ITEM 1. BUSINESS
Business Development
Northsight Capital Inc. was incorporated in the State of Nevada on May 21, 2008. We were originally formed to engage in the business of marketing, developing, and producing unique, proprietary water products. Our original intended line of enhanced bottled waters was based upon the experience and expertise of our founder, designed to make everyday hydration and nutrition a more enjoyable experience. In May of 2008, we commenced our initial operations, and had no significant assets. In May 2010, we abandoned our pursuit of the proprietary bottled water business. Since then and until June 23, 2014, we were a “shell company” within the meaning of applicable securities laws as we had no operations and our business was comprised of seeking acquisition candidates. We commenced limited operations during the quarterly period ended March 31, 2014.
In May, 2011, Safe Communications, Inc. (n/k/a Kuboo, Inc.) acquired 80% of the Company’s issued and outstanding common stock, and, as a result, became its parent company. On June 23, 2014, the Company completed the acquisition of approximately 7,500 cannabis related Internet domain names from Kae Yong Park, an individual who became our majority shareholder as a result of the acquisition. Currently, we own approximately 2,700 cannabis related internet domain names. In consideration of the acquisition of the 7,500 cannabis related Internet domain names from Kae Park, the Company:
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Issued an aggregate of 78.5 million shares of its common stock to Ms. Park;
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Issued to the seller a promissory note in the principal amount of $500,000. The note was amended and restated to provide that the first $100,000 installment payment due under the Note would be made July 25, 2014 (earlier than required), in exchange for which Kae Yong Park agreed to waive all interest due over the term of the note. Kae Yong Park has waived the requirement that the Company pay the $100,000 due under the Amended and Restated Note, until August 25, 2014. Such $100,000 has since been paid to Ms. Park. The remaining balance of $400,000 is payable in thirty-six equal monthly installments, commencing on the fifteenth day following the first month the Company realizes at least $150,000 in gross revenue;
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Agreed to pay a monthly royalty equal to the product of (i) six percent (6%) and (ii) the excess of the gross monthly revenue over $150,000. The royalty payment shall be payable for a period of thirty-six months from and after the first month in which the Company’s gross revenues are in excess of $150,000.
Kuboo, Inc. continues to be a significant stockholder of the Company. John Venners, the President, CEO and a director of Kuboo, Inc., serves as the Company’s Executive Vice President of Operations and sits on our board of directors (see Note 17 - Related Party Transactions).
On February 29, 2016, the Company entered into a joint venture agreement with Tumbleweed Holdings, Inc. (“TW”), pursuant to which a newly formed joint venture company had been developing an online dating service around the URL, www.jointlovers.com. Per the Joint Venture Agreement, the Company and TW own 60% and 40% respectively of equity of the joint venture company. Under the joint venture agreement, the Company and TW agreed as follows:
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The Company contributed the URL www.jointlovers.com to the joint venture entity, in exchange for 60% of the joint venture company.
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TW contributed $30,000 and agreed to contribute an additional $70,000 towards the development of the online web portal, in exchange for 40% of the joint venture company. With any additional funds required for development to be contributed 60% by the Company and 40% by TW.
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Revenue from the joint venture company will be shared proportionally with a portion of operating income to be used to repay principal and income due under the convertible notes referenced below (up to $165,000 in principal amount of notes).
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TW agreed to purchase an aggregate of $150,000 in principal amount of convertible notes, convertible into shares of the Company’s common stock at a conversion price of $.20 per share. In addition to repayment of principal, if the joint venture company has revenues, the notes are entitled to receive a portion of the joint venture company’s operating income until they have received an amount equal to 50% of the face value of the notes.
We are currently engaged in litigation with Tumbleweed with respect to the Joint Venture. See Item 3 Legal Proceedings.
On November 23, 2016, we entered into a non-binding Letter of Intent, as amended (“LOI”), to acquire Stargreen Holdings, LLC, a Los Angeles, California, company (“Stargreen”). The LOI expires April 30, 2017, subject to extension by agreement. Stargreen has filed applications for licenses/permits to cultivate and dispense legal marijuana and has entered into agreements to acquire/lease properties where it intends to cultivate, manufacture and dispense products to the legal medical and recreational marijuana markets. These agreements are subject to Stargreen securing funding necessary to consummate these acquisitions. As a condition of closing, the LOI requires Stargreen to secure, on mutually agreeable terms, a minimum investment into our company of $2.5 million (maximum of $23.1 million). To acquire Stargreen, we expect to issue Stargreen that number of shares of common stock, such that, after giving effect to said acquisition (but before the financing), Stargreen will own 75% of our issued and outstanding common stock. The closing of the acquisition of Stargreen is subject to various conditions, including satisfactory completion of due diligence, negotiation of definitive agreements, consummation at closing of the minimum $2.5 million funding on mutually agreeable terms and satisfaction prior at closing of certain of our preexisting liabilities.
Although Stargreen does not currently own or operate any legal marijuana businesses, subject to receipt of funding and necessary permits and licenses, Stargreen intends to build a large portfolio of assets to capitalize on industry supply chain economics by producing services and products at each stage. The planned extraction and cultivation operations will use state of the art equipment and resource management techniques to maximize quality and profitability while minimizing use of natural resources.
There is currently no assurance that we will close on the Stargreen acquisition.
The Company was previously a “shell company” within the meaning of applicable securities laws. The Company has ceased to be a “shell company” within the meaning of applicable securities laws in that the Company has raised capital, hired employees, leased space, acquired domain names, including prior to the acquisition described herein, engaged consultants and advisors, completed the construction and launch of several web portals, including “WeedDepot.com” and “TheMarijuanaCompanies.com”, conducted sales and marketing related activities, and negotiated vendor relationships.
The Company intends to build a variety of websites/portals around these domain names. These websites/portals will serve as directories for businesses engaged in the lawful sale and distribution of cannabis and hemp related products and services. To date we have completed and launched eight cannabis related websites, as described below. As noted below, subject to the receipt of additional funding, we intend to complete and launch an additional three cannabis related websites.
Products and Services
The Company’s principal business is to provide a wide variety of online directories for a broad range of businesses engaged in the lawful sale and distribution of cannabis and hemp related products.
The following constitute the Company’s major product categories: a monthly listing in one or more of the Company’s online directories, paid advertising in one or more of the Company’s online directories and leasing to customers one or more Internet domain names for the customer’s exclusive use.
The principal markets for the Company’s services are businesses that are engaged in the lawful sale and distribution of cannabis and cannabis related products and wish to (i) be included in one or more of the Company’s state based online directories, (ii) advertise in the Company’s online directories or (iii) lease one or more internet domain names from the Company.
A list of the approximately 7,500 internet domain names we acquired from Kae Yong Park (who became our majority shareholder in connection with the acquisition) is filed as Exhibit 99.3 to the Current Report on Form 8-K filed with the Commission June 25, 2014. We currently own approximately 2,700 cannabis related internet domain names.
Domain names we do not lease to customers will point to one or more of our websites based on the relevance of the internet domain name to the particular website.
We have already completed and launched the following websites:
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WeedDepot.com
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RateMyStrain.com
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420Careers.com
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MJBizWire.com
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MarijuanaRecipes.com
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MarijuanaSelfies.com
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Wiki-Weed.com
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MarijuanaMD.com
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TheMarijuanaCompanies.com
Weed Depot is a unique smart phone and internet platform directory with geo-mapping for dispensaries, doctors and clinics, head shops, tattoo parlors, and vape lounges. For mobile use, www.WeedDepot.com can be downloaded at Apple Apps and Google Play.
RateMyStrain.com - A site on which individuals or dispensaries can rate or insert new strains commenting on their use and effect. The site contains over 800 strains and descriptions.
420Careers.com - for anyone looking to hire or seeking a job in the cannabis space.
MJBizWire.com - Distribution of new events for companies in the cannabis space. Similar to PR Newswire, etc.
MarijuanaRecipes.com - A web site where subscribers can find hundreds of recipes and ingredients for creating snacks, meals and deserts using infused cannabis.
MarijuanaSelfies.com - A Web community for the freedom of expression and legalization of marijuana.
WikiWeed.com - WikiWeed.com is an informational, user-driven Wiki focused on both recreational and medical marijuana topics and information that allows collaborative editing of its content and structure by its users.
MarijuanaMD.com - A directory of medical doctors who are willing to issue medical marijuana cards to patients
TheMarijuanaCompanies.com- a directory of the company’s websites
Having completed the launch of the above-described websites, subject to the receipt of sufficient funding, which we currently do not have, our plan is to expand our sales and marketing activities with respect to these websites with a view to driving significant traffic to these websites, which in turn should make our directories more attractive to cannabis related enterprises that are trying to promote and advertise their business. We anticipate that it will cost approximately $35,000 per month ($400,000 per year) to effectively implement our sales and marketing plan. Currently, we do not have the requisite funds to implement our marketing plan.
Through our joint venture with Tumbleweed, we have been developing JointLovers.com as a website/mobile application. At this time, due to a lack of funding, we are not actively pursuing further development of the JointLovers.com app.
Subject to the receipt of sufficient funding, which we currently do not have, we intend to construct the following websites:
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WeedMedia.com
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MarijuanaAds.com
Once we commence development of these sites, we anticipate that it will take about six months and cost approximately $150,000 to construct and launch the foregoing websites. Currently, we do not have the requisite funds to build these websites. When and if these websites are constructed, we will also focus on the marketing these sites as well. We believe that the incremental marketing costs associated with the promotion of these to be built websites will not be material in relation to our total marketing budget.
Marketing and Distribution
Subject to the receipt of sufficient funding, which we currently do not have, we intend to expand the marketing and distribution of our services primarily through the following methods:
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Direct Sales
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Internet based advertising
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Social Media based campaigns
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Attendance at trade related shows
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Radio and TV Advertising
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Advertising in Industry based publications
To date, our sales and marketing related activities have included search engine optimization, direct selling efforts, direct mail, electronic mail, social media, and online advertising. We have engaged companies to assist us in our sales and marketing related activities: Hemp Media (provides online (Internet, smart phone and mobile device content to our business), New Times (print advertising), the musician Snoop Dogg (promotion of our Company and its business), and a nationally recognized men’s magazine (print advertising).
Competition
We expect to compete for consumer traffic with traditional, offline local business guides and directories and with other online providers of local and web search on the basis of a number of factors, including the reliability of our content, and the breadth, depth and timeliness of information. We also expect to compete for a share of local businesses’ overall advertising budgets with traditional, offline media companies and other Internet marketing providers on the basis of a number of factors, including the comprehensive nature of our online directories, effectiveness of our advertising solutions and our pricing structure. Our competitors are expected to include the following types of businesses:
(1)
Offline. We expect to compete with offline media companies and service providers who may have existing advertising relationships with local businesses. Services provided by competitors are expected to range from yellow pages listings to direct mail campaigns to advertising and listings services on local newspapers, magazines, television and radio.
(2)
Online. We expect to compete with Internet search engines, such as, Google, Yahoo! and Bing. We also expect to compete with various other online service providers and review and social media websites.
Currently, the Company’s primary online competitors are Weedmaps and Leafly, each an online directory of medical marijuana dispensaries and doctors. Neither Weedmaps nor Leafly currently serve the legal recreational market. Accordingly, we consider these companies a competitor only with respect to medical dispensaries/doctors, and not otherwise. Currently, Weedmaps and Leafly are much larger than we are and have substantially greater financial resources than we do. We believe that we will be able to compete effectively against these companies with respect to medical dispensaries/doctors, as we expect our pricing to be much lower than that offered by either of them. The Company is not currently aware of any other online directory of cannabis related products and services.
Customers
We have not yet realized significant revenues from our operations. We expect our customers to consist of the various businesses engaged in the lawful sale and distribution of cannabis and hemp related products, including retail shops, medical dispensaries, head shops, growers, distributors, suppliers, vendors, and the like. Our customers may also include legal, marketing, and event production companies seeking to serve the cannabis industry.
To the extent practicable from a business standpoint, we intend to diversify our customer base, so that we are not dependent on any particular customer.
Personnel
As of April 17, 2017, we had three full time employees and one part time employee, in addition to a number of subcontractors.
Website/Portal Development
Over the next twelve months, we expect to incur aggregate website development costs and expenses of approximately $175,000 related to the development of our websites and related technology and services. Our ability to engage in planned website and related technology development is subject to the availability of sufficient funds, which we currently do not have. If we are unable to fund necessary research and development, we will be at a competitive disadvantage and our business will be materially and adversely affected.
Intellectual Property
In general, we rely primarily on a combination of trade secrets, copyright and trademark laws, and confidentiality procedures to protect our technology. Due to the technological change that characterizes our business, we believe that the improvement of existing services, reliance upon trade secrets and proprietary know-how and the development of new services are generally as important as patent protection in establishing and maintaining a competitive advantage.
Circumstances outside our control could pose a threat to our intellectual property rights. For example, effective intellectual property protection may not be available in the United States or other countries in which we operate. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. Also, protecting our intellectual property rights is costly and time-consuming. Any unauthorized disclosure or use of our intellectual property could make it more expensive to do business and harm our operating results.
Companies in the Internet, media and other industries may own large numbers of patents, copyrights and trademarks and may frequently request license agreements, threaten litigation or file suit against us based on allegations of infringement or other violations of intellectual property rights. We may in the future face allegations that we have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties, including our competitors and non-practicing entities. As we face increasing competition and as our business grows, we will likely face claims of infringement.
Governmental Regulation
In general, as a company conducting business on the Internet, we are subject to a number of foreign and domestic laws and regulations relating to consumer protection, information security, data protection and privacy, among other things. In the area of information security and data protection, for example, the laws in several states require companies to implement specific information security controls to protect certain types of information. Likewise, all but a few states have laws in place requiring companies to notify users if there is a security breach that compromises certain categories of their information. Foreign data protection, privacy, and other laws and regulations can be more restrictive than those in the United States. Any failure on our part to comply with these laws may subject us to significant liabilities.
The state laws, rules and regulations governing the possession, use, sale and distribution of cannabis and products which may contain cannabis are constantly changing and evolving. Currently, the medicinal use of cannabis has been legalized in 26 states and Washington D.C. and seven of 7 of the 26 states, comprised of Alaska, California, Colorado, Maine, Massachusetts, Oregon, and Washington, plus the District of Columbia, have approved recreational consumer use of marijuana; but, pursuant to the federal Controlled Substances Act (“CSA”), the possession, use, sale and distribution of cannabis for recreational or medicinal purposes remains unauthorized and illegal. However, the state laws which authorize and regulate (or prohibit) the possession, use, sale and distribution of cannabis, as well as the federal laws prohibiting the same do not currently apply to our business as we are not engaged or participating in the possession, cultivation, sale or distribution of cannabis or products which may contain cannabis.
Nevertheless, as the cannabis industry continues to evolve, increased regulation and oversight by local, state and federal agencies is likely. For example, more stringent local or state regulation of the cannabis industry could adversely affect the industry which would in turn adversely affect our business. In addition, because the industry is in its infancy, the enforcement of the CSA as it relates to those using and engaging in the cannabis industry, by the Department of Justice, also remains an area of uncertainty. For example, although we do not believe it probable, if the US Federal Government were to enforce the CSA on a nationwide basis, the cannabis industry would in effect be abolished, which would have a material and adverse effect on our business, rendering us unable to continue as a going concern.
Many of these laws and regulations are still evolving and could be interpreted in ways that could harm our business. The application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate, and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices. There are also a number of legislative proposals pending before the U.S. Congress, various state legislative bodies and foreign governments concerning data protection that could affect us. For example, the European Commission is currently considering a data protection regulation imposing operational requirements on companies that receive personal data. The proposed requirements are different from those currently in place in the European Union, and the regulation may also include significant penalties for non-compliance.
Seasonality
We have not yet realized significant revenues from our business operations. Accordingly, we do not yet have a historical basis to determine whether our revenue will be subject to seasonal fluctuation.
Available Information
More information about us can be found by visiting our corporate Internet site, www.themarijuanacompanies.com. The public may read and copy any materials we file with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing, at the SEC’s Public Reference Room at 100 F St., NE, Washington, DC 20549, on official business days during the hours of 10 AM to 3 PM. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing, proxy and information statements, and other information regarding the Company and other issuers that file electronically with the SEC.
Effect of Existing or Probable Governmental Regulations on the Business
Smaller Reporting Company
We are subject to the reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and we are subject to the disclosure requirements of Regulation S-K of the SEC, as a “smaller reporting company.” That designation relieves us of some of the informational requirements of Regulation S-K.
