As used in this 10-Q, references to the “Company,” “Acquires Sales,” “we,” “our” or “us” refer to Acquired Sales Corp., unless the context otherwise indicates.
The Company has a history of recurring losses, which has resulted in an accumulated deficit of $7,157,473 as of June 30, 2014. In addition, the Company suffered losses from continuing operations during the six months ended June 30, 2014 and 2013 and used cash in its operating activities from continuing operations during the six months ended June 30, 2014 and 2013. Additionally, as discussed in Note 5 to the accompanying condensed consolidated financial statements, the Company sold 100% of the capital stock of its subsidiaries, Cogility Software Corporation and Defense & Security Technology Group, Inc., which were its primary source of revenue. These matters raise substantial doubt about the Company’s ability to continue as a going concern
This Management’s Discussion and Analysis or Plan of Operations (“MD&A”) section discusses our results of operations, liquidity and financial condition, contractual relationships and certain factors that may affect our future results. You should read this MD&A in conjunction with our financial statements and accompanying notes included for Acquired Sales Corp.
Forward-Looking Statements
Certain information included herein contains statements that may be considered forward-looking statements, such as statements relating to our anticipated revenues and operating results, future performance and operations, plans for future expansion, capital spending, sources of liquidity and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include the “Risk Factors” included herein and in our annual report on Form 10-K filed with the SEC on April 1, 2014, that can be read at www.sec.gov.
Overview
Acquired Sales Corp. is incorporated under the laws of the State of Nevada.
On January 12, 2013, Acquired Sales entered into an agreement with Drumright Group, LLC (“Drumright”) that was closed on February 11, 2013, wherein Acquired Sales sold 100% of the capital stock of its subsidiary, Cogility Software Corporation (“Cogility”) to Drumright in exchange for $3,975,000 in cash and a $3,000,000 receivable. The $3,000,000 was originally receivable as follows: $1,500,000 on August 11, 2013, less an estimated $32,258 in connection with a certain military contract delay, and $1,500,000 on February 11, 2014. In addition, Acquired Sales was required to hold $300,000 in an escrow account for potential subsequent claims. Acquired Sales was responsible for all costs and expenses and retained all accounts receivable relating to work performed by Cogility on revenue contracts through January 31, 2013, with those costs, expenses and revenue transitioning to Drumright thereafter. Acquired Sales retained a contract to create “legal analytics” software. The carrying value of Cogility’s net liabilities, excluding accounts receivable, was $32,899.
Under the terms of the agreement, Acquired Sales was required to transfer Cogility to Drumright without any liabilities. To accomplish this requirement, the $3,975,000 down payment was placed into an escrow account and to the extent necessary was used to pay Cogility’s liabilities, including liabilities that were secured by Cogility’s assets or its capital stock.
The Company agreed to indemnify Drumright for losses caused by breach of the Company’s representations and warranties. In March 2013, Drumright notified the Company of the existence of a second amendment to a license agreement between Cogility and one of its customers that was effective April 2007. On July 16, 2013 the parties entered into a Compromise and Release agreement whereby the parties agreed to reduce the purchase price by $2,000,000 by reducing the $3,000,000 receivable to $1,000,000 due on February 11, 2014. As a result of the Compromise and Release agreement, the Company recognized a gain on disposal of discontinued operations relating to the sale of Cogility of $5,007,899, of which $4,726,068 was recognized during the six months ended June 30, 2013.
On February 13, 2012, Acquired Sales purchased 100% of the equity interests of Defense & Security Technology Group, Inc. (“DSTG”). The results of DSTG’s operations have been included in the consolidated financial statements from February 13, 2012 through September 30, 2013. On September 30, 2013 Acquired Sales sold 100% of the common stock of DSTG back to the previous shareholder for $1. The Company recognized a loss on sale of $104,946 during the year ended December 31, 2013, none of which was recognized during the six months ended June 30, 2013.
