UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

¨ 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: 000-51225

 

SearchCore, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada		43-2041643
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
500 North Northeast Loop 323 Tyler, TX		75708
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code: (800) 727-1024

 

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 check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data 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 the definitions 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	¨	Smaller reporting company	x
(Do not check if a smaller reporting company)

 

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 issuers involved in bankruptcy proceedings during the preceding five years:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨

 

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. As of November 12, 2014, there were 50,102,105 shares of common stock, par value $0.001, issued and outstanding.

 

 

 

 

SEARCHCORE, INC.

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION
ITEM 1	Financial Statements			4
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
ITEM 3	Quantitative and Qualitative Disclosures About Market Risk			41
ITEM 4	Controls and Procedures			41
PART II – OTHER INFORMATION
ITEM 1	Legal Proceedings			42
ITEM 1A	Risk Factors			42
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds			42
ITEM 3	Defaults Upon Senior Securities			44
ITEM 4	Mine Safety Disclosures			44
ITEM 5	Other Information			44
ITEM 6	Exhibits			45

 

2

 

PART I – FINANCIAL INFORMATION

 

This Quarterly Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on management’s beliefs and assumptions, and on information currently available to management. Forward-looking statements include the information concerning our possible or assumed future results of operations set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements also include statements in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “consider” or similar expressions are used.

 

Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. Our future results and shareholder values may differ materially from those expressed in these forward-looking statements. Readers are cautioned not to put undue reliance on any forward‑looking statements.

 

3

 

ITEM 1  Financial Statements

 

SEARCHCORE, INC.

Condensed Consolidated Balance Sheets

 

		September 30,				December 31,
		2014				2013
		Unaudited				Audited
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	116,575			$	93,152
Accounts receivable			18,200				81,497
Inventory			1,363,665				-
Note receivables			882,304				1,200,000
Other current assets			331,289				37,365
TOTAL CURRENT ASSETS		$	2,712,033			$	1,412,014
Property and equipment, net			29,293				26,155
Intangible assets:
Domain names			84,363				420,862
Advertising rights			60,101				-
Note receivables noncurrent			970,000				473,000
Other assets			207,500				94,554
Other assets - discontinued operations			442,443				956,436
TOTAL ASSETS		$	4,505,733			$	3,383,021
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable		$	159,685			$	201,472
Accrued liabilities			1,398,606				2,030,680
Notes payable			716,998				196,087
Notes payable - related party			122,040				-
Flooring Credit Line			1,393,198				-
Current liabilities - discontinued operations			246,208				161,226
TOTAL CURRENT LIABILITIES		$	4,036,735			$	2,589,465
LONG TERM LIABILITIES
Other accrued liabilities			118,750				118,750
Notes payable			-				95,519
Notes payable - related party			80,707				161,250
Noncurrent liabilities - discontinued operations			-				400,000
TOTAL LONG TERM LIABILITIES			199,457				775,519
TOTAL LIABILITIES		$	4,236,192			$	3,364,984
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value: 20,000,000 shares authorized;
zero shares issued and outstanding at September 30, 2014;
zero shares issued and outstanding at December 31, 2013;			-				-
Common stock, $0.001 par value: 200,000,000 shares authorized;
50,102,105 shares issued and outstanding at September 30, 2014,
39,368,772 shares issued and outstanding at December 31, 2013,			50,102				39,369
Paid-in capital			(9,951,869	)			(10,717,336	)
Retained earnings			10,171,308				10,696,004
TOTAL STOCKHOLDERS' EQUITY			269,541				18,037
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	4,505,733			$	3,383,021

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

 

SEARCHCORE, INC.

Condensed Consolidated Statements of Operations (Unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2014				2013				2014				2013
REVENUE
Sales		$	351,543			$	-			$	401,916			$	-
Total revenue			351,543				-				401,916				-
OPERATING EXPENSES
Cost of sales			276,523				-				301,770				-
Selling, general and administrative expenses			664,248				683,454				1,234,192				1,860,747
Total operating expenses			940,771				683,454				1,535,962				1,860,747
Operating Loss			(589,228	)			(683,454	)			(1,134,046	)			(1,860,747	)
Other Income (Expense)
Gain on sale of ManufacturedHomes.com			-				-				847,351				-
Interest income			5,173				5,508				13,522				18,273
Interest expense			(76,268	)			(2,515	)			(164,837	)			(3,279	)
Total other income (expense)			(71,095	)			2,993				696,036				14,994
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES			(660,323	)			(680,461	)			(438,010	)			(1,845,753	)
Provision for Income Taxes			(97,000	)			-				(257,000	)			-
LOSS FROM CONTINUING OPERATIONS			(563,323	)			(680,461	)			(181,010	)			(1,845,753	)
Loss from discontinued operations, net of $1,000 and zero tax benefit for the nine months ended September 30, 2014 and 2013, respectively, and net of $1,000 and zero tax benefit for the three months ended September 30, 2014 and 2013, respectively.			(45,083	)			(95,061	)			(343,686	)			(163,889	)
NET LOSS		$	(608,406	)		$	(775,522	)		$	(524,696	)		$	(2,009,642	)
Loss per share, Basic and Diluted
Loss from continuing operations		$	(0.01	)		$	(0.02	)		$	(0.00	)		$	(0.04	)
Loss from discontinued operations			(0.00	)			(0.00	)			(0.01	)			(0.00	)
Total loss per share		$	(0.01	)		$	(0.02	)		$	(0.01	)		$	(0.05	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING			45,897,576				38,808,619				44,041,849				43,731,102

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

 

SEARCHCORE, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

		Nine Months Ended
		September 30,				September 30,
		2014				2013
Cash flows from operating activities:
Net loss		$	(524,696	)		$	(2,009,642	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			3,889				6,714
Amortization			1,541				107,376
Stock-based compensation			717,200				230,175
Gain on sale of ManufacturedHomes.com			(847,351	)			—
Changes in operating assets and liabilities:
Accounts receivable			(21,666	)			(22,843	)
Inventories			29,533				—
Prepaid expenses and deposits			(293,924	)			273,857
Other assets & note receivables			904,676				879,227
Accounts payable and accrued liabilities			(397,760	)			27,521
Net cash used in operating activities			(428,558	)			(507,615	)
Cash flows used in investing activities:
Purchases of property and equipment			(21,136	)			(30,910	)
Purchases of intangible assets			—				(85,260	)
Net cash used in investing activities			(21,136	)			(116,170	)
Cash flows provided by financing activities:
Payments on note payable			(390,880	)			(137,480	)
Proceeds from note payable			822,500				288,500
Proceeds from note payable - related party			41,497				—
Net cash provided by financing activities			473,117				151,020
Net increase (decrease) in cash and cash equivalents			23,423				(472,765	)
Cash and cash equivalents at beginning of period			93,152				514,382
Cash and cash equivalents at end of period		$	116,575			$	41,617
Non-cash investing and financing activity:
Shares issued pursuant to stock based compensation		$	695,000			$	—
Shares issued pursuant to conversion of accounts payable		$	59,000			$	—
Shares issued as additional interest expense		$	22,200			$	—

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

Note 1. General

 

Nature of Business

 

The Company, together with its wholly owned subsidiaries, is engaged in opening and operating manufactured home retail centers, currently in Texas. Its manufactured home operations are primarily conducted through its wholly owned subsidiary, Wisdom Homes Of America, Inc., however, the Company does maintain other wholly-owned subsidiaries which have little or no activity, each of which is incorporated or qualified to do business in the states in which it does so.

 

SearchCore, Inc. was formed on July 14, 2003 in the State of Nevada as Tora Technologies, Inc. On November 21, 2006, it changed its name to Makeup.com Limited, on January 29, 1010, it changed its name to LC Luxuries Limited, and on November 5, 2010, it changed its name to General Cannabis, Inc. On January 6, 2012, the Company changed its name to SearchCore, Inc.

 

Principal Services

 

The Company’s principal service is opening and operating manufactured home retail centers, also known as model home retail centers. Its primary customers are homebuyers who generally purchase manufactured homes to place on their own home sites, although periodically customers will request assistance in locating a lot in the areas where the Company has its retail centers. The Company generally operates its retail sales centers by having inventory on the retail center lots, although customers can order homes which are shipped directly from the factory to their home site. Most of the Company’s sales generally are to customers living within a radius of approximately one hundred miles from its retail centers.

 

In addition to Wisdom Homes of America, Inc., the Company has the following wholly-owned subsidiaries which have little or no operations:

 

Sportify, Inc.

VerticalCore Management, Inc.

VerticalCore Merchant, Inc.

VerticalCore Media, Inc.

VerticalCore Technologies, Inc.

Wisdom Home Loans of America, Inc.

General Marketing Solutions, Inc.

General Processing Corporation

 

Currently, the Company has no imminent or specific plans for any of these entities and they are held as corporations in good standing.

 

Sale of ManufacturedHomes.com Finder Site and other URL’s

 

On May 19, 2014, the Company sold the following domain names: www.ManufacturedHome.com, www.mManufacturedHomes.com, www.ManufacturedHouse.com, www.ManufacturedHomes.net, and www.ModularHomes.com. The domain names were sold to Platinum Technology Ventures, LLC, an entity owned and controlled by Brad Nelms, formerly the Company’s Chief Strategy Officer. As consideration for the sale of the domain names, the Company received a non-recourse secured promissory note in the amount of One Million Dollars ($1,000,000), and Platinum assumed all of its obligations under the Lease Agreement it had with Domain Capital, LLC, with the exception of the Company being responsible to make monthly lease payments for first six months after the closing of the transaction. The Company also received lifetime “gold” or equivalent membership levels on any manufactured home website owned or operated by Platinum. In connection with the transaction, Brad Nelms’ employment with the Company ceased. In order to assist Platinum in its operations, the Company agreed to loan it Ninety Thousand Dollars ($90,000) over six months. After making payments to Platinum in the sum of Forty Five Thousand Dollars ($45,000), on October 28, 2014, we entered into a Waiver and Mutual Release, pursuant to which both parties agreed to release one another from any and all rights and liabilities arising under the promissory note pertaining to the operating expense payments. Accordingly, we have no continuing obligation to make operating expense payments to Platinum, and Platinum has no obligation to repay the monies already paid.

 

7

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

Two additional domain names are subject to the Lease Agreement with Domain Capital, LLC, namely www.TravelTrailer.com and www.ToyHaulers.com. Upon satisfaction of the payment obligations under the Lease Agreement, those domains will be transferred back to the Company.

 

The Company’s decision to sell the www.ManufacturedHomes.com site and other related URL’s results from the increasing competition in the finder site space, and the internet presence and capital that some of those companies have. As a result of the increase in competition, and some of the competition such as Google owning the search engines, the Company believes it has and will continue to become more challenging to generate revenue in the finder site environment.

 

Manufactured Homes Retail Centers

 

The Company is currently expanding its focus in the manufactured housing industry and looking to leverage ancillary opportunities that it has discovered within that industry. Specifically, the Company is currently concentrating on the manufactured home retail center sector of the industry. In February 2014, the Company opened its first retail center in Rhome, Texas. Its second retail center in Tyler, Texas, was opened in April 2014, and its third retail center in Jacksboro, Texas, in May 2014. The Company signed a lease in July 2014 in anticipation of opening its fourth retail center in Mt. Pleasant, Texas. The retail centers are operated by the Company’s wholly owned subsidiary, Wisdom Homes Of America, Inc.

 

Note 2. Basis Of Presentation And Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q, which requires the Company to make estimates and assumptions that affect amounts reported. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. It is the opinion of management that the unaudited condensed consolidated financial statements include all adjustments consisting of normal recurring accruals considered necessary for a fair presentation. All significant intercompany balances and transactions have been eliminated.

 

Operating results for the nine-month period ended September 30, 2014 is not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The accompanying consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 as filed with the SEC.

 

8

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

Reclassifications

 

Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the consolidated results of operations or financial position for any years presented.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates are based on knowledge of current events and anticipated future events and accordingly, actual results may differ from those estimates.

 

Risks related to cash

 

The Company maintains cash in bank and deposit accounts, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.

 

Cash and Cash equivalents

 

The Company considers only highly liquid investments such as money market funds and commercial paper with maturities of 90 days or less at the date of their acquisition as cash and cash equivalents.

