ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
Ironstone Group, Inc, (“Ironstone” or the “Company”) a Delaware corporation, was incorporated in 1972. Beginning in 1986, a majority of Ironstone’s outstanding shares were owned by Hambrecht & Quist Group, a San Francisco-based investment banking and venture capital firm, and its affiliates (collectively “H&Q”). In September 2003, Ironstone repurchased all of these shares. Such repurchased shares are currently being held as treasury stock. William R. Hambrecht, Director and Chief Executive Officer, presently owns approximately 66.8% of Ironstone’s outstanding voting shares.
BUSINESS STRATEGY
Currently, the Company is reviewing options and new business opportunities. At December 31, 2013, the Company had $957,252 in marketable securities, $242,443 in cash, and $2,001,919 in non-marketable investments, and $809,000 in tax loss carry-forwards at its disposal.
There can be no assurance that the Company will acquire businesses, form additional alliances, or expand its existing services. Failure to expand the scope of services provided by the Company may have an adverse effect on the Company’s results of operations.
EMPLOYEES
As of December 31, 2013, the Company had five part-time employees. The employees received no cash compensation for the years ended December 31, 2013 and 2012, and are not subject to a collective bargaining agreement.
ITEM 1A.
ITEM 1A. RISK FACTORS
The Company’s main assets are investments in non-marketable securities of TangoMe, Inc., and marketable securities of Salon Media Group, Inc, Truett-Hurst, Inc., and FlexiInternational Software Inc. There can be no assurance that a market will continue to exist for these investments.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
The Company’s principal executive offices are located at 909 Montgomery Street, San Francisco, California 94133, in office space leased by its Chief Executive Officer.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
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 PURCHASE OF EQUITY SECURITIES
Our common stock trades on the OTC Markets under the trading symbol IRNS. The table below sets forth, for the fiscal quarters indicated, the reported high and low sale prices of our common stock, as reported by the OTC Markets. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Also, due to the very limited and sporadic nature of trading in our common stock, we believe there is not an established public trading market in our common stock, and there can be no assurance that such a trading market will develop.
Rules 15g-1 through 15g-9 promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) impose sales practice and disclosure requirements on certain brokers-dealers who engage in transactions involving a “penny stock.” The SEC has adopted regulations which generally define “penny stock” to be any equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. We believe that the penny stock rules may discourage investor interest in and limit the marketability of our common shares.
We are also a shell company as defined in Rule 12b-2 under the Exchange Act. Shell companies are subject to additional restrictions under the U.S. securities laws.
As of December 31, 2013, there were approximately 500 holders of record of the Company’s Common Stock. The Company has not paid cash dividends on its Common Stock since its inception and does not intend to pay cash dividends on its Common Stock in the foreseeable future.
On January 30, 2013 the Company granted 70,000 stock options to directors and officers of the Company. On August 20, 2013, the Company granted an additional 100,000 stock options to an employee of the Company. The option grants were intended as compensation for services provided to the Company. The options will vest over four years and have a 10 year term. The exercise price of the stock options grant in January 2013 is $.20 per share and for those granted in August 2013 is $1.20 per share. The stock options were issued in reliance on the exception from registration provided by Section 4(a) (2) of the Securities Act of 1933.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
While the Company continues to evaluate business opportunities, its sole source of revenue is from the sale of marketable and non-marketable securities. Management has classified these securities as available for sale in accordance with ASC Topic 320, “Investments - Debt and Equity Securities.” These securities are recorded at fair market value, and any unrealized gains and losses are reported as a separate component of shareholders’ equity. For securities for which there is an other-than-temporary impairment, an impairment loss is recognized as a realized loss.
Ironstone’s primary expenses are generated from maintaining regulatory reporting compliance, such as quarterly review and annual audit of the financial statements, seeking legal counsel when appropriate, consulting fees, and interest expense.
Fair Value Measurements
GAAP defines fair value, establishes a framework that the Company uses to measure fair value and provides for certain disclosures about the fair value measurements included in the Company’s financial statements. Refer to Note 2 in the Notes to the Financial Statements for these disclosures. Fair value is defined by accounting principles generally accepted in the United States of America (GAAP) as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between willing market participants on the measurement date.
