UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X.
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to____________
Commission File Number: 000-53661
|
NORTHSIGHT CAPITAL, INC. |
(Exact name of issuer as specified in its charter) |
| | |
Nevada | | 26-2727362 |
(State or Other Jurisdiction of incorporation or organization) | | (I.R.S. Employer I.D. No.) |
|
7740 East Evans Rd. |
Scottsdale, AZ 85260 |
(Address of Principal Executive Offices) |
|
(480) 385-3893 |
(Registrant’s Telephone Number, Including Area Code) |
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. Yes X. No .
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X. No .
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| | | |
Large accelerated filer | . | Accelerated filer | . |
Non-accelerated filer | .(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). Yes . No X.
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
The number of shares outstanding of each of the Registrant’s classes of common equity, as of the latest practicable date:
| | |
Class | | Outstanding as of November 19, 2015 |
Common Capital Voting Stock, $0.001 par value per share | | 111,312,296 shares |
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, Financial Statements and Notes to Financial Statements contain forward-looking statements that discuss, among other things, future expectations and projections regarding future developments, operations and financial conditions. All forward-looking statements are based on management’s existing beliefs about present and future events outside of management’s control and on assumptions that may prove to be incorrect. If any underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or intended.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
September 30, 2015
C O N T E N T S
| |
Balance Sheets (unaudited) | 3 |
Statements of Operations (unaudited) | 4 |
Statements of Cash Flows (unaudited) | 5 |
Notes to Unaudited Financial Statements | 6 |
2
NORTHSIGHT CAPITAL, INC.
BALANCE SHEETS
| | | | | | |
| | September 30, | | |
| | 2015 | | December 31, |
| | (unaudited) | | 2014 |
ASSETS | | | | | | |
Current Assets | | | | | | |
Cash | | $ | 45,048 | | $ | 20,690 |
Prepaid expenses | | | 131,000 | | | 31,500 |
Accounts receivable | | | - | | | - |
Debt issue costs, net of $2,763,639 amortization | | | 169,058 | | | - |
Total Current Assets | | | 345,106 | | | 52,190 |
| | | | | | |
Property and equipment, net of $4,580 and $1,471 depreciation | | | 7,857 | | | 10,966 |
Web Development Costs, net of $55,741 and $9,000 amortization | | | 283,420 | | | 327,912 |
Total Assets | | $ | 636,383 | | $ | 391,068 |
| | | | | | |
LIABILITIES AND STOCKHOLDERS' DEFICIT | | | | | | |
Current Liabilities | | | | | | |
Accounts payable and accrued expenses | | $ | 220,355 | | $ | 34,639 |
Accounts payable and accrued expenses – related party | | | 209,476 | | | 46,676 |
Notes payable – related party | | | 611,407 | | | - |
Advances - related party | | | - | | | 10,000 |
Notes payable, net of $22,054 discount | | | 57,846 | | | - |
Total Current Liabilities | | | 1,099,084 | | | 91,315 |
| | | | | | |
Noncurrent Liabilities | | | | | | |
Notes payable – related party | | | 400,000 | | | 400,000 |
Total Liabilities | | $ | 1,499,084 | | $ | 491,315 |
| | | | | | |
Commitments and Contingencies | | | | | | |
| | | | | | |
Stockholders' Deficit | | | | | | |
Common stock - 200,000,000 shares authorized having a par value of $.001 per share; 111,312,296 and 104,019,196 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively | | | 111,312 | | | 104,019 |
Stock payable | | | 62,000 | | | - |
Additional paid-in capital | | | 16,448,022 | | | 10,536,221 |
Accumulated deficit | | | (17,484,035) | | | (10,740,487) |
Total Stockholders' Deficit | | | (862,701) | | | (100,247) |
Total Liabilities and Stockholders' Deficit | | $ | 636,383 | | $ | 391,068 |
See accompanying notes to financial statements.
3
NORTHSIGHT CAPITAL, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended |
| September 30, | | September 30, | | September 30, | | September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
| | | | | | | | | | | |
Revenues | $ | 3,816 | | $ | - | | $ | 8,229 | | $ | - |
| | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | |
General administrative | | 566,682 | | | 571,582 | | | 1,085,842 | | | 708,239 |
Settlement Expense | | 62,000 | | | - | | | 62,000 | | | 932,500 |
Consulting expense - related party | | 73,500 | | | 4,637,500 | | | 249,000 | | | 4,647,000 |
Executive compensation | | 932,000 | | | 1,040,500 | | | 1,723,500 | | | 1,046,500 |
Professional fees | | 100,759 | | | 125,837 | | | 265,660 | | | 220,172 |
Rent - related party | | 13,500 | | | 13,500 | | | 40,500 | | | 20,500 |
Travel | | 6,395 | | | 9,025 | | | 14,997 | | | 16,441 |
Total operating expenses | | 1,754,836 | | | 6,397,944 | | | 3,441,499 | | | 7,591,352 |
| | | | | | | | | | | |
Loss from operations | | (1,751,020) | | | (6,397,944) | | | (3,433,270) | | | (7,591,352) |
Other Income (Expense) | | | | | | | | | | | |
Interest expense | | (1,831,701) | | | 2,671 | | | (3,310,278) | | | (71) |
| | | | | | | | | | | |
Net Loss | $ | (3,582,721) | | $ | (6,395,273) | | $ | (6,743,548) | | $ | (7,591,423) |
| | | | | | | | | | | |
Weighted Average Number of Common Shares | | | | | | | | | | | |
Outstanding - Basic and Diluted | 108,569,253 | | 99,308,727 | | 106,412,405 | | 52,449,487 |
Loss per Common Share - Basic and Diluted | $ | (0.03) | | $ | (0.06) | | $ | (0.06) | | $ | (0.14) |
See accompanying notes to financial statements.