 

Fair Value of Financial Instruments

 

The accounting standards regarding disclosures about fair value of financial instruments defines financial instruments and required fair value disclosure of those instruments. This accounting standard defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. Receivables, investments, payables, short and long term debt and warrant liabilities qualified as financial instruments. Management believes the carrying amounts of receivables, payables and debt are a reasonable estimate of fair value because of the short period of time between the origination of such instruments, their expected realization, and if applicable, their stated interest rate is equivalent to interest rates currently available. The three levels are defined as follows:

 

Level 1

Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2

Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

 

Level 3

Inputs to the valuation methodology are unobservable and significant to the fair value.

 

9

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

The Company analyzes all financial instruments with features of both liabilities and equity under the accounting standards regarding accounting for certain financial instruments with characteristics of both liabilities and equity, accounting for derivative instruments and hedging activities, accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, and the accounting standard regarding determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. The accounting standard specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. This standard provides a two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for this accounting standard scope exception. All warrants issued by the Company are denominated in U.S. dollars.

 

Accounts Receivable

 

Accounts receivable are recorded at the invoice amount and do not bear interest.

 

Advertising Cost

 

The Company expenses advertising costs when incurred. Advertising expense for the nine months ended September 30, 2014 and 2013 was $21,000 and $129,000, respectively.

 

Allowance for Doubtful Accounts

 

Allowance for doubtful accounts is defined as a company's estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company does not maintain an allowance for doubtful accounts based upon management’s review of the Company’s revenue structure whereby substantially all receivables are confirmed before they are booked as revenue. The Company reviews its allowance for doubtful accounts policy periodically. The Company does not have any off-balance-sheet exposure related to its customers.

 

Property and Equipment

 

Property and equipment are recorded at cost and depreciated using the straight-line method over the useful lives of the assets, generally from six to seven years. Property and equipment at September 30, 2014 and December 31, 2013 are presented net of accumulated depreciation of $7,000 and $16,000, respectively.

 

Goodwill

 

In accordance with Goodwill and Other Intangible Assets, goodwill is defined as the excess of the purchase price over the fair value assigned to individual assets acquired and liabilities assumed and is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis in the Company's fourth fiscal quarter or more frequently if indicators of impairment exist. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of the Company's reporting units with each respective reporting unit's carrying amount, including goodwill. The fair value of reporting units is generally determined using the income approach. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, the second step of the goodwill impairment test is performed to determine the amount of any impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. No amortization is recorded for goodwill with indefinite useful life. No goodwill impairment was recognized during the nine months ended September 30, 2014 or twelve ended December 31, 2013.

 

10

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

Intangible Assets

 

In accordance with Goodwill and Other Intangible Assets, intangible assets that are determined not to have an indefinite useful life are subject to amortization. The Company amortizes intangible assets using the straight-line method over their estimated useful lives.

 

Impairment of Long-Lived and Intangible Assets

 

In accordance with Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company assesses the recoverability of the long-lived and intangible assets by comparing the carrying amount to the estimated future undiscounted cash flow associated with the related assets. No impairment of intangible assets was recognized during the nine months ended September 30, 2014 or twelve ended December 31, 2013.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation in accordance with the provisions of Share-Based Payment, which addresses the accounting for equity-based compensation and which requires that the cost of all equity-based compensation arrangements, be reflected in the financial statements over the vesting period based on the estimated fair value of the awards. During the nine and twelve months ended September 30, 2014 and December 31, 2013, the Company had $695,000 and $230,000, respectively, in stock-based compensation expense related to issuances of shares of the Company’s common stock to consultants. During the nine months ended September 30, 2014, the Company issued shares of its common stock as additional interest expense in the amount of $22,200.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with ASC 605, “Revenue Recognition,” by recognizing as revenue the fees it charges customers as referenced below because persuasive evidence of an arrangement exists, the fees it charges are substantially fixed or determinable during the period that it provides the services, the Company and its customers understand the specific nature and terms of the agreed upon transactions, and collectability is reasonably assured and services have been rendered. 

 

The Company and its wholly owned subsidiaries recognize revenue as follows:

 

Manufactured Home Retail Centers – the Company generates revenues through its manufactured home retail centers Wisdom Homes Of America, Inc., which it started in January 2014. The Company anticipates opening and/or acquiring additional retail centers in 2014 and branding them under the name Wisdom Homes Of America, Inc. Its first center was opened in Rhome, Texas, in February 2014, its second retail center in Tyler, Texas, in April 2014, and its third retail center in Jacksboro, Texas, in May 2014, and it signed a lease in July 2014 in anticipation of opening its fourth retail center in Mt. Pleasant, Texas. The Company will purchase factory built houses and sell them to end users, and also anticipates structuring the sale of used manufactured homes.

 

11

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

Income Taxes

 

The Company follows Accounting for Income Taxes which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between the income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently due plus deferred taxes.

 

The charge for taxation is based on the results for the year as adjusted for items that are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect to temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent it is probable that taxable profit will be available against which deductible temporary differences can be utilized.

 

Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also recorded in equity.

 

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

 

Uncertain tax positions

 

The Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50% likely of being ultimately realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being sustained. The Company classifies income tax-related interest and penalties as interest expense and SGA expense, respectively, on the Consolidated Statement of Operations.

 

Recent Accounting Pronouncements

 

In July 2012, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, “Intangibles – Goodwill and Other (topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” (“ASU 2012-02”). ASU 2012-02 states that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangibles asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Codification subtopic 350-30, Intangibles – Goodwill and Other, General Intangibles Other than Goodwill. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company elected early adoption of this update and it had no impact on its financial statements.

 

12

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013, with an option for early adoption. We adopted this guidance at the beginning of our first quarter of fiscal year 2014, and did not determine there is any impact on our consolidated financial statements and disclosures.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016, and early adoption is prohibited. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently assessing the impact the adoption of ASU 2014-09 will have on our consolidated financial statements and disclosures.

 

In December 2011, the Financial Accounting Standards Board, or FASB, issued an accounting standards update to require disclosure of information about the effect of rights of offset with certain financial instruments on an entity’s financial position. In January 2013, the FASB issued an accounting standards update that clarifies the aforementioned offsetting disclosure requirements. The disclosure requirements are only applicable to rights of offset of certain derivative instruments, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with standards set forth by the FASB Codification subject to master netting arrangements or similar agreements. Adoption of this standard had no significant impact on the Company’s consolidated financial statements.

 

In February 2013, the FASB issued an accounting standards update that requires presentation for reclassification adjustments from accumulated other comprehensive income into net income in a single note or on the face of the financial statements. The Company has adopted the amendments in this standard effective in the first quarter of 2013. The adoption of this standard had an immaterial effect on the Company’s consolidated financial statements and as such, the required presentation is not included herein.

 

In July 2013, the FASB issued an accounting standards update that specifies that unrecognized tax benefits should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. When a net operating loss carryforward, a similar tax loss or tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes or the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this accounting standards update did not have significant impact on the Company’s consolidated financial statements.

 

13

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

FASB issued an accounting standards update amending ASC 220 to improve the comparability, consistency and transparency of reporting of comprehensive income. It amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU No. 2011-05 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. In December 2011, FASB issued ASU 2011-12. ASU 2011-12 indefinitely deferred the provisions of ASU 2011-05 requiring the presentation of reclassification adjustments on the face of the financial statements for items reclassified from other comprehensive income to net income. The adoption of this standard did not have a material impact on the Company’s financial statements.

 

FASB issued an accounting standards update amending ASC 820, which is effective for interim and annual periods beginning after December 31, 2011, to achieve common fair value measurement and disclosure requirements between GAAP and IFRS. This amendment changes the wording used to describe fair value and requires additional disclosures. The adoption of this amendment did not have a material impact on the Company’s financial statements.

 

In September 2011, the FASB issued an amendment to an existing accounting standard, which provides an option to perform a qualitative assessment to determine whether further impairment testing on goodwill is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this standard did not have a material impact on the Company’s financial statements.

 

During May 2009 and February 2010, the FASB issued a new authoritative pronouncement regarding recognized and non-recognized subsequent events. This guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The adoption of this guidance had no impact on the Company’s results of operations or financial position.

 

Other Recently Issued, but Not Yet Effective Accounting Pronouncements

 

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

 

14

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

Note 3. Equity Transactions

 

At September 30, 2014 the total number of shares of the Company’s common stock that were issued and outstanding was 50,102,105.

 

Stock-based Compensation

 

On February 28, 2014, the Company issued a total of five million five hundred thousand (5,500,000) shares of its common stock, restricted in accordance with Rule 144, to a total of five (5) individuals and entities who had rendered services to it prior to December 31, 2013. These shares were used to satisfy an aggregate debt of Four Hundred and Forty Thousand Dollars ($440,000) owed to service providers.

 

On September 8, 2014, we entered into a Consulting Agreement with a third party to provide consulting and advice related to potential partnerships, strategic contacts, joint ventures, corporate restructuring, and other business relationships, for a period of six months. Pursuant to the agreement, we agreed to issue to the consultant 3,333,333 shares of our common stock.

 

On September 9, 2014, we issued 350,000 shares of our common stock, restricted in accordance with Rule 144, to a third party for services rendered pursuant to a professional services agreement.

 

On September 11, 2014, we issued 250,000 shares of our common stock, restricted in accordance with Rule 144, to a third-party for services rendered pursuant to a memorandum of understanding.

 

Stock Issued But Not Outstanding & Stock Issued As Interest Expense

 

On March 28, 2014, the Company entered into, with a third party investor, a 20% convertible secured promissory note with a maturity date of April 26, 2015 and in the principal amount of $100,000 (the “Convertible Note”). As collateral, the Company placed 2,500,000 shares of its common stock into escrow on April 4, 2014, which shares are not included in the shares issued and outstanding. Finally, as an incentive to the third party investor to enter into the Note, the Company agreed to issue 300,000 shares of its common stock, which it did on April 4, 2014, and which were recorded as additional interest expense of $22,200.

 

Stock Issued But Not Outstanding

 

On March 28, 2014, the Company entered into, with a third party investor, a 20% convertible secured promissory note with a maturity date of April 28, 2015 and in the principal amount of $100,000 (the “Note”). As collateral, the Company placed 2,500,000 shares of its common stock into escrow on April 4, 2014, which shares are not included in the shares issued and outstanding.

 

Stock Issued For Conversion Of Accounts Payable

 

On September 17, 2014, we issued 1,000,000 shares of our common stock, restricted in accordance with Rule 144, to Merriman Capital, Inc., an investment banking firm, in satisfaction of an invoice for services rendered in the amount of $59,000, or $0.059 per share.

 

15

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

Note 4. Asset Sale

 

ManufacturedHomes.com

 

On May 19, 2014, the Company sold the following domain names: www.ManufacturedHome.com, www.ManufacturedHomes.com www.ManufacturedHouse.com, www.ManufacturedHomes.net, and www.ModularHomes.com. The domain names were sold to Platinum Technology Ventures, LLC, an entity owned and controlled by Brad Nelms, formerly the Company’s Chief Strategy Officer. As consideration for the sale of the domain names, the Company received a nonrecourse secured promissory note in the amount of One Million Dollars ($1,000,000), and Platinum assumed all of its obligations under the Lease Agreement it had with Domain Capital, LLC, with the exception of the Company being responsible to make monthly lease payments for first six months after the closing of the transaction. The Company also received lifetime “gold” or equivalent membership levels on any manufactured home website owned or operated by Platinum. In connection with the transaction, Brad Nelms’ employment with the Company ceased. As a result of its sale of the manufactured home domain names and associated intellectual property, the Company has terminated employees that previously worked in its Las Vegas, Nevada, office in connection with the development and operation of these domain names, and did not renew its lease for the Las Vegas office, which expired in April 2014. In order to assist Platinum in its operations, the Company agreed to loan it Fifteen Thousand Dollars ($15,000) per month for six (6) months, for an aggregate loan of Ninety Thousand Dollars ($90,000). Platinum is obligated to begin repaying this loan seven (7) months after it was issued, and its repayment obligations will continue for the following six (6) months. After making payments to Platinum in the sum of Forty Five Thousand Dollars ($45,000), on October 28, 2014, we entered into a Waiver and Mutual Release, pursuant to which both parties agreed to release one another from any and all rights and liabilities arising under the promissory note pertaining to the operating expense payments. Accordingly, we have no continuing obligation to make operating expense payments to Platinum, and Platinum has no obligation to repay the monies already paid.