In determining fair value, the Company uses various valuation approaches. GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company’s management. Unobservable inputs are inputs that reflect management’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observability of inputs as follows:
Level 1-Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
Level 2-Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3-Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The availability of observable inputs can vary from product to product and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, the liquidity of markets and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the management in determining fair value is greatest for instruments categorized in Level 3.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that the Company believes market participants would use in pricing the asset or liability at the measurement date.
RESULTS OF OPERATIONS
Year ended December 31, 2013
Operating expenses for 2013 totaled $46,984, an increase of $1,689 or 3.7% as compared to 2012. The increase was primarily due to an increase in professional fees of $4,021, state taxes of $18,841, and stock compensation expense of $10,326. Interest expense for fiscal year 2013 totaled $122,763, an increase of $26,666 or 27.8% as compared to fiscal year 2012. The increase was due to an increase in borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $164,430 and $65,776 for the years ended December 31, 2013 and 2012, respectively. The increase over fiscal year 2012 is attributed to an increase in cash used for accounts payable and accrued expenses. Net cash used in investing activities was $37,006 and $1,000,000 for the years ended December 31, 2013 and 2012, respectively. The decrease is due to a significant investment made in non-marketable securities by the Company in fiscal year 2012. Net cash provided by financing activities was $440,501 and $1,064,000 for the years ended December 31, 2013 and 2012, respectively. The decrease in cash provided by financing activities is due less cash needed from financing activities to support investing activities in fiscal year 2013 compared to fiscal year 2012.
The Company has a line of credit arrangement with First Republic Bank with a borrowing limit of $350,000 with interest based upon the lender’s prime rate. Interest is payable monthly at 7.75%. The line is guaranteed by William R. Hambrecht, Chief Executive Officer, Director and Robert H. Hambrecht, Director. The line of credit is due on demand. At December 31, 2013, the outstanding balance under the line was $350,000.
During the year the Company borrowed from related party William R. Hambrecht $123,000 with interest at 7.75% per annum. At December 31, 2013 the total outstanding amount borrowed from William R Hambrecht was $182,000. Additionally, the Company issued notes payable to a third party in fiscal year 2013 totaling approximately $87,501. As of December 31, 2013, the total notes payable to the third party, net of discount of $46,414 relating to warrants issued in connection with the notes, was $1,102,508.
The Company may obtain additional equity or working capital through additional bank borrowings and public or private sales of equity securities and exercises of outstanding stock options. The Company may also borrow additional funds from William R. Hambrecht. There can be no assurance, however, that such additional financing will be available on terms favorable to the Company, or at all.
While the Company explores new business opportunities, the primary capital resource of the Company relates to the March 30, 2012 purchase of 468,121 shares of non-marketable investment TangoMe, Inc. The investment in TangoMe, Inc. shares is valued at $2,001,919 and $1,000,000 for the years ended December 31, 2013 and 2012, respectively, For the year ended December 31, 2013, the Company recorded an unrealized gain of $1,001,919 on the investment. Given that the investment in TangoMe, Inc. does not have a readily determinable fair value, the Company exerts significant judgment in estimating the fair value using various pricing models and the information available to the Company that it deems most relevant.
Another capital resource of the Company is 1,926,857 shares of Common Stock of Salon Media Group, Inc. These shares resulted from the April 24, 2013 exchange of 843 shares of Series C Preferred Stock of Salon Media Group Inc. The investment in common shares of Salon is valued at $867,086 and $75,870 at December 31, 2013 and December 31, 2012 respectively. For the year ended December 31, 2013 the company recorded a related unrealized gain of $791,216 on the investment.
Additionally, in conjunction with making the investment in Salon, the Company received warrants to purchase common stock in Salon. In 2006, the Company exercised its warrants to purchase a total of 79,970 shares of common stock of Salon. This investment in common shares of Salon is valued at $35,987 and $7,198 as of December 31, 2013 and December 31, 2012, respectively. For the year ended December 31, 2013, the Company recorded an unrealized gain of $28,789 on the investment.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a Smaller Reporting Company as defined by Rule 12b-2 under the Securities Exchange Act of 1934 and are not required to provide the information under this item.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Ironstone Group, Inc.
