934 | ) | |||||||||||
Cash flows used in (from) investing activities | 101,978 | - | 101,978 | |||||||||||||
FINANCING ACTIVITIES | ||||||||||||||||
Proceeds from restricted cash | 20,000 | - | 20,000 | |||||||||||||
Proceeds from sale of common stock (net of share issue costs) | 6,099,900 | - | 6,099,900 | |||||||||||||
Cash flows from financing activities | 6,119,900 | - | 6,119,900 | |||||||||||||
Net increase (decrease) in cash and cash equivalents | 5,269,905 | - | 5,269,905 | |||||||||||||
Cash and cash equivalents, beginning of year | 2,105,340 | - | 2,105,340 | |||||||||||||
Cash and cash equivalents, end of year | $ | 7,375,245 | $ | - | $ | 7,375,245 |
F-16
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
The following table illustrates the effect of the adjustments by financial statement line item in the Company’s consolidated statements of stockholders’ equity as of December 31, 2008 and December 31, 2007:
As previously reported | ||||||||||||||||||||||||||||||||
Common stock | Additional Paid-in Capital | Accumulated Deficit | Total | Restatement Adjustment | As Restated Total | |||||||||||||||||||||||||||
Reference | Number of Shares | Amount | ||||||||||||||||||||||||||||||
Balance, December 31, 2006 | 17,836,339 | $ | 8,846 | $ | 3,605,579 | $ | (507,729 | ) | $ | 3,106,696 | $ | - | $ | 3,106,696 | ||||||||||||||||||
Adjustment to opening accumulated deficit | A, B, E(iii) | - | - | - | - | - | (319,850 | ) | (319,850 | ) | ||||||||||||||||||||||
Balance, December 31, 2006 | 17,836,339 | 8,846 | 3,605,579 | (507,729 | ) | 3,106,696 | (319,850 | ) | 2,786,846 | |||||||||||||||||||||||
Issuance of 60,284 common shares at $0.98 per share in lieu of accrued bonuses to officers | 60,284 | 60 | 59,018 | 59,078 | - | 59,078 | ||||||||||||||||||||||||||
Issuance of 1,000,000 common shares at $1.00 per share to CEO | 1,000,000 | 1,000 | 999,000 | 1,000,000 | - | 1,000,000 | ||||||||||||||||||||||||||
Private Placement of 2,550,000 common shares at $2.00 per share | 2,550,000 | 2,550 | 5,097,450 | 5,100,000 | - | 5,100,000 | ||||||||||||||||||||||||||
Share issue costs | - | (100 | ) | (100 | ) | - | (100 | ) | ||||||||||||||||||||||||
Stock-based compensation | D | - | 428,028 | 428,028 | (18,971 | ) | 409,057 | |||||||||||||||||||||||||
Net loss and comprehensive loss | A, B, C(i), D, E(i), E(iii) | - | (2,017,949 | ) | (2,017,949 | ) | 55,603 | (1,962,346 | ) | |||||||||||||||||||||||
Balance, December 31, 2007 | 21,446,623 | 12,456 | 10,188,975 | (2,525,678 | ) | 7,675,753 | (283,218 | ) | 7,392,535 | |||||||||||||||||||||||
Stock-based compensation | D, G(ii) | - | - | 2,111,354 | 2,111,354 | 51,172 | 2,162,526 | |||||||||||||||||||||||||
Issuance of 586,403 common shares per the merger agreement with Auctomatic | G(i) | 586,403 | 586 | 1,137,533 | 1,138,119 | 110,746 | 1,248,865 | |||||||||||||||||||||||||
Issuance of 33,000 common shares to investor relations firm | 33,000 | 33 | 85,649 | 85,682 | - | 85,682 | ||||||||||||||||||||||||||
Issuance of 120,000 common shares to investor relations firm | 120,000 | 120 | 218,057 | 218,177 | - | 218,177 | ||||||||||||||||||||||||||
Issuance of 50,000 warrants to investor relations firm | - | - | 45,500 | 45,500 | - | 45,500 | ||||||||||||||||||||||||||
Cancellation of 300,000 common shares not distributed | (300,000 | ) | - | - | - | - | - | |||||||||||||||||||||||||
Private Placement of 1,627,344 units at $0.65 per share | F | 1,627,344 | 1,627 | 1,056,148 | 1,057,775 | (157,895 | ) | 899,880 | ||||||||||||||||||||||||
Share issue costs | - | - | (86,803 | ) | (86,803 | ) | - | (86,803 | ) | |||||||||||||||||||||||
Extinguishment of accounts payable | 33,000 | 33 | 16,467 | 16,500 | - | 16,500 | ||||||||||||||||||||||||||
Net loss and comprehensive loss | A - E(ii), G(ii) | (10,006,456 | ) | (10,006,456 | ) | 19,186 | (9,987,270 | ) | ||||||||||||||||||||||||
Balance, December 31, 2008 | 23,546,370 | $ | 14,855 | $ | 14,772,880 | $ | (12,532,134 | ) | $ | 2,255,601 | $ | (260,009 | ) | $ | 1,995,592 |
F-17
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies used in preparation of these consolidated financial statements:
Principles of consolidation
The consolidated financial statements include the accounts of the Company, its wholly owned subsidiary Delaware, its wholly-owned subsidiary LCM Cricket Ventures, its 98.2% (December 31, 2007 - 94.9%) interest in its subsidiary DHI, DHI’s wholly owned subsidiaries Importers, Acadia, and 612793, and LCM Cricket Ventures’ 50.05% interest in Global Cricket Venture. The comparative figures in 2007 include its 50.4% interest in FT (from January 1, 2007 until the sale of the Company’s controlling interest in FT on November 12, 2007). All significant intercompany balances and transactions are eliminated on consolidation.
Use of estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of intangible assets, fair value measurement, related party transactions, stock based compensation, determination and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and for the periods that the consolidated financial statements are prepared. Actual results could differ from these estimates.
Business Combinations
On the acquisition of a subsidiary, the purchase method of accounting is used whereby the purchase consideration is allocated to the identifiable assets and liabilities on the basis of fair value at the date of acquisition. The Company considers critical estimates involved in determining any amount of goodwill, and tests for impairment of such goodwill as disclosed in its Goodwill accounting policy below.
Revenue recognition
Revenues and associated costs of goods sold from the on-line sales of products, currently consisting primarily of fragrances and other beauty products, are recorded upon delivery of products and determination that collection is reasonably assured. The Company records inventory as an asset for items in transit as title does not pass until received by the customer. All associated shipping and handling costs are recorded as cost of goods sold upon delivery of products.
Web advertising revenue consists primarily of commissions earned from the referral of visitors from the Company’s sites to other parties. The amount and collectibility of these referral commissions is subject to uncertainty; accordingly, revenues are recognized when the amount can be determined and collectibility can be reasonably assured. In accordance with Emerging Issues Task Force (“EITF”) 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, the Company records web advertising revenues on a gross basis.
Until the disposal of the Company’s shares in FrequentTraveller.com Inc. on November 12, 2007, revenues from the sales of travel products, including tours, airfares and hotel reservations, where the Company acted as the merchant of record and had inventory risk, were recorded on a gross basis. Customer deposits received prior to ticket issuance or 30-days prior to travel were recorded as deferred revenue. Where the Company did not act as the merchant of record and had no inventory risk, revenues were recorded at the net amounts, without any associated cost of revenue in accordance with EITF 99-19. See also Note 5.
Gains from the sale of domain names, whose carrying values are recorded as intangible assets, consists primarily of funds earned for the transfer of rights to domain names that are currently in the Company’s control. Revenues have been recognized when the sale agreement is signed and the collectibility of the proceeds is reasonably assured. In 2008, there was a sale of a geo-domain name for net proceeds of $369,041. Collectibility of the amounts owing on this sale are reasonably assured and therefore accounted for as a sale in the period the transaction occurred. There were no sales of domain names during 2007.
Gains from the sales-type leases of domain names, whose carrying values are recorded as intangible assets, consists primarily of funds earned over a period of time for the transfer of rights to domain names that are currently in the Company’s control. Collectibility of these revenues generated are reasonably assured and therefore accounted for as a sales-type lease in the period the transaction occurs. See also Note 12.
F-18
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign currency transactions
The consolidated financial statements are presented in United States dollars. The functional currency of the Company is United States dollars. In accordance with FAS No. 52, Foreign Currency Translation, the foreign currency financial statements of the Company’s subsidiaries are translated into U.S. dollars. Monetary assets and liabilities are translated using the foreign exchange rate that prevailed at the balance sheet date. Revenue and expenses are translated at weighted average rates of exchange during the year and stockholders’ equity accounts and certain other historical cost balances are translated by using historical exchange rates. Any resulting exchange gains and losses are presented as cumulative foreign currency translation gains (losses) within other accumulated comprehensive income (loss). There was no effect to comprehensive income (loss) related to the share conversion with DHI.
Transactions denominated in foreign currencies are remeasured at the exchange rate in effect on the respective transaction dates and gains and losses are reflected in the consolidated statements of operations.
Comprehensive loss
Comprehensive loss includes all changes in equity of the Company during a period except those resulting from investments by shareholders and distributions to shareholders. Comprehensive income (loss) includes net income (loss) and other comprehensive income (loss) (“OCI”). The major components included in OCI are cumulative translation adjustments arising on the translation of the financial statements of self-sustaining foreign operations and unrealized gains and losses on financial assets classified as available-for-sale. The Company has no self-sustaining foreign operations or unrealized gains or losses on financial assets classified as available-for-sale.
Loss per share
Basic loss per share is computed by dividing losses for the period by the weighted average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution of securities by including other potential common stock in the weighted average number of common shares outstanding for a period and is not presented where the effect is anti-dilutive.
Cash and cash equivalents
The Company considers all highly liquid instruments, with original maturity dates of three months or less at the time of issuance, to be cash equivalents.
Accounts receivable and allowance for doubtful accounts
The Company’s accounts receivable balance consists primarily of goods and services taxes (GST) receivable, advertising revenues receivable and the balance receivable relating to its December 31, 2008 sale of a domain name as disclosed in Note 12. Per the Company’s review of open accounts and collection history, the accounts receivable balances are reasonably collectible and therefore no allowance for doubtful accounts has been reflected at year end.
Inventory
Inventory is recorded at the lower of cost or market using the first-in first-out (FIFO) method. The Company maintains little or no inventory of perfume which is shipped from the supplier directly to the customer. The inventory on hand as at December 31, 2008 is recorded at cost of $74,082 and represents inventory in transit from the supplier to the customer.
Deferred Financing Costs
Costs directly identifiable with the raising of capital are charged against the related capital stock. Costs incurred to obtain debt financing are deferred and amortized by a charge to interest expense over the term of the related debt. Debt financing fees are amortized and included as part of interest expense. During the period, financing costs were charged against the capital stock issued during the period in a private placement. As there were no debt financings, no financing costs were amortized to interest expense.
Deferred Acquisition Costs
Deferred acquisition costs are direct or incremental costs directly related to acquisitions, and are deferred and added to the cost of the purchase. Only costs that are directly related to proposed transactions, where completion is considered more likely than not, are deferred. Once the Company ceases to be engaged on a regular ongoing basis and it is not likely that activities will resume, the costs are expensed. During the period, deferred acquisition costs were expensed in full as it is not possible to predict whether the related acquisition activities will resume.
F-19
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property & Equipment
These assets are stated at cost. Minor additions and improvements are charged to operations, and major additions are capitalized. Upon retirement, sale or other disposition, the cost and accumulated depreciation are eliminated from the accounts, and a gain or loss is included in operations.
