The accompanying notes are an integral part of these financial statements
7
CARING, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 1 – NATURE OF OPERATIONS
Caring, Inc. (the “Company” or “Caring.com”) was incorporated in Delaware on January 25, 2007. The Company is a leading online destination (www.caring.com) for those seeking information and support as they care for aging parents and other loved ones. The Company provides thousands of original articles, helpful tools, a comprehensive local directory of caregiving services, and the collective wisdom of an involved online community. The Company’s carefully researched and expert-reviewed content includes advice from a team of more than 50 trusted leaders in geriatric medicine, law, finance, housing, and other key areas of healthcare and eldercare. The Company also operates a call center where the Company’s Family Advisors are available to speak to consumers via telephone at no charge and provide them with advice on senior living communities that are conveniently located, have the amenities they desire, are within the consumer’s price range, and are highly rated by other consumers. Caring.com is a free resource to consumers and is supported by fees paid by advertisers and senior living communities. The Company is headquartered in San Mateo, California.
NOTE 2 – LIQUIDITY
During the year ended December 31, 2013, the Company incurred a net loss of $7,573,617 and generated negative cash flow from operations in the amount of $6,682,593. The Company's continued existence depends upon its ability to become profitable and to obtain additional debt or equity funding. Management anticipates the Company will achieve profitability and improve its liquidity through continued growth in revenue from its services, combined with appropriate cost controls. It is possible the Company could fail to attain required revenue growth, incur unexpected costs and expenses, fail to collect significant amounts it is owed or experience unexpected cash requirements that would force the Company to seek additional financing. If additional financing is not available, or is not available on acceptable terms, the Company would have to curtail and/or discontinue its operations.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s most significant estimates and judgments relate to the valuation of its common stock, options and warrants and deferred taxes and the related valuation allowance.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original or remaining maturity from the date of purchase of three months or less to be cash equivalents. As of December 31, 2013 and 2012, cash and cash equivalents consisted of cash deposited with banks and money market funds. The recorded carrying amount of cash and cash equivalents approximates their fair value.
Restricted Cash
In compliance with a pledge and security agreement entered into on April 5, 2013 related to revolving credit transactions, the Company has designated funds as restricted to support the amount owed on the Company’s credit cards.
CARING, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited with a federally-insured commercial bank in the United States and exceeded federally-insured limits by $4,827,816 and $1,740,117 at December 31, 2013 and 2012, respectively. The Company maintains its deposits with high-quality financial institutions, and therefore the Company believes the risk of loss to be remote.
The Company generally does not require collateral or other security in support of accounts receivable and does not charge interest on past due balances. The Company performs ongoing credit evaluations of its customers and maintains an allowance for doubtful accounts to provide for potential bad debts. Allowances are provided for individual accounts receivable when the Company becomes aware of a customer's inability to meet its financial obligations, such as in the case of bankruptcy, deterioration in the customer's operating results or change in financial position. If circumstances related to customers change, estimates of the recoverability of receivables are further adjusted. The Company also considers broader factors in evaluating the sufficiency of its allowances for doubtful accounts, including the length of time receivables are past due, macroeconomic conditions, significant one-time events and historical experience. The Company writes off bad debts against the allowance once all efforts at collection have been exhausted. As of December 31, 2013 and 2012, the Company had an allowance for doubtful accounts of $5,500 for estimated credit losses.
Revenue Concentrations and Major Customers
For the year ended December 31, 2011, the Company’s revenue was derived largely from advertising services provided to pharmaceutical companies, which can vary greatly from period to period depending on advertiser budgets, introductions of new pharmaceuticals directed towards the elderly, and regulatory issues related to such drugs already in the marketplace. In 2012 and 2013, the majority of the Company’s revenue shifted to its directory services, which tends to be a more steady and predictable revenue stream.
At December 31, 2013, 34% of revenue was related to two customers, and 32% of accounts receivable was related to two customers. At December 31, 2012, 28% of accounts receivable was related to one customer.