4
NORTHSIGHT CAPITAL, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | |
| | Nine Months Ended September 30, |
| | 2015 | | 2014 |
Cash Flows From Operating Activities | | | | | | |
Net loss | | $ | (6,743,548) | | $ | (7,591,423) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | |
Depreciation of property and equipment | | | 3,109 | | | 661 |
Amortization of web development costs | | | 44,492 | | | - |
Amortization of debt issue costs | | | 3,259,504 | | | - |
Amortization of debt discount | | | 49,778 | | | - |
Stock issued for release | | | 62,000 | | | 932,500 |
Stock issued for executive compensation | | | 1,282,500 | | | 980,000 |
Stock issued pursuant to contracts | | | 380,950 | | | - |
Stock issued for consulting | | | - | | | 4,599,000 |
Stock issued for contract labor | | | - | | | 219,000 |
Stock issued for advertising incentive | | | 750 | | | - |
Corporate expenses paid by shareholders | | | - | | | 71 |
Changes in operating assets and liabilities: | | | | | | |
Prepaid expenses | | | 31,500 | | | (53,500) |
Accounts payable and accrued expenses | | | 393,716 | | | 15,245 |
Accounts payable - related party | | | 159,800 | | | 67,726 |
Net Cash Used In Operating Activities | | | (1,075,449) | | | (830,720) |
Cash Flows From Investing Activities | | | | | | |
Purchase of property and equipment | | | | | | (9,035) |
Purchase of web development costs | | | - | | | (238,828) |
Purchase of domain registrations | | | - | | | (154,044) |
Net Cash Used In Investing Activities | | | - | | | (401,907) |
Cash Flows From Financing Activities | | | | | | |
Proceeds from sale of common stock, net of offering costs | | | 415,500 | | | 2,224,750 |
Payments for stock repurchase | | | | | | (75,500) |
Proceeds from notes | | | 79,900 | | | - |
Proceeds from notes – related party | | | 761,407 | | | - |
Payments on notes – related party | | | (157,000) | | | (100,000) |
Net Cash Provided by Financing Activities | | | 1,099,807 | | | 2,049,250 |
| | | | | | |
Net Increase In Cash | | | 24,358 | | | 816,623 |
Cash, Beginning of Period | | | 20,690 | | | - |
Cash, End of Period | | $ | 45,048 | | $ | 816,623 |
| | | | | | |
Supplemental Disclosure of Cash Flow Information: | | | | | | |
Cash paid for interest | | $ | - | | $ | - |
Cash paid for income taxes | | $ | - | | $ | - |
Non-Cash Activities | | | | | | |
Issuance of common stock for domain names | | $ | - | | $ | 31,279 |
Issuance of note payable for domain names | | $ | - | | $ | 500,000 |
Issuance of common stock as settlement of obligations | | $ | 208,000 | | $ | - |
Issuance of common stock for contracts | | $ | 131,000 | | $ | - |
Issuance of common stock in conjunction with debt agreements | | $ | 64,934 | | $ | - |
Cancellation of shares returned to company | | $ | - | | $ | 1,676 |
Finders fees settled with stock | | $ | 16,449 | | $ | 91,450 |
Warrants issued in conjunction with debt agreements | | $ | 3,435,460 | | $ | - |
Subscriptions receivable – related party | | $ | - | | $ | 50,000 |
See accompanying notes to financial statements.
5
NORTHSIGHT CAPITAL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2015
NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION
Northsight Capital Inc. (“Northsight” or “the Company”) is an early stage company incorporated in the State of Nevada on May 21, 2008. In May, 2011, Safe Communications, Inc. (n/k/a Kuboo, Inc.) acquired 80% of the Company’s issued and outstanding common stock, and, as a result, became its parent company. On June 25, 2014, the Company completed the acquisition of approximately 7,500 cannabis related Internet domain names, in exchange for which the Company issued 78.5 million shares of its common stock and a promissory note in the principal amount of $500,000. As a result of this transaction, the seller of the domain names became an 81% stockholder of the Company. Kuboo, Inc. continues to be a significant stockholder of the Company. John Venners, a director of Kuboo, Inc., is our EVP, Operations and also sits on our board of directors. See Note 12 - Related Party Transactions.
The Company’s principal business is to provide a wide variety of online directories for a broad range of businesses engaged in the lawful sale and distribution of cannabis and hemp related products. The following constitute the Company’s major product categories: a monthly listing in one or more of the Company’s online directories, paid advertising in one or more of the Company’s online directories and leasing to customers one or more Internet domain names for the customer’s exclusive use.
The accompanying financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The interim financial statements reflect all adjustments, consisting of normal recurring adjustments which, in the opinion of management, are necessary to present a fair statement of the results for the period.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The results of operations for the three and nine month period ended September 30, 2015, are not necessarily indicative of the operating results for the full year.
NOTE 2 – LIQUIDITY/GOING CONCERN
The Company is an early stage enterprise and has accumulated losses of $17,484,035 and has had consistent negative cash flows from operating activities since inception (May 2008). These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. During the nine months ended September 30, 2015 the Company (i) raised $415,500 in capital through the sale of common stock and (ii) received a net $601,407 in loans from its controlling shareholder and her spouse. The Company does not currently have sufficient cash to fund operating expenses. Management plans to (i) raise additional capital as soon as possible, to fund continued operations of the Company and (ii) continue its efforts to generate revenues and income from operations.
In the event the Company does not generate sufficient funds from revenues or financing through the issuance of its common stock or from debt financing, the Company will be unable to fully implement its business plan and pay its obligations as they become due, any of which circumstances would have a material adverse effect on its business prospects, financial condition, and results of operations. The accompanying financial statements do not include any adjustments that might be required should the Company be unable to recover the value of its assets or satisfy its liabilities.
6
NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS
In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-03, Interest — Imputation of Interest (Subtopic 835-30) — Simplifying the Presentation of Debt Issuance Costs, which provides guidance on simplifying the presentation of debt issuance costs, requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheets as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU No, 2015-15, Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements — Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (“ASU 2015-15”), which further clarifies ASU 2015-03 as it relates to presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. ASU 2015-15 allows an entity deferring and presenting debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. Both ASU 2015-03 and ASU 2015-15 require retrospective adoption and will be effective for financial statement periods beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. The Company has not early adopted ASU 2015-03 or ASU 2015-15 and the adoption of these standards is not expected to have a material effect on its financial statements or disclosures.
NOTE 4 – WEB DEVELOPMENT COSTS AND DOMAIN NAMES ASSETS
In accordance with ASC 350.50, during the nine months ended September 30, 2015 and the year ended December 31, 2014, the Company capitalized $0 and $339,162, respectively, towards the development of multiple websites on which third parties can advertise the sale and distribution of cannabis related products and services: an online “yellow pages.” The Company does not intend to engage in the sale or distribution of marijuana or related products. During the nine months ended September 30, 2015 the Company recorded website development expenses of $40,232 which is included in general and administrative expenses on the Company’s condensed statements of operations.
The Company amortizes these assets over their related useful lives (approximately 1 to 5 years), using a straight-line basis. Assets are reviewed for impairment whenever events or changes in circumstances exist that indicate the carrying amount of an asset may not be recoverable, or at least annually. Measurement of the amount of impairment, if any, is based upon the difference between the asset's carrying value and estimated fair value. Fair value is determined through various valuation techniques, including market and income approaches as considered necessary. During the three and nine months ended September 30, 2015 the Company recorded amortization expense of $18,091 and $44,491, respectively, related to websites previously launched. During the year ended December 31, 2014 the company fully impaired its capitalized domain registration assets.