Amortization for equipment is computed using declining balance method at the following annual rates:
Office Furniture and Equipment | 20% |
Computer Equipment | 30% |
Computer Software | 100% |
Auction Software | 3 years straight-line |
Amortization for leasehold improvements is based on a straight-line method calculated over the term of the lease. Auction software is amortized straight line over the life of the asset. Other additions are amortized on a half-year basis in the year of acquisition.
Website development costs
The Company has adopted the provisions of EITF No. 00-2, Accounting for Web Site Development Costs, whereby costs incurred in the preliminary project phase are expensed as incurred; costs incurred in the application development phase are capitalized; and costs incurred in the post-implementation operating phase are expensed as incurred. Website development costs are stated at cost less accumulated amortization and are amortized using the straight-line method over its estimated useful life. Upgrades and enhancements are capitalized if they result in added functionality which enables the software to perform tasks it was previously incapable of performing. See also Note 9.
Intangible assets
The Company has adopted the provisions of FAS No. 142, Goodwill and Intangible Assets, which revises the accounting for purchased goodwill and intangible assets. Under FAS No. 142, intangible assets with indefinite lives are no longer amortized and are tested for impairment annually. The determination of any impairment would include a comparison of estimated future operating cash flows anticipated during the remaining life with the net carrying value of the asset as well as a comparison of the fair value to book value of the Company.
The Company’s intangible assets, which consist of its portfolio of generic domain names, have been determined to have an indefinite life and as a result are not amortized. Management has determined that there is no impairment of the carrying value of intangible assets at December 31, 2008.
Goodwill
Goodwill represents the excess of acquisition cost over the fair value of the net assets of acquired entities. In accordance with FAS No. 142, Accounting for Goodwill and Other Intangible Assets. the Company is required to assess the carrying value of goodwill annually or whenever circumstances indicate that a decline in value may have occurred, utilizing a fair value approach at the reporting unit level. A reporting unit is the operating segment, or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management.
The goodwill impairment test is a two-step impairment test. In the first step, the Company compares the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using a discounted cash flow approach. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step in order to determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. The activities in the second step include valuing the tangible and intangible assets and liabilities of the impaired reporting unit based on their fair value and determining the fair value of the impaired reporting unit’s goodwill based upon the residual of the summed identified tangible and intangible assets and liabilities.
The fair value of the Perfume.com reporting unit exceeded the carrying value of the assigned net assets, therefore no further testing was required and an impairment charge was not required.
F-20
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Deferred Revenue
Revenue that has been received but does not yet qualify for recognition under the Company's policies is reflected as either deferred revenue or long-term deferred revenue.
Deferred Lease Inducements
Lease inducements, including rent free periods, are deferred and accounted for as a reduction of rent expense over the term of the related lease on a straight-line basis.
Advertising Costs
The Company recognizes advertising expenses in accordance with SOP 93-7, Reporting on Advertising Costs. As such, the Company expenses the costs of producing advertisements at the time production occurs or the first time the advertising takes place and expenses the cost of communicating advertising in the period during which the advertising space or airtime is used. Internet advertising expenses are recognized as incurred based on the terms of the individual agreements, which are generally: 1) a commission for traffic driven to the Website that generates a sale or 2) a referral fee based on the number of clicks on keywords or links to its Website generated during a given period. Total advertising expense in 2008 of $808,792 (2007 - $817,101) were reported in “Corporate Marketing” and “eCommerce Marketing” on the Company’s consolidated statements of operations.
Stock-based compensation
During the third quarter of 2007, the Company implemented the following new critical accounting policy related to its stock-based compensation. Beginning on July 1, 2007, the Company began accounting for stock options under the provisions of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (FAS 123(R)), which requires the recognition of the fair value of stock-based compensation. Under the fair value recognition provisions for FAS 123(R), stock-based compensation cost is estimated at the grant date based on the fair value of the awards expected to vest and recognized as expense ratably over the requisite service period of the award. The Company has used the Black-Scholes valuation model to estimate fair value of its stock-based awards which requires various judgmental assumptions including estimating stock price volatility and expected life. The Company’s computation of expected volatility is based on a combination of historical and market-based volatility. In addition, the Company considers many factors when estimating expected life, including types of awards and historical experience. If any of the assumptions used in the Black-Scholes valuation model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.
In August 2007, the Company’s Board of Directors approved an Incentive Stock Option Plan to make available 5,000,000 shares of common stock for the grant of stock options, including incentive stock options. Incentive stock options may be granted to employees of the Company, while non-qualified stock options may be granted to employees, officers, directors, consultants, independent contractors and advisors of the Company, provided such consultants, independent contractors and advisors render bona-fide services not in connection with the offer and sale of securities in a capital-raising transaction or promotion of the Company’s securities. See also Note 11.
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FAS No. 123R and the conclusions reached by the EITF in Issue No. 96-18. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by EITF 96-18.
Non-Controlling Interest
The consolidated financial statements include the accounts of DHI (and its subsidiaries). All intercompany accounts and transactions have been eliminated upon consolidation. The Company records non-controlling interest which reflects the 1.8% portion of the earnings of DHI and its subsidiaries allocable to the holders of the minority interest.
F-21
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes
During the first quarter of 2007, the Company adopted the following new critical accounting policy related to income tax. Beginning on January 1, 2007, the Company began accounting for income tax under the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company and its subsidiaries are subject to U.S. federal income tax and Canadian income tax, as well as income tax of multiple state and local jurisdictions. Based on the Company’s evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The Company’s evaluation was performed for the tax years ended December 31, 2002, 2003, 2004, 2005, 2006, 2007 and 2008, the tax years which remain subject to examination by major tax jurisdictions as of December 31, 2008. The Company may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to the Company’s financial results. In the event the Company has received an assessment for interest and/or penalties, it has been classified in the financial statements as selling, general and administrative expense.
Recent Accounting Pronouncements
FAS 168
In June, 2009, the FASB issued FAS No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – A Replacement of FASB Statement No. 162. The FASB Accounting Standards CodificationTM (Codification) will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. This statement is effective for financial statements issued for fiscal years and interim periods beginning after September 15, 2009, which, for the Company, would be the fiscal year beginning January 1, 2010. The Company is currently assessing the impact of FAS No. 168 on its financial position and results of operations.
FAS 166
In June, 2009, the FASB issued FAS No. 166, Accounting for Transfer of Financial Assets – An Amendment of FASB Statement No. 140. The new standard is intended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets: the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2009, which, for the Company, would be the fiscal year beginning January 1, 2010. The Company is currently assessing the impact of FAS No. 166 on its financial position and results of operations.
FAS 165
In May, 2009, the FASB issued FAS No. 165, Subsequent Events. The new standard is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This statement is effective for financial statements issued for interim or annual financial periods ending after June 15, 2009, which, for the Company, would be the interim period ending June 30, 2009. The Company does not expect that this Statement will result in a change in current practice.
F-22
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements (continued)
FAS 162
In May, 2008, the FASB issued FAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company does not expect that this Statement will result in a change in current practice.
FAS 161
In March 2008, the FASB issued FAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FAS No. 133. FAS No. 161 is intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance and cash flows. Entities are required to provide enhanced disclosures about: how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for under FAS No. 133 and its related interpretations; and how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. FAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, which, for the Company, would be the fiscal year beginning January 1, 2009. The Company is currently assessing the impact of FAS No. 161 on its financial position and results of operations.
FSP FAS 142-3
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). The intent of FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other applicable accounting literature. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, which for the Company, would be the fiscal year beginning January 1, 2009. The Company is currently assessing the impact of FSP FAS 142-3 on its financial position and results of operations.
FAS 141R
In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations ("141R"). FAS No. 141R significantly changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, preacquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under FAS No. 141R, changes in an acquired entity's deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. This standard will change accounting treatment for business combinations on a prospective basis. FAS No. 141R is effective for fiscal years beginning after December 15, 2008, which, for the Company, would be the fiscal year beginning January 1, 2009. The Company is currently assessing the impact of FAS No. 141R on its financial position and results of operations.
FAS 160
In December 2007, the FASB issued FAS No. 160 Noncontrolling Interests in Consolidated Financial Statements, and simultaneously revised FAS 141 Business Combinations. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, which, for the Company, would be the fiscal year beginning January 1, 2009. An entity may not adopt the policy before the transitional date. The Company is currently assessing the impact of FAS No. 160 and the revision of FAS 141 on its financial position and results of operations.
F-23
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements (continued)
FAS 159
In February 2007, the FASB issued FAS 159, “Fair Value Option for Financial Assets and Financial Liabilities,” which allows an irrevocable option, the Fair Value Option, to carry eligible financial assets and liabilities at fair value. The election is made on an instrument-by-instrument basis. Changes in fair value for these instruments are recorded in earnings. The objective of FAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.
The Company adopted FAS 159 in 2008. The adoption did not have a material effect on its financial results.
FAS 157
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This standard does not require any new fair value measurements.
In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2, which delays the effective date of FAS No. 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis, which for the Company would be the fiscal year beginning January 1, 2009.
In 2008, the Company adopted FAS 157 for financial assets and liabilities recognized at fair value on a recurring basis. The adoption did not have a material effect on its financial results. The disclosures required by FAS 157 for financial assets and liabilities measured at fair value on a recurring basis as at December 31, 2008 are included in Note 4.
The Company will apply the requirements of FAS 157 for fair value measurements of financial and nonfinancial assets and liabilities not valued on a recurring basis in 2009. The Company is currently evaluating the effect of this application on its financial reporting and disclosures.
In October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active, which clarifies the application of FAS 157 in determining the fair value of a financial asset when the market for that asset is not active. FSP FAS 157-3 is effective as of the issuance date and has not affected the valuation of its financial assets.
NOTE 4 – FINANCIAL INSTRUMENTS
Interest rate risk exposure
The Company currently has limited exposure to any fluctuation in interest rates.
Foreign exchange risk
The Company is subject to foreign exchange risk for sales and purchases denominated in foreign currencies. Foreign currency risk arises from the fluctuation of foreign exchange rates and the degree of volatility of these rates relative to the United States dollar. The Company does not actively manage this risk.
Concentration of credit risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents, and trade accounts receivable. The Company limits its exposure to credit loss by placing its cash and cash equivalents on deposit with high credit quality financial institutions. Receivables arising from sales to customers are generally immaterial and are not collateralized. Management regularly monitors the financial condition of its customers to reduce the risk of loss.
F-24
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 4 – FINANCIAL INSTRUMENTS (continued)
Fair values of Financial Instruments
As described in Note 3, the Company adopted the provisions of FAS 157 as of January 1, 2008. FAS 157 defines fair value, establishes a consistent framework for measuring fair value, and expands disclosures for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. FAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, FAS 157 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
Level 1 - observable inputs such as quoted prices in active markets for identical assets and liabilities;
Level 2 - observable inputs such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other inputs that are observable, or can be corroborated by observable market data; and
Level 3 - unobservable inputs for which there are little or no market data, which require the reporting entity to develop its own assumptions.
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, investment in sales-type lease, accounts payable, amounts payable to the BCCI and IPL, bonuses payable, amounts due to shareholders of Auctomatic and warrants. The Company did not elect to value its financial assets or liabilities in accordance with FAS 159. The Company believes that the recorded values of all of its financial instruments approximate their fair values because of their nature and respective durations.