We have audited the accompanying consolidated balance sheets of Ironstone Group, Inc. and Subsidiaries (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2012. The Company’s management is responsible for these financial statements. 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 consolidated financial position of Ironstone Group, Inc. and Subsidiaries as of December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2012 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. The Company does not have the necessary working capital for its planned activity, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are described in the notes to the consolidated financial statements. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Madsen & Associates CPA’s, Inc.
Murray, Utah
March 26, 2013
IRONSTONE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements
IRONSTONE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
The accompanying notes are an integral part of these consolidated financial statements
IRONSTONE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Deficit)
Years Ended December 31, 2013 and 2012
The accompanying notes are an integral part of these consolidated financial statements
IRONSTONE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
IRONSTONE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activities
Ironstone Group, Inc. and subsidiaries have no operations but are seeking appropriate business combination opportunities. Ironstone Group, Inc, (“Ironstone” or the “Company”) a Delaware corporation, was incorporated in 1972.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Ironstone Group, Inc. and its subsidiaries, AcadiEnergy, Inc., Belt Perry Associates, Inc., DeMoss Corporation, and TaxNet, Inc. (collectively the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.
Marketable and Non-Marketable Securities
Marketable and non-marketable securities have been classified by management as available for sale in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320, marketable securities are recorded at fair value and any unrealized gains and losses are excluded from earnings and reported as a separate component of shareholders’ equity until realized. The fair value of the Company’s marketable securities and investments at December 31, 2013 is based on quoted market prices. For the purpose of computing realized gains and losses, cost is identified on a specific identification basis. For marketable securities for which there is an other-than-temporary impairment, an impairment loss is recognized as a realized loss, and related adjustments are not made for recovery in value.
Securities determined to be non-marketable by the Company do not have readily determinable fair values. The Company estimates the fair value of these instruments using various pricing models and the information available to the Company that it deems most relevant. Among the factors considered by the Company in determining the fair value of financial instruments are discounted anticipated cash flows, the cost, terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, the Black-Scholes Options Valuation methodology adjusted for active market, the share price of a recent round of a financings by an outsider, and other considerations on a case-by-case basis and other factors generally pertinent to the valuation of financial instruments.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made in the financial statements relate to the valuation of the Company’s non-marketable investments. Actual results could differ from those estimates.
Income Taxes
The Company and its wholly owned subsidiaries file a consolidated federal income tax return. Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred income taxes. Deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Deferred income taxes are also recognized for net operating loss carryforwards that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
IRONSTONE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Ironstone follows the authoritative guidance on accounting for and disclosure of uncertainty in tax positions, which requires the Company to determine whether a tax position of Ironstone is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant taxing authority. The Company has determined that there is no effect on the financial statements from this authoritative guidance.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state, local, and foreign jurisdictions, where applicable. As of December 31, 2013, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations is from the year 2010 forward (with limited exceptions).
During the year ended December 31, 2013, the Company did not recognize any interest or penalties related to income taxes in its statement of operations.
Stock-Based Compensation
Ironstone recognizes the fair value of stock options granted on a straight-line basis over the requisite service period of the option grant, which is the standard vesting term of four years.
Ironstone recognized stock-based compensation expense of $10,326 during the year ended December 31, 2013. As of December 31, 2013, Ironstone had an aggregate of $80,765 of stock-based compensation remaining to be amortized to expense over the remaining requisite service period of the underlying options. Ironstone currently expects this stock-based compensation balance to be amortized as follows: $22,747 during fiscal year 2014; $22,747 during fiscal year 2015; $22,747 during fiscal year 2016 and $12,524 during fiscal year 2017.