Major Vendors
Purchases from two vendors providing traffic and lead acquisition services represented 36% of total vendor expenses for the year ended December 31, 2013. Accounts payable to these same vendors totaled $381,479 at December 31, 2013.
Purchases from three vendors providing traffic and lead acquisition services represented 70% of total vendor expenses for the year ended December 31, 2012. Accounts payable to these same vendors was $198,346 at December 31, 2012.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, generally 24 to 60 months. Expenditures for repairs and maintenance are charged to expense as incurred. Upon disposition, the cost and related accumulated depreciation are removed from the accounts, and the resulting gain or loss is reflected in the statements of operations.
CARING, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangible Assets
Intangible assets consist of the online directory and related intangibles resulting from the purchase of assets during 2009 from Gilbert Guide, a comprehensive online senior housing guide and homecare directory. The Gilbert Guide intangible assets are stated at cost less accumulated amortization, which is computed on the straight-line basis over a term of five years.
Goodwill
Goodwill is not amortized but is subject to impairment tests annually, or earlier if indicators of potential impairment exist, using a fair-value-based approach. The Company did not recognize any goodwill impairment charges in the years ended December 31, 2013 and 2012.
Long-lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured at the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of carrying amount or the fair value less costs to sell. No such impairments have been identified to date.
Revenue Recognition
The Company recognizes revenues when earned primarily from referral fees and from the sale of advertisements and directory listings. In general, revenues are recognized when persuasive evidence of an arrangement exists, the service has been delivered, the price is fixed and determinable and collection of the resulting receivable is reasonably assured.
The Company maintains an online directory of senior living providers, primarily in the categories of assisted living facilities, independent living communities, in-home care services and nursing homes. Customers may purchase online listings through fixed term contracts. Revenue from those directory listing arrangements is recognized ratably over the term of the applicable agreement.
Customers can also obtain online listings by contracting on a cost-per-acquisition basis, requiring them to pay the Company a fee only when a lead referred by the Company actually buys the services of the customer and maintains those services for a minimum length of time (typically 30 days). Revenue for such referral arrangements is recognized when (1) a “qualified” lead, as defined in the customer contract, has been provided to the customer, (2) the lead has moved into a customer facility and meets all other contractual requirements, and (3) all other revenue recognition criteria have been met. Due to the nature of the referral business, there are situations where some claimed move-ins, or critical pieces of information about some move-ins, are reported to the Company late or must be researched before they can be verified. In these cases, the Company’s policy is to recognize any associated revenue once the information has been confirmed and accepted by the customer, which is when the Company deems the referral fee to be due and payable. Retroactive adjustments to prior periods for delays in identifying move-ins are not made unless material. The Company may also owe a partial refund to a customer if a lead moves out of the customer facility within a specified short period. To date such move-out credits have not been material and no sales allowance has been recorded.
CARING, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
The Company also sells advertising placements on its website and in email newsletters to customers wishing to reach caregivers. Revenue from advertising is recognized as (1) advertisements are delivered, as measured by number of ads served in terms of impressions or the number of visitor clicks or (2) as publications are distributed. Revenue from sponsorship arrangements is recognized ratably over the term of the applicable agreement. The unrecognized revenue is recorded in deferred revenue on the balance sheet.
Internal-Use Software
The Company develops internal-use software as required to support its operations. Costs incurred to develop internal-use software during the application development stage are capitalized and reported at cost, subject to an impairment test. Application development stage costs generally include costs associated with software configuration, coding, installation, and testing. Costs of significant upgrades and enhancements that result in additional functionality are also capitalized whereas costs incurred for maintenance and minor upgrades and enhancements are expensed as incurred. Capitalized costs are amortized using the straight-line method over three years. The Company assesses the potential impairment of capitalized internal-use software whenever events or changes in circumstances indicate that the carrying value of the internal-use software may not be recoverable. As of December 31, 2013 and 2012, there were no capitalized internal-use software costs.