The following table shows the Company’s expected amortization over the next five years based upon currently amortized websites:
| | |
2015 (3 months) | $ | 16,158 |
2016 | | 64,632 |
2017 | | 64,632 |
2018 | | 64,632 |
2019 | | 58,392 |
| $ | 268,446 |
7
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 2015 and December 31, 2014:
| | | | | | | | |
| | As of September 30, 2015 | | As of December 31, 2014 | | Estimated Useful Life |
Furniture and equipment | | | 12,437 | | | 12,437 | | 3 years |
Total | | | 12,437 | | | 12,437 | | |
Less: Accumulated depreciation | | | (4,580) | | | (1,471) | | |
| | $ | 7,857 | | $ | 10,966 | | |
The Company records depreciation expense on a straight-line basis over the estimated life of the related asset (approximately 3 years). The Company recorded depreciation expense of $3,109 and $1,471 during the nine months ended September 30, 2015 and year ended December 31, 2014, respectively.
NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES RELATED PARTY
At September 30, 2015, the Company had a balance in related party accounts payable and accrued expenses of $209,476 which consisted of the following:
| | | | |
Party Name: | Relationship: | | | Amount |
Howard Baer | Spouse of majority shareholder | Consulting fees | | 90,000 |
John Venners | Director/EVP, President and CEO of Kuboo, Inc. | Consulting fees | | 103,500 |
John Venners | Director/EVP, President and CEO of Kuboo, Inc. | Advances | | 3,000 |
Kuboo, Inc. | Former parent company, significant shareholder | Rent, contract labor | | 12,976 |
| | | $ | 209,476 |
NOTE 7 – NOTES PAYABLE RELATED PARTY
On June 23, 2014, the Company issued a $500,000 promissory note in conjunction with the purchase of approximately 7,500 cannabis-related internet domain names. The note originally bore interest at the rate of 3.25% per annum and the first $100,000 in principal was payable upon the Company’s receipt of an aggregate of $1,000,000 in funding (whether debt or equity). The remaining $400,000 is payable in thirty-six equal monthly installments, commencing on the fifteenth day following the first month the Company realizes at least $150,000 in gross revenue (see Note 13 - Commitments and Contingencies).
On July 25, 2014, the Company amended and restated its promissory note in the principal amount of $500,000 owing to Kae Yong Park (the Company’s then majority shareholder) to provide that it would make the first $100,000 installment payment due under the Note on July 25, 2014 (earlier than required), in exchange for which Kae Yong Park agreed to waive all interest due over the term of the note. Thereafter, Kae Yong Park waived the requirement that the Company pay the $100,000 due under the Amended and Restated Note until August 25, 2014, at which time it was paid. The Company subsequently recaptured all previously recorded interest expense related to the note.
On May 19, 2015, the Company issued Park a non-interest bearing, unsecured demand promissory note to evidence all unpaid advances received by the Company to that point and to cover all additional advances received afterward. Unpaid principal under the note is due and payable upon the earlier of (i) an “event of default” (as defined), (ii) written demand and (iii) the Company’s receipt of capital (to the extent of net proceeds received) from any capital raising transaction after May 15, 2015, whether in the form of debt, equity or otherwise.
On September 21, 2015, the Company amended and restated its promissory note to Park to include all advances to date and provide certain assets, including all internet domain names, websites and related assets as collateral. Repayment terms remain the same, and Park has to date not enforced the provision requiring repayment upon receipt of net proceeds from capital raising transactions. On September 30, 2015, the Company amended and restated the note to include an additional $50,000 advanced to the Company. At September 30, 2015, the Company had a balance due on the note of $611,407 (see Note 14 – Subsequent Events).
8
The following table summarizes the Company’s debt under this note for the nine months ended September 30, 2015:
| | |
Amount due to Park - December 31, 2014 | $ | 10,000 |
Advances received from Park | | 758,407 |
Repayments made to Park | | (157,000) |
Balance due to Park – September 30, 2015 | $ | 611,407 |
NOTE 8 – NOTES PAYABLE
On July 1, 2015, the Company entered into a seven (7) day loan agreement with two parties for aggregate proceeds of $34,900. The note bears interest at the rate of three percent (3%) annually. In addition to the loans, the Company issued an aggregate 349,000 shares of common stock valued at $26,016 and warrants to purchase an aggregate 100,000 shares of the Company’s common stock at an exercise price of $0.25 per share valued at $6,898. The relative fair value of the shares and warrants associated with these notes have been recorded as debt discount to be amortized over the life of the loans. As of September 30, 2015 these notes have not yet been repaid.
On August 10, 2015, the Company entered into a one hundred twenty (120) day loan agreement with an existing investor for aggregate proceeds of $45,000 (two installments of $22,500 each). The note bears interest at the rate of three percent (3%) annually. As additional consideration for these loans, the Company issued an aggregate 1,200,000 shares of common stock valued at $38,918. The relative fair value of the shares associated with these notes have been recorded as debt discount to be amortized over the life of the loans).
The following table summarizes the Company’s notes payable for the nine months ended September 30, 2015:
| | |
Balance – December 31, 2014 | $ | - |
Loan proceeds received | | 79,900 |
Discounts on debt | | (71,832) |
Amortization of discounts on debt | | 49,778 |
Repayments on loans | | - |
Balance – September 30, 2015 | $ | 57,846 |
The Company had unamortized discounts on debt of $22,054 at September 30, 2015.
NOTE 9 – DEBT ISSUE COSTS
On May 15, 2015, the Company issued 2,000,000 warrants in conjunction with a debt agreement of its majority shareholder and her spouse with a third party under which the third party loaned funds to the majority shareholder and her spouse, and such persons in turn loaned a portion of such funds to the Company. Pursuant to the terms of the debt agreement, the Company issued an additional 1,000,000 warrants on July 15, 2015 in conjunction with the agreement’s automatic thirty (30) day extension. On August 5, 2015, the Company issued an additional 2,000,000 warrants as consideration for an additional sixty (60) day extension on the debt agreement. See Note 14 – Subsequent Events. The Company has valued these warrants using the Black-Scholes method and has recorded the value of as debt issue costs to be amortized over the life of the underlying note (see Note 11 – Stock Warrants).