The full impact of stock-based compensation in the future is dependent upon, among other things, the total number of stock options granted, the fair value of the stock options at the time of grant and the tax benefit that Ironstone may or may not receive from stock-based expenses. Additionally, stock-based compensation requires the use of an option-pricing model to determine the fair value of stock option awards. This determination of fair value is affected by Ironstone’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, Ironstone’s expected stock price volatility over the term of the awards.
Basic and Diluted Loss per Share
Basic loss per share (“EPS”) excludes dilution and is computed by dividing net income (loss) applicable to common shareholders by the weighted average number of common shares actually outstanding during the period. Diluted EPS reflects the dilution from potentially dilutive securities, except where inclusion of such potentially dilutive securities would have an anti-dilutive effect, using the average stock price during the period in the computation and because of the net loss for the periods presented. As of December 31, 2013, the Company does not have any potentially dilutive securities.
Reclassifications
Certain reclassifications have been made to prior period amounts in order to conform to the presentation in the current period. These reclassifications had no impact on previously reported net loss or total stockholders' equity.
IRONSTONE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update (ASU) 2013-02, Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires an entity to present parenthetically (on the face of the financial statements, in the notes, or in some cases, cross-referenced to related footnote disclosures) significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification. The amendment is effective prospectively for annual and interim periods beginning after December 15, 2012. The Company adopted this amendment in the three months ended March 31, 2013 and the adoption did not have a material impact on its consolidated financial statements as the Company only has one category relating to accumulated other comprehensive income, available-for-sale securities, and no amounts were reclassified for the year ended December 31, 2013.
Liquidity
As reflected in the accompanying financial statements the Company has net losses and has a negative cash flow from operations. If necessary the Company may seek to sell additional debt or equity securities or enter into new credit facilities to meet its cash needs. The Company cannot make assurances that it will be able to complete any financing or liquidity transaction, that such financing or liquidity transaction will be adequate for the Company’s needs, or that a financing or liquidity transaction will be completed in a timely manner. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recovery and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
2. FAIR VALUE MEASUREMENTS
The Company adopted ASC 820, “Fair Value Measurement and Disclosures”. ASC 820 defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States of America (“GAAP”) and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 describes a fair value hierarchy based on three levels of inputs of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
Level 1-Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
Level 2-Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3-Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level of input that is significant to the fair value measurement.
IRONSTONE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Market values were determined for each security in the investment portfolio based on quoted market prices and quoted market prices for similar securities. The following tables provide information about the Company’s financial instruments measured at fair value on a recurring basis as of December 31 by the fair value hierarchy:
IRONSTONE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table presents the Company’s investments measured at fair value using significant unobservable inputs (Level 3), including the valuation technique and unobservable inputs used to measure the fair value of those financial instruments:
IRONSTONE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table presents additional information about Level 3 assets measured at fair value on a recurring basis for fiscal year 2013. Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, unrealized gains or (losses) during the period for assets and liabilities within the Level 3 category presented in the tables below may include changes in fair value during the period that were attributable to both observable and unobservable inputs.
Transfers of financial instruments occur when there are changes in pricing observability levels. Transfers of financial instruments among the levels occur at the beginning of the reporting period. Transfers into Level 3 for fiscal year 2013 are attributed to the lack of observable inputs available for these securities beginning January 1, 2013. Transfers out of Level 3 during fiscal year 2013 are attributed to the April 24, 2013 conversion of Salon Media Group, Inc. Series C Preferred Stock into Salon Media Group, Inc. Common Stock, which is publicly traded.
3. INVESTMENTS
TangoMe, Inc.
On March 30, 2012, the Company purchased 468,121 shares of Series A Preferred Stock issued by TangoMe, Inc., from related party William R. Hambrecht at $2.14 per share, resulting in a total investment of $1,000,000. The value of this transaction was determined using the fair value of similar securities sold to unrelated third parties and was determined by management to be the best estimate of fair value as of December 31, 2012. For the year ended December 31, 2013, the Company recorded an unrealized gain of $1,001,919, bringing the total value of the investment in TangoMe, Inc. to $2,001,919 as of December 31, 2013. The fair value as of December 31, 2013 is based on similar securities sold to certain related and unrelated third parties, see Note 9. The use of a recent round of financing for TangoMe, Inc. is the primary significant unobservable input used in the fair value measurement of the Company’s investment. Significant increases (decreases) in any subsequent rounds of financing would result in a significantly higher (lower) fair value measurement.