Sarbanes/Oxley Act
We are also subject to certain provisions of the Sarbanes-Oxley Act of 2002. The Sarbanes/Oxley Act created a strong and independent accounting oversight board to oversee the conduct of auditors of public companies and strengthens auditor independence. It also requires steps to enhance the direct responsibility of senior members of management for financial reporting and for the quality of financial disclosures made by public companies; establishes clear statutory rules to limit, and to expose to public view, possible conflicts of interest affecting securities analysts; creates guidelines for audit committee members’ appointment, compensation and oversight of the work of public companies’ auditors; management assessment of our internal controls; auditor attestation of our internal controls; prohibits certain insider trading during pension fund blackout periods; requires companies and auditors to evaluate internal controls and procedures; and establishes a federal crime of securities fraud, among other provisions. Compliance with the requirements of the Sarbanes/Oxley Act will likely substantially increase our legal and accounting costs if we complete an acquisition, reorganization or merger.
Exchange Act Reporting Requirements
Section 14(a) of the Exchange Act requires all companies with securities registered pursuant to Section 12(g) of the Exchange Act to comply with the rules and regulations of the SEC regarding proxy solicitations, as outlined in Regulation 14A. Matters submitted to our shareholders at a special or annual meeting thereof or pursuant to a written consent will require us to provide our shareholders with the information outlined in Schedules 14A or 14C of Regulation 14; preliminary copies of this information must be submitted to the SEC at least 10 days prior to the date that definitive copies of this information are forwarded to our shareholders.
We are required to file annual reports on Form 10-K and quarterly reports on Form 10-Q with the Securities Exchange Commission on a regular basis, and are required to timely disclose certain material events (e.g., changes in corporate control; acquisitions or dispositions of a significant amount of assets other than in the ordinary course of business; and bankruptcy) in a Current Report on Form 8-K.
ITEM 1A.
ITEM 1A. RISK FACTORS
RISKS RELATED TO OUR BUSINESS
BECAUSE WE CURRENTLY HAVE NEGATIVE CASH FLOW FROM OPERATIONS AND ONLY MINIMAL CASH ON HAND, WE HAVE AN IMMEDIATE AND URGENT NEED TO RAISE ADDITIONAL FUNDS, WHICH FUNDS MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS OR AT ALL.
We continue to have an immediate and extremely urgent need for additional capital. Since early 2015, we have experienced great difficulty raising capital from third parties. The lack of operating capital continues to materially and adversely affect our business operations. Due to the lack of operating capital, we are unable to implement our business plan. We may not be able to raise the funds we need to fund our basic operations. If we do not receive a significant infusion of capital in the near term, it is unlikely that we will be able to continue as a going concern, in which case, investors would suffer a total loss of their investment in our Company.
If we cannot immediately raise funds on acceptable terms, we will not be able to complete the construction of our planned websites/portals, effectively market our services, execute our business plan, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. We may be unable to secure sufficient funding to continue operations and effect planned transactions, in which case you would suffer a total loss of your investment. If we are unable to obtain necessary funding, there will be a material adverse effect on our business, results of operations and financial condition.
THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
Our current independent registered public accounting firm issued an opinion on our financial statements for the years ended December 31, 2016 and 2015, respectively, which states that the financial statements were prepared assuming we will continue as a going concern and further states that our recurring losses from operations and inability to generate sufficient operating cash flow raise substantial doubt about our ability to continue as a going concern. As of April 17, 2017, we had only a minimal amount of cash on hand.
The Company has accumulated losses of $20,683,410 and has had sustained negative cash flows from operating activities since inception (May 2008). These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. During the year ended December 31, 2016, the Company raised aggregate net proceeds of $100,000 from non-related parties and $656,600 from related parties in capital through the issuance of notes payable. Management plans to (i) raise additional capital as soon as possible, to fund continued operations of the Company and (ii) eventually to generate profits from operations.
In the event the Company does not generate sufficient funds from revenues or financing through the issuance of its common stock or from debt financing, the Company will be unable to fully implement its business plan and pay its obligations as they become due, any of which circumstances would have a material adverse effect on its business prospects, financial condition, and results of operations. The accompanying financial statements do not include any adjustments that might be required should the Company be unable to recover the value of its assets or satisfy its liabilities.
WE ARE AN EARLY-STAGE COMPANY WITH AN UNPROVEN BUSINESS MODEL, WHICH MAKES IT DIFFICULT TO EVALUATE OUR CURRENT BUSINESS AND FUTURE PROSPECTS.
We have limited operating history upon which to base an evaluation of our current business and future prospects. We have not yet launched all of our planned websites/portals. The market for cannabis related directories/advertising is new and as yet untested. As a result, the revenue and income potential of our business and our market are unproven. In addition, we have little historical data with respect to directory listing rates (including renewals) for our services because we have not yet established a significant history of subscriptions. Further, because of our limited operating history and because the market for web-based cannabis related directories is relatively new and rapidly evolving, we have limited insight into trends that may emerge and affect our business. We may make errors in predicting and reacting to relevant business trends, which could harm our business.
Before investing, you should consider an investment in our stock in light of the risks, uncertainties and difficulties frequently encountered by early-stage companies in new and rapidly evolving markets such as ours. We may not be able to successfully address any or all of these risks. Failure to adequately do so could cause our business, results of operations and financial condition to suffer.
WE HAVE A LIMITED OPERATING HISTORY IN AN EVOLVING INDUSTRY, WHICH MAKES IT DIFFICULT TO EVALUATE OUR FUTURE PROSPECTS AND MAY INCREASE THE RISK THAT WE WILL NOT BE SUCCESSFUL.
We have a short operating history in an evolving industry that may not develop as expected, if at all. This short operating history makes it difficult to assess our future prospects. You should consider our business and prospects in light of the risks and difficulties we may encounter in this rapidly evolving industry. These risks and difficulties include our ability to, among other things:
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raise sufficient capital to fund even our most basic business operations;
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increase the number of users of our website, the number of paid subscribers and other content on our platform and our revenue;
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manage, measure and demonstrate the effectiveness of our advertising solutions and attract and retain new advertising clients, many of which may only have limited or no online advertising experience;
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successfully compete with existing and future providers of other forms of offline and online advertising;
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successfully compete with other companies that are currently in, or may in the future enter, the business of providing information regarding cannabis related businesses;
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successfully expand our business in new and existing markets, both domestic and international;
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successfully develop and deploy new features and products;
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avoid interruptions or disruptions in our service or slower than expected load times;
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develop a scalable, high-performance technology infrastructure that can efficiently and reliably handle increased usage, as well as the deployment of new features and products;
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hire, integrate and retain talented sales and other personnel;
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effectively manage rapid growth in our sales force, personnel and operations; and
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effectively partner with other companies.
If the demand for information regarding cannabis related businesses does not develop as we expect, or if we fail to address the needs of this demand, our business will be harmed. We may not be able to successfully address these risks and difficulties or others, including those described elsewhere in these risk factors. Failure to adequately address these risks and difficulties could harm our business and cause our operating results to suffer.
WE HAVE A HISTORY OF LOSSES. BECAUSE WE CURRENTLY HAVE LIMITED REVENUES AND EXPECT OUR OPERATING EXPENSES TO INCREASE IN THE FUTURE, WE MAY NEVER BECOME PROFITABLE.
Since we ceased to be a shell company within the meaning of applicable securities laws in the middle of 2014, we have experienced net losses and negative operating cash flows. As of December 31, 2016, we had an accumulated deficit of $20,683,410 and incurred net losses of $1,965,081 during the year ended December 31, 2016. Assuming we are able to raise additional capital to ramp our operations, we expect our near term quarterly losses to increase. We will likely incur significant net losses into the second quarter of 2018 and possibly longer. While we are unable to predict accurately our future operating expenses, subject to receipt of additional capital, we expect these expenses to increase substantially, as we, among other things:
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expand our domestic selling and marketing activities;
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continue the building of our websites/portals;
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develop new products and technologies;
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upgrade our operational and financial systems, procedures and controls; and
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hire additional personnel, including additional executive, administrative and technical staff;
We commenced business operations in early 2014. We have not yet generated any material revenue. We will need to generate substantial revenues to achieve and maintain profitability. If we fail to generate such revenues, we will continue to experience losses indefinitely. We may not be able to achieve or maintain profitability. We also may fail to accurately estimate and assess our increased operating expenses as we expand our operations. If our operating expenses exceed our expectations, our financial performance will be adversely affected, which will likely cause the price of our common stock to decline.
ADDITIONAL FUNDING WILL BE DILUTIVE TO STOCKHOLDERS OR MAY IMPOSE OPERATIONAL RESTRICTIONS.
An additional equity financing will be dilutive to our stockholders and debt financing, if available, may involve pledging our assets and restrictive covenants, which may limit our operating flexibility. If additional funds are raised through the issuance of equity securities or securities convertible into or exercisable for equity securities, the percentage ownership of our then existing stockholders will be reduced. These stockholders may experience additional dilution in net book value per share and any additional equity securities may have rights, preferences and privileges senior to those of the holders of our common stock.
WE RELY ON TRAFFIC TO OUR WEBSITE FROM SEARCH ENGINES SUCH AS GOOGLE, YAHOO! AND BING. IF OUR WEBSITE FAILS TO RANK PROMINENTLY IN UNPAID SEARCH RESULTS, TRAFFIC TO OUR WEBSITE COULD DECLINE AND OUR BUSINESS WOULD BE ADVERSELY AFFECTED.
Our success depends in part on our ability to attract users through unpaid internet search results on search engines such as Google, Yahoo! and Bing. The number of users we attract to our website from search engines is due in large part to how and where our website ranks in unpaid search results. These rankings can be affected by a number of factors, many of which are not in our direct control, and they may change frequently. For example, a search engine may change its ranking algorithms, methodologies or design layouts. As a result, links to our website may not be prominent enough to drive traffic to our website, and we may not be in a position to influence the results. In some instances, search engine companies may change these rankings in order to promote their own competing products or services or the products or services of one or more of our competitors. We believe that other websites have experienced fluctuations in search result rankings in the past, and we anticipate fluctuations in the future. Any reduction in the number of users directed to our website could adversely impact our business and results of operations.
We expect that Google in particular will be the most significant source of traffic to our website. Our success will depend on our ability to maintain a prominent presence in search results for queries regarding local cannabis related businesses on Google. Google may remove links to our website from portions of its web search product, and may promote its own competing services, including Google’s local services, in its search results. Given the large volume of traffic to our website we are expecting from Google and the importance of the placement and display of results of a user’s search, if Google were to take any of these actions in the future, there could be a substantial negative effect on our business and results of operations.
IF USERS DO NOT VALUE THE QUALITY AND RELIABILITY OF THE CONTENT THAT WE DISPLAY ON OUR PLATFORM, THEY MAY STOP OR REDUCE THE USE OF OUR SERVICES, WHICH COULD ADVERSELY IMPACT THE GROWTH OF OUR BUSINESS.
Our success depends on the quality of the reviews and other content that we show on our platform, including whether they are helpful, up-to-date, unbiased, relevant, and reliable. If users do not value the content on our platform, they may stop or reduce the use of our services, and traffic to our websites will decline. If our user traffic declines, our advertisers may stop or reduce the amount of advertising on our platform. As a result, our business could be negatively affected if we fail to obtain high quality content, or if the content we display is perceived to be unhelpful, out-of-date, biased, irrelevant, or unreliable. We must therefore ensure that our services and features are attractive to users, and encourage them to contribute. In addition, users who contribute content to our platform may provide content to our competitors or subsequently remove their content from our platform. If they do so, the value of our content may decline relative to other available services, and our business may be harmed.
While we attempt to filter or remove content that may be offensive, biased, unreliable or otherwise unhelpful, we cannot guarantee the effectiveness or adequacy of these efforts. If we fail to filter or remove a significant amount of content that is biased, unreliable, or otherwise unhelpful, or if we mistakenly filter or remove a significant amount of valuable content, our reputation and brand may be harmed, users may stop using our services and our business and results of operations could be adversely affected.
THERE HAS BEEN ONLY A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK, AND ITS PRICE HAS BEEN AND IS EXPECTED TO BE HIGHLY VOLATILE.
There has been only a limited public market for our common stock, and we cannot assure you that an active public market for our common stock will develop or be sustained in the future. Our common stock is quoted in the over the counter market (OTCBB), the market for which is highly illiquid and the quoted price of our common stock is likely not indicative of the underlying value of our common stock.
The market price of our common stock has been and is likely to continue to be highly volatile and could be subject to wide fluctuations in response to a number of factors, some of which are beyond our control, including:
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announcements of technological innovations or new services by us or our competitors;
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demand for our services;
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fluctuations in revenues/expenses;
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changes in our pricing policies or those of our competitors;
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changes in government regulations;
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quarterly variations in our operating expenses;
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our technological capabilities to accommodate any future growth in our operations or our customers; and
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imbalances between the supply and demand for shares of common stock in the over the counter market.
Further, the stock market has experienced significant price and volume fluctuations that have particularly affected the market price of the stock of many Internet-related companies, and that often have been unrelated or disproportionate to the operating performance of these companies. Market fluctuations such as these may seriously harm the market price of our common stock. In the past, securities class action suits have been filed following periods of market volatility in the price of a company’s securities. If such an action were instituted, we would incur substantial costs and a diversion of management attention and resources, which would seriously harm our business, results of operations and financial condition.
FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE.
Sales of a large number of shares of our common stock in the market after this offering, or the belief that these sales could occur, could cause a significant drop in the market price of our common stock. Of the 114,236,581 shares we had outstanding as of April 17, 2017, approximately 27,269,633 shares will become freely tradable upon the effectiveness under the Securities Act of the Registration Statement filed on that date. Consequently, the price of our common stock could drop substantially following the effectiveness of the Registration Statement if significant shares begin to be sold.
WE DO NOT INTEND TO PAY DIVIDENDS.
We have not declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings to fund growth and, therefore, do not expect to pay any dividends in the foreseeable future. See “Dividend Policy” for additional information regarding our dividend policy.
BECAUSE WE EXPECT TO DERIVE SUBSTANTIALLY ALL OF OUR FUTURE REVENUE FROM DIRECTORY LISTING FEES FOR OUR SERVICES AS WELL AS ADVERTISING FEES FROM OUR WEBSITES/PORTALS, ANY FAILURE OF THESE SERVICES TO SATISFY CUSTOMER DEMANDS OR TO ACHIEVE WIDESPREAD MARKET ACCEPTANCE WILL SERIOUSLY HARM OUR BUSINESS.
We expect that our revenues will come from listing fees from our cannabis related directories, as well as from advertising fees from such directories. As we have only recently launched certain of our planned Website/Portals and several are still under construction, we currently have no subscribers or advertising revenue. Our ability to generate revenues depends on our ability to secure paid directory listings and establish our advertiser base. To do so, we must convince prospective advertisers of the benefits of our services. We must also convince prospective advertisers that our advertising services work to their benefit. Many of these businesses are more accustomed to using more traditional methods of advertising, such as newspapers or print yellow pages directories. Failure to establish our subscriber/advertiser base will harm our business.
We expect that advertisers will not typically have long-term obligations to purchase our services. In addition, we expect to rely heavily on advertising spending by small and medium-sized local businesses, which have historically experienced high failure rates and often have limited advertising budgets. As a result, we may experience attrition in our advertisers in the ordinary course of business resulting from several factors, including losses to competitors, lower priced competitors, perceptions that our advertising solutions are unnecessary or ineffective, declining advertising budgets, closures and bankruptcies. We must continually add new subscribers/advertisers both to replace advertisers who choose not to renew their advertising or who go out of business, or otherwise fail to fulfill their advertising contracts with us, and to grow our business. Our advertisers’ decisions to renew depend on a number of factors, including the degree of satisfaction with our services and their ability to continue their operations and spending levels. The ratings and reviews that businesses receive from our users may also affect advertising decisions by current and prospective advertisers. For instance, favorable ratings and reviews, on the one hand, could be perceived as obviating the need to advertise, and unfavorable ratings and reviews, on the other, could discourage businesses from advertising to an audience they perceive as hostile or cause them to form a negative opinion of our services and user base which could discourage them from doing business with us.
If our advertisers increase their rates of non-renewal or if we experience significant advertiser attrition or contract breach, or if we are unable to attract new advertisers in numbers greater than the number of advertisers that we lose, our client base will decrease and our business, financial condition and results of operations would be harmed.
We may be unable to attain a sufficient number of subscribers and/or advertising customers to achieve our business objectives and we cannot assure you that sufficient numbers of subscribers and/or advertising customers will be acquired to achieve profitability. If we are unable to obtain a significant number of subscribers and/or advertising customers for our websites/portals, we will not realize the revenues we are expecting and there will be a material adverse effect on our business, results of operations and financial condition. As a result, if for any reason revenues from our cannabis directory related services or advertising do not materialize as rapidly as we anticipate, our operating results and our business will be significantly impaired. If our cannabis related directories or advertising services fail to meet the needs of our target customers, or if it does not compare favorably in price and performance to competing services, our growth will be limited.