The following table summarizes the Company’s debt issue costs for the nine months ended September 30, 2015:
| | |
Debt issue costs – December 31, 2014 | $ | - |
Fair value at the commitment date for warrants issued in conjunction with debt agreements | | 3,428,562 |
Amortization of debt issued costs | | (3,259,504) |
Debt issue costs – September 30, 2015 | $ | 169,058 |
The fair value at the commitment date for the above warrants were based upon the following management assumptions:
| | | |
| | Commitment Date |
Expected dividends | | | 0% |
Expected volatility | | | 150% - 159% |
Expected term: | | | 2 years |
Risk free interest rate | | | 0.55% – 0.73% |
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NOTE 10 - EQUITY
During the three months ended March 31, 2015, the Company sold 691,000 shares of its common stock for an aggregate $169,000 in cash proceeds. The Company incurred a finder’s fee of $15,400, which the company has satisfied through the issuance of 61,600 shares of common stock.
During the three months ended June 30, 2015, the Company sold 760,000 shares of its common stock for an aggregate $190,000 in cash proceeds. The Company incurred cash finder’s fees of $18,500 in connection with these sales.
During the three months ended June 30, 2015, the Company issued 3,000 shares of its common stock valued at $750 as an advertising incentive, the value of which has been recorded against revenue in the Company’s statements of operations.
In January and April 2015, the Company issued 250,000 shares of common stock valued at $252,500 and $230,000, respectively, to its then Chief Executive Officer, John Bluher, pursuant to his employment letter.
During the three months ended September 30, 2015, the Company sold 616,000 shares of its common stock for an aggregate $75,000 in cash proceeds. The Company incurred a finder’s fee of $1,050, which the company has satisfied through the issuance of 7,500 shares of common stock.
During the three months ended September 30, 2015, the Company issued an aggregate 1,549,000 shares of its common stock valued at $64,934 in conjunction with debt agreements.
During the three months ended September 30, 2015, the Company issued an aggregate 405,000 shares of its common stock valued at $380,950 for services pursuant to multiple contracts.
On July 1, 2015 the Company issued 100,000 shares of its common stock valued at $131,000 as consideration for an exclusive option to acquire the web portal LaMarihuana.com, subject to satisfaction of conditions.
On July 15, 2015 the Company issued 1,000,000 shares of its common stock valued at $800,000 to its then Chief Executive Officer, William Lupo, pursuant to his employment letter. Upon Mr. Lupo’s resignation on September 15, 2015, a separation agreement has been signed in which he has agreed to return 500,000 of these shares to the Company.
On September 16, 2016, in conjunction with John Bluher’s resignation as President, the Company issued 1,600,000 shares of its common stock, valued at $208,000, as payment in full of all amounts due Mr. Bluher under his employment letter.
NOTE 11 – STOCK WARRANTS
On May 15, 2015, the Company entered into an agreement to grant a warrant good for two years to purchase 2,000,000 shares of the Company’s stock at $0.05 per share in conjunction with a sixty day loan taken out by the Company’s then majority shareholder, Kae Yong Park, and her spouse, Howard Baer; a portion of these loan proceeds were advanced by Park/Baer to the Company to fund operations. The note to Park and Baer commenced on May 15th with an initial term of sixty days with an automatic thirty day extension, if not paid in full by the maturity date. The Company had agreed that, if the note were automatically extended, it would grant an additional warrant to purchase 1,000,000 shares of the Company’s stock (on the same terms as the original warrant) as consideration for the extension. On July 15, 2015, the Company issued an additional 1,000,000 warrants in consideration for the thirty day extension. On August 5, 2015, the Company issued an additional 2,000,000 warrants with the same terms as the previously issued warrants for an additional sixty day extension. These warrants have been accounted for as debt issue costs (see Note 8 – Debt Issue Costs).
On July 1, 2015, the Company issued three year warrants to purchase 100,000 shares of the Company’s common stock, at an exercise price of $0.25 per share in conjunction with debt agreements (see Note 8 – Notes Payable).
On September 29, 2015, the Company issued two year warrants to purchase 416,000 shares of the Company’s common stock, at an exercise price of $0.25 per share, in conjunction with an equity sale.
10
A summary of the Company’s warrant activity for the three months ended September 30, 2015 is as follows:
| | | | | | |
| | Number of Warrants | | Weighted Average Exercise Price |
Outstanding – December 31, 2014 | | | - | | $ | - |
Granted | | | 5,516,000 | | | 0.07 |
Exercised/settled | | | - | | | - |
Balance as September 30, 2015 | | | 5,516,000 | | $ | 0.07 |
The Company’s outstanding warrants at September 30, 2015 is as follows:
| | | | | | | | | | | | | | | | | | | |
| | |
Warrants Outstanding | | Warrants Exercisable |
Exercise Price Range
| | Number
Outstanding | | Weighted Average
Remaining
Contractual Life (in
years) | | Weighted Average
Exercise Price | | Number
Exercisable | | Weighted
Average
Exercise Price | | Intrinsic Value |
$0.05 - $0.25 | | | | 5,516,000 | | | 1.78 | | $ | 0.07 | | | 5,516,000 | | $ | 0.05 | | | 250,000 |
NOTE 12 – RELATED PARTY TRANSACTIONS
Effective May 2, 2014, the Company entered into an asset purchase agreement with Kae Park (the “Seller”), who became a related party upon the closing of the acquisition, which occurred on June 23, 2014.
Under this agreement, the Company agreed to acquire approximately 7,500 cannabis related Internet domain names, in exchange for which, the Company:
(a)
Issued to the Seller on the closing date 78.5 million shares of the Company’s restricted common stock which represented approximately 81% of the Company’s issued and outstanding common stock upon the closing;
(b)
Issued to the Seller a promissory note in the principal amount of $500,000. The note originally bore interest at the rate of 3.25% per annum and was payable as follows: upon the Company’s receipt of an aggregate of $1,000,000 in funding (whether debt or equity), $100,000 was to be paid, and the Company was required to pay the remaining balance of $400,000 in thirty-six equal monthly installments, commencing on the fifteenth day following the first month the Company realizes at least $150,000 in gross revenue; and
(c)
Is obligated to pay a monthly royalty to the Seller equal to the product of (i) six percent (6%) and (ii) the excess of the Company’s gross monthly revenue over $150,000 (“Royalty Payment”). The Royalty Payment is payable for a period of thirty six months from and after the first month in which the Company has gross revenues in excess of $150,000.
On July 25, 2014, the Company amended and restated the promissory note to provide that it would make the first $100,000 installment payment due under the Note on July 25, 2014 (earlier than required), in exchange for which Kae Yong Park agreed to waive all interest due over the term of the note. Thereafter, Kae Yong Park waived the requirement that the Company pay the $100,000 due under the Amended and Restated Note, until August 25, 2014, at which point such $100,000 was paid.
In addition, the Seller was required to provide such consulting services as the Company may require during the twelve month period following the closing of the acquisition. In consideration for these services, the Company is required to pay the Seller $9,500 per month, for a period of twelve months, commencing on the closing date and, on the first of each month thereafter.