IRONSTONE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Salon Media Group, Inc.
The Company owns 1,926,857 shares of Common Stock of Salon Media Group, Inc. These shares resulted from the April 24, 2013 exchange of 843 shares of Series C Preferred Stock of Salon Media Group Inc. This investment in common shares of Salon is valued at $0.45 per share, or $867,086, as of December 31, 2013. As of December 31, 2012, the Company had recorded an other-than-temporary impairment on the Series C preferred stock. For the year ended December 31, 2013 the Company recorded a related unrealized gain of $791,216 on the investment.
Additionally, in conjunction with making the investment in Salon, the Company received warrants to purchase common stock in Salon. In 2006, the Company exercised its warrants to purchase a total of 79,970 shares of common stock of Salon. This investment in common shares of Salon is valued at $0.45 per share, or $35,987, at December 31, 2013. For the year ended December 31, 2013, the Company recorded a related unrealized gain of $28,789 on the investment.
FlexiInternational Software, Inc.
The Company owns 78,000 shares of FlexiInternational Software stock. The investment in common shares of FlexiInternational Software is valued at $0.16 and $0.11 per share, or $12,480 and $8,580 at December 31, 2013 and 2012, respectively. For the year ended December 31, 2013 the Company recorded a related unrealized gain of $3,900 on the investment.
Truett-Hurst, Inc.
During fiscal year 2013 the Company purchased 10,000 shares of Truett-Hurst common stock. For the year ended December 31, 2013, the Company recorded a related unrealized gain of $4,694 on the investment.
4. RELATED PARTY TRANSACTIONS
Mr. William R Hambrecht, Chief Executive Officer, is a minority shareholder in Salon Media Group and a Director of Truett-Hurst, Inc.
Ms. Elizabeth Hambrecht, Chief Financial Officer, is currently the interim Chief Financial Officer of Salon Media Group, Inc. Ms. Hambrecht formerly served as President and Chief Executive Officer of Salon Media Group, Inc. Ms. Hambrecht is also the sister of a member of the Board of Directors, and is the daughter of the Chief Executive Officer.
To meet its cash needs during the 2013, the Company borrowed $123,000 from Mr. William R Hambrecht, Chief Executive Officer, at the same interest rate charged by First Republic Bank on its line of credit. Interest is payable to Mr. Hambrecht monthly. On December 31, 2013 the Company combined all the various notes payable, which were issued at various times to Mr. William R. Hambrecht, into one note for $182,000 at 7.75% interest, with a December 31, 2014 maturity.
Prior to December 31, 2013, the Company received $230,000 from certain new investors and certain of its existing investors, including related parties, pursuant to a stock purchase agreement. Under the stock purchase agreement, 131,429 shares of Ironstone’s Common Stock would be sold at a share price of $1.75 in exchange for these funds. As of December 31, 2013, the purchase agreement had not been finalized and the funds are shown on the consolidated balance sheets as cash and cash equivalents and shares payable. See Note 9 for further details.
5. NOTE PAYABLE
On March 31, 2012, the Company received $1,000,000 from a third party and issued a related promissory note. The note carries an 8% interest rate per year, and has a maturity date of March 31, 2017. Interest accrues on the balance and converts to separate notes payable on a quarterly basis. The total amounts due under the note agreement, including the notes related to accrued interest, are due in full at the end of the term. The note is secured by all of the assets of the Company through an accompanying security agreement. If the Company defaults on the note or security agreement, interest would accrue at 10% per annum. The gross amount payable under the note agreement as of December 31, 2013 totaled $1,148,994.