Our services may not achieve market acceptance. Our future financial performance also will depend, in part, on our ability to diversify our offerings by successfully developing, introducing and gaining customer acceptance of new services. We cannot assure you, however, that we will be successful in achieving market acceptance of any new services that we bring to market or that we will be able to secure contracts for paid directory listings/advertising on our Websites/Portals. Furthermore, there is a possibility that diversifying our existing offerings could harm our business, results of operations and financial condition.
THE MARKET FOR OUR SERVICES IS EMERGING, AND IF WE ARE NOT SUCCESSFUL IN PROMOTING AWARENESS OF OUR SERVICES, OUR BUSINESS WILL NOT SUCCEED.
Although legalization of marijuana is a relatively recent development, there has been a great deal of public focus on legalization for both recreational and medicinal purposes. Although we believe that cannabis related businesses are acutely aware of the need to market their products and services, in order for us to attract subscribers to our directories and paid advertising customers, we need to actively promote these services, so as to increase awareness and acceptance of these services. In addition, there may be a time-limited opportunity to achieve and maintain a significant share of the market for these services due in part to the emerging nature of these markets and the substantial resources available to our existing and potential competitors.
At this time, we do not have the capital necessary to promote and market our services, so we cannot assure you that we will be successful in this effort. If we are not successful in promoting market awareness and acceptance of our cannabis related directory and advertising services, it is unlikely that we will succeed in implementing our business plan. If cannabis related businesses do not recognize the need to market their products, then the market for our cannabis related directory and advertising services may develop more slowly than we expect, which could adversely affect our operating results. Developing and maintaining awareness of our cannabis related directory and advertising services is critical to achieving widespread acceptance of our services. Furthermore, we believe that the importance of product awareness will increase as competition in our market develops. Successful promotion of our services will depend largely on the effectiveness of our marketing efforts and on our ability to develop reliable and useful services, at competitive prices.
If we fail to successfully promote our services, due to a lack of capital or otherwise, or if our expenses to promote and maintain such services are greater than anticipated, our results of operations and financial condition will suffer.
WE FACE COMPETITION FROM BETTER ESTABLISHED COMPANIES THAT MAY HAVE SIGNIFICANTLY GREATER RESOURCES, WHICH COULD PREVENT US FROM GENERATING REVENUE OR ACHIEVING PROFITABILITY.
The market for our services is competitive and is likely to become even more so in the future. Increased competition could result in pricing pressures, reduced sales, reduced margins or the failure of our services to achieve or maintain more widespread market acceptance, any of which would have a material adverse effect on our business, results of operations and financial condition. Our current principal online competitors are Weedmaps and Leafly, each an online directory of medical marijuana dispensaries and doctors. Neither Weedmaps nor Leafly currently serve the legal recreational market. Accordingly, we consider these companies as competitors only with respect to medical dispensaries/doctors, and not otherwise. Currently, Weedmaps and Leafly are much larger than we are and have substantially greater financial resources than we do. We believe that we will be able to compete effectively against these companies with respect to medical dispensaries/doctors, as we expect our pricing to be much lower than that offered by either of them. We are not currently aware of any other online directory of cannabis related products and services.
Many of our current and potential competitors enjoy substantial competitive advantages, such as:
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greater name recognition and larger marketing budgets and resources;
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established marketing relationships and access to larger customer bases; and
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substantially greater financial, technical and other resources.
As a result, these competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. For all of the foregoing reasons, we may not be able to compete successfully against our current and future competitors.
WE MAY NOT BE SUCCESSFUL IN SECURING LISTING RENEWALS, IN WHICH CASE OUR REVENUES AND OPERATING RESULTS WILL BE ADVERSELY AFFECTED.
Our future success depends in part on achieving substantial revenue from listing fees for our cannabis related directory services. We anticipate that any listing fees for these cannabis related directory services will run on a monthly or annual renewal cycle. Our customers will have no obligation to renew their listings upon expiration of the monthly or annual renewal cycle. We cannot assure you that we will generate significant revenue from renewals. In order to achieve our long term revenue objectives, we will need to build a sizable base of customers that renew their listings at the end of each cycle. If we are unable to sell significant renewals, there will be a material adverse effect on our long term revenue potential and our operating results.
OUR TECHNOLOGY MAY FAIL TO KEEP PACE WITH THE RAPID CHANGE ASSOCIATED WITH THE INTERNET.
The success of our cannabis related directories/web portals will depend on the functionality and reliability of the technology incorporated into our websites/portals. Ongoing evolution of the Internet and search technologies will require us to continually improve the functionality, features and reliability of our technology. Any failure of our technology to keep pace with the rapid growth and technological change of the Internet/search technologies will impair the market acceptance of our directory and advertising services, which in turn will harm our business, results of operations and financial condition.
OUR EXISTING PERSONNEL AND INFRASTRUCTURE RESOURCES HAVE BEEN STRAINED BY OUR RECENT STAFF REDUCTIONS, AND IF WE ARE UNABLE TO IMPLEMENT APPROPRIATE CONTROLS AND PROCEDURES TO MANAGE THESE ACTIVITIES, WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS PLAN.
Due to a lack of operating capital, we have been forced to reduce our staffing levels, which has placed, and will continue to place, a strain on our management, administrative, operational and financial infrastructure. Our future success will depend in part upon the ability of our management and other personnel to manage our operational activity effectively. This will require us to hire and train additional personnel to manage our operations, for which we do not currently have the necessary capital. In addition, we will be required to continue to improve our operational, financial and management controls and our reporting systems and procedures. If we fail to successfully manage our operational growth, implementation of our business plan will be materially and adversely affected.
THE LOSS OF KEY EMPLOYEES AND TECHNICAL PERSONNEL OR OUR INABILITY TO HIRE ADDITIONAL QUALIFIED PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our success depends in part upon the continued service of our EVP, John Venners, who is on an interim basis acting as our ranking executive officer. Our success will also depend on our future ability to attract and retain highly qualified technical, managerial and marketing personnel. The market for qualified personnel has historically been, and we expect that it will continue to be, intensely competitive. We cannot assure you that we will continue to be successful in attracting or retaining such personnel. The loss of certain key employees, such as our EVP or future President/CEO, or our inability to attract and retain other qualified employees could have a material adverse effect on our business.
IF WE ACQUIRE ANY COMPANIES OR TECHNOLOGIES IN THE FUTURE, THEY COULD PROVE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS.
We may acquire or make investments in complementary companies, services and technologies in the future. We have not made any acquisitions or investments to date, and therefore our ability as an organization to make acquisitions or investments is unproven. Acquisitions and investments involve numerous risks, including:
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difficulties in integrating operations, technologies, services and personnel;
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diversion of financial and management resources from existing operations;
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risk of entering new markets;
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potential loss of key employees; and
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inability to generate sufficient revenues to offset acquisition or investment costs.
In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted which could affect the market price of our stock. As a result, if we fail to properly evaluate and execute acquisitions or investments, our business and prospects may be seriously harmed.
BECAUSE COMPETITION FOR OUR TARGET EMPLOYEES IS INTENSE, WE MAY NOT BE ABLE TO ATTRACT AND RETAIN THE HIGHLY SKILLED EMPLOYEES WE NEED TO SUPPORT OUR PLANNED GROWTH.
To execute our business plan, we must attract and retain highly qualified personnel. We need to hire additional personnel in virtually all operational areas, including sales and marketing, operations and technical support, customer service and administration. Competition for these personnel is intense, especially for persons with high levels of experience in designing and developing Internet-related services. We cannot assure you that we will be successful in attracting and retaining qualified personnel. Many of the companies with which we compete for experienced personnel have greater resources than we have. If we fail to attract new personnel or retain and motivate our current personnel, our business and future growth prospects could be severely harmed.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, AND THESE FLUCTUATIONS MAY CAUSE OUR STOCK PRICE TO FALL.
Our quarterly operating results will likely vary in the future as a result of fluctuations in any revenues and operating expenses. Subject to receipt of additional funding, we expect that our operating expenses will increase in the future as we expand our selling and marketing activities, increase our website development efforts and hire additional personnel. In addition, our operating expenses may fluctuate in the future, as a result of the following factors, among others:
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a concentration of marketing expenses for activities such as trade shows and advertising campaigns;
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a concentration of general and administrative expenses, such as recruiting expenses and professional services fees; and
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a concentration of website development costs.
As a result, it is possible that in some future periods, our results of operations may be below the expectations of current or potential investors. If this occurs, the price of our common stock will likely decline.
BECAUSE WE EXPECT TO RECOGNIZE REVENUE FROM ANY FUTURE FEES FOR DIRECTORY LISTINGS RATABLY OVER THE TERM OF THE LISTING AGREEMENT, DOWNTURNS IN SALES MAY NOT BE IMMEDIATELY REFLECTED IN OUR REPORTED REVENUES.
We expect that a substantial portion of our future revenues will come from listing fees from our cannabis related directories (although we currently are not realizing significant revenue from this service). Prospective customers will have the option to list on a monthly or an annual basis and may or may not renew their listings at the end of the period. For annual listings, we will bill customers for the entire listing period and would then recognize revenue from those annual listings over the terms of the listing period. As a result, we anticipate that a significant portion of any revenues we report in future quarters will be deferred revenue from listing agreements entered into and paid for during previous quarters. Because of this deferred revenue, the revenues we report in any quarter or series of quarters may mask significant downturns in sales and the market acceptance of our cannabis related directories.
WE MAY BE SUED BY THIRD PARTIES FOR ALLEGED INFRINGEMENT OF THEIR PROPRIETARY RIGHTS.
The internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of patent infringement or other violations of intellectual property rights. As the number of entrants into our market increases, the possibility of an intellectual property claim against us grows. Our technologies and services may not be able to withstand any third-party claims or rights against their use. Any intellectual property claims, with or without merit, could be time-consuming and expensive to litigate or settle, and could divert management attention from executing our business plan and thus could have a material adverse effect on our business, results of operations and financial condition.
WE MAY NOT BE ABLE TO DEVELOP ACCEPTABLE NEW SERVICES OR ENHANCEMENTS TO OUR EXISTING SERVICES AT A RATE REQUIRED BY OUR RAPIDLY CHANGING MARKET.
Our future success depends on our ability to develop new services or enhancements to our existing services that keep pace with rapid technological developments and that address the changing needs of our customers. We will need to continuously modify and enhance our technologies to keep pace with changes in Internet-related software, browser and search engine technologies. We may not be successful in either developing such services or timely introducing them to the market. In addition, uncertainties about the timing and nature of new technologies, or modifications to existing technologies, could increase our research and development expenses. The failure of our services to operate effectively with existing and future technologies will limit or reduce the market for our services, result in customer dissatisfaction and seriously harm our business, results of operations and financial condition.
OTHER VENDORS MAY DEVELOP SERVICES SIMILAR TO OURS, AND THEREBY REDUCE DEMAND FOR OUR SERVICES.
In the future, search engine providers may enhance or develop services that include functions that are currently provided by our services. If users of our directories are able to effectively locate cannabis related products and services through advanced search engine applications, the demand for our and services could decrease. Furthermore, even if our technology provides greater functionality and is more effective than services offered by search engine companies, potential customers might accept this limited functionality in lieu of purchasing enhancements of our services.
OUR SYSTEMS MAY BE VULNERABLE TO SECURITY RISKS OR SERVICE DISRUPTIONS THAT COULD HARM OUR BUSINESS.
The servers we utilize are vulnerable to physical or electronic break-ins and service disruptions, which could lead to interruptions, delays, loss of data or the inability to process searches. Such events could be very expensive to remedy, could damage our reputation and could discourage existing and potential customers from using our services. We may experience break-ins in the future. Any such events could substantially harm our business, results of operations and financial condition.
BECAUSE OUR SYSTEMS ARE COMPLEX AND MAY BE DEPLOYED IN A WIDE VARIETY OF ENVIRONMENTS, THEY MAY HAVE ERRORS OR DEFECTS THAT USERS IDENTIFY AFTER DEPLOYMENT, WHICH COULD HARM OUR REPUTATION AND OUR BUSINESS.
Systems as complex as ours frequently contain undetected errors when first introduced or when new versions or enhancements are released. We have from time to time found errors/defects in our systems, and we may find such errors/defects in the future. The occurrence of errors/defects could adversely affect sales of our services and divert the attention of web development personnel from our website development efforts and cause significant customer relations problems.
RISKS RELATED TO OUR INDUSTRY
EVOLVING REGULATION OF THE CANNABIS INDUSTRY MAY AFFECT US ADVERSELY.
The state laws, rules and regulations governing the possession, use, sale and distribution of cannabis and products which may contain cannabis are constantly changing and evolving. Currently, the medicinal use of cannabis has been legalized in 26 states and Washington D.C. and seven of 7 of the 26 states, comprised of Alaska, California, Colorado, Maine, Massachusetts, Oregon, and Washington, plus the District of Columbia, have approved recreational consumer use of marijuana; but, pursuant to the federal Controlled Substances Act (“CSA”), the possession, use, sale and distribution of cannabis for recreational or medicinal purposes remains unauthorized and illegal. However, the state laws which authorize and regulate (or prohibit) the possession, use, sale and distribution of cannabis, as well as the federal laws prohibiting the same do not currently apply to our business as we are not engaged or participating in the possession, cultivation, sale or distribution of cannabis or products which may contain cannabis.
Nevertheless, as the cannabis industry continues to evolve, increased regulation and oversight by local, state and federal agencies is likely. For example, more stringent local or state regulation of the cannabis industry could adversely affect the industry which would in turn adversely affect our business. In addition, because the industry is in its infancy, the enforcement of the CSA as it relates to those using and engaging in the cannabis industry, by the Department of Justice, also remains an area of uncertainty. For example, although we do not believe it probable, if the US Federal Government were to enforce the CSA on a nationwide basis, the cannabis industry would in effect be abolished, which would have a material and adverse effect on our business, rendering us unable to continue as a going concern.
EVOLVING REGULATION OF THE INTERNET AND CELLULAR INDUSTRIES MAY AFFECT US ADVERSELY.
There are also a number of legislative proposals pending before the U.S. Congress, various state legislative bodies and foreign governments concerning data protection that could affect us. Imposition of Internet and cellular use or other charges imposed by government agencies or by private organizations for accessing the Internet and cellular services could have a negative impact on our business. Laws and regulations applying to the solicitation, collection or processing of personal or consumer information could affect our activities. Furthermore, any regulation imposing additional fees for Internet or cellular use could result in a decline in the use and viability of Internet and cellular communications, which could have a material adverse effect on our business, results of operations and financial condition.
THE SUCCESS OF OUR BUSINESS DEPENDS IN PART ON THE CONTINUED GROWTH AND ACCEPTANCE OF THE INTERNET AND CELLULAR TECHNOLOGY AS INFORMATION GATHERING TOOLS.
Our revenues will depend in part on the continued acceptance of the Internet and cellular services as information gathering tools for individuals. The Internet and cellular systems may not continue to be viable media due to inadequate development of the necessary infrastructure, or timely development of complementary products, such as high-speed modems. Additionally, the internet and cellular systems could be adversely affected as information tools due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet/cellular activity, security, reliability, cost, ease-of-use, accessibility, and interest in Internet usage and quality-of-service. If the Internet and cellular services do not continue to be widespread informational media, demand for our Internet based directory and advertising services could be significantly reduced, which could have a material adverse effect on our business, results of operations and financial condition.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2:
ITEM 2: PROPERTIES
We are headquartered in Scottsdale, Arizona where we rent space from Kuboo, Inc., our former parent company and a significant shareholder. The monthly rent for this facility is $11,500. Under the current arrangement, the landlord pays taxes, maintenance and repairs.
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS
On August 15, 2016, the Company (“Plaintiff”) instituted a legal action in Arizona against, Tumbleweed Holdings Inc., (“TW”).
The complaint alleges that (i) TW breached the joint venture agreement by failing to fund the remaining $15,000 due to the joint venture company by April 29, 2016, (ii) TW breached the joint venture agreement by failing to fund the last $50,000 convertible note due to the Company by April 29, 2016, and (iii) TW breached the joint venture agreement by failing to fund their respective 40% of development expense in excess of the initial $100,000. The Company seeks damages in the amount of $128,000 plus interest.
On September 22, 2016, Tumbleweed Holdings Inc., instituted a counterclaim in Arizona in response to the above legal action. The complaint alleged that (i) The Company breached the joint venture agreement by failing to leverage relationships and failing to provide budgeting and accounting records, (ii) the Company breached implied covenant of good faith and fair dealing by enticing TW into making significant contributions and then failing to perform under the agreement, (iii) the Company was unjustly enriched by having use of funds contributed by TW, (iv) the Company converted funds contributed by TW into its own assets, and (v) the Company has not provided accounting for all funds received by TW. TW seeks damages in the amount to be determined at trial. The Company believes these claims are without merit and intends to vigorously defend itself against them.