NOTE 5 – NON-CONTROLLING INTEREST
The Company currently holds 98.2% (December 31, 2007 – 94.9%) of the issued and outstanding shares of its principal operating subsidiary, DHI. During Q1 2008, DHI issued 40,086,645 shares to Live Current Media Inc. at fair value in exchange for a conversion of intercompany debt of $3,000,000, therefore diluting the non-controlling interest by 3.3%. This conversion was accounted for using the purchase method, resulting in an increase to goodwill of $66,692, and a credit against the non-controlling interest of $75,478 charged to income in the year.
Until November 12, 2007, the Company owned a 50.4% controlling interest in FrequentTraveller.com Inc. (“FT”), a private Nevada corporation incorporated on October 29, 2002. FT commenced operations in November 2003, providing travel services to customers online and by telephone. Since inception, FT had incurred expenses in excess of revenues and Live Current’s share of the net liabilities was $276,805 as at November 12, 2007. On this date, the Company sold its 50.4% shareholdings in FT to the other FT shareholder for no additional consideration, resulting in a gain equal to FT’s net liabilities. The following table summarizes the assets and liabilities foregone in exchange for the Company’s shareholding.
Assets | ||||
Cash | $ | 46,974 | ||
Accounts Receivable | 7,570 | |||
Liabilities | ||||
Accounts payable and accrued liabilities | (176,312 | ) | ||
Deferred Revenue | (111,857 | ) | ||
Loan | (43,180 | ) | ||
Net Liabilities | $ | 276,805 |
F-25
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 6 – GLOBAL CRICKET VENTURE
Memoranda of Understanding
On April 17, 2008, the Company signed a Memorandum of Understanding (“MOU” or “Original MOU”) with the Board of Control for Cricket in India (“BCCI”) and the DLF Indian Premier League (“IPL”). The MOU, which would be preliminary to a final agreement, starts the Company’s planned exploitation of its cricket.com domain name.
Certain other subsidiaries and ventures have been incorporated or formed to further this business opportunity, however none of them have significant assets or operations to date, nor have any material binding contracts been signed.
During 2008, the Company incurred $1.47 million in furtherance of this plan; costs that have been included in corporate marketing, management fees and employee salaries, and corporate general and administrative expenses. There were no such costs in any period of 2007. The Company also incurred $1 million of liabilities in aggregate to the BCCI and IPL in respect of exclusive online content rights agreements.
As the plan to exploit cricket.com was in its early stages, all expenditures were charged to operations.
In August 2009, the Company transferred and assigned all its interests in the project, including its ownership of the cricket.com domain name, for cash and assumption by the third party of all past and future liabilities due to the BCCI and IPL. Refer to Note 19.
NOTE 7 – MERGER AGREEMENT
On March 25, 2008, the Company and its wholly owned subsidiary, Communicate.com Delaware, Inc. (“Delaware”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Entity, Inc., a Delaware corporation, (“Auctomatic”). The Company believed that Auctomatic’s technology framework and toolset will strengthen its commerce platform and Auctomatic’s team will dramatically enhance the Company’s product and technology capability.
The Merger Agreement closed on May 22, 2008 (the “Closing Date”). In connection with the Merger Agreement, the stockholders of Auctomatic received in total (i) $2,000,000 cash minus $152,939 in certain assumed liabilities and (ii) 1,000,007 shares of common stock of the Company (equal to $3,000,000 divided by $3.00 per share, the closing price of the Company’s common stock on the business day immediately preceding the Closing Date) in exchange for all the issued and outstanding shares of Auctomatic.
The consideration was payable on the Closing Date as follows: (i) 340,001 shares, or 34%, of the common stock and (ii) $1,200,000 less $152,939 in assumed liabilities. An additional 246,402 shares of common stock were issued and shall be distributed in equal amounts to the Auctomatic shareholders on each of the first, second and third anniversary of the Closing Date. The remaining $800,000 of the total Cash Consideration shall be distributed on the first anniversary of the Closing Date. All amounts of cash and common stock shall be distributed pro rata among the Auctomatic Stockholders.
The distribution of the remaining 413,604 shares of the common stock payable on the first, second and third anniversary of the Closing Date to the Auctomatic founders is subject to their continuing employment with the Company or a subsidiary on each Distribution Date. As these shares are contingent on future employment, they are considered contingent consideration and are required to be accounted for under FAS 123(R) as stock-based compensation. Subsequent to year end, one of the founders resigned from Live Current, and therefore the distribution of 137,868 shares of the common stock on the first, second and third anniversary will no longer be payable. The remaining 275,736 shares of the common stock owing to the other founders remain payable on the anniversary dates as noted above. See also Note 11.
At May 22, 2008, the present value of the amounts payable in cash to shareholders of Auctomatic on the first anniversary of the closing date was $640,000. At year end, the present value discount was accreted by $96,700, leaving a present value remaining at December 31, 2008 of $736,700.
Also at year end, $53,099 of cash owing at closing has yet to be paid to one of the Auctomatic shareholders. As a result, at year end, amounts payable to shareholders of Auctomatic totaled $789,799.
F-26
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 7 – MERGER AGREEMENT (continued)
The purchase price to affect the merger was allocated as following on the closing date:
Purchase Price Paid | ||||
Cash (net of assumed liabilities) | $ | 1,046,695 | ||
Transaction Costs | 387,358 | |||
Cash consideration for Auctomatic | 1,434,053 | |||
Present value of shares of common stock paid and payable to shareholders of Auctomatic | 1,248,865 | |||
Present value of amounts payable to shareholders of Auctomatic | 640,000 | |||
Total | $ | 3,322,918 |
Net Assets Acquired | ||||
Assets | ||||
Cash | $ | 3,066 | ||
Share subscriptions receivable | 780 | |||
Computer hardware | 7,663 | |||
Auction software | 925,000 | |||
Goodwill | 2,539,348 | |||
Less Liabilities | ||||
Accounts payable and accrued liabilities | (85,622 | ) | ||
Loan payable | (67,317 | ) | ||
Net Assets Acquired | $ | 3,322,918 |
To show effect to the merger of Auctomatic and Delaware as if the merger had occurred on January 1, 2008, the pro forma information for the nine months ended December 31, 2008 would have resulted in revenues that remain unchanged from those reported in the consolidated financial statements, no cumulative effect of accounting changes, and income before extraordinary items and net income which both would have decreased by $106,035. To show effect to the merger of Auctomatic and Delaware as if the merger had occurred on January 1, 2007, the comparative pro forma information for the year ended December 31, 2007 would have no effect to reported revenues, cumulative effect of accounting changes, income before extraordinary items or net income. See Note 19.
F-27
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 8 – PROPERTY & EQUIPMENT
2008 (as Restated) | Cost | Accumulated Amortization | Net Book Value | |||||||||
Office Furniture and Equipment | $ | 165,868 | $ | 30,778 | $ | 135,090 | ||||||
Computer Equipment | 100,789 | 51,554 | 49,235 | |||||||||
Computer Software | 27,276 | 13,638 | 13,638 | |||||||||
Auction Software | 925,000 | 179,861 | 745,139 | |||||||||
Leasehold Improvements | 142,498 | 42,749 | 99,749 | |||||||||
$ | 1,361,431 | $ | 318,580 | $ | 1,042,851 |
2007 (as Restated) | Cost | Accumulated Amortization | Net Book Value | |||||||||
Office Furniture and Equipment | $ | 28.644 | $ | 14,159 | $ | 14,485 | ||||||
Computer Equipment | 70,095 | 37,031 | 33,064 | |||||||||
Leasehold Improvements | 142,498 | 14,250 | 128,248 | |||||||||
$ | 241,237 | $ | 65,440 | $ | 175,797 |
NOTE 9 – WEBSITE DEVELOPMENT COSTS
Website development costs are related to infrastructure development of various websites that the Company operates. In previous years, costs qualifying for capitalization were immaterial and therefore were expensed as incurred. Website maintenance, training, data conversion and business process reengineering costs are expensed in the period in which they are incurred. Costs incurred in the application development phase are capitalized, and when the related websites reach the post-implementation operating phase, the Company begins amortizing these costs on a straight-line basis over 36 months beginning in the month following the implementation of the related websites.
2008 (As Restated) | 2007 (As Restated) | |||||||
Website Development Costs | $ | 405,001 | $ | - | ||||
Less: Amortization | ( 49,610 | ) | - | |||||
$ | 355,391 | $ | - |
During the year, the Company capitalized website development costs of $451,439. The Company expensed website development costs of $46,438 and corresponding accumulated amortization of $9,030 related to a domain name that was sold on December 31, 2008. The net effect of these amounts was offset against the gain from sales of domain names.
NOTE 10 – DEFERRED LEASE INDUCEMENTS
2008 (As Restated) | 2007 (As Restated) | |||||||
Deferred Lease Inducements | $ | 75,518 | $ | 95,656 | ||||
Less: Current Portion | (20,138 | ) | (20,138 | |||||
$ | 55,380 | $ | 75,518 |
F-28
NOTE 11 – COMMON STOCK
a) | Authorized |
The authorized capital of the Company consists of 50,000,000 common shares with a par value of $0.001 per share. No other shares have been authorized.
b) | Issued |
At December 31, 2008, there were 23,546,370 (2007 – 21,446,683) shares issued and outstanding.
2008
In June 2008, the Company issued 586,403 shares of common stock in relation to the May 22, 2008 merger with Auctomatic. Of those total issued shares, 340,001 shares were distributed to the shareholders and an additional 246,402 shares are being held for future distribution in three equal installments on the next three anniversary dates of the merger pursuant to the terms of the merger agreement. The value of the stock consideration was added to the cash consideration in the Company’s determination of the purchase price. See also Note 7. The remaining 413,604 shares of common stock are reserved for future issuance to the Auctomatic founders and are being accounted for as stock-based compensation pursuant to FAS 123(R). See also Note 11c and Note 11d.
In May and June 2008, the Company issued 45,000 shares to an investor relations firm that had been engaged to provide investor relations services to the Company. Of the 45,000 shares, 30,000 shares with a value of $85,350 were issued as partial consideration for services rendered, while the remaining 15,000 shares with an estimated value of $42,300 were recorded as a prepaid expense in June 2008 for services to be rendered in July 2008. In July 2008, this amount was revalued to $36,573 based on the July average stock price and expensed with the difference between the estimated and actual values adjusted to Additional Paid-In Capital.
The Company also issued 50,000 warrants to the investor relations firm in May 2008, and expensed $45,500 in relation to the value of the warrants. See also Note 11(e).
In August 2008, the Company issued 33,000 shares to an investor relations firm that had previously been engaged to provide investor relations services to the Company. The contract with this former investor relations firm terminated August 1, 2008. The 33,000 shares owing to the firm had a value of $85,682 and were issued as full consideration for services rendered.
In August and September 2008, the Company issued 30,000 shares to an investor relations firm that had been engaged to provide investor relations services to the Company. These shares, which were valued at $57,254, were issued as partial consideration for services rendered during the year.
In October 2008, the Company cancelled 300,000 shares of common stock that had been pre-maturely issued in a prior year in anticipation of a transaction that was never consummated.
During November 2008, the Company accepted subscriptions from 11 accredited investors pursuant to which the Company issued and sold 1,627,344 units consisting of one share of the Company’s common stock and two warrants, each for the purchase of one-half a share of common stock. The price per unit was $0.65. The Company raised gross proceeds of $1,057,775 (the “Offering”). The private placement closed on November 19, 2008. One warrant is exercisable at $0.78 (a 20% premium) and expires November 19, 2010. The other warrant is exercisable at $0.91 (a 40% premium) and expires November 19, 2011. The Company incurred $86,803 in share issuance costs related to the private placement. The Company is required to use its reasonable best efforts to file an S-1 Registration Statement with the SEC to register for resale the common stock and the common stock underlying the warrants. The securities were offered and sold by the Company to accredited investors in reliance on Section 506 of Regulation D of the Securities Act of 1933, as amended. Refer to Note 11e.