Employee Stock-based Compensation
The Company accounts for stock-based compensation in accordance with Accounting Standards Codification Topic No. 718, Compensation – Stock Compensation (“ASC 718”). Stock-based compensation cost is measured at the grant date based on fair value of the award and is recognized as expense net of an estimated forfeiture rate over the applicable vesting period of the stock award using the straight-line method, which is generally four years. In applying the fair value accounting provisions of ASC 718, the Company uses a generally accepted option valuation model, the Black-Scholes option pricing model. This model requires specified inputs to determine the fair value of stock-based awards consisting of (i) the fair value of the Company’s common stock on the grant date, (ii) the expected volatility of the Company’s common stock over the expected option life, (iii) the risk-free interest rate, (iv) the expected dividend yield and (v) the expected option life.
Non-Employee Stock-Based Compensation
Stock-based compensation expense related to stock options granted to non-employees is recognized as the stock options are earned. The Company believes that the estimated fair value of the stock options is more readily measurable than the fair value of the services received. The fair value of stock options granted to non-employees is calculated at each grant date and re-measured at each reporting date. The stock-based compensation expense related to a grant will fluctuate as the fair value of common stock fluctuates over the period from the grant date to the vesting date.
Technology and Content
Technology and content costs are charged to operations as incurred.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires among other things, that deferred income taxes be provided for temporary differences between the tax basis of the Company’s assets and liabilities and their financial statement carrying amount. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development tax credit carryforwards. A valuation allowance is provided against deferred tax assets unless it is more likely than not that they will be realized.
CARING, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (Continued)
Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, the Company considers all available evidence, including past operating results, estimates of future taxable income and the feasibility of tax planning strategies. In the event that the Company changes its determination as to the amount of deferred tax assets that is more likely than not to be realized, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
The Company follows the authoritative guidance regarding uncertain tax positions. This guidance requires that realization of an uncertain income tax position must be more likely than not (i.e., greater than 50% likelihood of receiving a benefit) before it can be recognized in the financial statements. The guidance further prescribes the benefit to be realized assumes a review by tax authorities having all relevant information and applying current conventions. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as income tax expense.
As of December 31, 2013, the federal and California income tax returns of the Company are still open and subject to examination by the Internal Revenue Service for the years 2007 through 2013.
Reclassification
Certain reclassifications were made to the 2012 financial statements to conform to the 2013 financial statement presentation. Such reclassifications had no effect on previously reported net loss or accumulated deficit.
NOTE 4 – FAIR VALUE MEASUREMENT
FASB Accounting Standards Codification Topic No. 820, Fair Value Measurements (“ASC 820”), defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair-value measurements. The statement, among other things, requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This includes applying the fair value concept to (i) nonfinancial assets and liabilities initially measured at fair value in business combinations, (ii) reporting units or nonfinancial assets and liabilities measured at fair value in conjunction with goodwill impairment testing, (iii) other nonfinancial assets and liabilities measured at fair value in conjunction with impairment assessments and (iv) asset retirement obligations initially measured at fair value.
The statement established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring fair value. This framework defines three levels of inputs to the fair value measurement process and requires that each fair value measurement be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety. The three broad levels of inputs defined by the hierarchy are as follows:
| · | | Level 1 Inputs – quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. |
| · | | Level 2 Inputs – inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a level 2 input must be observable for substantially the full term of the asset or liability. |
CARING, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 4 – FAIR VALUE MEASUREMENT (Continued)
| · | | Level 3 Inputs – unobservable inputs for the asset or liability. These unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances (which might include the reporting entity’s own data). |
The asset's or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The Company’s warrant liabilities are required to be measured at fair value in the financial statements. As discussed in Note 10, the warrant liabilities were valued using the Black-Scholes model, which requires subjective inputs such as volatility, expected term, share price and dividend yield; as a result, these liabilities are a level 3 measurement in the fair value hierarchy.
The Company also has a financial liability required to be disclosed at fair value, namely the term debt. The term debt’s carrying value approximates its carrying value based upon comparable credit facilities available to the Company with similar terms and conditions.