ITEM 4:
ITEM 4: MINE SAFETY DISCLOSURES
Not Applicable.
PART II
ITEM 5:
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common shares were approved for quotation on the OTC Bulletin Board (OTC) of the Financial Industry Regulatory Authority, Inc. (“FINRA”) under the symbol “NCAP” on May 12, 2009. There is currently only a very limited trading market for shares of our common stock. Management does not expect any active market to develop in our common stock unless and until we are able to implement our business plan. In any event, no assurance can be given that any active market for our common stock will ever develop or be maintained.
For any market that develops for our common stock, the sale of “restricted securities” (common stock) pursuant to Rule 144 of the SEC by members of management or any other person to whom any such securities may be issued in the future may have a substantial adverse impact on any such public market. For information regarding the requirements for resale under Rule 144, see the heading “Rule 144” below. In addition, of the 114,236,581 shares we had outstanding as of April 17, 2017, approximately 27,269,633 shares will become freely tradable upon the effectiveness under the Securities Act of the Registration Statement filed on that date. Consequently, the price of our common stock could drop substantially following the effectiveness of the Registration Statement if significant shares begin to be sold.
The following table sets forth, for the periods indicated, the high and low closing quotations, as reported by the OTC Bulletin Board, and represents prices between dealers, does not include retail markups, markdowns or commissions, and may not represent actual transactions:
These prices were obtained from the finance portal, Yahoo! Finance, and do not necessarily reflect actual transactions, retail markups, mark downs or commissions.
Holders
At April 17, 2017 we had approximately 187 shareholders of record, not including an indeterminate number of holders who may hold shares in “street name.”
Dividends
We have not declared any cash dividends with respect to our common stock and do not intend to declare dividends in the foreseeable future. Our future dividend policy cannot be ascertained with any certainty, and unless and until we complete any acquisition, reorganization or merger, no such policy will be formulated. There are no material restrictions limiting, or that are likely to limit, our ability to pay dividends on our securities.
Securities Authorized for Issuance
The Company has authorized common shares of 200,000,000.
Recent Issuances of Unregistered Securities
The unregistered securities were issued by us during the last year are as follows:
On February 29, 2016, we sold $100,000 of convertible notes and warrants to purchase 4.9% of our issued and outstanding stock, in connection with our Joint venture agreement with Tumbleweed Holdings, Inc., as disclosed in our Form 8-K Current Report filed with the SEC on March 2, 2016. The warrant to purchase Company common stock has an exercise price of $0.08 per share, a three-year term and a cashless exercise right.
On March 30, 2016, the Company issued 75,000 shares of common stock as settlement of a contract obligation to a vendor valued at $7,500.
On January 20, 2017, the Company issued the 400,000 shares of restricted stock as settlement of a prior lawsuit.
On April 10, 2017, we sold 1,000,000 shares of common stock in a private transaction at a per share price of $.025, for gross proceeds of $25,000, to an “accredited investor” within the meaning of Rule 502 of Regulation D under the Securities Act of 1933, as amended.
We believe that the foregoing transactions were exempt from the registration requirements under the Securities Act of 1933, as amended (“the Act”), based on the following facts: there was no general solicitation, there was a limited number of purchasers, each of whom the Registrant believes was an “accredited investor” (within the meaning of Regulation D under the Securities Act of 1933, as amended) and was sophisticated about business and financial matters, and all shares issued were subject to restriction on transfer, so as to take reasonable steps to assure that the purchaser was not an underwriter within the meaning of Section 2(11) under the Act.
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA
Not required for smaller reporting companies.
ITEM 7:
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on current management’s expectations. These statements may be identified by their use of words like “plans,” “expect,” “aim,” “believe,” “projects,” “anticipate,” “intend,” “estimate,” “will,” “should,” “could,” and other expressions that indicate future events and trends. All statements that address expectations or projections about the future, including statements about our business strategy, expenditures, and financial results are forward-looking statements. We believe that the expectations reflected in such forward-looking statements are accurate. However, we cannot assure the reader that such expectations will occur. Persons reviewing this Annual Report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and actual results may differ materially from those included within the forward-looking statements as a result of various factors. Such factors are discussed further below and also include general economic factors and conditions that may directly or indirectly impact our financial condition or results of operations.
Overview
On June 23, 2014, the Company acquired approximately 7,500 cannabis related Internet domain names from Kae Yong Park (who became our majority shareholder in connection with such acquisition). The list of domain names we acquired is filed as Exhibit 99.3 to the Form 8-K Current Report filed with the Commission on June 25, 2014. In consideration of the acquisition of these assets from Kae Yong Park, we issued her 78.5 million shares of our common stock. In addition, we issued a promissory note in the aggregate principal amount of $500,000, the payment of $400,000 of which is contingent upon our achieving $150,000 in monthly revenues. See Note 10 - Notes Payable Related Party and Note 15 - Commitments and Contingencies, in each case to the financial statements for the year ended December 31, 2016 filed herewith.
The note was amended and restated to provide that the first $100,000 installment payment due under the Note would be made July 25, 2014 (earlier than required), in exchange for which Kae Yong Park agreed to waive all interest due over the term of the note. Kae Yong Park has waived the requirement that the Company pay the $100,000 due under the Amended and Restated Note, until August 25, 2014. Such $100,000 has since been paid to Ms. Park. The remaining balance of $400,000 is payable in thirty-six equal monthly installments, commencing on the fifteenth day following the first month the Company realizes at least $150,000 in gross revenue.
The Company has already launched several websites and portals and, subject to receipt of funding, intends to build additional websites/portals around its owned internet domain names. These websites/portals will serve as directories for businesses engaged in the lawful sale and distribution of cannabis and hemp related products.
The Company was previously a “shell company” within the meaning of applicable securities laws. The Company has ceased to be a “shell company” within the meaning of applicable securities laws in that the Company has raised capital, hired employees, leased space, acquired domain names, including prior to the acquisition described herein, engaged consultants and advisors, completed the construction and launch of its primary website, “WeedDepot.com’, negotiated vendor relationships and conducted extensive sales and marketing related activities, including through search engine optimization, direct selling efforts, direct mail, electronic mail, social media, and online advertising.
Recent Developments
During 2016, we received an aggregate of $185,000 in connection with its joint venture with Tumbleweed Holdings, Inc. On February 29, 2016, in connection with this joint venture, we agreed to sell $150,000 of convertible notes which were to be funded in three equal installments of $50,000. Tumbleweed also agreed to provide an aggregate of $100,000 in funding to the joint venture, as discussed in Note 4 - Investment in Joint Venture.
Between February 29 and April 8, 2016, we received aggregate proceeds of $100,000 from the issuance of these convertible notes. The final $50,000 tranche was due April 29, 2016, but has not yet been paid. These notes are convertible into shares of our common stock at a price of $0.20 per share or a total of 250,000 shares each. Interest on these notes is to be payable quarterly in an amount equal to fifty percent of the original face value, based on a percentage of the joint venture company’s net revenues. This interest will be payable only in the event that the joint venture company generates net revenues. Concurrent with this agreement, we issued the first two of these convertible notes.
Between February 29 and May 6, 2016, the joint venture company received aggregate proceeds of $85,000 from Tumbleweed Holdings, the joint venture partner. The final $15,000 tranche of the joint venture investment was due April 29, 2016 and remains unpaid. We are in litigation with Tumbleweed and are seeking to compel Tumbleweed to comply with its funding obligations under the Joint Venture Agreement.
During 2015, the Company sold 2,781,285 shares of its common stock, for aggregate net proceeds of $465,500.
In addition, between December 31, 2014 and through April 17, 2017, Kae Yong Park, a significant stockholder, and her spouse, Howard. R. Baer (collectively, “Park”), advanced the Company $1,734,857 for short term capital needs, of which $241,340 has been repaid, $65,000 was assigned to an investor and $35,938 has been credited for use of the Company’s personnel. Park assigned $65,000 of debt owed to her by the Company to another investor who received a note from the Company to evidence the debt. At April 17, 2017, the Company had a note payable to Park for these advances of $1,407,579 which is secured by the assets of the Company. Because this debt is payable on demand, the company has classified it as a current liability.
Since December 1, 2016 and through March 10, 2017, John Lemak and/or Sandor Capital Master Fund have advanced an aggregate of $100,849 to us to fund basic operating activities. These loans are unsecured interest bearing notes. Sandor Capital Master Fund, which is controlled by Mr. Lemak, is a significant shareholder.
Neither Ms. Park nor Mr. Baer are not under any obligation to provide any further funding to us. Ms. Park and her spouse are no longer able to provide ongoing advances to fund our operations, even on a limited basis. The funding received during 2015 and 2016 is insufficient to fund even our most basic business operations. We have an immediate and urgent need for additional capital. Since early 2015, we have experienced great difficulty in raising capital from third parties. See “Liquidity and Capital Resources.”
On November 23, 2016, we entered into a non-binding Letter of Intent, as amended (“LOI”), to acquire Stargreen Holdings, LLC, a Los Angeles, California, company (“Stargreen”). The LOI expires April 30, 2017, subject to extension by agreement. Stargreen has filed applications for licenses/permits to cultivate and dispense legal marijuana and has entered into agreements to acquire/lease properties where it intends to cultivate, manufacture and dispense products to the legal medical and recreational marijuana markets. These agreements are subject to Stargreen securing funding necessary to consummate these acquisitions. As a condition of closing, the LOI requires Stargreen to secure, on mutually agreeable terms, a minimum investment into our company of $2.5 million (maximum of $23.1 million). To acquire Stargreen, we expect to issue Stargreen that number of shares of common stock, such that, after giving effect to said acquisition (but before the financing), Stargreen will own 75% of our issued and outstanding common stock. The closing of the acquisition of Stargreen is subject to various conditions, including satisfactory completion of due diligence, negotiation of definitive agreements, consummation at closing of the minimum $2.5 million funding on mutually agreeable terms and satisfaction prior at closing of certain of our preexisting liabilities.
Although Stargreen does not currently own or operate any legal marijuana businesses, subject to receipt of funding and necessary permits and licenses, Stargreen intends to build a large portfolio of assets to capitalize on industry supply chain economics by producing services and products at each stage. The planned extraction and cultivation operations will use state of the art equipment and resource management techniques to maximize quality and profitability while minimizing use of natural resources.
There is currently no assurance that we will close on the Stargreen acquisition.
Critical Accounting Policies and Significant Judgments and Estimates
The Securities and Exchange Commission (“SEC”) issued disclosure guidance for “critical accounting policies.” The SEC defines “critical accounting policies” as those that require the application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
Our significant accounting policies are described below. We anticipate that the following accounting policies will require the application of our most difficult, subjective or complex judgments:
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable represents obligations from customers that are subject to normal collection terms and are recorded at the invoiced amount, net of any allowance for doubtful accounts, and do not typically bear interest. The Company assesses the collectability of the accounts by taking into consideration the aging of accounts receivable, changes in customer credit worthiness, general market and economic conditions, and historical experience. Bad debt expenses are recorded as part of selling, general and administrative expenses in the statements of operations. The Company writes off the receivable balance against the allowance when management determines a balance is uncollectible. At December 31, 2016, the Company has recorded a full allowance of $34,204 against its receivable balance due to the uncertainty of its collectability.
Property and Equipment/Web Development Costs
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed on a straight-line basis over the estimated useful lives of the respective assets or, in the case of leasehold improvements, the remaining lease term, if shorter. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed and the resulting gains or losses are recorded as part of other income or expense in the statements of operations. Repairs and maintenance costs are expensed as incurred.
The estimated useful lives of the property and equipment are as follows:
Property and Equipment
Estimated Useful Life
Furniture, fixtures and equipment
3 years
Web development costs
5 years
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances exist that indicate the carrying amount of an asset may not be recoverable. When indicators of impairment exist, an estimate of undiscounted future cash flows is used in measuring whether the carrying amount of the asset or related asset group is recoverable. Measurement of the amount of impairment, if any, is based upon the difference between the asset’s carrying value and estimated fair value.
Income Taxes
Income taxes are provided in accordance with Statement of Financial Accounting Standards ASC 740 Accounting for Income Taxes. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carry forwards. Deferred tax expense (benefit) results from the net change during the year of deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of all of the deferred tax assets will be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Provision for income taxes consists of federal and state income taxes in the United States. Due to uncertainty as to the realization of benefits from our deferred tax assets, including net operating loss carry-forwards and other tax credits, we have a full valuation allowance reserved against such assets. We expect to maintain this full valuation allowance at least in the near term.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires us to make estimates and assumptions that affect the amounts reported in the accompanying financial statements and the accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate our estimates, including those related to fair values of financial instruments, taxes, and contingent liabilities, among others. We base our estimates on the limited historical experience we have and on other assumptions that are believed to be reasonable, the results of which formed the basis for making judgments about the carrying values of our assets and liabilities.
Results of Operations
Year ended December 31, 2016 Compared to the year ended December 31, 2015
The Company incurred a net loss of approximately $2 million during the year ended December 31, 2016, as compared with a net loss of approximately $8 million during the comparable prior period. The (all numbers approximate) $6 million decrease in net loss is due primarily to a $3.7 million decrease in non-cash interest expense, a $1.1 million decrease in general and administrative expense, a $1.5 million decrease in executive compensation, a $100,000 decrease in non-cash settlement expense, a $120,000 decrease in professional fees and an $80,000 decrease in consulting expense (related party), partially offset by a $490,000 increase in non-cash losses on securities and a $130,000 increase in non-cash losses on stock deposits. The decrease in interest expense is primarily due to the amortization of one time debt issue costs and discounts on short term debt issued during the prior period. The decrease in executive compensation and general and administrative expenses is primarily due to a reduction in workforce and operations due to cash constraints in the current year. If we are able to raise additional capital, we expect our operating expenses to increase sharply as we ramp up our operations, including website development and sales and marketing related activities.
Cash used in operating activities was approximately $700,000 during the year ended December 31, 2016 (about $58,000 per month), as compared with $1.5 million during the comparable prior year (or about $125,000 per month). The (all numbers approximate) $800,000 decrease was primarily due to a decrease in net loss of $6 million, an increase in loss on securities of $500,000 and an increase in stock given for LOI of $131,000, partially offset by a decrease in interest expense of $3.7 million, a decrease in stock issued for executive compensation and employment contracts of $1.5 million, a decrease of $500,000 in stock issued for contracts and a decrease of $100,000 in stock issued for settlements.
Cash used by investing activities during the year ended December 31, 2016 was approximately $28,000 due to the Company’s investments in its joint venture in the current year.
Cash provided by financing activities during the year ended December 31, 2016 was approximately $700,000 as compared to approximately $1.5 million in the prior comparable period. The $800,000 decrease was due to a decrease of $500,000 in net proceeds from common stock issuances and a decrease of $400,000 in net proceeds from related party notes, and an $80,000 decrease in proceeds from notes payable offset by a $100,000 increase in proceeds from convertible notes payable.
Liquidity and Capital Resources
As of April 17, 2017, we had only minimal cash on hand. Consequently, we have an immediate and extremely urgent need for additional capital. In order to fund our operations on a curtailed basis, (i) since January 5, 2015, we have raised $490,500 from the sale of 3,781,285 shares of common stock at an average per share price of $.13, and (ii) we have issued notes and convertible notes totaling $179,900, and (iii) between December 31, 2014 and through April 17, 2017, Kae Yong Park, a significant stockholder, and her spouse, Howard. R. Baer (collectively, “Park”), advanced the Company $1,734,857 for short term capital needs, of which $241,340 has been repaid, $65,000 was assigned to an investor and $35,938 has been credited for use of Company personnel. Park assigned $65,000 of debt owed to her by the Company to another investor who received a note from the Company to evidence the debt. At April 17, 2017, the Company had a note payable to Park for these advances of $1,407,579 which is secured by the assets of the Company.
We are also experiencing a severe and ever-increasing working capital deficiency (all numbers approximate). As of December 31, 2016, we had a working capital deficiency of approximately $2.8 million, compared to a working capital deficiency of approximately $1.6 million at December 31, 2015. The $1.2 million increase in the working capital deficiency was due primarily to a $494,000 increase in accounts payable and accrued expenses (including due to related party) and a $692,000 increase in notes payable (including to related party). Accordingly, we have essentially been funding our operations using debt and accounts payable. This is not a sustainable way to finance our operations. Consequently, we need to raise additional capital immediately.
We continue to have an immediate and extremely urgent need for additional capital. Since early 2015, we have experienced great difficulty raising capital from third parties. The lack of operating capital continues to materially and adversely affect our business operations. Neither Ms. Park nor her spouse are under any obligation to provide any further funding to us. Ms. Park and her spouse are no longer able to provide ongoing advances to fund our operations, even on a limited basis.
Due to the lack of operating capital, we are unable to implement our business plan, even on a curtailed basis. If we do not receive a significant infusion of capital in the near term, it is unlikely that we will be able to continue as a going concern, in which case, investors would suffer a total loss of their investment in our Company.