In December 2008, the Company extinguished $16,500 of accounts payable by issuing 33,000 shares to the investor relations firm that had previously been engaged to provide investor relations services to the Company.
F-29
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 11 – COMMON STOCK (continued)
b) | Issued (continued) |
2008 (continued)
In October, November and December 2008, the Company issued 45,000 shares to an investor relations firm that had been engaged to provide investor relations services to the Company. These shares, which were valued at $39,000, were issued as partial consideration for services rendered.
2007
On May 24, 2007 the Company issued 60,284 shares of common stock to management in lieu of $59,078 of bonuses payable.
On June 11, 2007, the Company issued 1,000,000 shares of common stock and 1,000,000 common stock share purchase warrants to a company owned and controlled by the Company’s Chief Executive Officer (“CEO”) in exchange for $1,000,000 cash. See also Note 11(e). The warrants expire on June 10, 2009.
During September and October 2007 the Company accepted subscriptions from 11 accredited investors pursuant to which the Company issued and sold 2,550,000 of the Company’s shares of common stock at a price of $2.00 per share for total gross proceeds of $5,100,000 (the “Offering”). The shares were issued pursuant to the subscriptions as follows: 1,000,000 shares for $1,999,956 net cash proceeds were issued before September 30, 2007, and the balance of 1,550,000 shares for net cash proceeds of $3,099,944, were issued in October 2007. Pursuant to the terms of the Offering, the Company filed a registration statement on Form SB-2 with the Securities and Exchange Commission (the “Registration Statement”) before December 31, 2007 covering the resale of the common stock (the “Registerable Securities”) sold. The Company is further required to use its reasonable best efforts to maintain the Registration Statement effective for a period of (i) two years or (ii) until such time as all the Registerable Securities are eligible for sale under Rule 144 of the Securities Act of 1933, as amended. The securities were offered and sold by the Company to accredited investors in reliance on Section 506 of Regulation D of the Securities Act of 1933, as amended.
c) | Reserved |
2008
At the year end, the Company reserved 413,604 shares of common stock for future issuance and distribution in relation to the May 22, 2008 merger with Auctomatic. These shares were to be issued to the Auctomatic founders in three equal instalments on the next three anniversary dates of the merger contingent on their continued employment with the Company pursuant to the terms of the merger agreement. Subsequent to year end, one of the Auctomatic founders resigned from the Company. As a result, 137,868 shares reserved for distribution to this individual have been released subsequent to year end and are no longer payable. Pursuant to the release, the balance of reserved shares of common stock for future issuance and distribution is 275,736. See also Note 7 and Note 11d.
d) | Stock Options |
The Board of Directors and stockholders approved the 2007 Stock Incentive Plan and adopted it August 21, 2007 (the “Plan”). The Company has reserved 5,000,000 shares of its common stock for issuance to directors, employees and consultants under the Plan. The Plan is administered by the Board of Directors. Vesting terms of the options range from immediately to five years and no options will be exercisable for a period of more than ten years.
All stock options noted herein vest over three years and are exercisable for a period of five years based on the date of grant. The Company values the options granted to employees and directors using the Black Scholes option pricing model at the date of grant. The Company values the options to consultants at each reporting period under FAS 123(R) for non-employees using the Black Scholes option pricing model.
F-30
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 11 – COMMON STOCK (continued)
d) | Stock Options |
The assumptions used in the pricing model include:
2008 (As Restated) | 2007 (As Restated) | |
Dividend yield | 0% | 0% |
Expected volatility | 64.86%-75.68% | 118.02% |
Risk free interest rate | 1.62% - 3.07% | 3.97% - 4.05% |
Expected lives | 3.375 years | 3.375 years |
(i) | On September 11, 2007, the Company granted a total of 1,200,000 stock options at an exercise price of $2.50 per share. 1,000,000 options were granted to the Company’s CEO and 100,000 options were granted to each of two directors. These options have a fair value of $1.50-$1.54 per option granted. |
(ii) | On September 11, 2007, the Company granted 50,000 stock options at an exercise price of $2.50 per share to a consultant. These options have a fair value of $0.06 per option granted at December 31, 2008. |
(iii) | On October 1, 2007, the Company granted to its Chief Operating Officer (“COO”) 1,500,000 options at an exercise price of $2.04 per share. These options have a fair value of $1.23 per option granted. All of these options were forfeited subsequent to year end. |
(iv) | On January 1, 2008, the Company granted to its Chief Corporate Development Officer (“CCDO”) 1,000,000 options at an exercise price of $2.06 per share. These options have a fair value of $1.19 per option granted. |
(v) | On January 7, 2008, the Company granted to its Vice President, Finance (“VP Finance”) 150,000 options at an exercise price of $1.98 per share. These options have a fair value of $1.14 per option granted. |
(vi) | On March 14, 2008, the Company granted to a director 100,000 options at an exercise price of $2.49 per share. These options have a fair value of $1.32 per option granted. |
(vii) | On May 27, 2008, the Company granted to its Vice President, General Counsel (“VP GC”) 125,000 options at an exercise price of $3.10 per share. These options have a fair value of $1.63 per option granted. |
(viii) | Between January 1, 2008 and December 31, 2008, the Company granted to its full-time corporate directors a total of 425,000 options at a range of exercise prices between $2.06 and $3.30 per share. These options have a fair value of between $1.19 and $1.58 per option granted. 25,000 of these options were forfeited during 2008, and an additional 100,000 options were forfeited subsequent to year end. |
(ix) | Between January 1, 2008 and December 31, 2008, the Company granted to its full-time employees a total of 290,000 options at a range of exercise prices between $0.65 and $3.10 per share. These options have a fair value of between $0.32 and $1.58 per option granted. 17,500 of these options have been forfeited during 2008, and an additional 92,500 options were forfeited subsequent to year end. |
(x) | Between January 1, 2008 and December 31, 2008, the Company granted to consultants a total of 70,000 options at exercise prices ranging from $2.06 to $2.49 per share. All of these options were forfeited during 2008. |
F-31
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 11 – COMMON STOCK (continued)
d) | Stock Options (continued) |
The Company recognizes stock-based compensation expense over the requisite service period of the individual grants, which generally equals the vesting period. FAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Due to recent economic developments, the Company has experienced a high level of forfeitures during the fourth quarter of 2008 and subsequent to year end. The Company assesses forfeiture rates for each class of grantees; executive management and directors, corporate directors, and general staff members. Executive management and directors are relatively few in number and turnover is considered remote, therefore the Company estimates forfeitures for this class of grantees to be 10%. Corporate directors are high level senior staff members with a forfeiture rate of 25% and general staff members have a slightly higher forfeiture rate due to higher average turnover rates at 35%. Estimate of forfeitures is reviewed on an annual basis. Stock-based compensation is expensed on a straight-line basis over the requisite service period.
The fair value of these options at December 31, 2008 of $5,824,833 (2007 - $3,716,714) will be recognized on a straight-line basis over a vesting term of 3 years and accordingly an expense has been recognized in the year ended December 31, 2008 of $1,992,461 (2007 - $409,057) and included in management fees and employee salaries expense.
On May 22, 2008, the Company reserved 413,604 shares of common stock for future issuance and distribution in relation to the merger with Auctomatic. These shares were to be issued to the Auctomatic founders in three equal instalments on the next three anniversary dates of the merger contingent on their continued employment with the Company pursuant to the terms of the merger agreement. As these shares are contingent on future employment, they are considered contingent consideration and are required to be accounted for under FAS 123(R) as stock-based compensation. Subsequent to year end, 137,868 of these shares were forfeited. See also Note 7. All such shares have been valued using the Black Scholes option pricing model at the date of grant using a 3 year term and a 33% forfeiture rate. The Company assesses forfeiture rates for these shares consistent to its analysis of granted options. The Auctomatic founders are considered corporate directors, along with some other employees. The forfeiture rate of 33% among Auctomatic founders alone is consistent with a 25% forfeiture rate for the whole class of corporate directors.
The fair value of these shares at December 31, 2008 of $1,157,049 (2007 - $Nil) will be recognized on a straight-line basis over a vesting term of 3 years and accordingly, an expense has been recognized in the year ended December 31, 2008 of $170,065 (2007 - $Nil) and included in management fees and employee salaries expense.
A summary of the option activity under the 2007 Plan during 2007 and 2008 is presented below:
Options | Shares | Weighted Average Exercise Price $ | Fair Value $ | |||||||||
Options outstanding, January 1, 2007 | - | - | - | |||||||||
Granted | 2,750,000 | 2.25 | 0.06 – 1.54 | |||||||||
Exercised | - | - | - | |||||||||
Cancelled or expired | - | - | - | |||||||||
Options outstanding, December 31, 2007 | 2,750,000 | 2.25 | 0.06 – 1.54 | |||||||||
Granted | 2,160,000 | 2.34 | 0.32 – 1.63 | |||||||||
Exercised | - | - | - | |||||||||
Cancelled or expired | 112,500 | 2.29 | 1.19 | |||||||||
Options outstanding, December 31, 2008 | 4,797,500 | 2.29 | 0.06 – 1.63 | |||||||||
Options vested at December 31, 2008 | 2,750,000 | 2.25 | 0.06 – 1.63 | |||||||||
Weighted average remaining life | 3.90 Years |
F-32
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 11 – COMMON STOCK (continued)
e) | Common Stock Purchase Warrants |
2008
On May 1, 2008, the Company issued 50,000 common stock share purchase warrants with an exercise price of $2.33 to its investor relations firm in connection with a services agreement. The warrants expire May 1, 2010. The Company valued these options using the Black Scholes option pricing model using the following assumptions: no dividend yield; expected volatility rate of 69.27%; risk free interest rate of 2.37% and an expected life of 2 years resulting in a fair value of $0.91 per warrant granted, and a total fair value of $45,500.
In connection with the private placement in November 2008, the Company issued 1,627,344 warrants for the purchase of one-half share of the Company’s common stock with an exercise price of $0.78 expiring November 19, 2010 and 1,627,344 warrants for the purchase of one-half share of the Company’s common stock with an exercise price of $0.91 expiring November 19, 2011. The Company valued the warrants expiring November 19, 2010 using the Black Scholes option pricing model using the following assumptions: no dividend yield; expected volatility rate of 75.24%; risk free interest rate of 1.09% and an expected life of 1 year. This resulted in a fair value of $0.09 per warrant. The Company valued the warrants expiring November 19, 2011 also using the Black Scholes option pricing model using the following assumptions: no dividend yield; expected volatility rate of 70.53%, risk free interest rate of 1.36% and an expected life of 2 years. This resulted in a fair value of $0.10 per warrant. The total fair value of both warrants at November 19, 2008 and December 31, 2008 was $157,895. The warrants issued are contingently redeemable in cash in certain circumstances which may not all be within the Company’s control. As a result, the accounting treatment for the warrants falls under EITF 00-19, and their fair value of $157,895 is recorded as a liability. Any future changes to the fair value of the warrants will be adjusted to the statement of operations in the period in which the change in fair value occurs.
2007
On June 11, 2007, in connection with the issuance of 1,000,000 common shares to a company owned and controlled by the Company’s Chief Executive Officer (“CEO”), the Company also issued 1,000,000 common stock share purchase warrants with an exercise price of $1.25. The warrants expired June 10, 2009.