The Company is in discussions and/or negotiations to enter into transactions with a number of licensed medical marijuana growers and dispensaries in several jurisdictions where such activities are legal at the state level. No assurances or guarantees whatsoever can be made as to whether any of such transactions will be successfully consummated, nor on what terms.
If the Company does enter into transactions with one or more licensed medical marijuana growers and/or dispensaries, then it is highly likely that the Company will be required to raise a substantial amount of equity capital and/or debt capital in connection with those transactions, which could result in substantial dilution for existing shareholders of the Company. No assurances whatsoever can be made that such transactions would result in profitability of the Company, nor what the impacts would be on the Company's balance sheet, income statement, or stock price.
In addition, marijuana is classified as a controlled substance by the U.S. federal government, and any entrance by the Company into the medical marijuana industry may trigger material legal and financial risks for the Company. Under certain scenarios, these material legal and financial risks could result in a shutdown or bankruptcy of the Company.
This Form 10-Q does not attempt to describe all of the numerous material risks and uncertainties associated with any possible entrance by the Company into the medical marijuana industry. If the Company does enter into the medical marijuana industry, then shareholders and potential shareholders are expressly cautioned that such participation will entail such numerous material risks and uncertainties, and associated "Risk Factors" will need to be set forth in subsequent filings by the Company with the U.S. Securities and Exchange Commission. The Company cannot
provide any assurances whatsoever in regard to the potential negative legal, regulatory, financial and operational risks to the Company associated with the potential entrance by the Company into the medical marijuana industry. You are urged to use caution in your evaluation of the Company's stock, and to seek the advice of competent legal and financial advisors in regard to the medical marijuana industry, which is currently in a state of rapid change and involves many variables, which are beyond the Company's control.
The Company further cautions you that as the recreational use of marijuana is permitted in certain states, that the medical marijuana industry is likely to be subjected to even more intense scrutiny and oversight by elected officials, legislative bodies, courts, law enforcement agencies, and community groups. The Company cannot provide any assurances whatsoever in regard to the future potential negative impacts of such intensified scrutiny and oversight.
The Company is also in discussions and/or negotiations with companies involved in various other industries, including but not limited to methadone clinics, auto recycling, and other industries.
Liquidity and Capital Resources
The following table summarizes the Company’s cash and cash equivalents, working capital and long-term debt as of June 30, 2014 and December 31, 2013, as well as cash flows for the six months ended June 30, 2014 and 2013.
| | | June 30, | | | December 31, | |
| | | 2014 | | | 2013 | |
| Cash and cash equivalents | | $ | 1,280,978 | | | $ | 427,294 | |
| Working capital | | | 1,255,092 | | | | 1,386,408 | |
| | | For the Six Months Ended | |
| | | June 30 | |
| | | | 2014 | | | | 2013 | |
| Cash used in operating activities from continuing operations | | $ | (126,316 | ) | | $ | (244,386 | ) |
| Cash provided by ( used in ) operating activities from discontinued operations | | | - | | | | (1,143,554 | ) |
| Cash provided by investing activities from discontinuing operations | | | 1,000,000 | | | | 3,670,135 | |
| Cash used in financing activities from continuing operations | | | (20,000 | ) | | | (2,251,846 | ) |
At June 30, 2014 all the Company’s assets consisted of cash from the sale of its subsidiaries. Total current assets at June 30, 2014 of $1,280,978 are adequate to fund current operations and fulfill corporate obligations, but not enough to fund growth and potential acquisitions. Current liabilities at June 30, 2014 included $25,886 of accounts payable; accounts payable consist mainly of liabilities for professional fees.
Comparison of June 30, 2014 and June 30, 2013
During the six months ended June 30, 2014 the Company incurred a loss from continuing operations of $131,316 mainly due to legal and professional fees and reimbursement for expenses incurred by the Company’s President. The Company currently has no revenue generating subsidiaries and is in discussions and/or negotiations to enter into transactions with a number of licensed medical marijuana growers and dispensaries in several jurisdictions where such activities are legal at the state level. No assurances or guarantees whatsoever can be made as to whether any of such acquisitions will be successfully consummated, nor on what terms.