We have not yet realized any meaningful operating revenues. We are however incurring significant costs and expenses in connection with the operation of our business and ongoing compliance costs associated with being a public company. Consequently, we are currently experiencing ongoing negative cash flows from operations.
As noted above, we have only minimal cash on hand. Our current cash on hand is insufficient to fund our operations and the implementation of our business plan. As a result, we have an immediate and urgent need for additional funds. We are seeking to raise funds from third parties, either in the form of debt or equity.
Based on our current business plan, we anticipate that our operating and website development activities will use approximately $100,000 in cash per month over the next twelve months, or $1.2 million. Currently we have virtually no cash on hand, and consequently, we are unable to implement our current business plan. We believe that our operations will not begin to generate positive cash flows until at least the second quarter of 2018 (assuming we secure sufficient funding in the near term to implement our business plan, which we currently do not have). Accordingly, we have an immediate and extremely urgent need for capital to fund our operating activities.
In order to remedy this liquidity deficiency, we are actively seeking to raise additional funds through the sale of equity and debt securities, and ultimately we will need to generate substantial positive operating cash flows. Our internal sources of funds will consist of cash flows from operations, but not until we begin to realize substantial revenues from the sale of services. As previously stated, we currently have no revenue, and our operations are generating negative cash flows, and thus adversely affecting our liquidity. We intend to raise additional funds through equity and/or debt financing. In addition, provided that we are able to secure substantial additional financing, we expect that our operations will begin to generate revenues around the end of the third quarter of 2017, which should ameliorate our liquidity deficiency. If we are unable to raise additional funds in the near term, we will not be able to implement our business plan, and it is unlikely that we will be able to continue as a going concern.
In the event we do not generate sufficient funds from revenues or financing through the issuance of common stock or from debt financing, we may be unable to fully implement our business plan and pay our obligations as they become due, any of which circumstances would have a material adverse effect on our business prospects, financial condition, and results of operations. The accompanying financial statements do not include any adjustments that might be required should the Company be unable to recover the value of its assets or satisfy its liabilities (see Note 3 to the Financial Statements - Liquidity/Going Concern).
Subject to the availability of funds, which we currently do not have, we expect to incur approximately $175,000 in website development expenditures over the next 12 months (included in the $1.2 million estimate of cash required over the next twelve months). The purpose of these expenditures will be for the development of various Websites/portals we intend to create and acquisition of additional domain names.
We expect to fund these website development expenditures through a combination of cash flows from operations and proceeds from equity financing. If we are unable to generate positive cash flows from operations, and/or raise additional funds (either through debt or equity), we will be unable to fund our website development expenditures, in which case, there could be an adverse effect on our business and results of operations.
We intend to raise additional funds in the near term from the further sales of shares of common stock. Additional sales of common stock will reduce the percentage interest of existing shareholders in our company. Although it is possible, we do not believe it is likely that we will raise funds through the sale of debt securities in the near term.
As described above, In June, 2014, we issued Kae Yong Park a promissory note in the principal amount of $500,000, as partial consideration for the acquisition of approximately 7500 cannabis related internet domain names. We have since paid $100,000 in principal to Ms. Park. The remaining balance of $400,000 is payable in thirty-six equal monthly installments, commencing on the fifteenth day following the first month we realize at least $150,000 in gross revenue. This remaining $400,000 balance is currently classified as a noncurrent liability. We believe that we will be able to make the approximate $11,000 monthly payment when (and if) we achieve the monthly $150,000 revenue threshold which triggers our repayment obligation.
In addition, as described above, as of April 17, 2017, we are indebted to Kae Park, a significant shareholder, and Howard Baer, her spouse, in the aggregate amount of $1,407,579, which is secured by all our assets. As of April 13, 2016 (with an effective date of January 1, 2016), $564,000 of the principal due under the note evidencing this indebtedness is interest bearing at the rate of 10% annually with any remainder being non-interest bearing. All amounts due under this note are payable on demand. If demand for payment is made, and we are unable to pay the amount due, we would be in default and Ms. Park and Mr. Baer would have the right to sell our assets to satisfy the amounts due them under the promissory note. In such event, shareholders of the company would like lose their entire investment in the Company.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements during the years ended December 31, 2016 and 2015.
ITEM 7A:
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statements of Operations
Statements of Cash Flows
Statement of Stockholders’ Deficit
Notes to Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Northsight Capital, Inc.
We have audited the accompanying balance sheets of Northsight Capital, Inc. (“the Company”) as of December 31, 2016 and 2015, and the related statements of operations, stockholders’ deficit, and cash flows for each of the years in the two year period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Northsight Capital, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered net losses since inception and has accumulated a significant deficit. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Sadler, Gibb & Associates, LLC
Salt Lake City, UT
April 17, 2017
NORTHSIGHT CAPITAL, INC.
BALANCE SHEETS
See accompanying notes to financial statements.
NORTHSIGHT CAPITAL, INC.
STATEMENTS OF OPERATIONS
See accompanying notes to financial statements.
NORTHSIGHT CAPITAL, INC.
STATEMENTS OF CASH FLOWS
See accompanying notes to financial statements.
NORTHSIGHT CAPITAL, INC.
STATEMENT OF STOCKHOLDER’S DEFICIT
See accompanying notes to financial statements.
NORTHSIGHT CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2016
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Northsight Capital Inc. (“Northsight” or “the Company”) was incorporated in the State of Nevada on May 21, 2008. In May, 2011, Safe Communications, Inc. (n/k/a Kuboo, Inc.) acquired 80% of the Company’s issued and outstanding common stock, and, as a result, became its parent company. On June 25, 2014, the Company completed the acquisition of approximately 7500 cannabis related Internet domain names, in exchange for which the Company issued 78.5 million shares of its common stock and a promissory note in the principal amount of $500,000. As a result of this transaction, the seller of the domain names became an 81% stockholder of the Company. Kuboo, Inc. continues to be a significant stockholder of the Company. John Venners, our EVP of Operations and a director, is also a director of Kuboo, Inc. See Note 17 - Related Party Transactions.
The Company’s principal business is to provide a wide variety of online directories for a broad range of businesses engaged in the lawful sale and distribution of cannabis and hemp related products. The following constitute the Company’s major product categories: a monthly listing in one or more of the Company’s online directories, paid advertising in one or more of the Company’s online directories and leasing to customers one or more Internet domain names for the customer’s exclusive use.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Such estimates include, but are not limited to, allowance for doubtful accounts and valuations of intangible assets, among others. Actual results could differ from those estimates.
Risk and Uncertainties
The Company operates in an industry that is subject to rapid change and intense competition. The Company’s operations are subject to significant risk and uncertainties including financial, operational, technological, regulatory and other risks, including the potential risk of business failure.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less at the date of purchase and money market accounts to be cash equivalents. As of December 31, 2016 and 2015, the Company had no cash equivalents and all cash amounts consisted of cash on deposit.
Stock-Based Compensation
Share-based compensation awards, including stock options and restricted stock awards, are recorded at estimated fair value on the awards’ grant date, based on estimated number of awards that are expected to vest. The grant date fair value is amortized on a straight-line basis over the time in which the awards are expected to vest, or immediately if no vesting is required. Share-based compensation awards issued to non-employees for services are recorded at either the fair value of the services rendered or the fair value of the share-based payments whichever is more readily determinable. The fair value of restricted stock awards is based on the fair value of the stock underlying the awards on the grant date as there is no exercise price.
The fair value of stock options is estimated using the Black-Scholes option-pricing model. The determination of the fair value of each stock award using this option-pricing model is affected by our assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards and the expected term of the awards based on an analysis of the actual and projected employee stock option exercise behaviors and the contractual term of the awards. We recognize stock-based compensation expense over the requisite service period, which is generally consistent with the vesting of the awards, based on the estimated fair value of all stock-based payments issued to employees and directors that are expected to vest.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of various payments that the Company has made in advance for goods or services to be received in the future. These prepaid expenses include service contracts paid in advance.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable represents obligations from customers that are subject to normal collection terms and are recorded at the invoiced amount, net of any allowance for doubtful accounts, and do not typically bear interest. The Company assesses the collectability of the accounts by taking into consideration the aging of accounts receivable, changes in customer credit worthiness, general market and economic conditions, and historical experience. Bad debt expenses are recorded as part of selling, general and administrative expenses in the statements of operations. The Company writes off the receivable balance against the allowance when management determines a balance is uncollectible. At December 31, 2016, the Company has recorded a full allowance of $34,204 against its receivable balance due to the uncertainty of its collectability.
Property and Equipment/Web Development Costs
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed on a straight-line basis over the estimated useful lives of the respective assets or, in the case of leasehold improvements, the remaining lease term, if shorter. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed and the resulting gains or losses are recorded as part of other income or expense in the statements of operations. Repairs and maintenance costs are expensed as incurred.
The estimated useful lives of the property and equipment are as follows:
Property and Equipment
Estimated Useful Life
Furniture, fixtures and equipment
3 years
Web development costs
5 years
Investment in joint Venture
The Company’s ownership of the joint venture company is accounted for under the equity method of accounting, in accordance with ASC 323. Under the equity method of accounting, an Investee Company’s accounts are not reflected within the Company’s Balance Sheets and Statements of Operations; however, the Company’s share of the earnings or losses of the Investee Company is reflected as a gain or loss on the Company’s investment. Additionally, under the equity method of accounting, the Company’s initial investment in the joint venture company was recorded at the historic cost basis of the contributed domain of $0. Accordingly, the Company expensed $475,751 related to the value of warrants the Company issued and is included as a component of loss on investments in the Company’s Statements of Operations.
When the Company’s carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company’s financial statements unless the Company guaranteed obligations of the Investee Company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized. On disposal of investments in joint ventures and associated companies, the difference between disposal proceeds and the carrying amounts of the investments are recognized in profit or loss.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances exist that indicate the carrying amount of an asset may not be recoverable. When indicators of impairment exist, an estimate of undiscounted future cash flows is used in measuring whether the carrying amount of the asset or related asset group is recoverable. Measurement of the amount of impairment, if any, is based upon the difference between the asset’s carrying value and estimated fair value.
Revenue Recognition
Revenue is recognized when all of the following criteria are met:
·
Persuasive evidence of an arrangement exists. Evidence of an arrangement consists of an order from the Company’s distributors, resellers or customers.
·
Delivery has occurred. Delivery is deemed to have occurred when title and risk of loss has transferred, either upon shipment of products to customers or upon delivery.
·
The fee is fixed or determinable. The Company assesses whether the fee is fixed or determinable based on the terms associated with the transaction.
·
Collection is reasonably assured. The Company assesses collectability based on credit analysis and payment history.
Revenue for ads sold is recognized upon delivery of the advertising or is amortized over the time period the advertisement runs using the straight-line method if the advertising contract spans multiple periods.
Advertising and Promotion
Advertising and promotion expenses include digital and print advertising, trade show events, endorsements and sponsorships, and promotional giveaways. Advertising costs are expensed as incurred unless they cover a specific period of time, in which case they are amortized over the service period. Advertising costs of $328 and $81,568 were incurred for the years ended December 31, 2016 and 2015, respectively.
Income Taxes
Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases, operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely to be realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
The Company records interest and penalties related to unrecognized tax benefits in income tax expense. There were no interest or penalties related to unrecognized tax benefits for the years ended December 31, 2016 and 2015.
Fair Value of Financial Instruments
The fair values of the Company’s assets and liabilities that qualify as financial instruments under FASB ASC Topic 825, “Financial Instruments,” approximate their carrying amounts presented in the accompanying financial statements at December 31, 2016 and 2015.
Loss Contingencies
The Company recognizes contingent losses that are both probable and estimable. In this context, the Company defines probability as circumstances under which events are likely to occur. In regards to legal costs, we record such costs as incurred.
Earnings per Share Policy
The Company complies with the accounting and disclosure requirements of FASB ASC 260, “Earnings Per Share.” Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per common share incorporates the dilutive effect of common stock equivalents on an average basis during the period.
The calculation of diluted net loss per share excludes all warrants as of December 31, 2016 and 2015, since their effect is anti-dilutive.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption
NOTE 3 - LIQUIDITY/GOING CONCERN
The Company has accumulated losses of $20,683,410 and have had sustained negative cash flows from operating activities since inception (May 2008). These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. During the year ended December 31, 2016, the Company raised gross proceeds of $100,000 from non-related parties and $656,600 from related parties in capital through the issuance of notes payable. Management plans to (i) raise additional capital as soon as possible, to fund continued operations of the Company and (ii) eventually to generate profits from operations.
In the event the Company does not generate sufficient funds from revenues or financing through the issuance of its common stock or from debt financing, the Company will be unable to fully implement its business plan and pay its obligations as they become due, any of which circumstances would have a material adverse effect on its business prospects, financial condition, and results of operations. The accompanying financial statements do not include any adjustments that might be required should the Company be unable to recover the value of its assets or satisfy its liabilities.
NOTE 4 - INVESTMENT IN JOINT VENTURE
On February 29, 2016, the Company entered into a joint venture agreement with Tumbleweed Holdings, Inc. (“TW”), pursuant to which a newly formed joint venture company had been developing an online dating service around the URL, www.jointlovers.com. Per the Joint Venture Agreement, the Company and TW own 60% and 40% respectively of equity of the joint venture company. Under the joint venture agreement, the Company and TW agreed as follows:
·
The Company contributed the URL www.jointlovers.com to the joint venture entity, in exchange for 60% of the joint venture company.
·
TW contributed $30,000 and agreed to contribute an additional $70,000 towards the development of the online web portal, in exchange for 40% of the joint venture company. With any additional funds required for development to be contributed 60% by the Company and 40% by TW.
·
Revenue from the joint venture company will be shared proportionally with a portion of operating income to be used to repay principal and income due under the convertible notes referenced below (up to $165,000 in principal amount of notes).
·
TW agreed to purchase an aggregate of $150,000 in principal amount of convertible notes, convertible into shares of the Company’s common stock at a conversion price of $.20 per share. In addition to repayment of principal, if the joint venture company has revenues, the notes are entitled to receive a portion of the joint venture company’s operating income until they have received an amount equal to 50% of the face value of the notes.
During the year ended December 31, 2016, Tumbleweed contributed a total of $85,000 to the joint venture company.
Additionally, both parties agreed to issue the other a warrant to purchase 4.9% of their outstanding common stock. Pursuant to this agreement, TW agreed to issue a warrant to the Company to purchase 9,770,878 shares of its common stock at an exercise price of $0.02 per share, and the Company agreed to issue a warrant to TW to purchase 5,525,318 shares of the Company’s common stock at an exercise price of $0.08 per share, valued at $475,751. The warrants have a three-year term and a cashless exercise right (see Note 6 - Securities and Note 13 - Stock Warrants for details). As of the date of these financial statements, TW has not yet issued the warrants due to the Company. Therefore, the Company has not yet recorded their value on its balance sheet.
The Company’s ownership of the joint venture company is accounted for under the equity method of accounting, in accordance with ASC 323. Under the equity method of accounting, an Investee Company’s accounts are not reflected within the Company’s Balance Sheets and Statements of Operations; however, the Company’s share of the earnings or losses of the Investee Company is reflected as a gain or loss on the Company’s investment. Additionally, under the equity method of accounting, the Company’s initial investment in the joint venture company was recorded at the historic cost basis of the contributed domain of $0. Accordingly, the Company expensed $475,751 related to the value of warrants the Company issued and is included as a component of loss on investments in the Company’s Statements of Operations.
When the Company’s carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company’s financial statements unless the Company guaranteed obligations of the Investee Company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized. During the year ended December 31, 2016, the joint venture company experienced a net loss attributable to the Company’s 60% ownership of $10,695 which is included on the company’s statements of operations.
As of December 31, 2016, Tumbleweed was in default under the terms of the joint venture agreement and owed the joint venture company the remaining $15,000 in development funding and the Company $50,000 for the final note purchase, both of which were due by April 29, 2016. Additionally, Tumbleweed owes the joint venture company $18,904, representing its 40% share of costs in excess of the first $100,000. The Company is currently in litigation with TW, seeking to compel TW to comply with its funding obligations under the Joint Venture Agreement.
On September 22, 2016, Tumbleweed Holdings Inc., instituted a counterclaim in Arizona in response to the above legal action. The complaint alleged that (i) The Company breached the joint venture agreement by failing to leverage relationships and failing to provide budgeting and accounting records, (ii) the Company breached implied covenant of good faith and fair dealing by enticing TW into making significant contributions and then failing to perform under the agreement, (iii) the Company was unjustly enriched by having use of funds contributed by TW, (iv) the Company converted funds contributed by TW into its own assets, and (v) the Company has not provided accounting for all funds received by TW. TW seeks damages in the amount to be determined at trial. The Company believes these claims are without merit and intends to vigorously defend itself against them.