The Company is headquartered in Scottsdale, Arizona where it rents space from Kuboo, Inc., its former parent company and a significant shareholder. Currently, the Company is renting approximately 1,500 square feet of space on a month-to-month basis. The monthly rent for this facility is $4,500.
During the three months ended March 31, 2015, the Company incurred expenses of $35,700 payable to Kuboo, Inc. for rent ($13,500) as well as its portion of salaries ($22,200) related to its use of certain Kuboo employees. During this same period, the Company made payments to Kuboo, Inc. of $26,000 for said expenses.
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During the three months June 30, 2015, the Company incurred expenses of $27,800 payable to Kuboo, Inc. for rent ($13,500) as well as its portion of salaries ($14,300) related to its use of certain Kuboo employees. During this same period, the Company made payments to Kuboo, Inc. of $29,500 for said accrued expenses. At June 30, 2015, the Company had a payable to Kuboo, Inc. of $45,176 for rent and contract labor.
During the three months September 30, 2015, the Company incurred rent expense of $13,500 payable to Kuboo, Inc. During this same period, the Company made payments to Kuboo, Inc. of $45,700 for accrued expenses. At September 30, 2015, the Company had a payable to Kuboo, Inc. of $12,976 for rent and contract labor.
During the three and nine months ended September 30, 2015, the Company paid $1,000 and $23,000, respectively, to Energy Plus, LLC, a company owned by John Venners, a director and Executive Vice President of the Company, for consulting services rendered.
During the nine months ended September 30, 2015, the Company’s controlling shareholder, Kae Yong Park and her spouse Howard Baer, advanced an aggregate of $758,407 to the Company for short-term capital needs, of which $157,000 has been repaid. The advances are non-interest bearing and payable on demand. At September 30, 2015, the Company had a note payable for these advances to Ms. Park/Mr. Baer of $611,407. See Note 14 – Subsequent Events
During the Nine months ended September 30, 2015, one of the Company’s directors, John Venners, advanced $3,000 to the Company for short-term capital needs. The advance is non-interest bearing and payable on demand.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
In May 2014, The Company entered into an asset purchase agreement pursuant to which it agreed to pay the seller $9,500 per month for a period of 12 months, for consulting services to be provided. This agreement also requires the Company to pay a monthly royalty equal to six percent of gross monthly revenues over $150,000. The royalty payment is payable for a period of thirty-six months from and after the first month in which the Company’s gross revenues are in excess of $150,000 (see Note 12 - Related Party Transactions).
On June 23, 2014, the Company issued a $500,000 promissory note in conjunction with the purchase of approximately 7,500 cannabis-related internet domain names. The original note bore interest at the rate of 3.25% per annum and was payable as follows: upon the Company’s receipt of an aggregate of $1,000,000 in funding (whether debt or equity), $100,000 was required to be paid. The remaining $400,000 is payable in thirty-six equal monthly installments, commencing on the fifteenth day following the first month the Company realizes at least $150,000 in gross revenue.
On May 15, 2015 the Company entered into an agreement (the “Funding Agreement”) with its then majority shareholder, Kae Park, and her spouse Howard Baer (collectively “Park”), under which Park committed to advance the Company a minimum of $200,000, on an unsecured and non-interest bearing basis, subject to Park’s receipt of funding from a third party lender of $300,000. On May 14, 2015, Park secured a note from a third party and has since advanced the required funds to the Company. In connection with the third party loan, Park originally pledged 55 million shares of her Company common stock as collateral pursuant to a Pledge Agreement (such pledged shares, as adjusted under the Pledge Agreement, the “Pledged Shares”).
Under the pledge agreement, if Park defaults on the repayment of the $300,000 note, the lender has the right to take ownership of the Pledged Shares, without any obligation to remit to Ms. Park proceeds from the collateral in excess of the unpaid obligations under the note. Under the Funding Agreement, if the Park Lender takes ownership of the Pledged Shares, the Company (i) must to issue Ms. Park 10 million shares of Company common stock (currently leaving Ms. Park with a net loss of approximately 22 million shares) and (ii) shall not effect a reverse split of its common stock for a period of two years.
On August 7, 2015, Lee Ori ("Plaintiff") instituted a legal action in Missouri against us, Wealthcorp, LLC, Winterwalk Capital, LLC, Christopher S. Walkup ("Walkup"), Marshall P. Winters and Paradigm Healthcare Solutions, LLC.
The complaint alleged that (i) Walkup represented to the Plaintiff that he had the right to subscribe to shares of our common stock at a per share price of $.25 and (ii) that Walkup was the Company’s agent and individually and in such alleged agency capacity offered to sell Plaintiff an aggregate of 1,075,000 shares of company common stock for a total purchase price of $425,000. The Complaint alleges that we are liable to the Plaintiff for the acts and omissions of Walkup, based on the allegation that he was our agent. The complaint seeks from us and Walkup (1) 1,075,000 shares of our common stock and (2) money damages in the amount of $425,000.
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Without admitting any responsibility, Company has agreed to issue 400,000 restricted shares of common stock valued at $62,000 to the Plaintiff as consideration for the settlement. These shares had not yet been issued as of the date of these financial statements. In addition, the Company has agreed to issue an additional 275,000 shares as liquidated damages if it breaches a certain material representation to be included in the settlement agreement. The Company will value these if and when the shares become issuable.
NOTE 14 – SUBSEQUENT EVENTS
On October 21, 2015, the Company appointed John B. Hollister as its interim CEO, and entered into an agreement which provides for a starting base salary of $400,000 per year, a signing bonus of $35,000 and warrants to purchase an aggregate five million shares of the Company’s common stock at $0.09 per share. The warrants are issuable as follows: 500,000 warrants within 5 business days of signing and 375,000 warrants to be issued in twelve quarterly installments of 375,000, commencing December 31, 2015, for so long as Mr. Hollister is employed by the Company.
Mr. Hollister has agreed to defer the payment of his salary and signing bonus as follows:
·
Prior to Receipt of $250,000 of Equity Capital. Mr. Hollister agreed to defer (i) all salary payments until the Company raises a minimum of $250,000 in equity funding and (ii) payment of the signing bonus until the Company raises a minimum of $500,000 in equity funding.
·
$250,000 in Equity Proceeds. Once the Company raises at least $250,000 in equity capital, Mr. Hollister shall be paid (i) fifty (50%) percent of the amount of his then accrued and unpaid salary and (ii) fifty (50%) percent of the amount of regular salary from and after the receipt of such funds.