 

The sale price was approximately $1,061,600. The sale price was determined based upon the nonrecourse secured promissory note in the original amount of $1 million, lifetime “gold” or equivalent membership levels on any manufactured home website owned or operated with a fair value of $61,600 (the “Advertising Rights”), and the assumption of $122,200 in leaseback obligations related to the domain names.

 

In conjunction with the sale of ManufacturedHomes.com, the Company discontinued the operations of VerticalCore Solutions, Inc. (“VCS”), VerticalCore Technologies, Inc. (“VCT”), and VerticalCore Media, Inc. (“VCM”), which previously oversaw the operations of ManufacturedHomes.com and its then Las Vegas office. For comparative purposes, all prior periods presented have been restated to reflect the reclassification of these entities to discontinued operations on a consistent basis. The Company does not expect any continuing cash flows from VCS, VCT nor VCM’s discontinued operations. See Note 11. Discontinued Operations for more information.

 

Pursuant to ASC 205-20-55: A discontinued operation arises upon the complete or near-complete disposal of a component of an entity. A component comprises (a) operations, and (b) cash flows, that can be clearly distinguished from those of the remainder of the entity and may be (1) a reportable segment, (2) a reporting unit, or (3) an asset group, provided that:

 

●	The operations and cash flows of the component have been or will be eliminated from the entity's ongoing operations, and

 

●	The entity will have no significant continuing involvement in the component after disposition.

 

The evaluation that should be made is (1) whether or not the operations and cash flows of a disposed component have been eliminated from the entity's ongoing operations, and (2) whether the types of continuing involvement in the operations of the disposed component are deemed significant.

 

16

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

The evaluation of whether operations and cash flows have been eliminated depends on whether:

 

	(1)	operations will continue and cash flows are expected to be generated; and
	(2)	the cash flows, based on their nature and significance, are considered direct or indirect.

 

If continuing direct cash flows are not eliminated, the component's operations should not be presented as a discontinued operation. Generally, direct cash flows are those associated with revenue-producing and cost-generating activities of a disposed component. Revenue-producing cash inflows and cost-generating cash outflows should be considered direct if, after the disposal transaction, they are expected to be recognized by the ongoing entity as a result of: (1) migration from the disposed component; and (2) the continuation of activities between such entity and the disposed component.

 

If expected continuing cash inflows and outflows are considered direct, an evaluation of their significance should be based on a comparison of the ongoing entity's expected continuing cash flows after the disposal transaction and the cash flows that would have been expected to be generated by the disposed component had the disposal transaction not taken place. If continuing cash flows are deemed direct, the results of operations of the disposal component should not be reported as a discontinued operation.

 

Pursuant to ASC 360-10-40: A gain or loss not previously recognized that results from the sale of a long-lived asset (disposal group) shall be recognized at the date of sale.

 

The Company does not expect to retain direct cash flows from this component resulting from the sale of the Company’s finder site ManufacturedHomes.com and related intellectual property. The Company’s finder site technology and telemarketing component and operations were effectively sold and it does not expect to generate revenue from this component.

 

As a result of the foregoing analysis, the cash flows from this component were eliminated and the component's operations were presented as discontinued operations. The Company recognized a gain on the sale of the disposal group at the date of the sale. The sale of ManufacturedHomes.com marks the Company’s complete exit from the finder site business.

 

Summary of Transaction

 

The following table summarizes the total sale price of $1,061,600:

 

Promissory note		$	1,000,000
ManufacturedHomes.com advertising rights			61,600
Total consideration		$	1,061,600

 

The following table summarizes the net assets sold:

 

Domain assets		$	336,500
Assumption of leaseback obligation			(122,200	)
Net assets sold		$	214,300

 

17

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

The following table summarizes the disposition with a total gain on sale of $847,300:

 

Total consideration		$	1,061,600
Net assets sold			(214,300	)
Gain on sale		$	847,300

 

Note 5. Inventory

 

The inventory balance at September 30, 2014 was $1,363,665 which consisted of 25 manufactured homes located at our retail lots and 7 manufactured homes on order which were stated at the lower of cost (average) or market. The manufactured homes are located at the Company’s Tyler, Texas, and Jacksboro, Texas, retail centers. At December 31, 2013, the Company did not have any inventory.

 

Note 6. Note receivables

 

Current Note Receivables

 

At September 30, 2014, the Company had recorded a $782,660 note receivable which represented the current portion of a $3,000,000 note receivable pursuant to the sale of the Company’s finder site WeedMaps.com. On December 11, 2012, the Company entered into an Agreement and Plan of Reorganization, pursuant to which it sold its finder site WeedMaps.com. Pursuant to the terms of the sale and as partial consideration the Company received a Secured Promissory Note in the original principal amount of Three Million Dollars ($3,000,000). Pursuant to the Note, the Company will receive (1) Two Hundred Fifty Thousand Dollars ($250,000) on January 15, 2013 (which payment date was extended to January 31, 2013), which payment was received; One Hundred Thousand Dollars ($100,000) each month beginning on February 25, 2013 and continuing on the twenty fifth (25th) of each month thereafter for a total of twenty eight (28) months, which payments for February through September 2014 were received; and Sixteen Thousand Five Hundred Dollars ($16,500) on July 25, 2015.

 

At September 30, 2014, the Company had recorded a $65,972 note receivable from Platinum Technology Ventures LLC pursuant to which it sold certain domain names. See Note 4 Asset Sale for more information.

 

At September 30, 2014, the Company had recorded a $33,671 note receivable which represented the current portion of a $1,000,000 non-recourse promissory note pursuant to the sale of the Company’s website ManufacturedHomes.com and related intellectual property. See Note 4 Asset Sale for more information.

 

Noncurrent Note Receivables

 

At September 30, 2014, the Company had recorded a $970,000 note receivable which represented the noncurrent portion of a $1,000,000 non-recourse promissory note pursuant to the sale of the Company’s website ManufacturedHomes.com and related intellectual property. See Note 4 Asset Sale for more information.

 

18

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

Note 7. Other Current Assets

 

At September 30, 2014, the Company had recorded $21,018 in prepaid insurance, $11,917 in prepaid filing fees, $216,667 in Prepaid consulting fees, $55,200 in deposits, and $26,488 in other.

 

Note 8. Property And Equipment

 

Property and equipment are recorded at cost and depreciated using the straight-line method over the useful lives of the assets, generally from six to seven years. Property and equipment at September 30, 2014 and December 31, 2013 consist of the following:

 

		September 30,				December 31,
Property and Equipment		2014				2013
Furniture and Computer Equipment		$	36,503			$	42,155
Less: Accumulated Depreciation			(7,210	)			(16,000	)
Property and Equipment, net		$	29,293			$	26,155

 

For the nine months ended September 30, 2014 depreciation expense was $3,889. For the twelve months ended December 31, 2013 depreciation expense was $10,000.

 

Note 9. Intangible Assets

 

Intangible assets consist of a suite of domain names. The domain names have been determined to have an indefinite useful life based primarily on the renewability of the domain name. Intangible assets with an indefinite life are not subject to amortization, but will be subject to periodic evaluation for impairment.

 

Intangible asset amounts at September 30, 2014 and December 31, 2013 are as follows:

 

		September 30,				December 31,
Intangible Assets		2014				2013
Domain names		$	84,363			$	420,862
Advertising rights			61,642				—
Subtotal		$	146,005			$	420,862
Accumulated amortization			(1,541	)			—
Total intangible Assets		$	144,464			$	420,862

 

See Note 11. Discontinued Operations for a discussion regarding the other intangible assets whose operations have been discontinued.

 

19

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

Summary of our premium and non premium domain names		Amount
ToyHaulers.com*		$	31,168
TravelTrailer.com*			51,168
Various other nonpremium domain names			2,027
Total premium and non premium domain names		$	84,363

_____________

* These domain names have been pledged as collateral in connection with a financing sale-leaseback with Domain Capital.

 

Note 10. Other Assets

 

At December 31, 2013, the Company had recorded a $177,000 note receivable which represented the noncurrent portion of a $3,000,000 note receivable it received pursuant to the sale of its finder site WeedMaps.com. See Note 4. Other Current Assets for more information on the current portion of this note receivable.

 

The balance of other assets at September 30, 2014 included $2,500 in rent deposits and $205,000 in deferred tax assets.

 

Note 11. Discontinued Operations

 

Sportify, Inc.

 

On March 5, 2014, Sports Asylum, Inc. changed its name to Sportify, Inc.

 

During the quarter ended December 31, 2013, the Company entered into a definitive plan to sell the assets related to Sportify.com, which includes the web software, trademarks, non-premium sports-related domain names and goodwill associated with its acquisition of Sportify, Inc. The transaction did not materialize and consequently the assets were not sold. Sportify, Inc. owns and operates the intellectual property associated with www.Sportify.com. The Company entered into a definitive plan to sell the assets related to Sportify because during the quarter ended December 31, 2013, management decided to focus the Company’s efforts and resources on expanding its operations in the manufactured housing industry. At December 31, 2013, the Company reclassed the assets, which had a net book value of $456,000, which amount comprised of $100,000 in sports related non-premium domain names, $10,000 in Sportify.com premium domain name, $1,000 in trademarks, $59,000 in goodwill, $430,000 in web software and $143,000 in accumulated amortization, to discontinued operations.

 

At September 30, 2014, $349,060 in net assets is recorded as Other assets - discontinued operations. The Sportify assets are being held for sale and as of the filing of this report, no buyer has been identified.

 

For comparative purposes, all prior periods presented have been restated to reflect the reclassification of this entity to discontinued operations on a consistent basis. The Company does not expect any continuing cash flows from Sportify’s discontinued operations.

 

20

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

Karate.com and Rodeo.com

 

During the quarter ended December 31, 2013, the Company entered into a definitive plan to sell the premium domain names Karate.com and Rodeo.com. The Company entered into a definitive plan to sell the Karate.com and Rodeo.com because during the quarter ended December 31, 2013, management decided to focus the Company’s efforts and resources on expanding its operations in the manufactured housing industry. At December 31, 2013 the Company reclassed Karate.com and Rodeo.com, which had a net book value of $100,000 which amount comprised of $500,000 in domain names and $400,000 in debt, to discontinued operations.

 

On April 3, 2014, the Company entered into an Assignment Agreement with a third party entity (the “Assignee”) pursuant to which it assigned and transferred to the Assignee the premium domain names Karate.com and Rodeo.com, which had a book value of $500,000, along with the associated $400,000 in debt. At April 3, 2014, the Company recorded a $100,000 loss on assignment associated with the transaction.

 

General Management Solutions, Inc.

 

The Company discontinued the operations of General Management Solutions, Inc. (“GMS”), which previously oversaw and provided all of the human resource issues for employees including hiring, terminating, and employee benefits. GMS has been a corporation in good standing with no operations since the end of 2012.

 

For comparative purposes, all prior periods presented have been restated to reflect the reclassification of this entity to discontinued operations on a consistent basis. The Company does not expect any continuing cash flows from GMS discontinued operations.

 

The assets and liabilities of discontinued operations related to GMS at September 30, 2014, consists of $11,373 in accounts payable and $20,603 in accrued liabilities recorded as Current liabilities - discontinued operations.

 

General Health Solutions, Inc.

 

The Company discontinued the operations of General Health Solutions, Inc., which constituted its entire Medical Clinic Management segment. The Company discontinued the operations of General Health Solutions because of increasing costs associated with managing the clinics and the recent increased competition in the medicinal cannabis clinic industry. A major factor in the success of managing the medicinal cannabis clinics is running successful online Pay Per Click (“PPC”) advertising campaigns. In PPC campaigns targeting is key, and factors that determine the pricing pertaining to certain key words depend heavily on the number of advertisers bidding on those certain key words. Taken together, i) the Company’s increasing success with its technology in its Marketing and Media Segment and ii) the increasing costs of PPC campaigns coupled with the increasing number of sole-practitioner doctors now offering medicinal cannabis recommendation letters as part of their medical practice offerings, which places downward pressure on pricing, led the Company to decide to discontinue the operations of General Health Solutions, which composes its entire Medical Clinic Management Segment and focus its efforts instead on its technology in its Marketing and Media Segment.