As of December 31, 2008, 4,304,688 warrants to purchase the Company’s common stock remain outstanding as follows:
Weighted | |||||||||
Outstanding | Average Exercise | Date of | |||||||
Warrants | Price | Expiry | |||||||
Warrants outstanding, January 1, 2007 | - | $ | - | ||||||
Granted June 11, 2007 | 1,000,000 | 1.25 | June 10, 2009 | ||||||
Cancelled or expired | - | - | |||||||
Warrants outstanding, December 31, 2007 | 1,000,000 | 1.25 | |||||||
Granted May 1, 2008 | 50,000 | 2.33 | May 1, 2010 | ||||||
Granted November 19, 2008 | 1,627,344 | 0.78 | November 19, 2010 | ||||||
Granted November 19, 2008 | 1,627,344 | 0.91 | November 19, 2011 | ||||||
Cancelled or expired | - | - | |||||||
Warrants exercisable December 31, 2008 | 4,304,688 | $ | 0.96 | ||||||
Weighted average remaining life | 1.92 Years |
F-33
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 12 – DOMAIN NAME LEASES AND SALES
On January 17, 2008, the Company entered into an agreement to lease one domain name to an unrelated third party for CDN$200,000. The terms of the agreement provide for the receipt of this amount in five irregular lease payments over a two-year term. The first payment of CDN$25,000 was due on January 17, 2008 (the “Effective Date”), CDN$45,000 was due 3 months after the Effective Date, CDN$80,000 was due 6 months after the Effective Date, CDN$25,000 is due 1 year after the Effective Date, and CDN$25,000 is due 2 years after the Effective Date. The Company will lease the domain name to the third party exclusively during the term of the agreement. Title and rights to the domain name will be transferred to the purchaser only when full payment is received at the end of the lease term. If the third party defaults on any payments, the agreement terminates, funds received to date are forfeited by the lessee, and rights to the domain name return to the Company. This transaction was recorded as a sales-type lease in 2008. The investment in a sales-type lease of $163,963 was recorded on the balance sheet on a net basis after the lease payments received to date. The gain of $168,206 was recorded at the present value of the lease payments over the term, net of the cost of the domain name, at an implicit rate of 6%. Payments have been collected to date according to the terms of the agreement.
On December 31, 2008, the Company entered into an agreement to sell one domain name to an unrelated third party for CDN$500,000. The terms of the agreement provided for the receipt of CDN$476,190 on December 31, 2008 and the balance of CDN$23,810 by March 31, 2009. The title of the domain name transferred to the buyer at December 31, 2008 and collection of the balance is reasonably assured, therefore the disposal and resulting gain of USD$293,215 was recorded on December 31, 2008.
There were no sales of domain names in the 2007 fiscal year.
NOTE 13 – OTHER EXPENSES
In 2008, the Company incurred various restructuring costs of $708,804. These included approximately $168,400 in severance payments to the former Chief Financial Officer (“CFO”), $25,700 in consulting fees to the former CFO to aid with transition of the new management team, $317,100 in signing bonuses to the new Chief Corporate Development Officer and the new Vice President Finance, additional severance of $53,600 paid to full time employees, $39,800 in costs related to changing the Company name and rebranding, $31,700 in valuation costs relating to the first quarter share issuance of DHI shares to the Company, $45,000 in financing costs relating to transactions with investment bankers that are no longer being pursued, and $27,300 in some final windup costs related to the FT disposition in late 2007.
In 2007, the Company incurred costs relating to restructuring, recruiting and relocating expenses associated with attracting the new management team totaling $637,730. Such costs included a $205,183 severance payment to the former Chief Executive Officer, $30,558 in consulting fees to the former Chief Executive Officer, a $205,183 signing bonus to the new President and Chief Operating Officer, $196,806 of general legal costs associated with the preparation of employment agreements, severance agreements and stock option agreements.
NOTE 14 – INCOME TAXES
The Company’s subsidiaries, DHI, Acadia, Importers, and 612793 are subject to federal and provincial taxes in Canada. The Company, its subsidiaries Delaware and FT (until the date of disposition of FT on November 12, 2007) are subject to United States federal and state taxes.
As at December 31, 2008, the Company and its US subsidiaries have net operating loss carryforwards of approximately $4,138,000 and capital loss carryforwards of $120,000 that result in deferred tax assets. The Company’s Canadian subsidiaries have non capital loss carryforwards of approximately $6,187,000 that result in deferred tax assets. These loss carryforwards will expire, if not utilized, through 2028. The Company’s subsidiary DHI also has approximately $896,300 in undepreciated capital costs relating to property and equipment that have not been amortized for tax purposes. The costs may be amortized in future years as necessary to reduce taxable income. Management believes that the realization of the benefits from these deferred tax assets is uncertain and accordingly, a full deferred tax asset valuation allowance has been provided and no deferred tax asset benefit has been recorded.
F-34
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 14 – INCOME TAXES (continued)
The Company’s actual income tax provisions differ from the expected amounts determined by applying the appropriate combined effective tax rate to the Company’s net income before taxes. The significant components of these differences are as follows:
2008 (As Restated) | 2007 (As Restated) | |||||||
Income (Loss) before income taxes | $ | (10,027,659 | ) | $ | (1,970,571 | ) | ||
Combined corporate tax rate | 35.0% | 34.1% | ||||||
Expected corporate tax recovery (expense) | 3,509,681 | 672,359 | ||||||
Effective foreign tax rate adjustment | (158,651 | ) | - | |||||
Increase (decrease) resulting from: | ||||||||
Non-taxable gain on disposal | - | 146,937 | ||||||
Effect of tax rate changes | (129,720 | ) | (195,193 | ) | ||||
Reduction in future tax benefits related to Auctomatic | (219,980 | ) | - | |||||
Reduction in future tax benefits related to intangible assets | (91,309 | ) | - | |||||
Non-taxable portion of domain name sales | 143,041 | - | ||||||
Stock based compensation | (701,983 | ) | (139,570 | ) | ||||
Non-deductible items and other | (176,776 | ) | 7,735 | |||||
Exchange adjustment to foreign denominated future tax assets | (71,806 | ) | 199,870 | |||||
Change in valuation allowance due to disposal of subsidiary | - | (271,460 | ) | |||||
Change in valuation allowance | (2,102,497 | ) | (420,678 | ) | ||||
Provision for income taxes | $ | - | $ | - |
The tax effects of temporary differences that give rise to significant components of future income tax assets and liabilities are as follows:
2008 (As Restated) | 2007 (As Restated) | |||||||
Deferred income tax assets: | ||||||||
Operating losses available for future periods | $ | 3,056,863 | $ | 752,303 | ||||
Property and equipment in excess of net book value | - | 477,792 | ||||||
Other differences | 24,134 | - | ||||||
3,080,997 | 1,230,095 | |||||||
Deferred income tax liabilities | ||||||||
Property and equipment in excess of net book value | (28,325 | ) | - | |||||
Indefinite life intangible assets | (206,370 | ) | (246,759 | ) | ||||
Other differences | - | (279,920 | ) | |||||
2,846,302 | 703,416 | |||||||
Valuation allowance | (3,052,672 | ) | (950,175 | ) | ||||
Net deferred income tax liability | $ | (206,370 | ) | $ | (246,759 | ) |
The Company has a deferred tax liability related to potential taxes owing on potential gains on disposal of its domain name intangible assets. GAAP does not permit taxable temporary differences associated with indefinite life intangible assets to be considered as evidence to otherwise reduce a valuation allowance associated with deductible timing differences in the same entity. The Company has recorded a related deferred tax liability and recovery in its consolidated financial statements at December 31, 2008 and December 31, 2007.
F-35
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 15 – SEGMENTED INFORMATION
The Company’s eCommerce operations have historically been conducted in three business segments, Domain Advertising, eCommerce Products, and eCommerce Services. The business segment of eCommerce services ended upon the termination of the Company’s relationship with FT on November 12, 2007.
During 2008, the Company began offering international shipping on its Perfume.com website. The operations from Perfume.com are included as the eCommerce Products business segment. The sales generated from regions other than North America have been immaterial during the year, and therefore no geographic segment reporting is required for 2008.
Revenues, operating profits and net identifiable assets by business segments are as follows:
For the year ended December 31, 2008 (as restated) | ||||||||||||||||
Advertising | eCommerce | eCommerce | Total | |||||||||||||
& Other | Products | Services | ||||||||||||||
$ | $ | $ | $ | |||||||||||||
Revenue | 93,140 | 9,271,693 | - | 9,364,833 | ||||||||||||
Segment Loss | (4,314,433 | ) | (5,221,108 | ) | - | (9,535,541 | ) | |||||||||
As at December 31, 2008 | $ | $ | $ | $ | ||||||||||||
Total Assets | 1,665,723 | 6,082,595 | - | 7,748,318 | ||||||||||||
Intangible Assets | 1,398,417 | 189,046 | - | 1,587,463 | ||||||||||||
For the year ended December 31, 2007 (as restated) | ||||||||||||||||
Advertising | eCommerce | eCommerce | Total | |||||||||||||
& Other | Products | Services | ||||||||||||||
$ | $ | $ | $ | |||||||||||||
Revenue | 449,613 | 8,097,315 | 480,591 | 9,027,519 | ||||||||||||
Segment Loss | (644,647 | ) | (1,644,685 | ) | (169,508 | ) | (2,458,840 | ) | ||||||||
As at December 31, 2007 | $ | $ | $ | $ | $ | |||||||||||
Total Assets | 1,384,718 | 8,196,489 | - | 9,581,207 | ||||||||||||
Intangible Assets | 1,384,718 | 260,343 | - | 1,645,061 |
The reconciliation of the segment profit to net loss before taxes as reported in the consolidated financial statements is as follows:
2008 | 2007 | |||||||
(As Restated) | (As Restated) | |||||||
Segment Loss | $ | (9,535,541 | ) | $ | (2,458,840 | ) | ||
Non-Operating (Income) and Expenses | ||||||||
Global Cricket Venture payments | (1,000,000 | ) | ||||||
Gains from sales and sales-type lease of domain names | 461,421 | - | ||||||
Accretion expense | (96,700 | ) | - | |||||
Interest and investment income | 67,683 | 119,574 | ||||||
Non-controlling interest | 75,478 | 91,890 | ||||||
Gain on Disposal of Investment of FrequentTraveler.com Inc. | 276,805 | |||||||
Net loss and comprehensive loss before taxes for the year | $ | (10,027,659 | ) | $ | (1,970,571 | ) |
Substantially all property and equipment and intangible assets are located in Canada.
F-36
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 16 – COMMITMENTS
Premise Lease
Effective October 1, 2007 the Company leased its office in Vancouver, Canada from an unrelated party for a 5-year period from October 1, 2007 to September 30, 2012. Pursuant to the terms of the lease agreement, the Company is committed to basic rent payments expiring September 30, 2012 as follows.
CDN $ | |
2009 | 116,188 |
2010 | 121,531 |
2011 | 126,873 |
2012 | 98,159 |
The Company will also be responsible for common costs currently estimated to be equal to approximately 75% of basic rent.
Cricket Venture
The MOU with the BCCI and the IPL requires the Company to pay both the BCCI and the IPL minimum payments over the next ten years, beginning on October 1, 2008. See also Note 6. Pursuant to the terms of the MOU, the future minimum payments are listed in the table below.