During the six months ended June 30, 2013, the Company recognized net income of $4,788,354, mainly due to a one-time gain on the sale of its subsidiary Cogility Software Corporation. The Company incurred a loss from continuing operations of $206,694 mainly due to legal and professional fees and loss from the extinguishment of debt. Income from discontinued operations of $4,995,048 included gain on sale of Cogility of $4,726,068. The Company greatly reduced its overhead costs with the sale of Cogility. As of June 30, 2013, our labor force consisted of one full time and one part time employee. All other labor was hired on a contract basis. This substantially reduced the Company’s fixed costs on a go forward basis.
The Company used cash from continuing operations of $126,316 for the six months ended June 30, 2014 primarily due to legal and professional fees and reimbursement for expenses incurred by the Company’s President. The Company used cash from continuing operations of $244,386 and $1,143,554 from discontinued operations for the six months ended June 30, 2013 primarily due to the repayment of nearly all accounts payable and accrued expenses in accordance with the Cogility purchase agreement.
The Company had net cash provided by investing activities from discontinued operations of $1,000,000 for the six months ended June 30, 2014 primarily due to the final payment received from the sale of Cogility. The Company had net cash provided by investing activities from discontinued operations of $3,670,135 for the six months ended June 30, 2013 primarily due to cash received from the sale of Cogility at the time of sale net of the purchase of property and equipment for DSTG.
The Company used $ 20,000 of cash from continuing operations in its financing activities to repurchase its common stock for the six months ended June 30, 2014. The Company used $2,251,846 of cash in its financing activities to pay down all the corporate debt in accordance with the Cogility purchase agreement during the six months ended June 30, 2013.
During the six months ended June 30, 2014, cash increased by $853,684 leaving the Company with $1,280,978 in unrestricted cash at June 30, 2014. This as compared to an increase in unrestricted cash of $30,349 during the six months ended June 30, 2013.
Comparison of the three and six months ended June 30, 2014 to June 30, 2013
The Company did not generate revenue from continuing operations during the three and six months ended June 30, 2014 and 2013. General and administrative expenses primarily consist of professional fees, including accounting, administration, finance and legal personnel. General and administrative expense from continuing operations were $147,579 for the six months ended June 30, 2014 compared to $123,106 for the six months ended June 30, 2013, representing an increase of $24,473. The increase in our general and administrative expense related to an increase in professional fees.
General and administrative expense from continuing operations were $72,233 for the three months ended June 30, 2014 compared to $63,479 for the three months ended June 30, 2013, representing an increase of $8,754. The increase in our general and administrative expense related to an increase in professional fees.
Net Income (Loss) –The Company incurred a loss from continuing operations of $131,316 for the six months ended June 30, 2014 compared to a loss from continuing operations of $206,694 for the six months ended June 30, 2013, representing an increase in selling, general and administrative expense such as professional fees and a decrease in loss from extinguishment of debt.
The Company realized income of $4,995,048 from discontinued operations for the six months ended June 30, 2013, mainly due to the gain on the sale of its subsidiary Cogility Software Corporation.
The Company incurred a loss from continuing operations of $63,912 for the three months ended June 30, 2014 primarily due to selling, general and administrative expenses such as professional fees.
The Company realized income of $1,109,858 from discontinued operations for the three months ended June 30,
2013, mainly due to an increase to the gain on the sale of its subsidiary Cogility Software Corporation and income generated from its subsidiary DSTG, which has been reclassified to discontinued operations. The Company incurred a loss from continuing operations of $63,479 for the three months ended June 30, 2013 due to general and administrative expenses such as professional fees, loss from extinguishment of debt and interest.
Critical Accounting Policies
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Significant estimates include share-based compensation forfeiture rates and the potential outcome of future tax consequences of events that have been recognized for financial reporting purposes. Actual results and outcomes may differ from management’s estimates and assumptions.