·
$500,000 in Equity Proceeds. Provided that the Company raises at least $500,000 in equity capital within ninety (90) days of the Agreement date, Mr. Hollister shall be paid (i) all of his then accrued and unpaid salary and (ii) his signing bonus, and he will continue to be paid fifty (50%) percent of the amount of regular salary from and after the receipt of such funds.
·
$1,000,000 in Equity Proceeds. Once the Company raises at least $1,000,000 in equity capital, Mr. Hollister shall be paid (i) all of his then accrued and unpaid salary and (ii) the full amount of his regular salary from and after the receipt of such funds.
Upon successful completion of at least $1,000,000 in equity capital raised, Mr. Hollister’s title will change to CEO and his position will no longer be interim in nature.
Since September 30, 2015, Kae Yong Park, our controlling shareholder, and her spouse, Howard R. Baer, have made additional advances to the Company in the aggregate amount of $183,500, leaving a balance due of $794,907 at November 19, 2015. These advances are secured by certain Company assets, including all of its internet domain names, websites and related assets, non-interest bearing and payable on demand.
On October 3, 2015, the Company issued a two year warrant to purchase 2,000,000 shares of the Company’s common stock at an exercise price of $0.05 per share in consideration for a further sixty day extension of the $300,000 third party loan described in Note 13 – Commitments and Contingencies.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking Statements
Statements made in this Quarterly Report which are not purely historical are forward-looking statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and our business, including, without limitation, (i) our ability to raise capital, and (ii) statements preceded by, followed by or that include the words “may,” “would,” “could,” “should,” “expects,” “projects,” “anticipates,” “believes,” “estimates,” “plans,” “intends,” “targets” or similar expressions.
Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following: general economic or industry conditions, nationally and/or in the communities in which we may conduct business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, our ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting our current or potential business and related matters.
Accordingly, results actually achieved may differ materially from expected results in these statements. Forward-looking statements speak only as of the date they are made. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
Overview
On June 23, 2014, the Company acquired approximately 7,500 cannabis related Internet domain names from Kae Yong Park (who became our majority shareholder in connection with such acquisition). The list of domain names we acquired is filed as Exhibit 99.3 to the Form 8-K Current Report filed with the Commission on June 25, 2014. In consideration of the acquisition of these assets from Kae Yong Park, we issued her 78.5 million shares of our common stock. In addition, we issued a promissory note in the aggregate principal amount of $500,000, the payment of $400,000 of which is contingent upon our achieving $150,000 in monthly revenues. See Note 12 - Related Party Transactions and Note 13 - Commitments and Contingencies.
The note was amended and restated to provide that the first $100,000 installment payment due under the Note would be made July 25, 2014 (earlier than required), in exchange for which Kae Yong Park agreed to waive all interest due over the term of the note. Kae Yong Park has waived the requirement that the Company pay the $100,000 due under the Amended and Restated Note, until August 25, 2014. Such $100,000 has since been paid to Ms. Park. The remaining balance of $400,000 is payable in thirty-six equal monthly installments, commencing on the fifteenth day following the first month the Company realizes at least $150,000 in gross revenue.
The Company has already launched several websites and portals and, subject to availability of sufficient funding (which the Company does not currently have), intends to build additional websites/portals around its owned internet domain names. These websites/portals will serve as directories for businesses engaged in the lawful sale and distribution of cannabis and hemp related products.
Recent Funding History
In addition to the asset acquisition and commencement of business operations described above, the Company has between January 5 and November 19, 2015, raised gross proceeds of $434,000 from the sale of 2,067,000 shares of common stock at an average per share price of $0.21.
Most recently, during September and October, 2015, the Company raised an aggregate of $75,000 from an existing investor through the sale of Units (consisting of one share of common stock and a warrant to purchase one share of common stock at an exercise price of $.25 per share), as follows: 416,667 Units (at a per unit price of $.06) and 714,285 Units at a per unit price of $.07. In order to induce this investor to make these purchases from the Company, our controlling shareholder sold the investor an aggregate of 12,408,735 shares of common stock, at an average per share price of $.016. Accordingly, the Company has been experiencing enormous difficulty raising capital in recent months.
Between December 31, 2014 and November 19, 2015,Kae Yong Park,our majority shareholder, and her spouse, Howard R, Baer (collectively, Park), made $959,407 of cash advances to us to fund our basic operations, $164,500 of which has been repaid, leaving a balance due of $794,907, as of November 19, 2015. The Company has used these limited funds to fund its basic operations on a scaled back basis.
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As noted above, as of November 19, 2015, the Company was indebted to Park in the aggregate the amount of $794,907. To evidence this indebtedness, on May 19, 2015, the Company issued Park a non-interest bearing, unsecured demand promissory note in the original principal amount of $403,000 ($794,907 currently outstanding) (“Company Note”). Unpaid principal under the Company Note is due and payable upon the earlier to occur of (i) an “event of default” (as defined), (ii) written demand and (iii) the Company’s receipt of capital (to the extent of net proceeds received) from any capital raising transaction after May 15, 2015, whether in the form of debt, equity or otherwise. Park has to date not enforced the provision requiring repayment upon receipt of net proceeds from capital raising transactions.
On September 21, 2015, the Company amended and restated the Company Note to include all advances to date for a total note of $632,307 and provide certain assets, including all internet domain names, websites and related assets as collateral. Repayment terms remain the same, and Park has to date not enforced the provision requiring repayment upon receipt of net proceeds from capital raising transactions. On September 30, 2015, the Company amended and restated the Company Note in connection with an additional $50,000 advanced to the Company.
Advances after May 14, 2015 were made pursuant to an agreement entered into with the Company on May 15, 2015 (the “Funding Agreement”). Under the Funding Agreement, Park committed to advance the Company a minimum of $200,000, on an unsecured and non-interest bearing basis, subject to Park’s receipt of funding from a third party lender of $300,000. On May 14, 2015, Park secured a commitment from a third party (“Park Lender”) to advance Park $300,000 in two tranches, $100,000 on May 14, 2015 and $200,000 on or before May 22, 2015. Park advanced total a total of $222,400 under this agreement to the Company between May 15, 2015 and June 30, 2015.