 

21

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

During February 2012, the Company committed to a definitive plan to terminate the Management Agreement (“Agreement”) and services associated with the Agreement, which resulted in General Health Solutions, Inc., the Company’s Medical Clinic Management segment, being reported as discontinued operations. For comparative purposes, all prior periods presented have been restated to reflect the reclassification of this segment to discontinued operations on a consistent basis. Following the closure of the clinics during the first quarter 2012, the Company does not expect any continuing cash flows from discontinued operations.

 

The assets and liabilities of the Company’s discontinued operations related to General Health Solutions at September 30, 2014, consists of $177,232 in notes payable recorded as Current liabilities - discontinued operations.

 

VerticalCore Merchant, Inc. - Tattoo.com

 

On January 21, 2013, the Company entered into a Management Agreement with Tattoo Interactive, LLC pursuant to which it will perform various marketing, promotion, and website management services with respect to the domain name known as Tattoo.com and the commercial website located at that domain. The Agreement has an initial term of twelve (12) months and shall automatically renew for successive one (1) year terms unless terminated in accordance with its terms. On February 5, 2014, the Company received a fully signed copy of a First Amendment to Management Agreement (the “First Amended Agreement”) dated as of January 27, 2014, pursuant to which Tattoo Interactive shall no longer have an obligation to reimburse the Company for any expenses or costs related to the Management Services as of January 1, 2014. The First Amended Agreement will automatically terminate on April 30, 2014 (the “Initial Term”) unless a separate written agreement is executed by the parties (if so extended, the “Extended Initial Term”). On April 30, 2014, the First Amended Agreement automatically terminated pursuant to term of the First Amendment to Management Agreement dated as of January 27, 2014 and the Company did not pursue a further amendment or extension.

 

The company discontinued the operations of VerticalCore Merchant, Inc. (“VCM”), which previously performed the operations related to Tattoo.com, as a result of the automatic termination of the First Amendment to Management Agreement dated as of January 27, 2014.

 

For comparative purposes, all prior periods presented have been restated to reflect the reclassification of this entity to discontinued operations on a consistent basis. The Company does not expect any continuing cash flows from VCM’s discontinued operations.

 

The assets and liabilities of the Company’s discontinued operations related to VCM at September 30, 2014, consists of $6,710 in fixed assets, $67,573 in accounts receivable, and $4 in other assets which are recorded as Other assets - discontinued operations, and $37,000 in accrued liabilities recorded as Current liabilities - discontinued operations.

 

VerticalCore Solutions, Inc., VerticalCore Media, Inc., and VerticalCore Technologies, Inc.

 

In conjunction with the sale of ManufacturedHomes.com, the Company discontinued the operations of VerticalCore Solutions, Inc. (“VCS”), VerticalCore Technologies, Inc. (“VCT”), and VerticalCore Media, Inc. (“VCM”), which previously oversaw the operations of ManufacturedHomes.com and its then Las Vegas office. See Note 4. Asset Sale for more information.

 

For comparative purposes, all prior periods presented have been restated to reflect the reclassification of these entities to discontinued operations on a consistent basis. The Company does not expect any continuing cash flows from VCS, VCT nor VCM discontinued operations.

 

22

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

VerticalCore Media, Inc. - The assets and liabilities of the Company’s discontinued operations related to VCM at September 30, 2014 consists of $17,390 in accounts receivable recorded as Other assets - discontinued operations.

 

VerticalCore Technologies, Inc. - The assets and liabilities of the Company’s discontinued operations related to VCT at September 30, 2014 consists of $1,711 in fixed assets recorded as Other assets - discontinued operations.

 

Note 12. Accounts Payable

 

Accounts payable at September 30, 2014 included amounts owed to certain vendors related to the ongoing normal course of the Company’s operations.

 

Note 13. Accrued Liabilities

 

Accrued liabilities at September 30, 2014 and December 31, 2013 are comprised of the following:

 

		September 30,				December 31,
Accrued liabilities		2014				2013
Tax payable		$	1,098,000			$	1,195,980
Deferred tax liability short term			107,000				146,000
Obligations on stock based compensation			—				440,000
Obligations on marketing agreements			27,000				27,000
Payroll liabilities			116,244				117,600
Other			50,362				104,100
Total accrued liabilities		$	1,398,606			$	2,030,680

 

At September 30, 2014, the Company had $1,098,000 in federal and state taxes payable which represent amounts due and payable for the years ended December 31, 2011 and 2012.

 

Note 14. Notes Payable

 

Domain Capital

 

On August 9, 2013, the Company entered into a sale-leaseback agreement with Domain Capital, LLC, pursuant to which it transferred its interest in the following domains to Domain Capital in exchange for One Hundred and Fifty-Thousand Dollars ($150,000.00): www.ManufacturedHome.com, www.ManufacturedHomes.com, www.ManufacturedHouse.com, www.ManufacturedHomes.net, www.ModularHomes.com, www.TravelTrailer.com, and www.ToyHaulers.com (the Domains). That same day, the Company entered into a Lease Agreement with Domain Capital, pursuant to which it is leasing the Domains at a cost of Five Thousand One Hundred and Ninety-Nine Dollars and Eighty Cents ($5,199.80) per month. The initial term of the Lease Agreement is thirty-six (36) months, and the sum of the lease payments due over the initial term are equal to the consideration it received for the Domains (i.e., $150,000.00) plus interest of 15%. The transactions closed on August 15, 2013, the date that the purchase price was delivered to the Company. At the termination of the Lease Agreement, pursuant to the terms of a Buyback Agreement, the Company can exercise an option to re-purchase the Domains for a total purchase price of one dollar ($1.00), assuming it is not in default under the Lease Agreement at that time. The proceeds the Company received from Domain Capital were used to satisfy outstanding debts related to its acquisition of the following domains, with the balance allocated to working capital: www.ModularHomes.com, www.TravelTrailer.com, and www.ToyHaulers.com.

 

On May 19, 2014, the Company sold the following domain names: www.ManufacturedHome.com, www.ManufacturedHomes.com www.ManufacturedHouse.com, www.ManufacturedHomes.net, and www.ModularHomes.com. Pursuant to the terms of the sale, the buyer assumed all of the Company’s obligations under the Lease Agreement the Company had with Domain Capital, LLC. See Note 4. Asset Sale for more information.

 

23

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

Asher Enterprises

 

On May 1, 2014, the Company entered into Securities Purchase Agreements with Asher Enterprises, Inc., pursuant to which it sold to Asher, or its affiliates, 8% Convertible Promissory Notes in the original principal amount of $47,500 (the “Note”). The Note has a maturity date of February 5, 2015, and is convertible after one hundred and eighty (180) days into common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 58% multiplied by the Market Price (representing a discount rate of 42%). “Market Price” means the average of the lowest six (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means the closing bid price on the applicable day. The “Fixed Conversion Price” shall mean $0.00005. The shares of common stock issuable upon conversion of the Notes will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The Notes can be prepaid by the Company at a premium as follows: (a) between 31 and 60 days after issuance - 114% of the principal amount; (b) between 61 and 90 days after issuance - 120% of the principal amount; (c) between 91 and 120 days after issuance - 124% of the principal amount; (d) between 121 and 180 days after issuance - 130% of the principal amount. The issuance of the Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with the Company’s operations, and there was no solicitation.

 

On January 3, 2014, the Company repaid the promissory note to Asher Enterprises, Inc. that, on July 11, 2013, it entered into in connection with a Securities Purchase Agreement, pursuant to which it sold to Asher a 8% Convertible Promissory Note in the original principal amount of $53,000 (the “Note”). The Company repaid the entire principal balance of the Note, plus accrued interest and a prepayment premium, in the amount of $70,840.

 

On February 19, 2014, the Company repaid the promissory note to Asher Enterprises, Inc. that, on August 22, 2013, it entered into in connection with a Securities Purchase Agreement, pursuant to which it sold to Asher a 8% Convertible Promissory Note in the original principal amount of $35,500 (the “Note”). The Company repaid the entire principal balance of the Note, plus accrued interest and a prepayment premium, in the amount of $43,897.

 

On May 28, 2014, the Company repaid the promissory note to Asher Enterprises, Inc. that, on December 12, 2013, it entered into in connection with a Securities Purchase Agreement, pursuant to which it sold to Asher a 8% Convertible Promissory Note in the original principal amount of $63,000 (the “Note”). The Company repaid the entire principal balance of the Note, plus accrued interest and a prepayment premium, in the amount of Eighty Four Thousand Fifty Four Dollars and Eight Cents ($84,054.08).

 

On July 8, 2014, we repaid the promissory note to Asher Enterprises, Inc. that, on January 6, 2014, we entered into in connection with a Securities Purchase Agreement, pursuant to which we sold to Asher a 8% Convertible Promissory Note in the original principal amount of $63,000 (the “Note”). We repaid the entire principal balance of the Note, plus accrued interest and a prepayment premium, in the amount of Eighty Four Thousand Four Hundred Dollars ($84,400.00).

 

On August 25, 2014, we repaid the promissory note to Asher Enterprises, Inc., that on February 24, 2014, we entered into in connection with a Securities Purchase Agreement, pursuant to which we sold Asher an 8% Convertible Promissory Note in the original principal amount of $53,000 (the “Note”). We repaid the entire principal balance of the Note, plus accrued interest and a prepayment premium, in the amount of Seventy One Thousand Dollars ($71,000).

 

24

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

KBM Worldwide Inc.

 

On June 2, 2014, July 9, 2014 and August 26, 2014, the Company entered into Securities Purchase Agreements with Asher Enterprises, Inc., pursuant to which it sold to Asher, or its affiliates, 8% Convertible Promissory Notes in the original principal amounts of $63,000, $53,000, and $47,500, respectively (the “Notes”). The Notes have maturity dates of March 15, 2015, April 14, 2015, and May 28, 2015, respectively, and are convertible after one hundred and eighty (180) days into common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 58% multiplied by the Market Price (representing a discount rate of 42%). “Market Price” means the average of the lowest six (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means the closing bid price on the applicable day. The “Fixed Conversion Price” shall mean $0.00005. The shares of common stock issuable upon conversion of the Notes will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The Notes can be prepaid by the Company at a premium as follows: (a) between 31 and 60 days after issuance - 114% of the principal amount; (b) between 61 and 90 days after issuance - 120% of the principal amount; (c) between 91 and 120 days after issuance - 124% of the principal amount; (d) between 121 and 180 days after issuance - 130% of the principal amount. The issuance of the Notes was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with the Company’s operations, and there was no solicitation.

 

Adar Bay

 

On June 27, 2014, the Company entered into a Securities Purchase Agreement with Adar Bays, LLC, pursuant to which it sold to Adar two (2) 8% convertible notes, each in the principal amount of $35,000 (the “Notes”). The first of the two notes (the “First Note”) was paid for by Adar at the Closing, while the second of the two notes (the “Second Note”) was paid for the issuance of an offsetting $35,000 note issued by the Company to the Buyer (the “Buyer Note”), provided that prior to conversion of the Second Note, the Buyer must have paid off the Buyer Note. Each of the Notes have a maturity date of June 30, 2015 and is convertible after 180 days into common stock at 58% of the lowest trading price of the common stock for the ten (10) prior trading days, with a floor of $0.0001 per share. The shares of common stock issuable upon conversion of the Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The First Note can be prepaid by the Company at a premium as follows: (a) between 0 and 90 days after issuance – 130% of the principal amount; (b) between 91 and 150 days after issuance – 140% of the principal amount; and (c) between 151 and 180 days after issuance – 150% of the principal amount. The Second Note cannot be prepaid; however, if the First Note is prepaid, the Second Note shall be automatically cancelled, as will the Buyer Note. The Buyer Note has a maturity of February 28, 2015 and bears interest at the rate of 8% per annum. The purchase and sale of the Notes closed on June 30, 2014, the date that the purchase price was delivered to the Company.

 

Convertible Note #1

 

On March 28, 2014, the Company entered into, with a third party investor, a 20% convertible secured promissory note with a maturity date of April 26, 2015 and in the principal amount of $100,000 (the “Convertible Note”), which is convertible into the Company’s common stock at $0.08 per share and which is collateralized by up to $15,000 on a monthly basis by the $100,000 in monthly payments which the Company receives pursuant to its sale of WeedMaps Media, Inc. if not paid in full within six months of the date of the Note. Furthermore, as further collateral, the Company placed 2,500,000 shares of its common stock into escrow. Finally, as an incentive to the third party investor to enter into the Note, the Company issued 300,000 shares of its common stock. As of September 30, 2014, the Company had received the principal of $100,000 of the principal amount. The Company accounts for debt discount according to ASC 470-20 Debt With Conversion And Other Options. No debt discount associated with the Convertible Note was recorded because the fair value of the common stock at the commitment date ($0.05) was less than the effective conversion price of the conversion feature ($0.07). As such, there was no intrinsic value associated with the conversion feature and thus no debt discount was recognized.