BCCI USD$ | IPL USD$ | TOTAL USD $ | |
2009 | 2,625,000 | 1,625,000 | 4,275,000 |
2010 | 3,000,000 | 2,000,000 | 5,000,000 |
2011 | 3,750,000 | 2,500,000 | 6,250,000 |
2012 | 3,000,000 | 2,000,000 | 5,000,000 |
2013 | 3,000,000 | 2,000,000 | 5,000,000 |
2014 | 3,000,000 | 2,000,000 | 5,000,000 |
2015 | 3,000,000 | 2,000,000 | 5,000,000 |
2016 | 3,000,000 | 2,000,000 | 5,000,000 |
2017 | 3,250,000 | 2,250,000 | 5,500,000 |
2018 | 1,750,000 | 1,250,000 | 3,000,000 |
On or about October 1, 2008, the Company was scheduled to make payments to the BCCI and the IPL in the amounts of $625,000 and $375,000, respectively, in connection with Global Cricket Venture. The payments owed to the BCCI were renegotiated, although a formal amendment to the MOU had not been signed at December 31, 2008. The parties agreed that the October 1, 2008 payment would be decreased by $500,000, to $125,000, and that the payment of $750,000 that was due to be made on October 1, 2009 would be eliminated entirely. The amounts due to the IPL were not changed. Given that these renegotiated amounts had not yet been memorialized in writing, on October 1, 2008 the Company accrued and expensed the initial amounts owing to the BCCI of $625,000 and to the IPL of $375,000.
The commitment schedule above reflects the original commitments according to the MOUs, not including any of the parties’ renegotiations. Such payments may be subject to certain withholding or other taxes which the Company may be required to gross up pursuant to the terms of the MOU. These terms were further renegotiated in March 2009. In August 2009, an unrelated third party agreed to assume and be liable for all past and future obligations and liabilities of GCV. See Note 19.
F-37
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 17 – CONTINGENCY
A former Chief Executive Officer of DHI commenced a legal action against DHI on March 9, 2000 for wrongful dismissal and breach of contract. He is seeking, at a minimum, 18.39% of the outstanding shares of DHI, specific performance of his contract, special damages in an approximate amount of $30,000, aggravated and punitive damages, interest and costs. On June 1, 2000, DHI filed a Defense and Counterclaim against this individual claiming damages and special damages for breach of fiduciary duty and breach of his employment contract. The outcome of these legal actions is currently not determinable and as such the amount of loss, if any, resulting from this litigation is presently not determinable. To date, there has been no further action taken by the plaintiff since the filing of the initial legal action on March 9, 2000.
NOTE 18 – RELATED PARTY TRANSACTIONS
The Company issued shares of common stock to related parties pursuant to private placements in 2007 and 2008 as follows:
2008
On November 19, 2008, the Company closed a private placement financing in which Mr. Hampson invested $126,750. Mr. Hampson received 195,000 restricted shares of common stock, two-year warrants to purchase 97,500 common shares at an exercise price of $0.78, and three-year warrants to purchase 97,500 common shares at an exercise price of $0.91.
On November 19, 2008, the Company closed a private placement financing in which Jonathan Ehrlich, its then President and Chief Operating Officer, invested $25,000. Mr. Ehrlich received 38,461 restricted shares of common stock, two-year warrants to purchase 19,230 common shares at an exercise price of $0.78, and three-year warrants to purchase 19,230 common shares at an exercise price of $0.91.
On November 19, 2008, the Company closed a private placement financing in which Mark Melville, its Chief Corporate Development Officer, invested $35,000. Mr. Melville received 53,846 restricted shares of common stock, two-year warrants to purchase 26,923 common shares at an exercise price of $0.78, and three-year warrants to purchase 26,923 common shares at an exercise price of $0.91.
2007
On September 24, 2007, the Company closed a $5,100,000 private placement financing in which Mr. Hampson invested $110,000. Mr. Hampson received 55,000 restricted shares of the Company’s common stock.
On June 11, 2007, the Board of Directors of Live Current issued 1,000,000 shares of common stock and warrants to purchase up to 1,000,000 additional shares of restricted common stock at the price of $1.25 effective until June 10, 2009 to Hampson Equities Ltd., a company owned and controlled by C. Geoffrey Hampson, the Company’s Chief Executive Officer, pursuant to a subscription agreement dated June 1, 2007. The amount of the subscription was $1,000,000.
The Company has not entered into any other significant related party transactions with individuals or companies either owned or subject to significant influence by management, directors, and principal shareholders.
F-38
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 19 – SUBSEQUENT EVENTS
Global Cricket Venture
On March 31, 2009, the Company, its recently formed subsidiary GCV, the BCCI and the IPL amended the MOUs. The Company and the BCCI jointly entered into a Termination Agreement, pursuant to which the BCCI Memorandum was terminated. The Company, Global Cricket Venture and the BCCI, on behalf of the IPL, entered into a Novation Agreement with respect to the IPL Memorandum. Under the Novation Agreement, the $1 million owing at December 31, 2008 was reduced to $500,000. The responsibility for this payment and the benefits associated with the MOU formerly held by the Company were transferred to GCV.
In August 2009, GCV transferred and assigned to an unrelated third party (“CricketCo”) all of its rights, title, and interest in and to the original MOU with the IPL, as the original MOU was amended by the Novation Agreement that was signed on March 31, 2009. Pursuant to this agreement, CricketCo also agreed to assume and be liable for all past and future obligations and liabilities of GCV arising from the original MOU, as it was amended by the Novation. The Company has also agreed to sell the domain name cricket.com to a company related to CricketCo whereby the Company will sell the cricket.com domain name, along with the website, content, copyrights, trademarks, etc., for consideration of four equal payments of $250,000. The cricket.com domain name shall remain the property of the Company until all payments have been made. The Company cannot determine the financial impact of this transaction at this time.
Auctomatic
In August 2009, the Company reached an agreement with twelve of the eighteen Auctomatic shareholders to convert $424,934 of the $800,000 payable into a convertible interest bearing note with a one year term. The payment due date is May 22, 2010.
Also in August 2009, the Company reached an agreement with the remaining two founders of Auctomatic which terminates their employment. Under their severance agreements, the Company will repay the amounts owed under the Merger Agreement at a 10% discount to face value, and will record an additional $60,000 in severance costs due to them under their employment agreements. In consideration of these payments, these individuals have each agreed to forfeit their rights to 91,912 shares of Live Current common stock that were due to be issued to each of them in May 2010 and May 2011 under the Merger Agreement.
The Company no longer has any intention of using the software as a platform for the development of any of its domain names. It has now adapted a different platform for Perfume.com, and will use platforms developed by the Company’s partners for Karate.com and likely any future partnerships. The Company believes that any resale value of the software without the individuals who built it is minimal. In Q1 of 2009, one founder of Auctomatic left the Company, and subsequent to Q2 of 2009, the other two founders of Auctomatic were terminated. The auction software that was acquired pursuant to the Merger Agreement was developed by these three founders. As all founders of Auctomatic are no longer employed, the Company no longer has any individuals who can understand or modify the technology. As a result, the Company believes that the auction software is impaired and will write off its net book value of $590,973 at the end of the second quarter of 2009.
Employment Severance Agreement
Pursuant to the terms and conditions of an employment severance agreement dated February 4, 2009 (the “COO Severance Agreement”) between the Company and its former President and Chief Operating Officer (“COO”), the COO resigned as the Company’s President and Chief Operating Officer and as an officer of the Company’s subsidiaries effective January 31, 2009. The Company has agreed to pay the COO CDN$600,000, which consists of a severance allowance in the amount of CDN$298,000 and an accrued special bonus in the amount of CDN$250,000, less any and all applicable government withholdings and deductions, as well as other benefits in the amount of CDN$52,000. The severance allowance and other benefits will be paid over a period of 12 months. The accrued special bonus was expensed in 2008 when it became due and is included in bonuses payable at the year end. The other benefits were owing to the COO before his resignation. The payment of the net amount of the accrued special bonus is to be converted to equity and paid in restricted shares of the Company’s common stock over a period of 12 months. The number of shares of common stock to be issued for each payment will be computed using the closing price of the common stock on the 15th day of each month or, in the event that the 15th day is not a trading day, on the trading day immediately before the 15th day of the month. The Company has expensed the severance allowance in the first quarter of 2009.
F-39
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 19 – SUBSEQUENT EVENTS (continued)
Employment Severance Agreement (continued)
In June 2009, the Company and the COO renegotiated the payment terms of the amounts under the COO Severance Agreement. As of September 1, 2009, the remaining severance allowance and additional benefits to be paid shall be paid in equal semi-monthly instalments over a remaining period of ten months instead of five months, and therefore will continue through June 30, 2010. In addition, the COO deferred the net monthly equity payments that the Company was obligated to pay him during the 2009 calendar year to December 31, 2009.
Stock Issuances
On January 2, 2009, the Company issued 15,000 shares to the investor relations firm that was engaged to provide investor relations services to the Company. This was the Company’s final share issuance to this investor relations firm. The agreement has been terminated.
On January 8, 2009, the Company entered into an agreement whereby $120,776 of its accounts payable were extinguished in exchange for the issuance of 345,075 shares of its common stock. As a result of this agreement, 172,538 shares were issued on January 22, 2009 and 172,537 shares were issued on February 20, 2009.
On April 9, 2009, the Company entered into an agreement whereby $8,625 of its accounts payable were extinguished in exchange for the issuance of 27,823 shares of its common stock, which were issued on April 14, 2009.
On June 17, 2009, the Company issued 45,956 shares of its common stock to each of the two Auctomatic founders remaining employed with the Company as required under the Merger Agreement (Note 7), for a total of 91,912 shares.
Stock Option Plan
In January 2009, 1,692,500 stock options were forfeited.
On March 25, 2009, a total of 115,000 stock options were granted to five of its full-time employees at an exercise price of $0.30 per share.
On March 25, 2009, the Company’s Board of Directors reduced the exercise price of all outstanding stock options granted pursuant to the Live Current Media Inc. Stock Incentive Plan to $0.65. These options are held by its officers, directors, employees, consultants and agents. The incremental value of $213,895 relating to the fair values at the date of the reduction in price has been included in the period expense during the first quarter of 2009.
In April and May 2009, a total of 10,000 stock options were granted to two of the Company’s full-time employees at exercise prices between $0.30 and $0.35.
On September 1, a total of 75,000 stock options were granted to two of its corporate directors at an exercise price of $0.22 per share.
F-40
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 19 – SUBSEQUENT EVENTS (continued)
Sales of Domain Names
In February 2009, the Company sold a domain name for $1.25 million, to be paid in irregular instalments between February 2009 and February 2010. Due to the uncertainty regarding the collectibility of the funds in the future, amounts received were recorded as a gain on sale of a domain name. This agreement was breached by the buyer in May 2009, and the buyer forfeited a total of $355,000 that had already been paid to the Company in February, March, April and May 2009. Under the terms of the agreement, the Company retained the receipted payments and ownership of the domain name. The Company retained the rights to renegotiate payment terms with the original buyer or enter into a new arrangement with a new buyer. In August 2009, the Company sold this domain name for net proceeds of $990,000 to an unrelated buyer, the payment of which was received in full upon execution of the agreement. See Note 12.
In February 2009, the Company sold a domain name for net $360,000, to be paid in one full instalment.
In April 2009, the Company sold a domain name for net proceeds of $360,000, which was paid in full upon execution of the agreement.
In July 2009, the Company sold three domain names for net proceeds of $652,500, the payments of which were received in full shortly after execution of the agreements.
In August 2009, the Company sold the domain name www.cricket.com as disclosed above.
NOTE 20 – COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the basis of presentation adopted in the current period.
F-41
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 21 – RESTATED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables illustrate selected unaudited consolidated statement of operations data for each restated quarter of fiscal 2008 as described in Note 2.