In order to secure the funding commitment from the Park Lender and enable Park to fund the Company, (i) the Company agreed to issue the Park Lender warrants to purchase 2 million shares of common stock at an exercise price of $.05 per share and (ii) Kae Yong Park pledged to the Park Lender 55 million shares of her Company common stock as collateral for Park’s repayment of amounts Park borrowed from the Park Lender. Under the note payable by Park to the Park Lender (“Park Note”), Park was required to repay the $300,000 Park Note within sixty days, unless the Company has not paid her back within such time period, in which event, there would be an automatic thirty day extension of the maturity date of the Park Note (for a total of ninety days), in consideration for which the Company was required to issue to the Park Lender a warrant to purchase 1 million shares of Company common stock at an exercise price of $.05 per share. On July 15, 2015, The Park Note was extended for thirty and a warrant to purchase 1 million shares was issued. On August 5, 2015 the Park Note was extended further until October 15, 2015, in consideration for which the Company has issued the Park Lender warrants to purchase an additional 2 million shares of common stock at $.05 per share. Finally, on October 3, 2015 the Park Note was extended further until December 15, 2015, in consideration for which the Company has issued the Park Lender warrants to purchase an additional 2 million shares of common stock at $.05 per share. Thus, the company has issued the Park Lender warrants to purchase an aggregate of 5,000,000 shares at an exercise price of $.05 per share, in consideration of cumulative extensions of the Park Note of 150 days.
Under the Pledge Agreement, if Park defaults on the repayment of the $300,000 Park Note, the Park Lender has the right to take ownership of all of Ms. Park’s shares of Company common stock pledged thereunder (currently approximately 32 million shares), without any obligation to remit to Ms. Park proceeds from the collateral in excess of the unpaid obligations under the Park Note. Under the Funding Agreement, if the Park Lender takes ownership of Ms. Park’s pledged shares, the Company (i) must to issue Ms. Park 10 million shares of Company common stock (leaving Ms. Park with a net loss of about 22 million shares) and (ii) shall not effect a reverse split of its common stock for a period of two years.
Neither Ms. Park nor Mr. Baer are not under any obligation to provide any further funding to the Company. The Company has an immediate and urgent need for additional capital. See “Liquidity and Capital Resources.”
15
Results of Operations
Three Months Ended September 30, 2015 Compared to the Three Months Ended September 30, 2014
The Company incurred a net loss of approximately $3.6 million for the quarter ended September 30, 2015, compared with a net loss of approximately $6.4 million during the comparable prior quarter. The (all numbers approximate) $2.8 million decrease in net loss is due primarily to a $4.6 million decrease in related party consulting expense and a $100,000 decrease in executive compensation, partially offset by a $1.8 million increase in interest expense. The $4.6 million decrease in related party consulting expense relates primarily to one time stock gifts to Company related persons by the Company’s majority shareholder in 2014, which stock gifts were accounted for as consulting expense in the Company’s statement of operations. The increase in interest expense is primarily due to the amortization of one time debt issue costs and discounts on short term debt issued during the current period.
Nine Months Ended September 30, 2015 Compared to the Nine Months Ended September 30, 2014
Explanatory Note
The Company did not fully commence operations until the latter part of the second quarter of 2014. Consequently, the nine months ended September 30, 2014 does not reflect nine months of operations. As a result, the Company believes that comparing the nine months ended September 30, 2015 with the comparable prior period is only of limited utility.
The Company incurred a net loss of approximately $6.7 million for the nine months ended September 30, 2015, compared with a net loss of approximately $7.6 million during the comparable prior period. The (all numbers approximate) $900,000 decrease in net loss is due primarily to a $4.4 million decrease in related party consulting expense related to one time stock gifts in the prior year period and a $900,000 decrease in settlement expense, partially offset by a $3.3 million increase in interest expense, a $700,000 increase in executive compensation and a $400,000 increase in general and administrative expenses. The increase in interest expense is primarily due to the amortization of one time debt issue costs and discounts on short term debt issued during the current period. The increase in executive compensation is primarily due to non-cash stock payments which were not offered in the prior year period.
Cash used in operating activities during the nine months ended September 30, 2015 (all numbers approximate) was $1.1 million, an increase of approximately $300,000 million over the $800,000 used during the comparable prior period. The $300,000 increase was due primarily to a (all numbers approximate) $4.8 million decrease in stock issued for consulting and contract labor, and a $900,000 decrease in stock issued for releases, partially offset by $800,000 decrease in net loss, a $3.3 million increase in amortization expense, a $300,000 increase in stock issued for executive compensation, a $400,000 increase in stock issued pursuant to contracts and a $500,000 increase in accounts payable and accrued liabilities.
Cash used in investing activities for the nine months ended September 30, 2015 was zero as compared to approximately $400,000 in the prior period due to the Company halting capital investments in the current period.
Cash provided by financing activities for the nine months ended September 30, 2015 was approximately $1.1 million as compared to approximately $2 million in the prior comparable period. The $900,000 decrease is due to a decrease of $1.8 million in net proceeds from common stock issuances, partially offset by an $800,000 increase in net proceeds from related party advances and notes. The Company encountered much greater difficulty raising equity capital during the nine months ended September 30, 2015, when compared with the comparable prior period.
16
Liquidity and Capital Resources
As of September 30, 2015 and November 19, 2015, we had only minimal cash on hand. Consequently, we continue to have an immediate and urgent need for additional capital. As disclosed above, in order to fund our basic operations, (i) since January 5, 2015, we have raised gross proceeds of $434,000 from the sale of 2,067,000 shares of common stock at an average per share price of $.21, (ii) in July 2015, we received $34,900 (in consideration for which we issued a 7 day promissory note and agreed to issue 349,000 shares of common stock and 100,000 warrants to purchase shares at $0.25 per share), (iii) in August 2015, we received $45,000 (in consideration for which we issued a 120 day promissory note and agreed to issue 1,200,000 shares of common stock), and (iv) between December 31, 2014 and November 19, 2015, Kae Yong Park, our majority shareholder, and her spouse, Howard Baer, have collectively made $959,407 of cash advances to us, $164,500 of which has been repaid, leaving a balance due of $794,907, as of November 19, 2015. However, most recently, during September and October, 2015, the Company raised an aggregate of $75,000 from an existing investor through the sale of Units (each consisting of one share of common stock and a warrant to purchase one share of common stock at an exercise price of $.25 per share), as follows: 416,667 Units (at a per unit price of $.06) and 714,285 Units at a per unit price of $.07. In order to induce this investor to make these purchases from the Company, our controlling shareholder sold the investor an aggregate of 12,408,735 shares of common stock, at an average per share price of $.016. Accordingly, the Company has been experiencing enormous difficulty raising capital in recent months. See “Recent Funding Developments” above. Neither Ms. Park nor Mr. Baer have any obligation to provide further funding to us.
We have not yet realized significant operating revenues. We are however incurring significant costs and expenses in connection with the development of our new business, implementation of our business plan and ongoing compliance costs associated with being a public company. Consequently, we are currently experiencing negative cash flows from operations.