 

25

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

Convertible Note #2

 

On March 28, 2014, the Company entered into, with a third party investor, a 20% convertible secured promissory note with a maturity date of April 28, 2015 and in the principal amount of $100,000 (the “Note”), which is convertible into common stock at $0.08 per share and which is collateralized by up to $15,000 on a monthly basis by the $100,000 in monthly payments which the Company receives pursuant to its sale of WeedMaps Media, Inc. if not paid in full within six months of the date of the Note. Furthermore, as further collateral, the Company placed 2,500,000 shares of its common stock into escrow.

 

Convertible Notes 3 & 4

 

On September 8, 2014, we entered into a Securities Purchase Agreement and issued a Convertible Promissory Note to each of two investors. The Notes are each in the original principal amount of $35,000, pay interest at the rate of 8% per annum, and have a maturity date of September 7, 2015. The Notes may be prepaid by us at any time for a premium of 120% of the principal amount and any accrued and unpaid interest. The Notes are convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 62% multiplied by the Market Price (as defined herein) (representing a discount rate of 38%), but no more than $0.06 per share. “Market Price” means the lowest Trading Price (as defined below) for the Common Stock during the five Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means, for any security as of any date, the VWAP value as posted on Bloomberg. The “Fixed Conversion Price” shall mean $0.0005. The shares of common stock issuable upon conversion of the Notes will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The purchase and sale of the Notes closed on September 9, 2014, the date that the purchase price was delivered to us.

 

LG Capital Funding

 

On May 16, 2014, the Company entered into a Securities Purchase Agreement with LG Capital Funding, LLC (“LG Capital”), pursuant to which it sold to LG Capital an 8% Convertible Promissory Note in the original principal amount of $105,000 (the “Note”). The Note has a maturity date of May 16, 2015, and is convertible after 180 days into common stock at a forty two percent (42%) discount from the lowest trading price of the common stock, as reported by any exchange upon which the common stock is then traded, for the ten (10) trading days prior to the Company’s receipt of notice from the Note holder to exercise this conversion feature. The conversion price shall be subject to a minimum conversion price of $0.0001 per share (the “floor price”), but in the event that the floor price is triggered, the conversion discount shall increase from forty two percent (42%) to fifty two (52%), calculated against the floor price. Interest accrued on the Note shall be payable in shares of common stock, calculated using the same conversion formula. The Note can be prepaid at a premium as follows: (a) between 0 and 90 days after issuance – 120% of the principal amount; (b) between 91 and 150 days after issuance – 130% of the principal amount; (c) between 151 and 180 days after issuance – 140% of the principal amount. There is no right to prepay the Note after 180 days. The purchase and sale of the Note closed on May 19, 2014, the date that the purchase price was delivered to the Company. On November 5, 2014, we repaid the promissory note to LG Capital Funding LLC. We repaid the entire principal balance of the Note, plus accrued interest and a prepayment premium, in the amount of 150,912.

 

Typenex Co-Investment, LLC

 

On July 18, 2014, the Company entered into a Securities Purchase Agreement with Typenex Co-Investment, LLC, pursuant to which it sold to Typenex a 10% Convertible Promissory Note in the original principal amount of $85,500 (the “Note”), which reflected an original issue discount of $7,500 and legal fees of $3,000. The Note has a maturity date of June 23, 2015, and is convertible after 180 days into common stock at $0.075 per share (the “Conversion Price”). The Conversion Price is subject to adjustment downward if the Company issues its common stock at a lower price prior to any conversion. The shares of common stock issuable upon conversion of the Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The Note can be prepaid by at a premium of 125% of the principal amount and any accrued and unpaid interest. The purchase and sale of the Note closed on July 23, 2014, the date that the purchase price was delivered to the Company.

 

26

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

Below is a summary of note payable amounts:

 

Notes payable - current portion		September 30, 2014				December 31, 2013
Adar Bay		$	35,706			$	-
Asher Enterprises			49,082				152,000
Convertible Note #1			100,000				-
Convertible Note #2			100,000				-
Convertible Note #3			35,169				-
Convertible Note #4			35,169				-
Domain Capital			-				44,087
KBM Worldwide			166,486
LG Capital			108,153				-
Typenex Co-Investments			87,233				-
		$	716,998			$	196,087

 

Notes payable - noncurrent portion		September 30, 2014				December 31, 2013
Domain Capital			-				95,519
		$	-			$	95,519

 

Note 15. Notes Payable - Related Party

 

Sportify Note

 

On December 31, 2012, the Company entered into a Securities Purchase Agreement by and among it, on the one hand, and Sportify, Inc., a Nevada corporation, and its shareholders, Sabas Carrillo (“Carrillo”), an individual, and James Pakulis (“Pakulis”), an individual and one of the Company’s officers and directors, on the other hand. Pursuant to the agreement, upon the closing of the transaction, the Company purchased 100% of the issued and outstanding equity interests of Sportify in exchange for (a) the cancellation of a previous Secured Promissory Note issued to Sportify, entered into on or about August 22, 2012 and with an outstanding principal balance of Two Hundred Eighty Five Thousand Dollars ($285,000) and (b) Two Hundred Fifteen Thousand Dollars ($215,000) represented by promissory notes in the original principal amount of One Hundred Sixty One Thousand Two Hundred Fifty Dollars ($161,250) to Pakulis and Fifty Six Thousand Seven Hundred Fifty Dollars ($53,750) to Carrillo. The closing of the purchase took place on December 31, 2012. On July 11, 2013, the Company entered into a First Amendment to Promissory Note with each of Pakulis and Carrillo to extend the date that it will begin making payments thereunder from June 30, 2013 to September 30, 2013, and extended the maturity date of the notes by a corresponding six months. On November 8, 2013, effective as of September 30, 2013, the Company entered into a Second Amendment to Promissory Note with each of Pakulis and Carrillo to extend the date that it will begin making payments thereunder from September 30, 2013 to December 31, 2013, and extended the maturity date of the notes by a corresponding six months. On March 19, 2014, effective as of December 31, 2013, the Company entered into a Third Amendment to Promissory Note with Pakulis to extend the date that it will begin making payments thereunder from December 31, 2013 to January 1, 2015, and extended the maturity date of the notes by a corresponding twelve months.

 

27

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

Pakulis Demand Note

 

During the nine months ended September 30, 2014, James Pakulis, one of the Company’s officers and directors, loaned the Company $41,497, which represents the principal amount of an unsecured demand note with nominal interest of 1.10%.

 

Below is a summary of note payable - related party amounts:

 

Notes payable - related party		September 30, 2014				December 31, 2013
Current portion		$	122,040			$	-
Noncurrent portion			80,707				161,250
		$	202,747			$	161,250

 

Note 16. Inventory Flooring Credit Line

 

On May 12, 2014, the Company entered into a consignment agreement (the “Consignment Agreement”) and Indemnification Agreement with a third-party Inventory Financing Company (the “Inventory Financer”), pursuant to which the Inventory Financer will consign new and used manufactured home inventory to the Company’s wholly owned subsidiary, Wisdom Homes of America, Inc. (“WHOA”). Per the Consignment Agreement, WHOA is to pay the Inventory Financer a monthly fee of one percent (1%) of the agreed consignment price for fees incurred during the prior calendar month, or prorated for any partial month. Fees for consigned property begin to accrue from (i) the date used inventory is consigned or (ii) in the case of new inventory, from the date the property is ready to ship and WHOA has been notified of its readiness for shipment.

 

The consignment price for used inventory shall be One Thousand Dollars ($1,000) greater than the Inventory Financer’s acquisition price for a singlewide manufactured home and Fifteen Hundred Dollars ($1,500) greater for a multisection home. The consignment price for new inventory shall be equal to the Inventory Financer’s invoice price. Wisdom Homes of America, Inc. (WHOA) shall reduce the outstanding balance of consigned property by One Thousand Dollars ($1,000) per year, due on the anniversary of each respective consignment, and after the first anniversary of any consigned property, the monthly consignment fee with respect to such property shall increase from 1% to 1.4%. In the event any mobile home is consigned for eleven hundred (1,100) days or more, the entire balance owing shall be immediately due and payable. All money received by WHOA for the purpose of selling a mobile home consigned by the Inventory Financer to WHOA shall be held in trust for the benefit of the Inventory Financer until the entire outstanding balance owed for the consigned property is satisfied. Furthermore, the Inventory Financer shall have a security interest in all manufactured homes that have been financed by the Inventory Financer or for which the Inventory Financer has advanced any funds or incurred any obligation which has enabled WHOA to acquire the manufactured homes.

 

The Consignment Agreement shall be effective for a term of five (5) years or for so long as there are manufactured homes consigned to WHOA by the Inventory Financer. During the term of the Consignment Agreement, WHOA will maintain insurance on all manufactured homes consigned to it by Legal, and shall be responsible for any home that is destroyed or suffers more than Fifteen Hundred Dollars ($1,500) in damage. For a period of three (3) years following the termination of the Consignment Agreement, WHOA shall not operate, own, mange, or in any way be affiliated with a mobile home sales facility within twenty (20) miles of WHOA’s facility located at 4888 FM 2264, Rhome, Texas, 76078. WHOA’s obligations under the Consignment Agreement are personally guaranteed by James Pakulis, SearchCore’s CEO, Brent Nelms, WHOA’s President, and Burnett Hunt, the general manager of WHOA’s manufactured home retail center in Jacksboro, Texas.

 

28

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

On May 12, 2014, the Company also entered into an addendum to the Consignment Agreement. Pursuant thereto, so long as WHOA is current on all amounts owed to the Inventory Financer and maintains a consignment inventory of at least four (4) manufactured homes during the previous month, the consignment fee owed to the Inventory Financer shall be reduced from 1% to 0.8% per month, and prorated for any partial month. This reduced rate shall be in addition to a Ten Dollar ($10) monthly administration fee and does not pertain to any consigned inventory that has been held on consignment for more than one (1) year.

 

On May 21, 2014, the Company paid the Inventory Financer a Fifty Thousand Dollar ($50,000) security deposit, which the Inventory Financer can use to setoff past due amounts owed pursuant to the Consignment Agreement, should any exist in the future. In two (2) years, if WHOA is in compliance with the Consignment Agreement and current on all amounts due and owing to the Inventory Financer thereunder, if any, the security deposit will be refunded to WHOA.

 

At September 30, 2014, the Company had recorded $1,393,198 in the flooring creditline.

 

Note 17. Other Long Term Accrued Liabilities

 

At September 30, 2014, the Company had a balance of $118,750 in noncurrent tax payable.

 

Note 18. Income Per Common Share

 

Income per common share is based on the weighted average number of common shares outstanding. The Company complies with Earnings Per Share, which requires dual presentation of basic and diluted earnings per share on the face of the statements of operations. Basic per share earnings or loss excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted-average common shares outstanding for the period. Diluted per share earnings or loss reflect the potential dilution that could occur if convertible preferred stock or debentures, options and warrants were to be exercised or converted or otherwise result in the issuance of common stock that is then shared in the earnings of the entity.

 

As of September 30, 2014, there were 598,939 common stock purchase warrants outstanding that were not included in the computation of diluted EPS because to do so would have been antidilutive for the period presented.

 

Note 19. Income Taxes

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Significant components of the Company's tax provisions and deferred tax assets as of September 30, 2014 and December 31, 2013 are as follows:

 

The components of tax provision:

 

		September 30, 2014				December 31, 2013
Current
Federal		$	(98,000	)		$	(475,000	)
State			-				70,750
			(98,000	)			(404,250	)
Deferred
Federal			41,000				(651,000	)
State			8,000				(268,000	)
			49,000				(919,000	)
Change in valuation allowance			(209,000	)			(77,000	)
Total provision		$	(258,000	)		$	(1,400,250	)

 

The total tax provision is $258,000 of which $259,000 corresponds to current operations and $1,000 (tax benefit) corresponds to discontinued operations.