March 31, 2008 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||
ASSETS | |||||||||||||
Current | |||||||||||||
Cash and cash equivalents | $ | 4,905,745 | $ | - | $ | 4,905,745 | |||||||
Accounts receivable (net of allowance for doubtful accounts of nil) | 142,220 | - | 142,220 | ||||||||||
Prepaid expenses and deposits | 165,062 | - | 165,062 | ||||||||||
Current portion of receivable from sales-type lease | 140,540 | - | 140,540 | ||||||||||
Total current assets | 5,353,567 | - | 5,353,567 | ||||||||||
Long-term portion of receivable from sales-type lease | 23,423 | - | 23,423 | ||||||||||
Deferred acquisition costs | 121,265 | - | 121,265 | ||||||||||
Property & equipment | 314,600 | - | 314,600 | ||||||||||
Website development costs | 147,025 | - | 147,025 | ||||||||||
Intangible assets | 1,625,881 | - | 1,625,881 | ||||||||||
Goodwill | (i) | - | 66,692 | 66,692 | |||||||||
Total Assets | $ | 7,585,761 | $ | 66,692 | $ | 7,652,453 | |||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||
Current | |||||||||||||
Accounts payable and accrued liabilities | $ | 1,311,817 | $ | - | $ | 1,311,817 | |||||||
Bonuses payable | (ii), (iii) | - | 215,025 | 215,025 | |||||||||
Deferred revenue | 19,644 | - | 19,644 | ||||||||||
Current portion of deferred lease inducements | 20,138 | - | 20,138 | ||||||||||
Total current liabilities | 1,351,599 | 215,025 | 1,566,624 | ||||||||||
Non-controlling interest | (i) | - | 23,972 | 23,972 | |||||||||
Deferred income tax | (v) | - | 246,759 | 246,759 | |||||||||
Deferred lease inducements | 70,483 | - | 70,483 | ||||||||||
Total Liabilities | 1,422,082 | 485,756 | 1,907,838 | ||||||||||
STOCKHOLDERS' EQUITY | |||||||||||||
Common Stock | 12,456 | - | 12,456 | ||||||||||
Additional paid-in capital | (iv) | 10,671,119 | (57,394 | ) | 10,613,725 | ||||||||
Accumulated deficit | (i) to (vi) | (4,519,896 | ) | (361,670 | ) | (4,881,566 | ) | ||||||
Total Stockholders' Equity | 6,163,679 | (419,064 | ) | 5,744,615 | |||||||||
Total Liabilities and Stockholders' Equity | $ | 7,585,761 | $ | 66,692 | $ | 7,652,453 |
F-42
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 21 – RESTATED QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)
For the quarter ended March 31, 2008 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||
SALES | $ | 1,848,479 | $ | - | $ | 1,848,479 | |||||||
COSTS OF SALES (excluding depreciation and amortization as shown below) | 1,486,062 | - | 1,486,062 | ||||||||||
GROSS PROFIT | 362,417 | - | 362,417 | ||||||||||
OPERATING EXPENSES | |||||||||||||
Amortization and depreciation | 15,266 | - | 15,266 | ||||||||||
Corporate general and administrative | (vi) | 486,087 | 63,750 | 549,837 | |||||||||
ECommerce general and administrative | 169,813 | - | 169,813 | ||||||||||
Management fees and employee salaries | (ii), (iii), (iv) | 1,090,671 | 85,179 | 1,175,850 | |||||||||
Corporate marketing | 26,459 | - | 26,459 | ||||||||||
ECommerce marketing | 149,187 | - | 149,187 | ||||||||||
Other expenses | 629,856 | - | 629,856 | ||||||||||
Total Operating Expenses | 2,567,339 | 148,929 | 2,716,268 | ||||||||||
NON-OPERATING INCOME (EXPENSES) | |||||||||||||
Gain from sales and sales-type lease of domain names | 168,206 | - | 168,206 | ||||||||||
Interest and investment income | 42,498 | - | 42,498 | ||||||||||
Non-controlling interest | (i) | - | 51,506 | 51,506 | |||||||||
Total Non-Operating Income (Expenses) | 210,704 | 51,506 | 262,210 | ||||||||||
NET LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD | $ | (1,994,218 | ) | $ | (97,423 | ) | $ | (2,091,641 | ) | ||||
BASIC AND DILUTED LOSS PER SHARE | $ | (0.10 | ) | (0.00 | ) | $ | (0.10 | ) | |||||
WEIGHTED AVERAGE NUMBER OF COMMON | |||||||||||||
SHARES OUTSTANDING - BASIC AND DILUTED | 19,970,334 | - | 19,970,334 |
(i) | The Company recorded goodwill of $66,692 in relation to the debt conversion between a subsidiary, Domain Holdings Inc., and the parent company, Live Current Media Inc. as disclosed in Note 5. There was an increase to the non-controlling interest during the quarter of $15,186 and a credit to the non-controlling interest included in Other Income and Expenses of $51,506. The carry forward effect of the non-controlling interest from December 31, 2007 was an increase of $8,786. |
(ii) | The Company recorded as an additional liability and compensation expense $35,315 for bonuses of CDN $100,000 each that are to be paid to its President and Chief Corporate Development Officer on January 1, 2009 and on January 1, 2010. |
(iii) | The Company recorded as an additional liability and compensation expense $88,287 for bonuses of CDN $250,000 each that were to be paid to its former President on October 1, 2008 and on October 1, 2009. The carry forward effect to these bonuses payable (current liabilities) from December 31, 2007 amounted to $91,423. |
F-43
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 21 – RESTATED QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)
(iv) | The Company revised its estimate relating to the estimated life of its granted stock options. The revised estimated life of 3.375 years resulted in a decrease to its stock based compensation expense of $38,423 and a corresponding decrease to Additional paid-in capital. There was also a corresponding carry forward effect to Additional paid-in capital from December 31, 2007 resulting in a decrease of $18,971. |
(v) | The Company accrued and expensed deferred taxes relating to an estimated potential future tax liability on future gains on sales of its domain name intangible assets. The carry forward effect from December 31, 2007 to liabilities was an increase of $246,759, with a corresponding increase in Opening Accumulated Deficit. |
(vi) | The Company recorded additional Corporate General and Administrative expenses of $63,750 during the quarter for the accrual of audit fees that were reversed from the accounts for the year ended December 31, 2007 and recorded in the first quarter of 2008. |
F-44
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 21 – RESTATED QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)
June 30, 2008 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||
ASSETS | |||||||||||||
Current | |||||||||||||
Cash and cash equivalents | $ | 1,897,940 | $ | - | $ | 1,897,940 | |||||||
Accounts receivable (net of allowance for doubtful accounts of nil) | 131,898 | - | 131,898 | ||||||||||
AR from GCV | 733,539 | - | 733,539 | ||||||||||
Prepaid expenses and deposits | 310,726 | - | 310,726 | ||||||||||
Current portion of receivable from sales-type lease | 98,378 | - | 98,378 | ||||||||||
Total current assets | 3,172,481 | - | 3,172,481 | ||||||||||
Long-term portion of receivable from sales-type lease | 23,423 | - | 23,423 | ||||||||||
Property & equipment | 1,225,440 | - | 1,225,440 | ||||||||||
Website development costs | 276,030 | - | 276,030 | ||||||||||
Intangible assets | 1,625,881 | - | 1,625,881 | ||||||||||
Goodwill | (i), (ii), (iii) | 2,417,296 | 177,438 | 2,594,734 | |||||||||
Total Assets | $ | 8,740,551 | $ | 177,438 | $ | 8,917,989 | |||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||
Current | |||||||||||||
Accounts payable and accrued liabilities | $ | 1,518,222 | $ | - | $ | 1,518,222 | |||||||
Bonuses payable | (i), (ii), (v), (vi) | 333,442 | 340,276 | 673,718 | |||||||||
Due to shareholders of Auctomatic | 781,117 | - | 781,117 | ||||||||||
Deferred revenue | 15,787 | - | 15,787 | ||||||||||
Current portion of deferred lease inducements | 20,138 | - | 20,138 | ||||||||||
Total current liabilities | 2,668,706 | 340,276 | 3,008,982 | ||||||||||
Non-controlling interest | - | - | - | ||||||||||
Deferred income tax | (i) | - | 246,759 | 246,759 | |||||||||
Deferred lease inducements | 65,449 | - | 65,449 | ||||||||||
Total Liabilities | 2,734,155 | 587,035 | 3,321,190 | ||||||||||
STOCKHOLDERS' EQUITY | |||||||||||||
Common Stock | 13,087 | - | 13,087 | ||||||||||
Additional paid-in capital | (i), (iii), (iv), (vii) | 12,483,794 | 52,765 | 12,536,559 | |||||||||
Accumulated deficit | (i) to (vii) | (6,490,485 | ) | (462,362 | ) | (6,952,847 | ) | ||||||
Total Stockholders' Equity | 6,006,396 | (409,597 | ) | 5,596,799 | |||||||||
Total Liabilities and Stockholders' Equity | $ | 8,740,551 | $ | 177,438 | $ | 8,917,989 |
F-45
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 21 – RESTATED QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)
For the quarter ended June 30, 2008 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||
SALES | $ | 1,935,454 | $ | - | $ | 1,935,454 | |||||||
COSTS OF SALES (excluding depreciation and amortization as shown below) | 1,578,886 | - | 1,578,886 | ||||||||||
GROSS PROFIT | 356,568 | - | 356,568 | ||||||||||
OPERATING EXPENSES | |||||||||||||
Amortization and depreciation | 43,888 | - | 43,888 | ||||||||||
Corporate general and administrative | 591,169 | - | 591,169 | ||||||||||
ECommerce general and administrative | 100,495 | - | 100,495 | ||||||||||
Management fees and employee salaries | (iv), (v), (vi), (vii) | 1,479,782 | 124,664 | 1,604,446 | |||||||||
Corporate marketing | 20,243 | - | 20,243 | ||||||||||
ECommerce marketing | 129,885 | - | 129,885 | ||||||||||
Other expenses | 33,691 | - | 33,691 | ||||||||||
Total Operating Expenses | 2,399,153 | 124,664 | 2,523,817 | ||||||||||
NON-OPERATING INCOME (EXPENSES) | |||||||||||||
Interest and investment income | 16,680 | - | 16,680 | ||||||||||
Non-controlling interest | (i), (ii) | - | 23,972 | 23,972 | |||||||||
Total Non-Operating Income (Expenses) | 16,680 | 23,972 | 40,652 | ||||||||||
NET LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD | $ | (2,025,905 | ) | $ | (100,692 | ) | $ | (2,126,597 | ) | ||||
BASIC AND DILUTED LOSS PER SHARE | $ | (0.10 | ) | (0.00 | ) | $ | (0.10 | ) | |||||
WEIGHTED AVERAGE NUMBER OF COMMON | |||||||||||||
SHARES OUTSTANDING - BASIC AND DILUTED | 20,832,026 | - | 20,832,026 |
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 21 – RESTATED QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)
For the six months ended June 30, 2008 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||
SALES | $ | 3,783,933 | $ | - | $ | 3,783,933 | |||||||
COSTS OF SALES (excluding depreciation and amortization as shown below) | 3,064,948 | - | 3,064,948 | ||||||||||
GROSS PROFIT | 718,985 | - | 718,985 | ||||||||||
OPERATING EXPENSES | |||||||||||||
Amortization and depreciation | 59,154 | - | 59,154 | ||||||||||
Corporate general and administrative | (i) | 1,039,065 | 63,750 | 1,102,815 | |||||||||
ECommerce general and administrative | 270,308 | - | 270,308 | ||||||||||
Management fees and employee salaries | (iv), (v), (vi), (vii) | 2,553,328 | 209,843 | 2,763,171 | |||||||||