Following are the major categories of liabilities measured at fair value on a recurring basis at December 31, 2013:
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | December 31, 2013 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | | | | | |
Warrant Liabilities | | $ | - | | $ | - | | $ | 805,118 | | $ | 805,118 |
| | | | | | | | | | | | |
Following are the major categories of assets and liabilities measured at fair value on a recurring basis at December 31, 2012:
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | December 31, 2012 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | | | | | |
Warrant Liabilities | | $ | - | | $ | - | | $ | 67,290 | | $ | 67,290 |
| | | | | | | | | | | | |
CARING, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2013 and 2012:
| | | | | |
| | | | | |
| | | |
| 2013 | | 2012 |
Furniture and fixtures | $ | 141,363 | | $ | 141,363 |
Computer equipment | | 101,705 | | | 88,295 |
Leasehold improvements | | 47,558 | | | 42,967 |
Computer software | | 17,779 | | | 14,790 |
| | 308,405 | | | 287,415 |
Less accumulated depreciation | | (219,377) | | | (162,680) |
Total | $ | 89,028 | | $ | 124,735 |
Depreciation expense on property and equipment for the years ended December 31, 2013 and 2012 totaled $60,300 and $70,533, respectively.
NOTE 6 – ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31, 2013 and 2012:
| | | | | |
| | | | | |
| | | |
| 2013 | | 2012 |
Employee-related liabilities | $ | 570,500 | | $ | 271,831 |
Other accrued liabilities | | 144,250 | | | 29,552 |
Total | $ | 714,750 | | $ | 301,383 |
NOTE 7 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The carrying value of goodwill was $57,042 as of December 31, 2013 and 2012, respectively, and related to the 2009 acquisition of the assets of Gilbert Guide. The Company paid approximately $312,000 for Gilbert Guide, and the goodwill was recorded as the difference between the purchase price and the accounts receivable acquired of approximately $19,000 and the value determined for the Gilbert Guide intangible assets of approximately $236,000. The Company completed its annual evaluation of this goodwill and concluded that there was no impairment as of December 31, 2013 and 2012.
CARING, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 7 – GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
Intangible Assets
The components of intangible assets as of December 31, 2013 and 2012 were as follows:
| | | | | | | | | |
| | December 31, 2013 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Amount |
| | | | | | | | | |
Directory Assets | | $ | 236,250 | | $ | (200,812) | | $ | 35,438 |
| | | | | | | | | |
| | December 31, 2012 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Amount |
| | | | | | | | | |
Directory Assets | | $ | 236,250 | | $ | (153,562) | | $ | 82,688 |
| | | | | | | | | |
Amortization expense for intangible assets for each of the years ended December 31, 2013 and 2012 was $47,250.
The remaining net amount of $35,438 for the intangible assets is expected to be fully amortized in 2014.
NOTE 8 – TERM DEBT
On April 3, 2012, the Company entered into a loan and security agreement with a bank that provided for up to $2,000,000 of growth capital advances maturing on October 1, 2015. The Company was required to make interest-only payments through April 2013 and then 30 equal monthly installments of principal plus interest until the maturity date. Funds loaned under this facility were secured by the Company’s assets and a security interest in any proceeds from the sale of its copyrights. The term debt bore interest at the greater of the prime rate (3.25% at December 31, 2012) or LIBOR rate (0.168% at December 31, 2012) plus 2.5%, plus an applicable margin of 2%. The agreement required that the Company comply with certain loan covenants as defined in the agreement. As of December 31, 2012, the Company was in compliance with the loan covenants. In March 2013, the Company repaid the entire $2,000,000.
In connection with this loan and security agreement, the lender was issued a warrant for the purchase of 50,906 shares of Series B convertible preferred stock at an exercise price of $0.9822 per share. The warrant expires on April 3, 2022. See Note 10, Warrants, for additional information. The value of the warrant at issuance of $39,503 was recorded as a discount to the term debt and was being amortized over the term of the loan, until it was paid off early in 2013. At that time, the remaining discount was expensed to interest expense. Amortization of this discount to interest expense for 2013 and 2012 was $28,283 and $11,220, respectively.