IRONSTONE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In connection with the note agreement, the Company also issued warrants with a 10-year term to this third party to purchase 187,296 shares of the Company’s common stock, for total consideration of $1. If the third party elects to purchase only a portion of the allotted shares, then the purchase price shall be prorated for the portion purchased. The warrants were separately valued using the Black-Scholes model, and it was determined the fair value of the warrants at March 31, 2012 was $56,188. This amount has been recorded as a discount on the $1,000,000 note payable and will be amortized over the 5 year term of the note. For the year ended December 31, 2013, accretion of the note payable discount was $5,560 and the remaining unamortized balance was $46,414.
The inputs to the Black-Scholes model were as follows: Stock price at March 31, 2012 of $0.30 per share; exercise price of $.000005 per share; Expected term of 10 years; Risk-free interest rate of 4.84%; Dividend rate of 0; Volatility of 60%. All 187,296 warrants were issued and outstanding at December 31, 2013.
Furthermore, during 2013 the Company entered into a note payable agreement with a related party, William R. Hambrecht. This note carries a 7.75% interest rate per annum and has a maturity date of December 31, 2014. The note payable carried a principal balance of $182,000 as of December 31, 2013, with additional accrued interest of $10,120.
The scheduled maturities of notes payable outstanding as of December 31, 2013 are as follows:
6. LINE OF CREDIT ARRANGEMENT
The Company has a line of credit arrangement with First Republic Bank (the “lender”) with a borrowing limit of $350,000 with interest based upon the lender’s prime rate. Interest is payable monthly at 7.75% at December 31, 2013. The line is guaranteed by both William R. Hambrecht, Director and Chief Executive Officer, and Robert H. Hambrecht, Director. The line of credit is due on demand. At December 31, 2013, the outstanding balance under the line was $350,000. The total recorded interest expense on this note for the year ended December 31, 2013 and December 31, 2012 was $27,125 and $28,388, respectively. The line of credit is renewable on a yearly basis based upon the lender’s review.
IRONSTONE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. INCOME TAXES
ASC 740, “Income Taxes” requires the recognition of deferred tax assets and liabilities for the expected future consequences of events that have been recognized in the financial statements or tax returns. Deferred income taxes reflect the net tax effects of (i) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and (ii) operating loss and tax credit carryforwards. The tax effects of significant items comprising the Company's deferred income taxes at December 31, 2013 and 2012 are as follows:
The reasons for the difference between the amount computed by applying the statutory federal income tax rate to losses before income tax benefit and the actual income tax benefit for the years ended December 31, 2013 and 2012 are as follows:
Section 382 of the Internal Revenue Code of 1986, as amended, imposes an annual limitation on the availability of net operating loss carryforwards to offset taxable income when an ownership change occurs. Due to the redemption of shares of common stock in 2003, the Company underwent such an “ownership change.” Therefore, the Company’s use of losses incurred through the date of the “ownership change” will be limited to approximately $49,000 per year.
In the opinion of management, based on the uncertainty that the Company will be able to generate taxable income in the future, the realization of the loss carryforwards is not likely and, accordingly, a valuation allowance has been recorded to offset such amount in its entirety.
The Company is subject to taxation in the U.S. and the state of California. All tax years are subject to examination by the U.S. and California tax authorities due to the carryforward of unutilized net operating losses. The Company had no accrual for interest or penalties on the balance sheet at December 31, 2013 and 2012.
IRONSTONE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. SHAREHOLDERS’ EQUITY
Treasury Stock
On September 15, 2003, the Board of Directors authorized the Company to purchase 745,536 shares of Company common stock at $0.70 per share for an aggregate purchase price of $521,875. The repurchase represented 50.11% of the issued and outstanding shares of the Company. During the year ended December 31, 2008, the Company paid $699 for fractional Treasury shares. As of December 31, 2013, the treasury shares are held by the Company.
Preferred Stock
The Company is authorized to issue up to five million shares of preferred stock without further shareholder approval; the rights, preferences and privileges of which would be determined at the time of issuance. No shares have been issued as of December 31, 2013.
Stock Option Plans
The Company has adopted a 2013 Equity Incentive Plan. As of January 30, 2013, 187,296 shares were available for grant under the Plan. The plan provides for incentive stock options to be granted at times and prices determined by the Company’s Board of Directors. The stock options are to be granted to directors, officers and employees of the Company, as well as certain consultants and other persons providing services to the Company.