Corporate marketing | 46,702 | - | 46,702 | ||||||||||
ECommerce marketing | 279,072 | - | 279,072 | ||||||||||
Other expenses | 663,547 | - | 663,547 | ||||||||||
Total Operating Expenses | 4,911,176 | 273,593 | 5,184,769 | ||||||||||
NON-OPERATING INCOME (EXPENSES) | |||||||||||||
Gain from sales and sales-type lease of domain names | 168,206 | - | 168,206 | ||||||||||
Interest and investment income | 59,178 | - | 59,178 | ||||||||||
Non-controlling interest | (i), (ii) | - | 75,478 | 75,478 | |||||||||
Total Non-Operating Income (Expenses) | 227,384 | 75,478 | 302,862 | ||||||||||
NET LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD | $ | (3,964,807 | ) | $ | (198,115 | ) | $ | (4,162,922 | ) | ||||
BASIC AND DILUTED LOSS PER SHARE | $ | (0.19 | ) | (0.01 | ) | $ | (0.20 | ) | |||||
WEIGHTED AVERAGE NUMBER OF COMMON | |||||||||||||
SHARES OUTSTANDING - BASIC AND DILUTED | 20,832,026 | - | 20,832,026 |
(i) | Refer to carry forward effects of the prior quarter. |
(ii) | The Company recorded goodwill of $66,692 in relation to the debt conversion between a subsidiary, Domain Holdings Inc., and the parent company, Live Current Media Inc., as disclosed in Note 5. There was a decrease to the non-controlling interest during the quarter of $8,786 resulting in a balance at quarter end of the non-controlling interest of NIL. There was also a credit to the non-controlling interest included in Other Income and Expenses in the quarter of $23,972. |
(iii) | Related to the acquisition of Auctomatic, the Company adjusted its purchase price allocation to reflect an additional $110,746 of goodwill acquired in the acquisition. The corresponding increase was recorded to Additional paid-in capital. |
(iv) | Also related to the acquisition of Auctomatic, the Company recorded as an expense the portion of the fair value of 413,604 shares of its common stock which were to be issued to the founders of Entity Inc. (“Auctomatic”) based on the period of service these founders provided to the Company, computed in relation to the period of service required for the founders to become entitled to the shares under FAS 123(R). The related stock based compensation expense in the June 30, 2008 quarter is $45,326, and the corresponding amount increased Additional paid-in capital during the quarter. |
F-46
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 21 – RESTATED QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)
(v) | The Company recorded as an additional liability and compensation expense $35,786 for bonuses of CDN $100,000 each that are to be paid to its President and Chief Corporate Development Officer on January 1, 2009 and on January 1, 2010. |
(vi) | The Company recorded as an additional liability and compensation expense $89,465 for bonuses of CDN $250,000 each that were to be paid to its former President on October 1, 2008 and on October 1, 2009. |
(vii) | The Company revised its estimate relating to the estimated life of its granted stock options. The revised estimated life of 3.375 years resulted in a decrease to its stock based compensation expense of $45,913 and a corresponding decrease to Additional paid-in capital. |
September 30, 2008 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||
ASSETS | |||||||||||||
Current | |||||||||||||
Cash and cash equivalents | $ | 802,744 | $ | - | $ | 802,744 | |||||||
Accounts receivable (net of allowance for doubtful accounts of nil) | 67,577 | - | 67,577 | ||||||||||
Prepaid expenses and deposits | 101,042 | - | 101,042 | ||||||||||
Current portion of receivable from sales-type lease | 23,423 | - | 23,423 | ||||||||||
Total current assets | 994,786 | - | 994,786 | ||||||||||
Long-term portion of receivable from sales-type lease | 23,423 | - | 23,423 | ||||||||||
Deferred financing costs | 106,055 | - | 106,055 | ||||||||||
Deferred acquisition costs | 320,264 | - | 320,264 | ||||||||||
Property & equipment | 1,135,130 | - | 1,135,130 | ||||||||||
Website development costs | 351,199 | - | 351,199 | ||||||||||
Intangible assets | 1,625,881 | - | 1,625,881 | ||||||||||
Goodwill | (i) | 2,428,602 | 177,438 | 2,606,040 | |||||||||
Total Assets | $ | 6,985,340 | $ | 177,438 | $ | 7,162,778 | |||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||
Current | |||||||||||||
Accounts payable and accrued liabilities | $ | 2,004,416 | $ | - | $ | 2,004,416 | |||||||
Bonuses payable | (i), (iii), (iv) | 489,960 | 449,096 | 939,056 | |||||||||
Due to shareholders of Auctomatic | 749,699 | - | 749,699 | ||||||||||
Deferred revenue | 12,371 | - | 12,371 | ||||||||||
Current portion of deferred lease inducements | 20,138 | - | 20,138 | ||||||||||
Total current liabilities | 3,276,584 | 449,096 | 3,725,680 | ||||||||||
Deferred income tax | (i) | - | 246,759 | 246,759 | |||||||||
Deferred lease inducements | 60,414 | - | 60,414 | ||||||||||
Total Liabilities | 3,336,998 | 695,855 | 4,032,853 | ||||||||||
STOCKHOLDERS' EQUITY | |||||||||||||
Common Stock | 13,150 | - | 13,150 | ||||||||||
Additional paid-in capital | (i), (ii), (v) | 13,175,885 | 150,502 | 13,326,387 | |||||||||
Accumulated deficit | (i) to (v) | (9,540,693 | ) | (668,919 | ) | (10,209,612 | ) | ||||||
Total Stockholders' Equity | 3,648,342 | (518,417 | ) | 3,129,925 | |||||||||
Total Liabilities and Stockholders' Equity | $ | 6,985,340 | $ | 177,438 | $ | 7,162,778 |
F-47
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 21 – RESTATED QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)
For the quarter ended September 30, 2008 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||
SALES | $ | 1,954,684 | $ | - | $ | 1,954,684 | |||||||
COSTS OF SALES (excluding depreciation and amortization as shown below) | 1,602,249 | - | 1,602,249 | ||||||||||
GROSS PROFIT | 352,435 | - | 352,435 | ||||||||||
OPERATING EXPENSES | |||||||||||||
Amortization and depreciation | 96,707 | - | 96,707 | ||||||||||
Amortization of website development costs | 29,143 | - | 29,143 | ||||||||||
Corporate general and administrative | 1,014,145 | - | 1,014,145 | ||||||||||
ECommerce general and administrative | 114,973 | - | 114,973 | ||||||||||
Management fees and employee salaries | (ii), (iii), (iv), (v) | 1,964,479 | 206,557 | 2,171,036 | |||||||||
Corporate marketing | 14,449 | - | 14,449 | ||||||||||
ECommerce marketing | 99,412 | - | 99,412 | ||||||||||
Other expenses | 20,000 | - | 20,000 | ||||||||||
Total Operating Expenses | 3,353,308 | 206,557 | 3,559,865 | ||||||||||
NON-OPERATING INCOME (EXPENSES) | |||||||||||||
Accretion interest expense | (56,600 | ) | - | (56,600 | ) | ||||||||
Interest and investment income | 7,266 | - | 7,266 | ||||||||||
Total Non-Operating Income (Expenses) | (49,334 | ) | - | (49,334 | ) | ||||||||
NET LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD | $ | (3,050,207 | ) | $ | (206,557 | ) | $ | (3,256,764 | ) | ||||
BASIC AND DILUTED LOSS PER SHARE | $ | (0.14 | ) | (0.01 | ) | $ | (0.15 | ) | |||||
WEIGHTED AVERAGE NUMBER OF COMMON | |||||||||||||
SHARES OUTSTANDING - BASIC AND DILUTED | 21,625,005 | - | 21,625,005 |
F-48
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 21 – RESTATED QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)
For the nine months ended September 30, 2008 | Reference | As previously reported | Restatement adjustment | As restated | |||||||||
SALES | $ | 5,738,616 | $ | - | $ | 5,738,616 | |||||||
COSTS OF SALES (excluding depreciation and amortization as shown below) | 4,667,197 | - | 4,667,197 | ||||||||||
GROSS PROFIT | 1,071,419 | - | 1,071,419 | ||||||||||
OPERATING EXPENSES | |||||||||||||
Amortization and depreciation | 155,861 | - | 155,861 | ||||||||||
Amortization of website development costs | 29,143 | - | 29,143 | ||||||||||
Corporate general and administrative | (i) | 2,053,210 | 63,750 | 2,116,960 | |||||||||
ECommerce general and administrative | 385,281 | - | 385,281 | ||||||||||
Management fees and employee salaries | (ii), (iii), (iv), (v) | 4,517,807 | 416,400 | 4,934,207 | |||||||||
Corporate marketing | 61,151 | - | 61,151 | ||||||||||
ECommerce marketing | 378,484 | - | 378,484 | ||||||||||
Other expenses | 683,547 | - | 683,547 | ||||||||||
Total Operating Expenses | 8,264,484 | 480,150 | 8,744,634 | ||||||||||
NON-OPERATING INCOME (EXPENSES) | |||||||||||||
Gain from sales and sales-type lease of domain names | 168,206 | - | 168,206 | ||||||||||
Accretion interest expense | (56,600 | ) | - | (56,600 | ) | ||||||||
Interest and investment income | 66,444 | - | 66,444 | ||||||||||
Non-controlling interest | (i) | - | 75,478 | 75,478 | |||||||||
Total Non-Operating Income (Expenses) | 178,050 | 75,478 | 253,528 | ||||||||||
NET LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD | $ | (7,015,015 | ) | $ | (404,672 | ) | $ | (7,419,687 | ) | ||||
BASIC AND DILUTED LOSS PER SHARE | $ | (0.32 | ) | (0.02 | ) | $ | (0.34 | ) | |||||
WEIGHTED AVERAGE NUMBER OF COMMON | |||||||||||||
SHARES OUTSTANDING - BASIC AND DILUTED | 21,625,005 | - | 21,625,005 |
(i) | Refer to carry forward effects of the prior quarter. |
(ii) | Also related to the acquisition of Auctomatic, the Company recorded as an expense the portion of the fair value of 413,604 shares of its common stock which were to be issued to the founders of Entity Inc. (“Auctomatic”) based on the period of service these founders provided to the Company, computed in relation to the period of service required for the founders to become entitled to the shares under FAS 123(R). The related stock based compensation expense in the September 30, 2008 quarter is $104,251, and the corresponding amount increased Additional paid-in capital during the quarter. |
(iii) | The Company recorded as an additional liability and compensation expense $31,091 for bonuses of CDN $100,000 each that are to be paid to its President and Chief Corporate Development Officer on January 1, 2009 and on January 1, 2010. |
(iv) | The Company recorded as an additional liability and compensation expense $77,729 for bonuses of CDN $250,000 each that were to be paid to its former President on October 1, 2008 and on October 1, 2009. |
F-49
Live Current Media Inc.
(formerly Communicate.com Inc.)
Notes to the Amended and Restated Consolidated Financial Statements
For the year ended December 31, 2008
As restated – Note 2
NOTE 21 – RESTATED QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)
(v) | The Company revised its estimates relating to the estimated life of its granted stock options. The revised estimated life of 3.375 years resulted in a decrease to its stock based compensation expense of $6,514 and a corresponding decrease to Additional paid-in capital. |
F-50