CARING, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 8 – TERM DEBT (Continued)
On March 5, 2013, the Company entered into a loan and security agreement with a bank that provided for up to $3,000,000 of growth capital advances maturing on July 1, 2016. The Company was required to make interest-only payments through December 2013, and then 30 equal monthly installments of principal plus interest until the maturity date. Funds loaned under this facility were secured by the Company’s assets and a security interest in any proceeds from the sales of its copyrights. The term debt bore interest at the prime rate plus 1.75%. The agreement required that the Company comply with certain loan covenants as defined in the agreement. The Company drew the entire $3,000,000 and used $2,000,000 to repay its prior term debt. In September 2013, the Company borrowed an additional $500,000 under this facility, and in December 2013, the Company repaid the entire $3,500,000.
In connection with this loan facility, the lender was issued warrants for the purchase of 61,087 shares of Series B convertible preferred stock at an exercise price of $0.9822 per share. The warrants expire on March 5, 2020. In September 2013 an additional 12,726 warrants were issued under the same terms, expiring on September 10, 2020. The value of the warrants at issuance of $42,911 was recorded as a discount to the term debt and was being amortized over the term of the agreement, until it was paid off late in 2013. At that time, the remaining discount was expensed to interest expense. Amortization of this discount to interest expense for 2013 was $42,911. See Note 10, Warrants, for additional information.
On December 23, 2013, the Company entered into a loan and security agreement with a lender that provides for up to $8,000,000 of advances maturing in June 2017. The Company is required to make interest-only payments through December 2014, and then 30 equal monthly installments of principal plus interest until the maturity date. Funds loaned under this facility are secured by the Company’s assets and intellectual property. The term debt bears interest at 11.75%. The agreement requires that the Company comply with certain loan covenants as defined in the agreement. As of December 31, 2013, the Company is in compliance with the loan covenants. The Company drew the entire $8,000,000 in December 2013 and used $3,500,000 to repay its prior term debt.
In connection with this loan and security agreement, the lender was issued warrants for the purchase of 814,498 shares of Series B convertible preferred stock at an exercise price of $0.9822 per share. The warrants expire on March 31, 2024. The value of the warrants at issuance of $701,120 was recorded as a discount to the term debt and is being amortized over the term of the agreement. Amortization of this discount to interest expense for 2013 was $7,721. See Note 10, Warrants, for additional information.
Following are the future principal payments under this loan and security agreement as of December 31, 2013:
| | | | | | |
| | | | | |
Year ending December 31 | | | | | |
2014 | | | | | $ | - |
2015 | | | | | | 2,943,730 |
2016 | | | | | | 3,278,333 |
2017 | | | | | | 1,777,937 |
| | | | | | 8,000,000 |
Less discount on debt | | | | | | (693,399) |
| | | | | | 7,306,601 |
Less short-term portion | | | | | | - |
Long-term portion | | | | | $ | 7,306,601 |
| | | | | | |
CARING, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 9 – STOCKHOLDERS’ EQUITY
At December 31, 2013, the authorized capital stock of the Company consisted of 71,190,072 shares, comprised of 41,099,674 shares of common stock and 30,090,398 shares of convertible preferred stock of which 3,444,444 are designated as Series Seed convertible preferred stock (Series Seed), 6,365,000 are designated as Series A convertible preferred stock (Series A) and 20,280,954 shares are designated as Series B convertible preferred stock (Series B). All classes of the Company's common stock and convertible preferred stock have a par value of $0.0001 per share.
Common Stock
In 2007, the Company issued 5,133,334 shares of common stock to its founding stockholders (Founder Stock) and certain officers of the Company. The shares of the common stock were issued pursuant to restricted stock agreements and were subject to certain restrictions including repurchase rights and transfer limitations. Under these arrangements, the Company may elect to repurchase all unvested shares when employment with the Company terminates at the original issue prices ranging from $0.01 to $0.05 per share. As of December 31, 2013, no shares of the Founder Stock were subject to repurchase.