Summary balance sheet information on the joint venture for at December 31, 2016 and 2015 is as follows:
Summary revenue information on the joint venture for the years ended December 31, 2016 and 2015 is as follows:
NOTE 5 - ADVANCES - RELATED PARTY
With the formation of the Company’s joint venture (see Note 4 - Investment in Joint Venture), Tumbleweed Holdings agreed to fund one hundred percent of the first $100,000 of web development costs related to the web site www.jointlovers.com. During the year ended December 31, 2016, the Joint Venture Company incurred costs totaling $128,936 related to the development of jointlovers.com as well as $18,125 in general and administrative costs. Per the Joint Venture Agreement, the Company is responsible for 60% of all costs after the initial $100,000, representing a total share of $28,056 in the joint venture’s costs. During this same period, the company paid costs totaling $62,260 on behalf of the Joint Venture Company satisfying the Company’s share of $28,056 while the excess $34,204 is due to the Company. Due to the uncertainty of collectability, the Company has recorded an allowance for bad debt equaling the amount due.
NOTE 6 - SECURITIES
In conjunction with the formation of the joint venture discussed in Note 4, Tumbleweed Holdings agreed to issue the Company a warrant to purchase up to 9,770,878 shares of Tumbleweed Holdings, Inc. at an exercise price of $0.02 with an expiration date three years from the date of issuance. At December 31, 2016, Tumbleweed had not yet issued these warrants to the Company. The Company will record the value of these warrants on its balance sheet once they are received.
NOTE 7 - WEB DEVELOPMENT COSTS AND DOMAIN NAMES ASSETS
In accordance with ASC 350-50, during the years ended December 31, 2016 and 2015, the Company did not capitalize any costs incurred towards the development of various websites, including a website on which third parties can advertise the sale and distribution of cannabis related products and services: an online “yellow pages.” The Company does not intend to engage in the sale or distribution of marijuana or related products. The Company recorded website development expenses of $25,184 and $79,205 which is included in general and administrative expenses during the years ended December 31, 2016 and 2015, respectively.
The Company amortizes web development costs over their related useful lives (approximately 1 to 5 years), using a straight-line basis. Fair value is determined through various valuation techniques, including market and income approaches as considered necessary. The Company recorded amortization of $72,366 and 62,583 during the years ended December 31, 2016 and 2015, respectively.
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2016 and 2015:
The Company records depreciation expense on a straight-line basis over the estimated life of the related asset (approximately 3 years). The Company recorded depreciation expense of $4,146 and $4,145 during the years ended December 31, 2016 and 2015, respectively.
NOTE 9 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES RELATED PARTY
At December 31, 2016, the Company had a balance in related party accounts payable and accrued expenses of $704,997 which consisted of the following:
Party Name:
Relationship:
Amount
Howard Baer
Spouse of significant shareholder
Consulting fees
$
270,500
Howard Baer
Spouse of significant shareholder
Accrued Interest
56,555
John Venners
Director/EVP, President and CEO of Kuboo, Inc.
Consulting fees
233,466
John Venners
Director/EVP, President and CEO of Kuboo, Inc.
Advances
3,000
Kuboo, Inc.
Former parent company, significant shareholder
Rent
141,476
$
704,997
NOTE 10 - NOTES PAYABLE RELATED PARTY
On May 19, 2015, the Company issued Kae Yong Park and her spouse Howard Baer (together, “Park”) a non-interest bearing, unsecured demand promissory note to evidence all unpaid advances received by the Company to that point and to cover all additional advances received afterward. Unpaid principal under the note is due and payable upon the earlier of (i) an “event of default” (as defined), (ii) written demand and (iii) the Company’s receipt of capital (to the extent of net proceeds received) from any capital raising transaction after May 15, 2015, whether in the form of debt, equity or otherwise.
On September 30, 2015, the Company amended and restated its promissory note to Park to include all advances to date and provide certain assets, including all internet domain names, websites and related assets as collateral. Repayment terms remain the same, and Park has to date not enforced the provision requiring repayment upon receipt of net proceeds from capital raising transactions.
On April 13, 2016, the Company agreed to amend the promissory note so as to make $564,000 in principal amount due under said Note interest bearing at the rate of 10% per annum. At December 31, 2016, the Company had accrued interest under this note of $56,555.
During the year ended December 31, 2016, Park advanced an aggregate of $594,050 to the Company for short-term capital needs. During this period the Company repaid $63,690 of its secured debt to Park. Park assigned $65,000 of debt owed to her by the Company to another investor who received a replacement note from the Company to evidence the debt. At December 31, 2016, the Company had a note payable to Park for these advances of $1,414,667 which is secured by the assets of the Company. Because this debt is payable on demand, the company has classified it as a current liability.
On May 11, 2016, Kae Park, a significant shareholder, assigned $65,000 of debt owed to her by the Company to an investor who is a significant shareholder. The investor received a one-year note from the Company to evidence the debt. Interest on the note is payable quarterly in an amount equal to a percentage of the Company’s joint venture company’s net revenues, up to fifty percent of the original face value. This interest will be payable only in the event that the joint venture company generates net revenues. See Note 4 - Investment in Joint Venture.
The following table summarizes the Company’s balance for these advances for the year ended December 31, 2016:
Amount due - December 31, 2015
$
949,307
Advances received from Park
594,050
Debt assigned to investor
(65,000)
Repayments made to Park
(63,690)
Balance due - December 31, 2016
$
1,414,667
On June 23, 2014, the Company issued a $500,000 promissory note in conjunction with the purchase of approximately 7,500 cannabis-related internet domain names. The note originally bore interest at the rate of 3.25% per annum and the first $100,000 of which was payable upon the Company’s receipt of an aggregate of $1,000,000 in funding (whether debt or equity). The remaining $400,000 is payable in thirty-six equal monthly installments, commencing on the fifteenth day following the first month the Company realizes at least $150,000 in gross revenue (see Note 15 - Commitments and Contingencies).
On July 25, 2014, the Company amended and restated its promissory note in the principal amount of $500,000 owing to Kae Yong Park (the Company’s then majority shareholder) to provide that it would make the first $100,000 installment payment due under the Note on July 25, 2014 (earlier than required), in exchange for which Kae Yong Park agreed to waive all interest due over the term of the note. Thereafter, Kae Yong Park waived the requirement that the Company pay the $100,000 due under the Amended and Restated Note until August 25, 2014, at which time it was paid. The Company subsequently recaptured all previously recorded interest expense related to the note.
Between December 1, 2016 and December 30, 2016, the company received proceeds of $62,550 from a related party and significant shareholder for which a note was issued bearing 8% interest annually. The notes, as extended, mature on August 1, 2017 and are unsecured. At December 31, 2016, the company had accrued interest of $125 related to the notes.
NOTE 11 - NOTES PAYABLE
Notes
On July 1, 2015, the Company entered into a seven (7) day loan agreement with two parties for aggregate proceeds of $34,900. The note bears interest at the rate of six percent (6%) annually. In addition to the loans, the Company issued an aggregate 349,000 shares of common stock valued at $26,016 and warrants to purchase an aggregate 100,000 shares of the Company’s common stock at an exercise price of $0.25 per share valued at $6,898. The relative fair value of the shares and warrants associated with these notes have been recorded as debt discount to be amortized over the life of the loans. As of December 31, 2016, these notes have not yet been repaid and principal and interest totaling $38,032 is in default.
On August 10, 2015, the Company entered into a one hundred twenty (120) day loan agreement with an existing investor for aggregate proceeds of $45,000 (two installments of $22,500 each). The note bears interest at the rate of six percent (6%) annually and has a security interest over the domain www.jointlovers.com. As additional consideration for these loans, the Company issued an aggregate 1,200,000 shares of common stock valued at $38,918. The relative fair value of the shares associated with these notes have been recorded as debt discount to be amortized over the life of the loans). As of December 31, 2016, these notes have not yet been repaid and principal and interest totaling $48,325 is in default.
Convertible Notes
On February 29, 2016, in conjunction with its joint venture agreement (see Note 4 - Investment in Joint Venture), the Company entered an agreement to issue three $50,000, one year convertible notes. These notes are convertible into shares of the Company’s stock at a price of $0.20 per share or a total of 250,000 shares each Interest on the note is payable quarterly in an amount equal to a percentage of the Company’s joint venture company’s net revenues, up to fifty percent of the original face value This interest will be payable only in the event that the joint venture company generates net revenues. Concurrent with this agreement, the Company issued the first of these convertible notes. On April 8, 2016, the Company issued the second of these convertible notes. As December 31, 2016, the proceeds from the third note investment of $50,000 had not been received.
Dilutive shares associated with convertible notes outstanding at December 31, 2016 is as follows:
The following table summarizes the Company’s notes and convertible notes payable for the year ended December 31, 2016:
NOTE 12 - EQUITY
Between January 5 and October 26, 2015, the Company sold 2,781,285 shares of its common stock for $484,500 in gross cash proceeds. The Company incurred a finder’s fees of $34,950, which the company has satisfied as follows: $18,500 in cash, $16,450 through the issuance of 69,100 shares of common stock.
On February 12, 2015, the Company issued 3,000 shares of its common stock valued at $750 as an advertising incentive, the value of which has been recorded against revenue in the Company’s statements of operations.
Between July 1 and August 10, 2015, the Company issued an aggregate 1,549,000 shares of its common stock valued at $64,934 in conjunction with debt agreements.
Between August 20 and November 30, 2015, the Company issued an aggregate 1,440,000 shares of its common stock valued at $502,800 for services pursuant to multiple contracts.
On January 1 and April 1, 2015, the Company issued 250,000 shares of common stock valued at $252,500 and $230,000, respectively, to its then Chief Executive Officer, John Bluher, pursuant to his employment letter.
On July 15, 2015, the Company issued 1,000,000 shares of its common stock valued at $800,000 to its then Chief Executive Officer, William Lupo, pursuant to his employment letter. Upon Mr. Lupo’s resignation on September 15, 2015, a separation agreement was signed in which he agreed to return 500,000 of these shares to the Company. The Company subsequently received the shares on November 19, 2015.
On July 1, 2015, the Company issued 100,000 shares of its common stock valued at $131,000 as consideration for an exclusive option to acquire the web portal LaMarihuana.com, subject to satisfaction of conditions.
On September 16, 2015, in conjunction with John Bluher’s resignation as President, the Company issued 1,600,000 shares of its common stock, valued at $208,000, as payment in full of all amounts due Mr. Bluher under his employment letter.
On October 9, 2015, the Company issued 200,000 shares of common stock valued at $20,000 as settlement of a contract dispute.
During the year ended December 31, 2015, without admitting any responsibility, the Company agreed in principle to issue 400,000 shares of common stock valued at $62,000 as settlement of legal proceedings, the value of which is included in Subscription payable on the Company’s Balance Sheet at December 31, 2015, pending execution of a definitive agreement. The Settlement Agreement was executed in November, 2016 and the 400,000 shares were issued.
On March 30, 2016, the Company issued 75,000 shares of common stock as settlement of a contract obligation to a vendor valued at $7,500.
NOTE 13 - STOCK WARRANTS
On May 15, 2015, the Company entered into an agreement to grant to a lender a two year warrant to purchase 2,000,000 shares of the Company’s stock at $0.05 per share in conjunction with a sixty-day loan taken out by the Company’s then majority shareholder, Kae Yong Park, and her spouse, Howard Baer; a significant portion of these loan proceeds were advanced by Park/Baer to the Company to fund operations. The note to Park and Baer commenced on May 15th with an initial term of sixty days with an automatic thirty-day extension, if not paid in full by the maturity date. The Company had agreed that, if the note were automatically extended, it would grant an additional warrant to purchase 1,000,000 shares of the Company’s stock (on the same terms as the original warrant) as consideration for the extension. On July 15, 2015, the Company issued an additional 1,000,000 warrants in consideration for the thirty-day extension. On August 5, 2015, October 3, 2015 and December 5, 2015 the Company issued three additional warrants, respectively, to purchase 2,000,000 shares of common stock, in each case as consideration for additional sixty (60) day extensions on the debt agreement. These warrants have been expensed as interest.
The Company applied fair value accounting for all warrants issued. The fair value of each warrant granted is estimated on the date of grant using the Black-Scholes option-pricing model. The fair value at the commitment date for the above warrants were based upon the following management assumptions:
On July 1, 2015, the Company issued three year warrants to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.25 per share in conjunction with debt agreements (see Note 11 - Notes Payable).
Between September 29, 2015 and October 27, 2015, the Company issued two year warrants to purchase an aggregate 1,130,285 shares of the Company’s common stock, at an exercise price of $0.25 per share, in conjunction with equity sales.
On October 21, 2015, the Company issued two year warrants to John Hollister, Interim CEO, to purchase 500,000 shares of the Company’s common stock at an exercise price of $0.09 per share in conjunction with his employment contract. These warrants were valued at $32,250 using the Black-Scholes pricing model and were fully vested upon issuance.
On December 31, 2015, the Company issued two year warrants to John Hollister, Interim CEO, to purchase 375,000 shares of the Company’s common stock at an exercise price of $0.09 per share in conjunction with his employment contract. These warrants were valued at $19,906 using the Black-Scholes pricing model and were fully vested upon issuance.
On February 29, 2016, in conjunction with the Company’s joint venture agreement (see Note 4 - Investment in Joint Venture), the company agreed to issue a warrant to purchase 5,525,318 shares of the Company’s common stock at an exercise price of $0.08 per share. These warrants were valued at $475,751 using the Black-Scholes pricing model, were fully vested upon issuance and have a cashless exercise provision.
On March 31, 2016, the Company issued two year warrants to John Hollister, Interim CEO, to purchase 375,000 shares of the Company’s common stock at an exercise price of $0.09 per share in conjunction with his employment contract. These warrants were valued at $33,236 using the Black-Scholes pricing model and were fully vested upon issuance.
On June 30, 2016, the Company issued two year warrants to John Hollister, Interim CEO, to purchase 375,000 shares of the Company’s common stock at an exercise price of $0.09 per share in conjunction with his employment contract. These warrants were valued at $29,720 using the Black-Scholes pricing model and were fully vested upon issuance.
On September 30, 2016, the Company issued two year warrants to John Hollister, Interim CEO, to purchase 375,000 shares of the Company’s common stock at an exercise price of $0.09 per share in conjunction with his employment contract. These warrants were valued at $39,638 using the Black-Scholes pricing model and were fully vested upon issuance.
The Company has applied fair value accounting for all warrants issued. The fair value of each warrant granted is estimated on the date of grant using the Black-Scholes option-pricing model. The fair value at the commitment date for the above warrants were based upon the following management assumptions:
A summary of the Company’s warrant activity for the year ended December 31, 2016 is as follows:
The Company’s outstanding warrants at December 31, 2016 are as follows:
The weighted average fair value per warrant issued during the year ended December 31, 2016 was $0.09.
NOTE 14 - EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period.
Since the Company reflected a net loss for the years ended December 31, 2016 and 2015, respectively, the effect of considering any common stock equivalents, if exercisable, would have been anti-dilutive. Therefore, a separate computation of diluted earnings (loss) per share is not presented.
The Company has the following common stock equivalents at December 31, 2016 and 2015, respectively:
NOTE 15 - COMMITMENTS AND CONTINGENCIES
In May 2014, The Company entered into an asset purchase agreement that requires the Company to pay a monthly royalty equal to six percent of gross monthly revenues over $150,000. The royalty payment is payable for a period of thirty-six months from and after the first month in which the Company’s gross revenues are in excess of $150,000 (see Note 17 - Related Party Transactions).
On June 23, 2014, the Company issued a $500,000 promissory note in conjunction with the purchase of approximately 7,500 cannabis-related internet domain names. The original note bore interest at the rate of 3.25% per annum and was payable as follows: upon the Company’s receipt of an aggregate of $1,000,000 in funding (whether debt or equity), $100,000 was required to be paid. The remaining $400,000 is payable in thirty-six equal monthly installments, commencing on the fifteenth day following the first month the Company realizes at least $150,000 in gross revenue.
On July 25, 2014, the Company amended and restated its promissory note in the principal amount of $500,000 owing to Kae Yong Park (the Company’s then majority shareholder) to provide that it would make the first $100,000 installment payment due under the Note on July 25, 2014 (earlier than required), in exchange for which Kae Yong Park agreed to waive all interest due over the term of the note. Thereafter, Kae Yong Park waived the requirement that the Company pay the $100,000 due under the Amended and Restated Note until August 25, 2014, at which time it was paid.