 

29

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

The components of deferred tax asset:

 

		September 30, 2014				December 31, 2013
Deferred income tax assets:
State taxes		$	129,000			$	129,000
Net operating losses			558,000				357,000
Depreciation			70,000				137,000
			757,000				623,000
Deferred income tax liabilities:
Installment gain			(573,000	)			(390,000	)
			184,000				233,000
Valuation allowance			(86,000	)			(295,000	)
Net deferred tax assets/(liabilities)		$	98,000			$	(62,000	)

 

The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible. The amount of deferred tax assets considered realizable could change if future taxable income is realized. At both September 30, 2014 and December 31, 2013, the Company had U.S. federal tax net operating loss carryforwards (“NOLs”) of approximately $1,169,000 and $554,000, respectively, which begin to expire in 2021. At September 30, 2014 and December 31, 2013, the Company had State NOLs of $2,751,000 and $2,250,000, respectively. The NOLs are subject to limitations under IRC Section 382 of the Internal Revenue Code (“Section 382”).

 

Note 20. Related Party Transactions

 

All material intercompany transactions have been eliminated upon consolidation of the Company’s entities. During the nine months ended September 30, 2014, cash transfers, equity and accounts between the Company and its subsidiaries have been eliminated upon consolidation.

 

See Note 15. Notes Payable- Related Party for information regarding a Securities Purchase Agreement entered into on December 31, 2012, with Sportify, Inc., a Nevada corporation, and its shareholders, Sabas Carrillo, an individual, and James Pakulis, an individual and one of the Company’s officers and directors.

 

See Note 15. Notes Payable- Related Party for information regarding an unsecured demand note whereby during the nine months ended September 30, 2014, James Pakulis, one of the Company’s officers and directors, loaned the Company $41,497.

 

30

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

Note 21. Commitments And Contingencies

 

The Company’s executive offices are located in Tyler, Texas, at 500 N Northeast Loop 323, Tyler, Texas. The parcel is approximately a 1.8-acre tract of land. Pursuant to the terms of the lease, rent is $2,500 per month for 37 months. The Company is confident that this commercial space will provide adequate space to meet its needs and provide for future growth.

 

During February 2014, the Company entered into a new lease at 4888 FM 2264, Rhome, TX. The parcel is approximately a 2-acre tract of land. Pursuant to the terms of the lease, rent is $1,300 per month for 24 months.

 

On May 7, 2014, the Company signed a Memorandum of Understanding pursuant to which it would agree to take over Heritage Mobile Homes, a manufactured home retail center located in Jacksboro, Texas. Pursuant to the Memorandum of Understanding, the Company will assume the office and lot lease for $1,108 per month. The lot is currently leased on a month-to-month basis.

 

On July 1, 2014, the Company entered into a Lease Agreement for a two-acre lot, including office and parking, in Mt. Pleasant, Texas. The base rent is $2,500 per month, and the lease is for a period of twenty four (24) months.

 

Set forth below is a summary of current obligations as of September 30, 2014 comprised exclusively of the rental lease obligations to make future payments due by the period indicated below:

 

Rhome, Texas Retail Center		Minimum Payments				Monthly Base Rent
2014		$	3,900			$	1,300
2015		$	15,600			$	1,300
2016		$	1,300			$	1,300

 

Tyler, Texas Retail Center		Minimum Payments				Monthly Base Rent
2014		$	7,500			$	2,500
2015		$	30,000			$	2,500
2016		$	30,000			$	2,500
2017		$	12,500			$	2,500

 

Jacksboro, Texas Retail Center		Minimum Payments				Monthly Base Rent
2014		$	3,324			$	1,108
2015		$	13,296			$	1,108

 

Mt. Pleasant, Texas Retail Center		Minimum Payments				Monthly Base Rent
a2014		$	7,500			$	2,500
a2015		$	30,000			$	2,500
a2016		$	15,000			$	2,500

 

31

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

Note 22. Warrants

 

As of September 30, 2014, there were 598,939 common stock purchase warrants outstanding. The following table summarizes information about common stock warrants outstanding at September 30, 2014.

 

Outstanding																Exercisable
Exercise Price				Number Outstanding				Weighted Average Remaining Contractual Life (years)				Weighted Exercise Price Average				Number Exercisable				Weighted Average Exercise Price
$	4.00				250,000				0.05			$	1.67				250,000			$	1.67
	0.061				348,939				2.88				0.04				348,939				0.04
$	0.061 - $4				598,939				2.93			$	1.71				598,939			$	1.71

 

Note 23. Subsequent Events

 

The Company evaluated its September 30, 2014 financial statements for subsequent events through November 13, 2014, the date the financial statements were available to be issued.

 

KBM Worldwide Inc.

 

On October 20, 2014, we entered into a Securities Purchase Agreement with KBM Worldwide, Inc., pursuant to which we sold to KBM a 8% Convertible Promissory Note in the original principal amount of $83,000 (the “Note”). The Note has a maturity date of July 22, 2015, and is convertible after 180 days into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 58% multiplied by the Market Price (representing a discount rate of 42%).“Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means the closing bid price on the applicable day. The “Fixed Conversion Price” shall mean $0.00005. The shares of common stock issuable upon conversion of the Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The Note can be prepaid by us at a premium as follows: (a) between 0 and 30 days after issuance – 109% of the principal amount and any accrued and unpaid interest; (b) between 31 and 60 days after issuance – 114% of the principal amount and any accrued and unpaid interest; (c) between 61 and 90 days after issuance – 120% of the principal amount and any accrued and unpaid interest; (d) between 91 and 120 days after issuance – 124% of the principal amount and any accrued and unpaid interest; and (e) between 121 days and 180 days after issuance – 130% of the principal amount and any accrued and unpaid interest. The purchase and sale of the Note closed on October 28, 2014, the date that the purchase price was delivered to us.

 

Asher Enterprises, Inc.

 

On October 27, 2014, we repaid the promissory note to Asher Enterprises, Inc., that on May 1, 2014, we entered into in connection with a Securities Purchase Agreement, pursuant to which we sold Asher an 8% Convertible Promissory Note in the original principal amount of Forty Seven Thousand Five Hundred Dollars ($47,500) (the “Note”). We repaid the entire principal balance of the Note, plus accrued interest and a prepayment premium, in the amount of Sixty Eight Thousand Two Hundred and Seventeen Dollars and Eighty One Cents ($68,217.81).

 

Platinum Technology Ventures, LLC

 

On May 19, 2014, we sold the domain names listed in our Current Report on Form 8-K dated May 12, 2014, and filed with the Commission on May 23, 2014, to Platinum Technology Ventures, LLC. In connection with Platinum’s acquisition of those domain names, and to assist in its operations, we agreed to loan Platinum Fifteen Thousand Dollars ($15,000) per month for six (6) months, for an aggregate loan of Ninety Thousand Dollars ($90,000). Platinum was obligated to begin repaying this loan seven (7) months after it was issued, and its repayment obligations will continue for the following six (6) months.

 

32

 

SEARCHCORE, INC.

Notes to the Consolidated Financial Statements

September 30, 2014

Unaudited

 

After making payments to Platinum in the sum of Forty Five Thousand Dollars ($45,000), on October 28, 2014, we entered into a Waiver and Mutual Release, pursuant to which both parties agreed to release one another from any and all rights and liabilities arising under the promissory note pertaining to the operating expense payments. Accordingly, we have no continuing obligation to make operating expense payments to Platinum, and Platinum has no obligation to repay the monies already paid.

 

LG Capital Funding, LLC

 

On October 29, 2014, we entered into a Securities Purchase Agreement with LG Capital Funding, LLC (“LG Capital”), pursuant to which we sold to LG Capital an 8% Convertible Promissory Note in the original principal amount of $105,000 (the “Note”). The Note has a maturity date of October 29, 2015, and is convertible after 180 days into our common stock at a forty two percent (42%) discount from the lowest trading price of our common stock, as reported by any exchange upon which our common stock is then traded, for the ten (10) trading days prior to our receipt of notice from the Note holder to exercise this conversion feature. The conversion price shall be subject to a minimum conversion price of $0.0001 per share (the “floor price”), but in the event that the floor price is triggered, the conversion discount shall increase from forty two percent (42%) to fifty two (52%), calculated against the floor price. Interest accrued on the Note shall be payable in shares of our common stock, calculated using the same conversion formula. The Note can be prepaid by us at a premium as follows: (a) between 0 and 90 days after issuance – 120% of the principal amount; (b) between 91 and 150 days after issuance – 130% of the principal amount; (c) between 151 and 180 days after issuance – 140% of the principal amount. There is no right to prepay the Note after 180 days. The purchase and sale of the Note closed on October 31, 2014, the date that the purchase price was delivered to us.

 

On November 5, 2014, we repaid the promissory note to LG Capital Funding, LLC, that on May 16, 2014, we entered into in connection with a Securities Purchase Agreement, pursuant to which we sold LG Capital an 8% Convertible Promissory Note in the original principal amount of One Hundred Five Thousand Dollars ($105,000). We repaid the entire principal balance of the Note, plus accrued interest and a prepayment premium in the amount of One Hundred and Fifty Thousand Nine Hundred Twelve Dollars ($150,912).

 

Ghost Management Group, LLC

 

On December 11, 2012, we entered into an Agreement and Plan of Reorganization, pursuant to which we sold our finder site, Weedmaps.com. Pursuant to the terms of the sale and as partial consideration, we received a Secured Promissory Note in the original principal amount of Three Million Dollars ($3,000,000). Pursuant to the Note, we are to receive (i) Two Hundred Fifty Thousand Dollars ($250,000) on January 15, 2013 (which payment date was extended to January 31, 2013), which was received; (ii) One Hundred Thousand Dollars ($100,000) each month beginning on February 25, 2013, and continuing on the twenty fifth (25th) of each month thereafter for a total of twenty eight (28) months, which payments for February 2013 through October 2014 were received; and (iii) Sixteen Thousand Five Hundred Dollars ($16,500) on July 25, 2015.

 

On November 5, 2014, we entered into a First Amended to Secured Promissory Note with Ghost Management Group, LLC—the current obligor under the Note. Pursuant to this amendment, Ghost Management made a principal payment of One Hundred Thousand Dollars ($100,000) on November 4, 2014, which represented the payment that would otherwise have been due on May 25, 2015. In consideration for accelerating this payment, we agreed to waive the final payment of Sixteen Thousand Five Hundred Dollars ($16,500) that would have been due on July 25, 2015. All other payment obligations under the Note remain unchanged, and accordingly, we will receive six (6) more payments of One Hundred Thousand Dollars on the 25th of each month between November 25, 2014, and April 25, 2014.

 

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ITEM 2  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

We have expanded into the manufactured housing industry. Specifically, we are concentrating on the manufactured home retail center sector of the industry. We have three retail centers located in the state of Texas in the following cities: Rhome, Tyler, and Jacksboro; and we have signed a lease in anticipation to open our fourth retail center in Mount Pleasant. The retail centers are operated by our wholly owned subsidiary, Wisdom Homes Of America, Inc. In conjunction with the above, we are continuously seeking opportunities within the manufactured housing industry in order to increase revenues.

 

The strategic reasons for concentrating our efforts and resources in the manufactured housing industry include our management’s experience in locating, opening and operating manufactured home retail centers.

 

Why We Entered The Manufactured Housing Industry – We entered the manufactured housing industry because we believe the industry offers a unique opportunity to assist a large number of potential homebuyers acquire an affordable house. Given the events that have transpired in the manufactured housing industry over the past 5 years, including contractions and consolidations with manufacturers and retailers, we believe the industry is fragmented and disjointed, which has resulted in a marketable decline in the number of manufacturers and retails. Nevertheless, there has been a steady increase in the number of manufactured homes sold in the US since 2011. With the decline in the number of retailers, and recent improving economic indicators, we believe there is a favorable opportunity to enter into the marketplace.