In 2009, the Company issued 2,116,000 shares of common stock at $0.15 per share to the sellers of Gilbert Guide. The shares of the common stock were issued pursuant to restricted stock arrangements and are subject to certain restrictions including transfer limitations.
In 2013, the Company issued 33,334 shares of common stock at $0.30 per share in exchange for consulting services.
Convertible Preferred Stock
In 2007, the Company issued Series Seed and Series A shares and raised $775,000 and $5,999,999, respectively.
In 2009, the Company raised $10,000,033 through the issuance of 10,181,260 shares of Series B.
In 2010, the Company raised an additional $4,000,000 through the issuance of 4,072,490 shares of Series B.
In 2013, the Company raised an additional $3,487,524, net of issuance costs, through the issuance of 3,593,971 shares of Series B.
At December 31, 2013, convertible preferred stock consisted of the following:
| | | | | | | | | | | | |
| | Shares Authorized | | Shares Issued and Outstanding | | Liquidation Amount | | Gross Proceeds |
| | | | | | | | | | | | |
Series Seed | | | 3,444,444 | | | 3,444,444 | | $ | 775,000 | | $ | 775,000 |
Series A | | | 6,365,000 | | | 6,299,873 | | | 5,999,999 | | | 5,999,999 |
Series B | | | 20,280,954 | | | 17,847,721 | | | 17,530,000 | | | 17,530,028 |
| | | 30,090,398 | | | 27,592,038 | | $ | 24,304,999 | | $ | 24,305,027 |
| | | | | | | | | | | | |
CARING, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 9 – STOCKHOLDERS’ EQUITY (Continued)
Convertible Preferred Stock (Continued)
The significant features of the Company's convertible preferred stock are as follows:
Dividend Provisions
The holders of Series Seed, Series A and Series B are entitled to receive, when and if declared by the Board of Directors, noncumulative dividends at a rate of $0.018, $0.08 and $0.08 per share, respectively, per annum, adjustable for certain events, such as stock splits and combinations. The Company has not declared any dividends to date.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the Company, the holders of convertible preferred stock then outstanding shall be entitled to be paid, out of the available funds and assets, and prior and in preference to any payment or distribution of any such funds on any shares of common stock, an amount per share equal to the original issue price for each such series of convertible preferred stock, respectively, plus all declared but unpaid dividends thereon for the Series B, Series A and Series Seed. If assets are not sufficient to permit such payment, payment will be made on a pro rata, equal priority, pari passu basis.
Conversion Rights
Each outstanding share of Series Seed, Series A and Series B is convertible into one fully paid and non-assessable share of common stock. Each share of convertible preferred stock shall automatically be converted into fully paid and non-assessable shares of common stock immediately prior to the closing of a firm commitment, underwritten public offering in which the aggregate offering price equals or exceeds $40,000,000 or exceeds $4.00 per share. Conversion may also occur upon written consent by the convertible preferred stockholders who own at least two-thirds (2/3) of the then outstanding shares of convertible preferred stock. The conversion price is subject to adjustment for stock splits, recapitalizations, reorganizations and other equity restructuring transactions. Additionally, the conversion price is subject to the adjustment based upon future dilutive issuances at a price less than the Series B conversion price.
Voting Rights
The holders of each share of convertible preferred stock are entitled to the number of votes equal to the number of shares of common stock into which such share is convertible.
NOTE 10 – WARRANTS
In December 2008, in connection with the Company entering into a loan security agreement, the Company issued a warrant to purchase 62,999 shares of Series A at an exercise price of $0.9524 per share. The warrant expires on December 16, 2018. The fair value of the warrant on the date of issuance and at each remeasurement date was determined using the Black-Scholes option pricing model with the following assumptions: contractual life of 5 - 10 years, volatility of 57% - 75%, risk-free interest rate of 0.95% - 3.7%, and no dividend yield. The fair value of the warrant on the date of issuance of $47,501 was classified in the balance sheet as a liability instrument and as a result, is recorded at fair value with changes in fair value being recorded in the statement of operations under the caption “gain (loss) on change in fair value of warrant liabilities.” During 2013, the fair value change recorded in the statement of operations was a gain of $2,268. At December 31, 2013, the warrant is outstanding.