On August 7, 2015, Lee Ori (“Plaintiff”) instituted a legal action in Missouri against us, Wealthcorp, LLC, Winterwalk Capital, LLC, Christopher S. Walkup (“Walkup”), Marshall P. Winters and Paradigm Healthcare Solutions, LLC. The complaint alleged that (i) Walkup represented to the Plaintiff that he had the right to subscribe to shares of our common stock at a per share price of $.25 and (ii) that Walkup was the Company’s agent and individually and in such alleged agency capacity offered to sell Plaintiff an aggregate of 1,075,000 shares of company common stock for a total purchase price of $425,000. The Complaint alleges that we are liable to the Plaintiff for the acts and omissions of Walkup, based on the allegation that he was our agent. The complaint seeks from us and Walkup (1) 1,075,000 shares of our common stock and (2) money damages in the amount of $425,000.
Without admitting any responsibility, the Company and the Plaintiff have settled the matter. Under the settlement agreement, the Company agreed to issue 400,000 restricted shares of common stock valued at $62,000 to the Plaintiff as consideration for the settlement. These shares are being issued after the date of these financial statements. In addition, the Company has agreed to issue an additional 275,000 shares as liquidated damages if it breaches a certain material representation to be included in the settlement agreement. The Company will value these if and when the shares become issuable.
On August 15, 2016, the Company instituted a legal action in Arizona against, Tumbleweed Holdings Inc., (“TW”). The complaint alleged that (i) TW breached the joint venture agreement by failing to fund the remaining $15,000 due to the joint venture company by April 29, 2016, (ii) TW breached the joint venture agreement by failing to fund the last $50,000 convertible note due to the Company by April 29, 2016, and (iii) TW breached the joint venture agreement by failing to fund their respective 40% of development expense in excess of the initial $100,000. The Company seeks damages in the amount of $128,000 plus interest.
On September 22, 2016, Tumbleweed Holdings Inc., instituted a counterclaim in Arizona in response to the above legal action. The complaint alleged that (i) The Company breached the joint venture agreement by failing to leverage relationships and failing to provide budgeting and accounting records, (ii) the Company breached implied covenant of good faith and fair dealing by enticing TW into making significant contributions and then failing to perform under the agreement, (iii) the Company was unjustly enriched by having use of funds contributed by TW, (iv) the Company converted funds contributed by TW into its own assets, and (v) the Company has not provided accounting for all funds received by TW. TW seeks damages in the amount to be determined at trial. The Company believes these claims are without merit and intends to vigorously defend itself against them.
NOTE 16 - INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due. Deferred taxes relate to differences between the basis of assets and liabilities for financial and income tax reporting which will be either taxable or deductible when the assets or liabilities are recovered or settled.
At December 31, 2016 and 2015, the Company had net operating loss (“NOL”) carry-forwards for federal and state income purposes approximating $5,434,137 and $4,333,812, respectively. These losses are available for future years and expire through 2034. Pursuant to Internal Revenue Code Section 382, utilization of these losses may be severely or completely limited due to more than 50% ownership changes in 2014, 2011 and 2010.
The deferred tax asset at December 31, 2016 and 2015 is summarized as follows:
Income Tax Footnote
12/31/2016
12/31/2015
Cumulative NOL
$
(5633,041)
$
(4,333,812)
Deferred Tax assets:
(34% Federal, 7% Avg. Corp. Rate)
Net operating loss carry forwards
(8,473,442)
(7,668,510)
Stock/options issued for services
5,312,555
5,270,524
Stock/options issued for release
415,621
415,621
Depreciation and amortization
93,322
61,977
Impairment expense
144,913
144,913
Unrealized losses on investment
199,287
-
Valuation allowance
2,307,744
1,775,475
$
-
$
-
The Company has taken a 100% valuation allowance against the deferred asset attributable to the NOL carry-forwards of approximately $2,307,744 and $1,775,000 at December 31, 2016 and 2015, respectively, due to the uncertainty of realizing the future tax benefits. The increase in valuation allowance of approximately $532,000 is primarily attributable to the Company’s net operating loss during the year ended December 31, 2016.
The components of the income tax provision for the years ended December 31, 2016 and 2015 are as follows:
Book income (loss) from operations
$
(804,932)
$
(3,268,362)
Stock/options issued for services
42,031
2,355,856
Stock/options issued for release
-
33,594
Depreciation and amortization
31,345
56,765
Unrealized losses on investment
199,287
-
Change in valuation allowance
532,269
822,147
$
-
$
-
NOTE 17 - RELATED PARTY TRANSACTIONS
Effective May 2, 2014, the Company entered into an asset purchase agreement with Kae Park (the “Seller”), who became a related party upon the closing of the acquisition, which occurred on June 23, 2014.
Under this agreement, the Company agreed to acquire approximately 7,500 cannabis related Internet domain names, in exchange for which, the Company:
(a)
Issued to the Seller on the closing date 78.5 million shares of the Company’s restricted common stock which represented approximately 81% of the Company’s issued and outstanding common stock upon the closing;
(b)
Issued to the Seller a promissory note in the principal amount of $500,000. The note originally bore interest at the rate of 3.25% per annum and was payable as follows: upon the Company’s receipt of an aggregate of $1,000,000 in funding (whether debt or equity), $100,000 was to be paid, and the Company was required to pay the remaining balance of $400,000 in thirty-six equal monthly installments, commencing on the fifteenth day following the first month the Company realizes at least $150,000 in gross revenue; and
(c)
Is obligated to pay a monthly royalty to the Seller equal to the product of (i) six percent (6%) and (ii) the excess of the Company’s gross monthly revenue over $150,000 (“Royalty Payment”). The Royalty Payment is payable for a period of thirty-six months from and after the first month in which the Company has gross revenues in excess of $150,000.
On July 25, 2014, the Company amended and restated the promissory note to provide that it would make the first $100,000 installment payment due under the Note on July 25, 2014 (earlier than required), in exchange for which Kae Yong Park agreed to waive all interest due over the term of the note. Thereafter, Kae Yong Park waived the requirement that the Company pay the $100,000 due under the Amended and Restated Note, until August 25, 2014, at which point such $100,000 was paid.
In addition, the Seller was required to provide such consulting services as the Company may require during the twelve-month period following the closing of the acquisition. In consideration for these services, the Company was required to pay the Seller $9,500 per month, for a period of twelve months, commencing on the closing date and, on the first of each month thereafter.
We are headquartered in Scottsdale, Arizona where we rent space from Kuboo Inc. our former parent company and a significant shareholder. Currently, the Company is renting approximately 6,100 square feet of space on a month-to-month basis. The monthly rent for this facility is $11,500. During the year ended December 31, 2016 the company incurred expenses payable to Kuboo, Inc. of $138,000 for rent and allocated rent expenses of $3,600 to the Joint Venture Company.
During the year ended December 31, 2016, Kae Yong Park, a significant shareholder, and her spouse, Howard Baer, advanced an aggregate of $594,050 to the Company for short-term capital needs. During this period, the Company also repaid $63,690 of its secured debt to Park. Additionally, on May 11, 2016, Park assigned $65,000 of debt owed to her by the Company to another investor for which the Company issued the investor a one-year replacement note for $65,000. At December 31, 2016, the Company had a note payable to Park for these advances of $1,414,667 which is secured by the assets of the Company.
During the year ended December 31, 2016, the Company incurred expenses of $180,000 related to its consulting contract with Howard Baer, the spouse of Kae Yong Park, a significant shareholder.
During the year ended December 31, 2016, the Company received funds related to its joint venture of $85,000 and spent cash on behalf of its joint venture totaling $147,261. During this period, the Company’s 60% share of the joint venture’s expenses were $127,356. The remaining $34,204 is due from the Joint Venture Company, and is included in advances - related party.
On April 13, 2016, the Company agreed to amend the promissory note with Kae Yong Park and Howard R. Baer so as to make $564,000 in principal amount due under said Note interest bearing at the rate of 10% per annum, effective January 1, 2016. The remaining principal is non-interest bearing. At December 31, 2016, the Company has accrued interest owed under this agreement of $56,555.
NOTE 18 - SUBSEQUENT EVENTS
We have evaluated all events that occurred after the balance sheet date through the date when our financial statements were issued to determine if they must be reported. Management has determined that other than as disclosed below, there were no additional reportable subsequent events to be disclosed.
Capital Activity
Since December 31, 2016, Kae Yong Park, a significant shareholder, and her spouse, Howard R. Baer, have made additional advances to the Company of $36,400, have received repayments of $7,550, and have credited $35,938 against the amount due them, in exchange for the use of Company personnel, leaving a balance due of $1,407,579 at April 17, 2017. These advances are secured by certain Company assets, including all of its internet domain names, websites and related assets, non-interest bearing and payable on demand.
Equity Transactions
On January 10, 2017, the Company issued 400,000 previously accrued shares of the Company’s commons stock as settlement of its lawsuit with Lee Ori (see Note 15 - Commitments and Contingencies).
On April 10, 2017, we sold 1,000,000 shares of common stock in a private transaction at a per share price of $.025, for gross proceeds of $25,000, to an “accredited investor” within the meaning of Rule 502 of Regulation D under the Securities Act of 1933, as amended.
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None; not applicable.
ITEM 9A(T):
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Identification of Directors and Executive Officers
Our executive officer/director and his respective ages, positions and biographical information are set forth below.
Name
Age
Positions Held
Since
John P. Venners
Executive Vice President, Operations Director
August 5, 2015
August 18, 2014
Thomas M. Dean
Director
July 1, 2015
Background and Business Experience
John P. Venners. Mr. Venners has, since August 5, 2015, been our Executive Vice President, Operations and has since August 18, 2014, served as a member of the board of directors of the Company. He also served as our interim president from May 31, 2011 through March 24, 2014. The Board of Directors concluded that Mr. Venners should serve as a member of our board of directors based upon his experience in governmental relations.
Since September, 2010, Mr. Venners has been President, CEO, and a director of Kuboo, Inc., an Arizona based company focused on developing an internet portal that provides a safe environment for children to use and learn about the internet. Kuboo, Inc.is a significant shareholder of the Company and may be considered an affiliate of the Company. In addition, John Bluher, our CEO and one of our directors is also a director of Kuboo, Inc.
Mr. Venners has, since May and February, 2011, also served as Treasurer and director (respectively) of NCAP Security Systems, Inc., a subsidiary of Kuboo which was developing a corporate security business.
Since January, 2008, Mr. Venners has served as President of BioEcoTek - Hawaii, a company engaged in the waste-to-energy business. In June, 2009, Mr. Venners founded and has since been President of Harbor Energy Capital, a renewable energy consulting business. Prior to January, 2008 and since 1976, Mr. Venners was President of Venners and Company, Ltd., a Washington D.C based energy consulting firm.
Thomas M. Dean. Effective July 1, 2015, Mr. Dean was appointed a director by our Board of Directors. Mr. Dean will serve on the Board of Directors until the next annual meeting of shareholders and until his successor is duly elected, subject to earlier resignation or removal.
Mr. Dean was a founding member and has been President of Murdock Capital Partners Corp. since 1998. Murdock Capital Partners Corp. is a New York private merchant banking firm providing corporate finance and financial advisory services. It advises its corporate clients on all aspects of investment banking, including mergers and acquisitions, public and private financing, management buy-outs and corporate divestitures.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended (“Section 16(a)”), requires our Directors and executive officers, and persons who beneficially own more than ten percent of a registered class of our equity securities (collectively, “Section 16 reporting persons”), to file with the SEC initial reports of ownership and reports of changes in ownership of our Common Stock and other equity securities. Section 16 reporting persons are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of any such reports furnished to us, none of the Section 16 reporting persons failed to file on a timely basis reports required by Section 16(a) of the Exchange Act with respect to our most recent fiscal year, except John Hollister, our former CEO, failed to file two Form 4s to report two common stock purchase warrants (each for 375,000 shares) granted in June and October, 2016.
Code of Ethics
Management is currently in the process of establishing a company Code of Ethics.
Corporate Governance
Nominating Committee
Our bylaws do not provide a procedure for Stockholders to nominate directors. The Board of Directors does not currently have a standing nominating committee. The Board of Directors currently has the responsibility of selecting individuals to be nominated for election to the Board of Directors. Qualifications considered by the Directors in nominating an individual may include, without limitation, independence, integrity, business experience, education, accounting and financial expertise, reputation, civic, community and industry relationships and industry knowledge. In nominating an existing director for re-election to the Board of Directors, the Directors will consider and review an existing director’s Board and Committee attendance, performance and length of service.
Audit Committee
We have not yet established an Audit Committee because, due to our relatively low material operations and the fact that we presently have only three directors and one executive officer, we believe that we are able to effectively manage the issues normally considered by an Audit Committee. Following significant increases in our business operations, a further review of this issue will no doubt be necessary.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to our current and former CEOs and Presidents and to each of the three most highly compensated executive officers (collectively, the “Named Executive Officers”) during or with respect to the fiscal years ended December 31, 2016, 2015, and 2014.
Summary Compensation Table
Name and principal position
Year
Salary
Bonus
Equity
Compensation
(1,3,4)
All other
compensation
Total
John Hollister,
-
-
$102,594
-
$102,594
Former Interim CEO(1)
-
-
$51,048
-
$51,048
-
-
-
-
-
John Venners, EVP Operations(2)
$180,000
-
-
-
180,000
Former President
$73,973
-
-
-
73,973
-
-
-
-
-
William Lupo, Former CEO(3)
-
-
-
-
-
-
-
$800,000
-
$800,000
-
-
-
-
-
John Bluher, Former CEO(4)
-
-
-
-
-
Former President
$207,000
-
$482,500
$36,000
$725,500
$162,500
$50,000
$1,651,500
$23,000
$1,887,000
John Gorman(5)
-
-
-
-
-
Former President, Treasurer
-
-
-
-
-
$15,000
-
-
-
$15,000
(1)
On October 21, 2015, John Hollister became our interim CEO. His agreement provides for a base salary of $400,000 annually and a $35,000 signing bonus subject to deferral until certain equity benchmarks are met as well as warrants to purchase an aggregate five million shares of the Company’s common stock at $0.09 per share. The warrants are issuable as follows: 500,000 warrants within 5 business days of signing and 4,500,000 warrants to be issued in twelve quarterly installments of 375,000, commencing December 31, 2015, for so long as Mr. Hollister was employed by the Company. The amounts previously reported as deferred Salary and Bonus were recaptured upon Mr. Hollister’s resignation, as the conditions for payment of the deferred salary had not been satisfied. Equity compensation represents warrants to purchase an aggregate shares of the Company’s common stock. Mr. Hollister resigned as Interim CEO effective November 13, 2016.
(2)
On August 5, 2015, Mr. Venners became our Executive Vice President, Operations. His agreement provides for an annual base salary of $180,000. Mr. Venners resigned from his previous position as President, Treasurer and Secretary on March 24, 2014. Between March 2014 and August 2015, Mr. Venners provided consulting services to the Company which are included in consulting expense - related party in our statements of operations.
(3)
On July 15, 2015, the Company appointed William Lupo, Jr. as its CEO and issued 1,000,000 shares of its common stock valued at $800,000 pursuant to his employment letter. Upon Mr. Lupo’s resignation on September 15, 2015, a separation agreement was signed for which he agreed to waive all accrued salary and subsequently returned 500,000 of these shares to the Company.
(4)
Upon the hiring of William Lupo, Jr., Mr. Bluher stepped down as CEO and was appointed President. Effective September 11, 2015, Mr. Bluher resigned as President at which time unpaid salaries and expense reimbursements due under his employment contract totaling $208,000 were settled with the issuance of 1,600,000 shares of the Company’s common stock.
(5)
Mr. Gorman became our President, Secretary and Treasurer on March 24, 2014 and resigned on August 18, 2014, following the appointment of John Bluher as our CEO. Mr. Gorman was through the date of his resignation being paid an annual salary of $36,000 for serving as our part time and interim President, treasurer and Secretary.
Narrative Compensation Disclosure
The Board of Directors, which also functions as our Compensation Committee, intends to adopt a performance-based bonus program for the Company’s executive officers.
Retirement Plan
We do not currently have any retirement plan, but we expect to adopt one in the near term.
Option Grants in the Last Fiscal Year
On March 31, 2016, the Company issued two year warrants to John Hollister, Interim CEO, to purchase 375,000 shares of the Company’s common stock at an exercise price of $0.09 per share in conjunction with his employment contract. These warrants were valued at $33,236 using the Black-Scholes pricing model and were fully vested upon issuance.
On June 30, 2016, the Company issued two year warrants to John Hollister, Interim CEO, to purchase 375,000 shares of the Company’s common stock at an exercise price of $0.09 per share in conjunction with his employment contract. These warrants were valued at $29,720 using the Black-Scholes pricing model and were fully vested upon issuance.
On September 30, 2016, the Company issued two year warrants to John Hollister, Interim CEO, to purchase 375,000 shares of the Company’s common stock at an exercise price of $0.09 per share in conjunction with his employment contract. These warrants were valued at $39,638 using the Black-Scholes pricing model and were fully vested upon issuance.