 

Why We Have Used Micro Financing To Finance Our Transition – Beginning in June 2013 and continuing through November 2014, we have entered into various promissory notes and convertible promissory notes with third party lenders. The aggregate amount of debt capital raised by us through micro financing is approximately $1.2 million, which includes $390,880 in amounts that we have already repaid in full. Subsequent to the quarter ending September 30, 2014 we paid off a total of $219,130 in promissory notes and raised an additional $188,000. These third party firms, for the most part, focus on lending to small public companies. The availability of such micro lenders has played an important and vital role in our operations by providing us with the ability to raise debt capital based upon our operational needs. While no assurance can be given, we believe that these lenders will continue to be available to us. Finally, as referenced above, we opened our first manufactured home retail center during the first quarter 2014 and by the third quarter 2014 had generated revenue of $402,000 from the sale of manufactured homes. In light of our past performance, we believe that we will be able to raise debt and/or equity capital on more favorable terms as we continue to grow.

 

Why We Have Increased The Number Of Recent Press Releases – Beginning in September 2014 we increased the number of press releases issued. Given our recent developments and, in particular, focus solely in the manufactured housing retail industry, we want to keep our shareholders and the public abreast of our developments during this time of change and growth. We anticipate higher than normal issuance of press releases for the indefinite future.

 

How Are We Financing Our Inventory – Our ability to finance our inventory of manufactured homes is an important component to our growth and operations. There are two ways in which we sell manufactured homes: the first is from our inventory of manufactured homes that are located at one of our retail centers and the second is directly from the factory. In each case, we become responsible for the full value of a manufactured home upon possession, which highlights the importance of our flooring line in our growth and operations. During the second quarter 2014, we entered into a flooring line agreement with a related party to our manufactured home supplier allowing us to place orders, in the aggregate, for manufactured homes of up to approximately $1 million in value. The flooring line was increased during October 2014 to $2 million. We anticipate that we will continue to increase our existing flooring line or obtain other flooring lines as we increase sales.

 

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How Are We Financing Our Retail Centers – To date, we have financed new retail centers with funds we received through the issuance of promissory notes, and to a lesser extent, revenues generated from ongoing operations. We believe that as revenue from the sale of manufactured homes continues to grow, we will be able to raise debt and/or equity capital on more favorable terms in order to finance the opening of additional retail centers.

 

Our Recent Milestones

 

Retail Centers Opened – In February 2014 we opened our first retail center in Rhome, Texas. Our second retail center in Tyler, Texas, opened in April 2014, and our third retail center in Jacksboro, Texas, opened in May 2014. We signed a lease in July 2014 in anticipation to open our fourth retail center in Mount Pleasant, Texas. In general, we believe it will take six to nine months from the time we open a retail center to have it operating at its full sales capacity. During this time, we hire appropriate staff, build an inventory and method for delivering manufactured homes in the area, establish our sales pipeline, and begin sales.

 

We Are Meeting Our Financing Requirements – We anticipate that each retail center will require approximately $75,000 in costs to open, and will require a flooring line of approximately $600,000 for purchasing inventory. To date, we have established approximately $2 million in inventory financing, which is adequate to meet our current inventory financing needs. As we continue to grow our sales, we believe that the funds available to us for the purposes of financing our inventory will increase.

 

We Are Increasing Our Pending Sales Transactions – We generated $402,000 in revenue from the sale of manufactured homes during the nine months ended September 30, 2014. As of September 30, 2014, we had a total of 25 manufactured homes at our retail centers and 22 pending transactions.

 

Our Inventory Ordered – In August 2014 we received an inventory of 13 manufactured homes and placed an order to acquire 15 more. In September 2014, we received the 15 manufactured homes ordered in August and placed an order for 12 additional homes. In October 2014, we began to receive the manufactured homes ordered in September and placed an order for an additional 15 manufactured homes, with an option to purchase 7 more.

  

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Three and Nine Months Ended September 30, 2014 compared to the Three and Nine Months Ended September 30, 2013

 

Results of Operations

 

Revenue

 

Our sales, cost of sales, operating expenses and operating loss for the three and nine months ended September 30, 2014, compared to the three and nine months ended September 30, 2013, were as follows:

 

		Three Months Ended								Nine Months Ended
		September 30, 2014				September 30, 2013				September 30, 2014				September 30, 2013
Sales		$	351,543			$	-			$	401,916			$	-
Cost of sales			276,523				-				301,770				-
SG&A expenses			664,248				683,454				1,234,192				1,860,747
Operating loss		$	(589,228	)		$	(683,454	)		$	(1,134,046	)		$	(1,860,747	)

 

On May 19, 2014, we sold ManufacturedHomes.com along with all of the associated domain names and intellectual property associated with the operations of the website. As a result of our sale of the ManufacturedHomes.com-related domain names and associated intellectual property, we have terminated employees that previously worked in our Las Vegas, Nevada, office in connection with the development and operation of these domain names. We also did not renew our lease for the Las Vegas office, which expired in April 2014. These changes, taken together with the reduction in our debt associated with the domain names by the buyers, have significantly reduced our overhead expenses. Furthermore, in conjunction with the sale of ManufacturedHomes.com, we discontinued the operations of VerticalCore Solutions, Inc., VerticalCore Technologies, Inc., and VerticalCore Media, Inc., which previously oversaw the operations of ManufacturedHomes.com and our former Las Vegas office. For comparative purposes, all prior periods presented have been restated to reflect the reclassification of these entities to discontinued operations on a consistent basis. The sale of ManufacturedHomes.com marks the Company’s complete exit from the finder site business. See Note 4. Asset Sale and Note. 11. Discontinued Operations in the footnotes to the financial statements herewith for more information.

 

Sales for the three and nine months ended September 30, 2014, consisted of sales of manufactured homes at our model home retail centers in Texas. For the three and nine months ended September 30, 2013, all revenue from our finder sites, including Tattoo.com, to whom we previously provided marketing services, have been restated to reflect the reclassification of these entities to discontinued operations on a consistent basis. At September 30, 2014, we had $1,364,000 in manufactured home inventory at our model home retail centers located in Tyler and Jacksboro, Texas. Our current sales are using the flooring credit line we have with our existing inventory flooring company.

 

We expect that as our manufactured home inventory continues to grow as a result of the increase in our flooring credit line, we will also see a corresponding increase in our sales. To date, we have experienced some delays in the increase of our sales primarily due to our limited flooring credit line and the limited number of model homes at our retail centers. During the quarter ended September 30, 2014, we began to resolve these issues, primarily through increases in our inventory flooring line.

 

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Operating Expenses

 

Operating Expenses - Our operating expenses increased during the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, in general because of our efforts to expand our operations into the manufactured home retail center industry. Our operating expenses decreased during the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013 because we have decreased amounts spent on salaries and employee benefits, insurance costs, and consulting and programmers fees following the sale of our finder sites.

 

Salaries And Employee Benefits - During the three and nine months ended September 30, 2014 and 2013, salaries and employee benefits were $65,034 and $373,504, respectively, and $362,843 and $953,673, respectively. The significant decrease in salaries and employee benefits was because we decreased the number of technology specialists, including the number of programmers and engineers whose responsibilities included, but were not limited to, developing software and finder sites. This was accompanied by significant decreases in amounts spent related to the operations of our former finder sites, including coders, designs and sales staff.

 

Professional Fees - During the three and nine months ended September 30, 2014 and 2013, professional fees were $484,827 and $657,875, respectively, and $279,593 and $639,931, respectively. The increase during the three and nine months ended September 30, 2014 as compared to 2013 was a result of a slight increase in spending on consulting, business development and professional fees related to our efforts to expand our operations in Texas serving the manufactured home industry.

 

General And Administrative Expenses - During the three and nine months ended September 30, 2014 and 2013, general and administrative expenses were $82,965 and $136,651 respectively, and $31,257 and $204,068 respectively. The increase during the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 is attributable to increases in amounts spent on rent and lease payments at our retail centers in Texas, increases in office and travel expenses, and to a lesser extent, amounts spent on marketing and advertising. The decrease during the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 are primarily attributable to decreases in spending on marketing and advertising related to our former finder site businesses, and to a lesser extent, decreases in noncash amortization expense.

 

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Liquidity and Capital Resources

 

Our cash, current assets, intangible assets, total assets, current liabilities, and total liabilities as of September 30, 2014 and December 31, 2013 were as follows:

 

		September 30, 2014 (unaudited)				December 31, 2013 (audited)				Percentage Change
Cash		$	117,000			$	93,000				25.8	%
Total current assets			2,712,000				1,412,000				92.1	%
Intangible assets:
Domain names			144,000				421,000				(65.8	)%
Total intangible assets			144,000				421,000				(65.8	)%
Total assets			4,506,000				3,383,000				33.2	%
Total current liabilities			4,037,000				2,589,000				55.9	%
Total long term liabilities			199,000				776,000				(74.4	)%
Total liabilities		$	4,236,000			$	3,365,000				(25.9	)%

 

Our intangible assets at September 30, 2014 consisted of the domain names www.TravelTrailer.com and www.ToyHaulers.com and the advertising rights pursuant to our sale of www.ManufacturedHomes.com. Our intangible assets decreased by $275,000 as a result of our sale of the following domain names: www.ManufacturedHome.com, www.ManufacturedHomes.com www.ManufacturedHouse.com, www.ManufacturedHomes.net, and www.ModularHomes.com. Pursuant to the terms of the sale, the buyer assumed all of our obligations under the Lease Agreement we had with Domain Capital, LLC. See Financial Statements, Note 4. Asset Sale for more information.

 

Our current liabilities increased by $1,448,000, from $2,589,000 at December 31, 2013 to $4,037,000 at September 30, 2014, primarily as a result of $864,000 in additional loans and $1,393,200 in our flooring credit line, which was offset by $390,900 in payments on notes payable and our recent sale of domain names, and to a lesser extent, $244,000 in reduction of our federal taxes payable as a result of utilizing our net operating losses, as well as for $440,000 that had been accrued during 2013 for consulting services that we paid in noncash stock based payments.

 

Our total long-term liabilities decreased by $577,000, from $776,000 at December 31, 2013 to $199,000 at September 30, 2014, primarily as a result the Assignment Agreement with a third party entity pursuant to which we assigned and transferred the premium domain names Karate.com and Rodeo.com along with the associated $400,000 in debt, the sale of ManufacturedHomes.com and the associated domain names and intellectual property pursuant to which the buyer assumed all of our obligations under the Lease Agreement we had with Domain Capital, LLC, which included $96,000 in long term debt, and to a lesser extent, reclassifying noncurrent debt to current. See Financial Statements, Note 4. Asset Sale for more information.

 

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During the nine months ended September 30, 2014, we recognized a non-cash gain of $847,400 on the sale of ManufacturedHomes.com, the associated domain names and intellectual property. See Financial Statements, Note 4. Asset Sale for more information.

 

Cash Requirements

 

We had approximately $116,600 in cash and cash equivalents as of September 30, 2014. Our operating loss for the nine months ended September 30, 2014 was $1,134,000. We had net loss for the nine months ended September 30, 2014 of $524,700 which was based on a non-cash, one-time gain on the sale of ManufacturedHomes.com and the associated intellectual property. We had a working capital deficit of approximately $1.33 million at September 30, 2014. During the nine months ended September 30, 2014, our principal source of liquidity was cash generated from our then-current operations, cash received pursuant to notes payables with third parties, as well as payments we received pursuant to the sale of the finder site Weedmaps.com, which during the nine months ended September 30, 2014, totaled $900,000 and, pursuant to a First Amendment to secured Promissory Note dated November 5, 2014, will result in additional payments totaling $300,000 during the year ending December 31, 2014, and $400,000 during the year ending December 31, 2015, which are reflected in our statements of cash flows under the section changes in operating assets and liabilities: Other assets & note receivables. At our current burn rate, our current level of revenue generated from operations, our cash on hand, together with the $100,000 per month that we will receive pursuant to the sale of our finder site Weedmaps.com, is insufficient to cover our monthly expenses. We have had to, and will continue to, seek financing in the form of debt or stock sales to finance our operations until we reach break-even.

 

Sources and Uses of Cash

 

Operations

 

We had net cash used in operating activities of $428,600 for the nine months ended September 30, 2014, as compared to net cash used in operating activities of $507,600 for the nine months ended September 30, 2013. For the nine months ended September 30, 2014, the net cash used by operating activities consisted primarily of net loss of $524,700, which included a one-time non-cash gain of $847,400 on the sale of ManufacturedHomes.com and the associated intellectual property, non-cash expense of $695,000 in stock based compensation, non-cash expense of $22,200 in stock issued as additional interest expense, a $343,700 loss related to discontinued operations, and a decrease in accounts payable and accrued liabilities of $397,800, an increase in prepaid expenses and deposits of $293,900, plus non-cash amortization and depreciation expense of $1,500 and $3,900, respectively. For the nine months ended September 30, 2013, the net cash used by operating activities consisted primarily of a net loss of $2,009,600 which included a $163,900 loss related to discontinued operations, and a slight increase in accounts payable and accrued liabilities of $27,500, a decrease in prepaid expenses and deposits of $273,900, plus non-cash amortization and depreciation expense of $107,400 and $6,700, respectively.