CARING, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 10 – WARRANTS (Continued)
In April 2012, in connection with the Company entering into a loan security agreement, the Company issued a warrant to purchase 50,906 shares of Series B at an exercise price of $0.9822 per share. The fair value of the warrant on the date of issuance and at each remeasurement date was determined using the Black-Scholes option pricing model with the following assumptions: contractual life of 8.25 - 10 years, volatility of 57% - 75%, risk-free interest rate of 1.63% - 2.7%, and no dividend yield. The fair value of the warrant on the date of issuance of $39,503 was classified in the balance sheet as a liability instrument and as a result, is recorded at fair value with changes in fair value being recorded in the statement of operations under the caption “gain (loss) on change in fair value of warrant liabilities.” During 2013, the fair value change recorded in the statement of operations was a gain of $2,036. At December 31, 2013, the warrant is outstanding.
In March 2013, in connection with the Company entering into a loan security agreement, the Company issued a warrant to purchase 61,087 shares of Series B at an exercise price of $0.9822 per share. The fair value of the warrant on the date of issuance and at each remeasurement date was determined using the Black-Scholes option pricing model with the following assumptions: contractual life of 6.18 - 7 years, volatility of 57% - 60%, risk-free interest rate of 1.27% - 2.17%, and no dividend yield. The fair value of the warrant on the date of issuance of $35,492 was classified in the balance sheet as a liability instrument and as a result, is recorded at fair value with changes in fair value being recorded in the statement of operations under the caption “gain (loss) on change in fair value of warrant liabilities.” During 2013, the fair value change recorded in the statement of operations was a gain of $2,321. At December 31, 2013, the warrant is outstanding.
In September 2013, in connection with the loan security agreement entered into in March 2013, the Company issued an additional warrant to purchase 12,726 shares of Series B at an exercise price of $0.9822 per share. The fair value of the warrant on the date of issuance and at each remeasurement date was determined using the Black-Scholes option pricing model with the following assumptions: contractual life of 6.69 - 7 years, volatility of 57% - 58%, risk-free interest rate of 2.35% - 2.4%, and no dividend yield. The fair value of the warrant on the date of issuance of $7,419 was classified in the balance sheet as a liability instrument and as a result, is recorded at fair value with changes in fair value being recorded in the statement of operations under the caption “gain (loss) on change in fair value of warrant liabilities.” During 2013, the fair value change recorded in the statement of operations was a gain of $229. At December 31, 2013, the warrant is outstanding.
In December 2013, in connection with the Company entering into a loan security agreement, the Company issued warrants to purchase 814,498 shares of Series B at an exercise price of $0.9822 per share. The fair value of the warrant on the date of issuance and at each remeasurement date was determined using the Black-Scholes option pricing model with the following assumptions: contractual life of 10.25 years, volatility of 57%, risk-free interest rate of 2.94 – 3.04%, and no dividend yield. The fair value of the warrant on the date of issuance of $701,121 was classified in the balance sheet as a liability instrument and as a result, is recorded at fair value with changes in fair value being recorded in the statement of operations under the caption “gain (loss) on change in fair value of warrant liabilities.” During 2013, the fair value change recorded in the statement of operations was a loss of $652. At December 31, 2013, the warrant is outstanding.
CARING, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 10 – WARRANTS (Continued)
The following schedule details the Preferred Stock warrant activity for 2013:
| | | | | | |
| | Shares | | Fair Value |
| | | | | | |
Warrants outstanding - December 31, 2012 | | | 113,905 | | $ | 67,290 |
Warrants issued | | | 888,311 | | | 744,031 |
Change in Fair Value | | | - | | | (6,203) |
Warrants outstanding - December 31, 2013 | | | 1,002,216 | | $ | 805,118 |
| | | | | | |
The following schedule details the Preferred Stock warrant activity for 2012:
| | | | | | |
| | Shares | | Fair Value |
| | | | | | |
Warrants outstanding - December 31, 2011 | | | 62,999 | | $ | 36,690 |
Warrants issued | | | 50,906 | | | 39,503 |
Change in Fair Value | | | - | | | (8,903) |
Warrants outstanding - December 31, 2012 | | | 113,905 | | $ | 67,290 |
| | | | | | |
NOTE 11 – STOCK-BASED COMPENSATION
In March 2007, the Company's Board of Directors approved the adoption of a stock option plan (the “Option Plan”). As amended, the Option Plan permits the Company to grant up to 5,105,870 shares of the Company's common stock.