Income Taxes – Provisions for income taxes are based on taxes payable or refundable for the current year and deferred income taxes. Deferred income taxes are provided on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements and on tax carry forwards. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is provided against deferred income tax assets when it is not more likely than not that the deferred income tax assets will be realized.
Basic and Diluted Earnings (Loss) Per Common Share – Basic earnings (loss) per common share is determined by dividing earnings (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per common share is calculated by dividing earnings (loss) by the weighted-average number of common shares and dilutive common share equivalents outstanding during the period. When dilutive, the incremental potential common shares issuable upon exercise of stock options and warrants are determined by the treasury stock method. There were 2,148,774 employee stock options and 938,000 warrants outstanding during the three and six months ended June 30, 2014 that were excluded from the computation of diluted earnings (loss) per share because their effects would have been anti-dilutive. There were 2,173,774 employee stock options and 938,000 warrants outstanding during the three and six months ended June 30, 2013 that were excluded from the computation of diluted earnings (loss) per share because their effects would have been anti-dilutive.
Recent Accounting Pronouncements - In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The effective date will be the first quarter of fiscal year 2016 using one of two retrospective application methods. The Company has not determined the potential effects on the financial statements.
In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-12, Compensation-Stock Compensation (Topic 718)-Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force). ASU No. 2014-12 requires that a performance target that affects vesting and could be achieved after the requisite service period shall be treated as a performance condition. The effective date will be the first quarter of fiscal year 2016. The Company has not determined the potential effects on the financial statements.
Contractual Cash Obligations and Commercial Commitments - The William Noyes Webster Foundation, Inc. (the "Foundation"), a non-profit Massachusetts corporation, has received a provisional license from the Commonwealth of Massachusetts to own and operate a medical marijuana cultivation facility and dispensary in Barnstable County, Massachusetts. Jane W. Heatley ("Heatley") is the founder and a member of the board of directors of the Foundation.
On July 8, 2014, Acquired Sales Corp. ("AQSP") and Heatley agreed to use their respective best efforts, working exclusively together as a team, and not as a partnership or other entity, in order to consummate transactions, agreements, contracts and other arrangements pursuant to which AQSP will provide capital and expertise to the Foundation.
On July 14, 2014, the Foundation signed and delivered to AQSP a Secured Promissory Note (the "Note") which is in the stated loan amount of $1,500,000. The Note provides that the $1,500,000 loan may be advanced in one or more installments as the Foundation and AQSP may mutually agree upon. The Foundation and AQSP mutually agreed that the first installment of this loan would be $602,500. Pursuant to instructions from the Foundation, on July 14, 2014, AQSP paid $2,500 owed by the Foundation to one of its consultants, and AQSP advanced $600,000 directly to the Foundation. The amount and timing of subsequent loan installments under the Note, which will total $897,500, have not yet been mutually agreed upon between the Foundation and AQSP.
The unpaid balance of the Note will bear interest at the rate of 12.5% per annum, compounded monthly. The first payment by the Foundation under the Note shall be made as soon after the Foundation commences operations of its medical marijuana cultivation facility and dispensary as the Foundation's cash flows shall reasonably permit, but in any event no later than one year after the Foundation commences operations. The principal of the Note shall be payable in eight consecutive equal quarterly installments, commencing on the last day of the calendar quarter in which the Foundation commences operations. The Note is secured by, among other things, all of the Foundation’s accounts, receivables, inventory, contractual rights, intangibles, equipment, goods, investment properties as set out in a Security Agreement dated July 14, 2014.
On July 14, 2014, AQSP borrowed $300,000 from the Roberti Jacobs Family Trust (the "Trust"). The Trust is an affiliate of Gerard M. Jacobs, AQSP's Chief Executive Officer. The loan was repaid in full on August 5, 2014.
The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company defends itself vigorously against any such claims. Although the outcome of these other matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.
Off Balance Sheet Arrangements – We have no off-balance sheet arrangements.