 

Investments

 

During the nine months ended September 30, 2014, we had $21,100 cash flows from investing activities as compared to $117,200 for the nine months ended September 30, 2013. For the nine months ended September 30, 2014, the net cash used in investing activities was primarily related to purchases of computers, office furniture and other equipment for our retail centers in Texas.

 

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Financing

 

We had net cash from financing activities of $473,100 for the nine months ended September 30, 2014, as compared to net cash from financing activities of $151,000 for the nine months ended September 30, 2013. For the nine months ended September 30, 2014, our net cash used in financing activities consisted of payments on notes payable, which were offset by new convertible notes from third parties, in addition to a $41,500 demand note from James Pakulis, one of our officers and directors. For the nine months ended September 30, 2013, our net cash used in financing activities consisted of payments on notes payable related to our domain name acquisitions as well as payments on notes payable, which were offset by new convertible notes from third parties.

 

Debt Instruments, Guarantees, and Related Covenants

 

We have no disclosure required by this Item.

 

Critical Accounting Estimates

 

Goodwill

 

In accordance with Goodwill and Other Intangible Assets, goodwill is defined as the excess of the purchase price over the fair value assigned to individual assets acquired and liabilities assumed and is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis in our fourth fiscal quarter or more frequently if indicators of impairment exist. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of our reporting units with each respective reporting unit's carrying amount, including goodwill. The fair value of reporting units is generally determined using the income approach. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, the second step of the goodwill impairment test is performed to determine the amount of any impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. No amortization is recorded for goodwill with indefinite useful life. No goodwill impairment was recognized during the nine months ended September 30, 2014 and 2013, respectively.

 

Intangible Assets

 

In accordance with Goodwill and Other Intangible Assets, intangible assets that are determined not to have an indefinite useful life are subject to amortization. We amortize intangible assets using the straight-line method over their estimated useful lives.

 

Impairment of Long-Lived and Intangible Assets

 

In accordance with Accounting for the Impairment or Disposal of Long-Lived Assets, we review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We assess the recoverability of the long-lived and intangible assets by comparing the carrying amount to the estimated future undiscounted cash flow associated with the related assets. No impairment of intangible assets was recognized during the nine months ended September 30, 2014, and no impairment of long-lived assets was recognized during the nine months ended September 30, 2014.

 

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Net Loss

 

For the nine months ended September 30, 2014, we had an operating loss of $ 1,134,000. We had net loss for the nine months ended September 30, 2014, of $524,700 which was based on a one-time non-cash gain on the sale of ManufacturedHomes.com and the associated intellectual property. For the nine months ended September 20, 2013, we had a net loss of $2,009,600. The operating loss we experienced during the nine months ended September 30, 2014, was a result of our efforts to expand our operations in the manufactured home retail center business.

 

ITEM 3  Quantitative and Qualitative Disclosures About Market Risk

 

As a smaller reporting company, we are not required to provide the information required by this Item.

 

ITEM 4  Controls and Procedures

 

(a)  Disclosure Controls and Procedures

 

We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of September 30, 2014, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2014, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described in our Annual Report on Internal Control Over Financial Reporting filed in our Annual Report on Form 10-K.

 

Our principal executive officers do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive officers have determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

(b)  Changes in Internal Control over Financial Reporting

 

No change in our system of internal control over financial reporting occurred during the period covered by this report, the three month period ended September 30, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 1  Legal Proceedings

 

In the ordinary course of business, we are from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of our management, other than as set forth herein, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.

 

In April 2014, a former employee filed a complaint against us, several of our wholly-owned subsidiaries, and James Pakulis, one of our Directors and our President and Chief Executive Officer, in the Orange County Superior Court. The claims include disability discrimination, failure to accommodate, retaliation, wrongful termination, unpaid wages, overtime, failure to provide meal and rest periods, failure to provide accurate wage statements, unfair business practices and failure to reimburse for reasonable business expenses. Discovery is underway. Under California law, an employee is entitled to recover legal fees and costs if a claim for overtime and/or minimum wage is successful, and thus the claim is currently in excess of $200,000. We believe most, if not all, of the claims are without merit and are vigorously defending the case.

 

ITEM 1A  Risk Factors

 

As a smaller reporting company, we are not required to provide the information required by this Item.

 

ITEM 2  Unregistered Sales of Equity Securities and Use of Proceeds

 

KBM Worldwide, Inc.

 

On July 9, 2014, we entered into a Securities Purchase Agreement with KBM Worldwide, Inc., pursuant to which we sold to KBM a 8% Convertible Promissory Note in the original principal amount of $53,000 (the “Note”). The Note has a maturity date of April 14, 2015, and is convertible after 180 days into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 58% multiplied by the Market Price (representing a discount rate of 42%). “Market Price” means the lowest Trading Price for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means the closing bid price on the applicable day. The “Fixed Conversion Price” shall mean $0.00005. The shares of common stock issuable upon conversion of the Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The Note can be prepaid by us at a premium as follows: (a) between 0 and 30 days after issuance – 109% of the principal amount and any accrued and unpaid interest; (b) between 31 and 60 days after issuance – 114% of the principal amount and any accrued and unpaid interest; (c) between 61 and 90 days after issuance – 120% of the principal amount and any accrued and unpaid interest; (d) between 91 and 120 days after issuance – 124% of the principal amount and any accrued and unpaid interest; and (e) between 121 days and 180 days after issuance – 130% of the principal amount and any accrued and unpaid interest. The purchase and sale of the Note closed on July 14, 2014, the date that the purchase price was delivered to us.

 

The issuance of the Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) thereof. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

 

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Typenex Co-Investment, LLC

 

On July 18, 2014, we entered into a Securities Purchase Agreement with Typenex Co-Investment, LLC, pursuant to which we sold to Typenex a 10% Convertible Promissory Note in the original principal amount of $85,500 (the “Note”), which reflected an original issue discount of $7,500 and legal fees of $3,000. The Note has a maturity date of June 23, 2015, and is convertible after 180 days into our common stock at $0.075 per share (the “Conversion Price”). The Conversion Price is subject to adjustment downward if we issue our common stock at a lower price prior to any conversion. The shares of common stock issuable upon conversion of the Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The Note can be prepaid by us at a premium of 125% of the principal amount and any accrued and unpaid interest. The purchase and sale of the Note closed on July 23, 2014, the date that the purchase price was delivered to us.

 

The issuance of the Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) thereof. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

 

KBM Worldwide, Inc.

 

On August 26, 2014, we entered into a Securities Purchase Agreement with KBM Worldwide, Inc., pursuant to which we sold to KBM a 8% Convertible Promissory Note in the original principal amount of $47,500 (the “Note”). The Note has a maturity date of May 28, 2015, and is convertible after 180 days into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 58% multiplied by the Market Price (representing a discount rate of 42%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means the closing bid price on the applicable day. The “Fixed Conversion Price” shall mean $0.00005. The shares of common stock issuable upon conversion of the Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The Note can be prepaid by us at a premium as follows: (a) between 0 and 30 days after issuance – 109% of the principal amount and any accrued and unpaid interest; (b) between 31 and 60 days after issuance – 114% of the principal amount and any accrued and unpaid interest; (c) between 61 and 90 days after issuance – 120% of the principal amount and any accrued and unpaid interest; (d) between 91 and 120 days after issuance – 124% of the principal amount and any accrued and unpaid interest; and (e) between 121 days and 180 days after issuance – 130% of the principal amount and any accrued and unpaid interest. The purchase and sale of the Note closed on August 28, 2014, the date that the purchase price was delivered to us.

 

The issuance of the Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) thereof. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

 

Convertible Notes

 

On September 8, 2014, we entered into a Securities Purchase Agreement and issued a Convertible Promissory Note to each of two investors. The Notes are each in the original principal amount of $35,000, pay interest at the rate of 8% per annum, and have a maturity date of September 7, 2015. The Notes may be prepaid by us at any time for a premium of 120% of the principal amount and any accrued and unpaid interest. The Notes are convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 62% multiplied by the Market Price (as defined herein) (representing a discount rate of 38%), but no more than $0.06 per share. “Market Price” means the lowest Trading Price (as defined below) for the Common Stock during the five Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means, for any security as of any date, the VWAP value as posted on Bloomberg. The “Fixed Conversion Price” shall mean $0.0005. The shares of common stock issuable upon conversion of the Notes will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The purchase and sale of the Notes closed on September 9, 2014, the date that the purchase price was delivered to us.

 

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The issuance of the Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

 

Stock for Services

 

On September 9, 2014, we issued 350,000 shares of our common stock, restricted in accordance with Rule 144, to a third-party for services rendered pursuant to a professional services agreement. The issuance was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, the party was sophisticated and familiar with our operations, and there was no solicitation in connection with the offering.

 

On September 9, 2014, we issued 3,333,333 shares of our common stock, restricted in accordance with Rule 144, to a third-party for services rendered pursuant to the Consulting Agreement. The issuance was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, the party was sophisticated and familiar with our operations, and there was no solicitation in connection with the offering.

 

On September 11, 2014, we issued 250,000 shares of our common stock, restricted in accordance with Rule 144, to a third-party for services rendered pursuant to a memorandum of understanding. The issuance was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, the party was sophisticated and familiar with our operations, and there was no solicitation in connection with the offering.

 

On September 17, 2014, we issued 1,000,000 shares of our common stock, restricted in accordance with Rule 144, to Merriman Capital, Inc., an investment banking firm, in satisfaction of an invoice for services rendered in the amount of $59,000, or $0.059 per share. The issuance was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, the party was sophisticated and familiar with our operations, and there was no solicitation in connection with the offering.

 

ITEM 3  Defaults Upon Senior Securities

 

There have been no events which are required to be reported under this Item.

 

ITEM 4  Mine Safety Disclosures

 

Not applicable.

 

ITEM 5  Other Information

 

There have been no events which are required to be reported under this Item.

 

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ITEM 6  Exhibits

 

(a)  Exhibits

 

2.1 (1)		Agreement and Plan of Reorganization dated December 11, 2012
2.2 (1)		Securities Purchase Agreement dated December 31, 2012
3.1 (1)		Amended and Restated Articles of Incorporation of General Cannabis, Inc.
3.2 (1)		Certificate of Amendment to Articles of Incorporation
3.3 (1)		Bylaws of General Cannabis, Inc.
10.1 (2)		Securities Purchase Agreement dated July 9, 2014
10.2 (2)		Convertible Promissory Note dated July 9, 2014
10.3 (3)		Securities Purchase Agreement dated July 18, 2014
10.4 (3)		Convertible Promissory Note dated July 18, 2014
10.5 (4)		Securities Purchase Agreement dated August 26, 2014
10.6 (4)		Convertible Promissory Note dated August 26, 2014
10.7 (5)		Form of Securities Purchase Agreement dated September 8, 2014
10.8 (5)		Form of Convertible Promissory Note dated September 8, 2014
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1		Chief Executive Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Chief Financial Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Schema Document
101.CAL		XBRL Calculation Linkbase Document
101.DEF		XBRL Definition Linkbase Document
101.LAB		XBRL Lables Linkbase Document
101.PRE		XBRL Presentation Linkbase Document

 

(1)  Incorporated by reference from our Registration Statement on Form 10 dated January 29, 2013 and filed with the Commission on January 30, 2013.

(2)  Incorporated by reference from our Current Report on Form 8-K dated July 15, 2014 and filed with the Commission on July 18, 2014.

(3)  Incorporated by reference from our Current Report on Form 8-K dated and filed with the Commission on July 24, 2014.

(4)  Incorporated by reference from our Current Report on Form 8-K dated and filed with the Commission on September 3, 2014.

(5)  Incorporated by reference from our Current Report on Form 8-K dated September 9, 2014 and filed with the Commission on September 10, 2014.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

	SearchCore, Inc.
Dated: November 13, 2014		/s/ James Pakulis
	By:	James Pakulis
	Its:	President and Chief Executive Officer

 

 

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