The Option Plan provides for the grant of incentive and non-statutory stock options to employees, non-employee directors and consultants of the Company. Options granted under the Option Plan generally have a contractual term of ten years from the date of the grant and vest over four years. At the discretion of the Company's Board of Directors, certain options may be exercisable immediately at the date of grant but are subject to a repurchase right, under which the Company may buy back any unvested shares at their original exercise price in the event of an employee's termination prior to full vesting. All other options are exercisable only to the extent vested. At December 31, 2013, there were no shares that had been early exercised that were subject to the Company's repurchase right at the respective dates. The exercise price of incentive stock options granted under the Option Plan must be at least equal to 100% of the fair value of the Company's common stock at the date of grant, as determined by the Board of Directors. The exercise price of non-statutory options granted under the Option Plan must be at least equal to 85% of the fair value of the Company's common stock at the date of grant, as determined by the Board of Directors.
For the year ended December 31, 2013, the Company recorded stock-based compensation expense of $132,143, of which $114,694 was related to employee stock-based compensation and $17,449 was related to non-employee stock-based compensation.
CARING, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 11 – STOCK-BASED COMPENSATION (Continued)
For the year ended December 31, 2012, the Company recorded stock-based compensation expense of $92,113, of which $74,197 was related to employee stock-based compensation and $17,916 was related to non-employee stock-based compensation.
Stock option activity for the years ended December 31, 2013 and 2012 is as follows:
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | Weighted | |
| | | | | Weighted | | | Average | |
| | | | | Average | | | Remaining | |
| | | | | Exercise Price | | | Contractual | |
| | | Shares | | Per Share | | | Life (in years) | |
Outstanding at December 31, 2011 | | | 2,439,385 | | $ | 0.33 | | | 8.0 | |
Options granted | | | 538,500 | | $ | 0.41 | | | | |
Options exercised | | | (13,500) | | $ | 0.39 | | | | |
Options cancelled | | | (707,478) | | $ | 0.40 | | | | |
Outstanding at December 31, 2012 | | | 2,256,907 | | $ | 0.33 | | | 7.3 | |
Options granted | | | 828,500 | | $ | 0.43 | | | | |
Options exercised | | | (175,000) | | $ | 0.11 | | | | |
Options cancelled | | | (242,500) | | $ | 0.42 | | | | |
Outstanding at December 31, 2013 | | | 2,667,907 | | $ | 0.37 | | | 7.2 | |
| | | | | | | | | | |
Vested and expected to vest at December 31, 2013 | | | 2,494,819 | | $ | 0.36 | | | 7.1 | |
| | | | | | | | | | |
Exercisable at December 31, 2013 | | | 1,968,425 | | $ | 0.35 | | | 6.8 | |
| | | | | | | | | | |
The total pretax intrinsic value of options exercised during the years ended December 31, 2013 and 2012 was $81,250 and $120, respectively. The intrinsic value is the difference between the estimated fair value of the Company's common stock at the date of exercise and the exercise price for in-the-money options. Total cash received in 2013 and 2012 from options exercised was $18,500 and $5,265, respectively. The weighted average grant date fair value of options granted during the years ended December 31, 2013 and 2012 was $0.14 and $0.11, respectively. The total fair value of shares vested during 2013 and 2012 was $102,831 and $69,514, respectively.
As of December 31, 2013, there was $70,920 of unamortized stock-based compensation costs related to unvested stock options which are expected to be recognized over a weighted average period of 1.9 years.