Our operations will use increasing amounts of cash in coming quarters as we further ramp up our operations, unless and until we are able to generate revenue from our operating activities
Based on our current business plan, we anticipate that our operating and website development activities will use approximately $300,000 in cash per month over the next twelve months, or $3.6 million. We currently have virtually no cash on hand. We believe that our operations will not begin to generate positive cash flows until at least the second quarter of 2016. Accordingly, we have an immediate and urgent need for capital to fund our operating activities.
In order to remedy this liquidity deficiency, we are actively seeking to raise additional funds through the sale of equity and debt securities, and ultimately we will need to generate substantial positive operating cash flows. We expect our internal sources of funds to consist of cash flows from operations, but not until we begin to realize substantial revenues from the sale of services. As previously stated, we currently have no meaningful revenue, and our operations are generating negative cash flows, and thus adversely affecting our liquidity. We have been attempting to raise additional funds through equity and/or debt financing, but, as disclosed above, have encountered great difficulty in securing additional equity funding. We expect that our operations will begin to generate revenues during the second quarter of 2016, which should help ameliorate our liquidity deficiency. If we are unable to raise additional funds almost immediately, we will not be able to implement our business plan, and it is unlikely that we will be able to continue as a going concern.
In the event we do not generate sufficient funds from revenues or financing through the issuance of common stock or from debt financing, we will be unable to implement our business plan and pay our obligations as they become due, any of which circumstances would have a material adverse effect on our business prospects, financial condition, and results of operations. The accompanying financial statements do not include any adjustments that might be required should the Company be unable to recover the value of its assets or satisfy its liabilities. See Note 2 to the Financial Statements - Liquidity/Going Concern.
Subject to the availability of funds, which we currently do not have, we expect to incur approximately $300,000 in website development expenditures over the next 12 months (included in the $3.6 million estimate of cash required over the next twelve months). The purpose of these expenditures will be for the development of various Websites/portals we intend to create and acquisition of additional domain names.
We expect to fund these website development expenditures through a combination of cash flows from operations and proceeds from equity and or debt financing. If we are unable to generate positive cash flows from operations, and/or raise additional funds (either through debt or equity), we will be unable to fund our website development expenditures, in which case, there could be an adverse effect on our business and results of operations.
17
We hope to raise additional funds in the near term from the further sales of shares of common stock, but, again have recently encountered great difficulty in our efforts to secure additional equity funding. Additional sales of common stock will reduce the percentage interest of existing shareholders in our company. Although it is possible, we do not believe it is likely that we will raise funds through the sale of debt securities in the near term.
As described above, In June, 2014, we issued Kae Yong Park a promissory note in the principal amount of $500,000, as partial consideration for the acquisition of approximately 7,500 cannabis related internet domain names. We have since paid $100,000 in principal to Ms. Park. The remaining balance of $400,000 is payable in thirty-six equal monthly installments, commencing on the fifteenth day following the first month we realize at least $150,000 in gross revenue. This remaining $400,000 balance is currently classified as a noncurrent liability. We believe that we will be able to make the approximate $11,000 monthly payment when (and if) we achieve the monthly $150,000 revenue threshold which triggers our repayment obligation.
As noted above, as of November 19, 2015, the Company was indebted to Park in the aggregate the amount of $794,907. To evidence this indebtedness, Company has issued Park a non-interest bearing, secured demand promissory note in the $682,307 ($794,907 currently outstanding) (“Company Note”). Unpaid principal under the Company Note is due and payable upon the earlier to occur of (i) an “event of default” (as defined), (ii) written demand and (iii) the Company’s receipt of capital whether in the form of debt, equity or otherwise.
Off-balance Sheet Arrangements
None.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not required.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls over Procedures
Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted by the Securities and Exchange Commission, and that such information is accumulated and communicated to management, including the CEO and Financial Controller, to allow timely decisions regarding required disclosures.
Under the supervision and with the participation of our management, including our CEO and financial controller, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon that evaluation, our CEO and financial controller concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls were not effective.
Changes in Internal Control over Financial Reporting
None
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On August 7, 2015, Lee Ori ("Plaintiff") instituted a legal action in Missouri against us, Wealthcorp, LLC, Winterwalk Capital, LLC, Christopher S. Walkup ("Walkup"), Marshall P. Winters and Paradigm Healthcare Solutions, LLC.
The complaint alleged that (i) Walkup represented to the Plaintiff that he had the right to subscribe to shares of our common stock at a per share price of $.25 and (ii) that Walkup was our agent and individually and in such alleged agency capacity offered to sell Plaintiff an aggregate of 1,075,000 shares of company common stock for a total purchase price of $425,000. The Complaint alleges that we are liable to the Plaintiff for the acts and omissions of Walkup, based on the allegation that he was our agent. The complaint seeks from us and Walkup (1) 1,075,000 shares of our common stock and (2) money damages in the amount of $425,000.
Without admitting any responsibility, the Company and the Plaintiff have agreed to settle this matter and are currently negotiating a definitive agreement. The Company has agreed to issue 400,000 restricted shares of common stock valued at $62,000 to the Plaintiff as consideration for the settlement. In addition, the Company has agreed to issue an additional 275,000 shares as liquidated damages if it breaches a certain material representation contained in the settlement agreement. The Company will value these if and when the shares become issuable.
Item 1A. Risk Factors
Not required.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 14, 2015, the Company sold 200,000 shares of its common stock for total gross proceeds $50,000 ($0.25 per share).
On July 1, 2015, the Company received $34,900, in consideration for which we issued 7 day promissory note and agreed to issue 349,000 shares of common stock and 100,000 warrants to purchase shares at $0.25 per share.
In August 2015, we received $45,000, in consideration for which we issued a 120 day promissory note and agreed to issue 1,200,000 shares of common stock.
During September and October, 2015, the Company raised an aggregate of $75,000 from an existing investor through the sale of Units (each consisting of one share of common stock and a warrant to purchase one share of common stock at an exercise price of $.25 per share), as follows: 416,667 Units (at a per unit price of $.06) and 714,285 Units at a per unit price of $.07. In order to induce this investor to make these purchases from the Company, our controlling shareholder sold the investor an aggregate of 12,408,735 shares of common stock, at an average per share price of $.016
The Company believes that the foregoing transactions were exempt from the registration requirements under the Securities Act of 1933, as amended (“the Act”), based on the following facts: there was no general solicitation, there was a limited number of purchasers, each of whom we believe was an “accredited investor” (within the meaning of Regulation D under the Securities Act of 1933, as amended) and was sophisticated about business and financial matters, and all shares issued were subject to restriction on transfer, so as to take reasonable steps to assure that the purchaser was not an underwriter within the meaning of Section 2(11) under the Act.
Item 3. Defaults upon Senior Securities
None; not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
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Item 6. Exhibits
(a)
Exhibits
Identification of Exhibit