70,000 stock options were granted on January 30, 2013. The fair value of these options granted under the Plan were estimated using the Black-Scholes model with the following price and assumptions: Stock Price $.20 per share, Exercise Price $.20 per share, Time to Maturity 6.33 years, Risk-free Interest Rate 4%, Annualized Volatility 121%.
An additional 100,000 stock options were granted on August 20, 2013. The fair value of these options granted under the Plan were estimated using the Black-Scholes model with the following price and assumptions: Stock Price $1.20 per share, Exercise Price $1.20 per share, Time to Maturity 4.0 years, Risk-free Interest Rate 1.1%, Annualized Volatility 93%.
For the year ended December 31, 2013, the Company recorded share based compensation expense related to stock options in the amount of $3,208 on the 70,000 stock options issued January 30, 2013 and $7,118 on the stock options issued August 20, 2013.
9. SUBSEQUENT EVENTS
The Company received cash totaling $230,000 in December, 2013 relating to a stock purchase agreement with certain new investors and certain of its existing investors, including related parties. The stock purchase was finalized on January 2, 2014 when the funds were used to purchase 131,429 shares of Common Stock at a price of $1.75 per share.
Additionally, on March 30, 2012 the Company purchased 468,121 shares of Series A Preferred Stock of TangoMe, Inc. for $2.14 per share. Subsequent to December 31, 2013, a round of financing for the TangoMe, Inc. non-marketable securities took place. This round of financing valued the shares at $4.28 per share. The Company determined that the new share price approximated fair value of shares owned by the Company as of December 31, 2013. Based on the new share price, the Company recorded an unrealized gain of $1,001,919 for the year ended December 31, 2013.
On January 2, 2014 Mr. Thomas Thurston was appointed to the Board of Directors.
The Company evaluated subsequent events to the date these consolidated financial statements were issued. Other than the matters noted above, there were no other material subsequent events that required recognition or additional disclosure in these consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer evaluated the effectiveness of our “disclosure controls and procedures” as defined in Exchange Act Rules 13a-15(e) as of December 31, 2013 in connection with the filing of this Annual Report on Form 10K. Based on that evaluation our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2013, in light of the material weakness described below, our disclosure controls and procedures were not effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in rules and forms of the SEC and is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.
Notwithstanding the material weakness, our company’s financial statements in this Form 10K fairly present in all material respects, the financial condition, results of operations and cash flows of our company as of and for the periods presented in accordance with generally accepted accounting principles in the United States.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal controls over financial reporting for the three-months ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Controls over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.
All internal controls over financial reporting, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention or overriding of controls. Therefore, even effective internal control over financial reporting can provide only reasonable, and not absolute, assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal controls over financial reporting may vary over time.
Our management, including our chief executive officer and chief financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our evaluation, management concluded that, as of December 31, 2013, our internal control over financial reporting was not effective based on those criteria because of the existence of the following material weaknesses.
1)
The Company does not have an adequate number of independent board members and therefore does not have an independent audit committee.
2)
Our limited number of employees results in the Company’s inability to have a sufficient segregation of duties within its accounting and financial reporting activities.
These absences constitute material weaknesses in the Company’s corporate governance structure.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting because the Company is a smaller reporting company.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS
William R. Hambrecht has been the Chief Executive Officer of The Company since 2008. He is also the Chairman and Co-Chief Executive Officer of WR Hambrecht + Co which he founded in January 1998. He was co-founder of Hambrecht & Quist in 1968 where he held various executive management positions until he resigned in December 1997. He holds a B.S. degree from Princeton University . Mr. Hambrecht is also a Director of Salon Media Group, Inc. and Truett-Hurst, Inc.
Robert H. Hambrecht is a founding partner of W.R. Hambrecht + Co., an investment banking firm, founded in January 1998. From 1996 through January 1998, Mr. Hambrecht was Vice President of H&Q Venture Partners, a venture capital firm. From 1994 to 1996, Mr. Hambrecht was employed by Unterberg Harris, an investment banking firm. Mr. Hambrecht earned a master’s degree in public administration from Columbia University in 1993. Mr. Hambrecht brings his deep knowledge of investing in securities of public companies to the Board of Directors.