Director Compensation
No compensation was paid to any director for serving as such, with respect to the fiscal years ended December 31, 2016 and 2015.
Through December 31, 2016, Directors who were compensated as employees received no additional compensation for service on our Board of Directors. The Board of Directors plans to establish a compensation plan for nonemployee directors, in connection with our appointment of such director(s).
It is anticipated that each non-employee Director will receive an annual cash fee. In addition, in order to align their interests with those of the shareholders, each non-employee Director may also be granted rights to purchase shares of common stock at an exercise price to be determined by the Board of Directors. We also expect that all or a portion of these rights will vest monthly on a pro rata basis over each non-employee Director’s initial term as a Director.
Equity Incentive Plans
We have not yet established any Equity Incentive Plans. We anticipate that we will establish one or more equity incentive plans for our officers and directors.
All Compensation
No cash compensation, deferred compensation or long-term incentive plan awards were issued or granted to our management during the years ended December 31, 2016 and 2015. Furthermore, no member of our management has been granted any option or stock appreciation rights; accordingly, no tables relating to such items have been included within this item.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners
The following table provides information concerning beneficial ownership of our common stock as of April 17, 2017, for (i) each person named in the “Summary Compensation Table” as a current Named Executive Officer, (ii) each current director individually, (iii) all directors and executive officers as a group, and (iv) each person known by us to beneficially own more than 5% of our outstanding common stock. The address for our executive officers and directors is in care of Northsight Capital, Inc., 7740 East Evans Rd., Scottsdale, AZ 85260.
Beneficial Owners
Name of Beneficial Owner(1)(2)
Amount and Nature of Beneficial Ownership
Percent of Class
Kae Park
PO Box 14110
Scottsdale, AZ 85260
23,590,932
20.65%
John Venners(3)
4,000,000
3.50%
Thomas Dean
-
-
Kuboo, Inc.
8,166,666
7.15%
7740 East Evans Rd.
Scottsdale, AZ 85260
Sandor Capital Master Fund(4)
37,380,305
32.72%
2828 Routh St., Suite 500
Dallas TX 75201
Christopher Walkup(5)
9,500,941
8.32%
PO Box 12882
Scottsdale, AZ 85267
All Directors and executive officers as a group (2 persons) (6)
12,166,666
11.42%
* Less than one percent (1%).
(1)
Based upon information furnished by the persons listed. Except as otherwise noted, all persons have sole voting and investment power over the shares listed. A person is deemed, as of any date, to have “beneficial ownership” of any security that such person has the right to acquire within 60 days after such date.
(2)
There were 113,236,581 shares of our common stock outstanding on April 17, 2016
(3)
John Venners is a director and the CEO of Kuboo, Inc.
(4)
John Lemak is the General Partner of Sandor Capital Master Fund, in which capacity, he manages the fund’s assets and day to day business activities. The shares beneficially owned above include warrants to purchase an additional aggregate 10,130,285 shares of common stock held by Sandor Capital Master Fund.
(5)
Includes shares owned of record by Wealthcorp, LLC, Winterwalk, LLC and Christopher Walkup, who is a managing member of each of Wealthcorp, LLC and Winterwalk, LLC.
(6)
Includes shares owned of record by Kuboo, Inc.
SEC Rule 13d-3 generally provides that beneficial owners of securities include any person who, directly or indirectly, has or shares voting power and/or investment power with respect to such securities, and any person who has the right to acquire beneficial ownership of such security within 60 days. Any securities not outstanding which are subject to such options, warrants or conversion privileges exercisable within 60 days are treated as outstanding for the purpose of computing the percentage of outstanding securities owned by that person. Such securities are not treated as outstanding for the purpose of computing the percentage of the class owned by any other person.
Changes in Control
None, not applicable.
Securities Authorized for Issuance under Equity Compensation Plans
None, not applicable.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORS INDEPENDENCE
Transactions with Related Persons
By way of background, Kuboo, Inc., our former majority shareholder, acquired 10,000,000 shares of our common stock on May 31, 2011 for $250,000 in cash, and in connection therewith, acquired control of our company. During the year ended December 31, 2013, Kuboo, Inc. paid $35,248 on our behalf in payment of our operating expenses, consisting primarily of professional and other fees related to being a public company. These payments were treated as a contribution to our capital. Kuboo, Inc. did not pay any of our expenses during the year ended December 31, 2014. John Venners, A member of our board, and his spouse, Angela McGlowan, are each a member of the Board of Directors of Kuboo, Inc. Mr. Venners is also President and CEO of Kuboo, Inc. As of February 28, 2017, Kuboo owns 8,166,666 shares of our outstanding common stock (or about 7.24%). Accordingly, Kuboo, Inc. may be deemed an affiliate/related party of our Company.
In April 2014, we entered into an agreement with certain of our shareholders (“Principal Shareholders”), and Kuboo, Inc. By way of background, in May 2011, we, Kuboo and the Principal shareholders entered into a Stock Purchase Agreement (“SPA”) and we and the Principal Shareholders entered into a Principal Shareholders Agreement (“PSA”). Under the April 2014 agreement, (i) the Principal Shareholders released us and Kuboo from any obligation to pay them an additional $50,000 under the PSA or SPA (or otherwise), (ii) we released Kuboo from any obligation under the SPA to pay us the additional $50,000 specified in the SPA, (iii) the Principal Shareholders agreed to surrender 1,675,604 shares of our common stock to us for cancellation (iv) the Principal Shareholders released us from any obligation to register their Company common stock shares pursuant to section 10.2 of the SPA or otherwise, and (v) we agreed to include on a piggyback basis an aggregate of 300,000 shares of common stock on each of the next two Securities Act registration statements we file (an aggregate of 600,000 shares of common stock).
Effective, April 9, 2014, the Principal Shareholders surrendered to us for cancellation 1,675,604 shares of the Company’s common stock in accordance with the April 2014 Agreement described above.
On April 14, 2014, we issued an aggregate of 3,730,000 restricted shares of our common stock to the shareholders of NCAP Security Systems, Inc. (other than Kuboo, Inc., our then parent company), in cancellation of an equal number of shares of NCAP Security Systems, Inc. The shares were issued in full and complete satisfaction of any and all amounts that could be claimed in relation to the shareholders’ investment in NCAP Security Systems, Inc.
On June 23, 2014, we completed the acquisition of approximately 7,500 cannabis related Internet domain names (“Acquisition”), in exchange for which, the Company issued to Kae Yong Park, the seller, (i) 78.5 million shares of our restricted common stock which represented approximately 81% of our then issued and outstanding common stock and (ii) a promissory note in the principal amount of $500,000 (“Note”). The note originally bore interest at the rate of 3.25% per annum. The Note was originally payable as follows: upon our receipt of an aggregate of $1,000,000 in funding (whether debt or equity), $100,000 was to be paid, and the remaining balance of $400,000 was payable in thirty-six equal monthly installments, commencing on the fifteenth day following the first month we realize at least $150,000 in gross revenue.
On July 25, 2014, we amended and restated the Note owing to Kae Yong Park (our then majority shareholder) to provide that we would make the first $100,000 installment payment due under the Note on July 25, 2014 (earlier than required), in exchange for which Kae Yong Park agreed to waive all interest due over the term of the Note. The Note, as amended and restated, otherwise remains in full force and effect.
In addition, the Seller was required to provide such consulting services as the Company may require during the twelve-month period following the closing of the acquisition. In consideration for these services, the Company was required to pay the Seller $9,500 per month, for a period of twelve months, commencing on the closing date and, on the first of each month thereafter.
In September 2014, in connection with our raising an additional $917,500 in capital, including $105,000 in connection with warrant exercises at $.20 per share, as a further inducement to the purchasers, Kae Yong Park transferred an aggregate of 3,775,000 shares of our common stock to persons in connection with their purchase from us of a like number of shares. That is, for each share an investor purchased from us, Ms. Park transferred one share of common stock to such purchaser. As consideration for her transferring such shares of our common stock to these purchasers, we paid Ms. Park an aggregate of $75,500 (or $.02 per share).
During the year ended December 31, 2014, we paid an aggregate of $178,378 to Howard R. Baer, the spouse of our then controlling shareholder, Kae Yong Park, in consideration for the purchase of cannabis related internet domain names and related services rendered. The amounts paid to Howard R Baer for the purchase of cannabis related Internet domain names was based upon Mr. Baer’s cost plus a fee for Mr. Baer’s services equal on average to approximately 15% of his cost.
During the year ended December 31, 2014, we paid a total of $270,000 to Kuboo, Inc., a significant shareholder (the President of which is a director and EVP of our Company, and a former director of which was our CEO) as payment for rent as well as its portion of salaries/consulting fees related to our use of certain Kuboo employees and consultants, one of whom is John Venners, a director and EVP, and one of whom is Howard Baer, the spouse of one of our significant shareholders. Payments made to Kuboo, Inc. during this period included reimbursements to Kuboo, Inc. of (i) $62,000 for consulting services rendered by Howard Baer, the spouse of the one of our significant shareholders and (ii) $49,000 for consulting services rendered by John Venners, one of the our directors. During this same time period, we recognized rent expense of $34,000 and salary and consulting expenses of $151,950. At December 31, 2014, the Company had a payable to Kuboo, Inc. of $37,176 for rent, consulting fees and contract labor.
The Company’s then controlling shareholder, Kae Yong Park, advised the Company that on September 3, 2014, she gifted an aggregate 2,100,000 shares to two related parties of the Company as follows: 2,000,000 shares to John Venners, one of the Company’s directors and the President and CEO of Kuboo, Inc (a significant shareholder) and 100,000 shares to John Gorman, an employee and former President and director of the Company. The Company deemed this transfer to be in consideration for services and accordingly recorded a non-cash expense of $4,599,000 ($2.19 per share) for the fair value of the shares transferred. This amount is included in consulting expense - related party on the condensed statement of operations.
On December 2, 2014, we entered into a business advisory services agreement (“Agreement”) with Howard R. Baer, the spouse of Kae Yong Park, our then controlling shareholder. This Agreement supersedes the consulting agreement between us and HR Baer Consulting, LLC (controlled by Howard R. Baer), dated May 30, 2014, under which no compensation was paid to Mr. Baer and which was terminated effective September 1, 2014. Under the Agreement, Mr. Baer is required to render such business advisory services to us as we may request, including with respect to budgeting, website development and sales and marketing with respect to our various web portals, including WeedDepot.com. The Agreement provides that Mr. Baer will be paid $15,000 per month for these services and requires Mr. Baer to devote at least 100 hours per month to rendering business advisory services to us. The Agreement may be terminated by either party for any reason upon written notice to the other party. During both years ended December 31, 2016 and 2015, the Company incurred expenses of $180,000, related to this contract and had an outstanding balance related to this contract of $ 270,500 at December 31, 2016.
We are headquartered in Scottsdale, Arizona where we rent space from Kuboo Inc. our former parent company and a significant shareholder. Currently, the Company is renting approximately 6,100 square feet of space on a month-to-month basis. The monthly rent for this facility is $11,500. During the year ended December 31, 2016 the company incurred expenses payable to Kuboo, Inc. of $138,000 for rent and allocated rent expenses of $3,600 to the Joint Venture Company.
During the year ended December 31, 2016, Kae Yong Park, a significant shareholder, and her spouse, Howard Baer, advanced an aggregate of $594,050 to the Company for short-term capital needs. During this period, the Company also repaid $63,690 of its secured debt to Park. On May 11, 2016, Park assigned $65,000 of debt owed to her by the Company to another investor, in connection with which the Company issued the investor a one-year replacement note for $65,000. At December 31, 2016, the Company had a note payable to Park for these advances of $1,414,667 which is secured by the assets of the Company.
During the year ended December 31, 2016, the Company incurred expenses of $180,000 related to its consulting contract with Howard Baer, the spouse of Kae Yong Park, a significant shareholder.
During the year ended December 31, 2016, the Company received funds related to its joint venture of $85,000 and spent cash on behalf of its joint venture totaling $147,261. During this period, the Company’s 60% share of the joint venture’s expenses were $127,356. The remaining $32,204 is due from the Joint Venture Company, and is included in advances - related party.
On April 13, 2016, the Company agreed to amend the promissory note with Kae Yong Park and Howard R. Baer so as to make $564,000 in principal amount due under said Note interest bearing at the rate of 10% per annum, effective January 1, 2016. The remaining principal is non-interest bearing. At December 31, 2016, the Company has accrued interest owed under this agreement of $56,555.
Director Independence
In determining whether the members of our board of directors and its committees are independent, we have elected to use the definition of “independence” set forth in the listing standards of the NASDAQ Stock Market. After considering all relevant relationships and transactions, our board of directors has determined that none of our directors are “independent” within the meaning of the applicable listing standards of the NASDAQ Stock Market, except for Mr. Dean. The Company does not at this time have separate Audit, Compensation, or Nominating and Governance Committees. Instead, the full board of directors has the responsibility of selecting and working with our independent auditors, setting executive compensation, and selecting individuals to be nominated for election to the board of directors. We anticipate enlarging our Board of Directors and filling one or more of the resulting vacancies with directors who are “independent” within the meaning of applicable listing standards of the NASDAQ Stock Market.
ITEM 14:
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
See Item 9 for information on our current and prior auditors. The following is a summary of the fees billed to us by our principal accountants during the fiscal years ended December 31, 2016 and 2015:
Audit Fees - Consists of fees for professional services rendered by our principal accountants for the audit of our annual financial statements and review of the financial statements included in our Forms 10-Q or services that are normally provided by our principal accountants in connection with statutory and regulatory filings or engagements.
Audit-related Fees - Consists of fees for assurance and related services by our principal accountants that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit fees.”
Tax Fees - Consists of fees for professional services rendered by our principal accountants for tax compliance, tax advice and tax planning.
All Other Fees - Consists of fees for products and services provided by our principal accountants, other than the services reported under “Audit fees,” “Audit-related fees,” and “Tax fees” above.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
We have not adopted an Audit Committee; therefore, there is no Audit Committee policy in this regard. However, we do require approval in advance of the performance of professional services to be provided to us by our principal accountant. Additionally, all services rendered by our principal accountant are performed pursuant to a written engagement letter between us and the principal accountant.
PART IV
ITEM 15:
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(3) Exhibits. The following exhibits are filed as part of this Annual Report:
No.
Description
3.1
Articles of Incorporation, as amended (1)
3.2
Bylaws (1)
10.4
Asset Purchase Agreement between the Company and Kae Park, dated May 2, 2014 (2)
10.5
Amended and Restated Promissory Note issued to Kae Yong Park July 25, 2014 (3)
10.8
Agreement with Howard R. Baer dated December 2, 2014 (5)
10.9
Agreement with Kae Yong Park and Howard R. Baer regarding Funding (4)
10.10
Amended and Restated Promissory Note Issued to Kae Yong Park and Howard R. Baer Dated September 30, 2015 (6)
10.11
Agreement with Sandor Capital Master Fund (4)
10.12
Lease Agreement with Kuboo, Inc. dated May 19, 2015 (4)
10.13
Security Agreement with Kae Yong Park and Howard R. Baer Dated September 30, 2015 (6)
10.14
Employment agreement of John B. Hollister dated October 21, 2015 (6)
10.15
Joint Venture Agreement with Tumbleweed Holdings, Inc., dated February 29, 2016 (7)
10.16
Form of Convertible Note issued to Tumbleweed Holdings, Inc., dated February 29, 2016 (7)
10.17
Form of Note issued to Sandor Capital Master Fund dated May 11, 2016 (8)
Certification of Principal Executive and Principal Financial Officer as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002*
Certification of Principal Executive and Principal Financial Officer pursuant to 18 U.S.C section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
(1) Filed as Exhibits to our Form S-1 Registration Statement on July 11, 2008 and incorporated herein by reference.
(2) Filed as Exhibit 4.01 to our Current Report on Form 8-K filed on May 7, 2014 and incorporated herein by reference.
(3) Filed as Exhibit to our Form 10-Q filed on May 20, 2015 and incorporated herein by reference.
(4) Filed as Exhibits to our Form 10K filed on May 20, 2015 and incorporated herein by reference.
(5) Filed as Exhibit to our Form S-1 Registration Statement on December 12, 2014 and incorporated herein by reference.
(6) Filed as Exhibits to our Form 10Q filed on November 20, 2015 and incorporated herein by reference.
(7) Filed as Exhibits to our Form 10K filed on April 14, 2016 and incorporated herein by reference.
(8) Filed as Exhibits to our Form 10Q filed on May 16, 2016 and incorporated herein by reference.
*Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
NORTHSIGHT CAPITAL, INC.
Date:
04/17/2017
By:
/s/ John P. Venners
John P. Venners, EVP Operations, Director
Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NORTHSIGHT CAPITAL, INC.
Date:
04/17/2017
By:
/s/ John P. Venners
John P. Venners, EVP Operations, Director