Denis T. Rice is Senior Counsel with the law firm of Arnold & Porter LLP in San Francisco, which combined in 2012 with the Howard Rice law firm of which Mr. Rice was a founding partner. The California State Bar bestowed its annual Lifetime Achievement Award in Business Law on Mr. Rice in 2009. He has an A. B. degree from the Woodrow Wilson School of Public and International Affairs at Princeton University. Mr. Rice draws upon his business law practice, spanning over 50 years in participating in deliberations of the Board of Directors
Thomas Thurston is CEO and Founder of Growth Science, a data science think-tank that uses algorithms to predict disruptive innovation. Formerly, he used data science to guide growth investments and innovation at Intel Corporation, He was Managing Partner at Rottura Capital, an algorithm-based long-short hedge fund. He also helped found a high performance computing business that was acquired in 2008. A former Fellow at the Harvard Business School, Mr. Thurston holds a BA, MBA and JD.
EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of the Company’s executive officers as of December 31, 2013. A summary of the background and experience of William R. Hambrecht is set forth above under “Directors” and of Elizabeth Hambrecht is set forth below:
Elizabeth Hambrecht was appointed Chief Financial Officer on July 1, 2013. Ms. Hambrecht also serves as Interim Chief Financial Officer at Salon Media Group, which operates the popular Salon.com website. Previously, Ms. Hambrecht served as Chief Executive Officer of Salon Media Group, from February 2005 to September 2007, and from September 2008 to May 2009. She also served as a director of Salon Media Group from 2003 to 2012. Before Salon, Elizabeth was a co-founder of Asiacontent.com, a pioneer in Asia’s Internet industry, and helped fund and launch Boom.com, Hong Kong’s first electronic brokerage. Prior to Boom.com, Elizabeth was a equities analyst covering emerging markets at Goldman Sachs (Hong Kong) and before that at Baring Securities. Elizabeth has served as a director of Salon Media Group, and as a Trustee of the San Francisco Friends School, the Asian Art Museum of SF and Northern California Public Broadcast (NCPB). She graduated with a B.A. degree from Vassar College and studied Mandarin at the Taipei Language Institute.
Code of Ethics
The Company has adopted a Code of Business Conduct and Ethics (the “Code”) that applies to all of the Company’s employees (including its executive officers) and directors. The Company will provide to any person without charge, upon request, a copy of the Code. Any such request must be made in writing to the Company, c/o William R. Hambrecht, 909 Montgomery Street, San Francisco, CA 94133.
Section 16(a). Beneficial Ownership Reporting Compliance
During 2013, Wiliam R. Hambrecht did not file a Form 4 reporting the transfer of shares of the company’s common stock to two employees of the Company. Robert H. Hambrecht, Denis T. Rice, Quock Fong, and Elizabeth Hambrecht have made no filings under Section 16(a) of the Securities Exchange Act of 1934, including Form 3s; Robert H. Hambrecht, Quock Fong and Denis T. Rice did not file a Form 4 related to issuance of employee stock options in 2013, and Ms. Hambrecht did not file a Form 4 reporting the receipt of shares from Wiliam R. Hambrecht.
PART III - (Continued)
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Outside directors may also receive stock option grants under the Company’s 2013 Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”). Only non-employee directors of the Company or an affiliate of such directors (as defined in the Internal Revenue Code of 1986, as amended from time to time, hereinafter the “Code”) are eligible to receive options under the Directors’ Plan. Options granted under the Directors’ Plan are not intended to qualify as incentive stock options under the Code.
Options under the Directors’ Plan have a ten-year term; however, each option will terminate prior to the expiration date if the optionee’s service as a non-employee director, or, subsequently, as an employee, of the Company terminates. The exercise price of each option under the Directors’ Plan must be equal to the fair market value of the Common Stock on the date of grant. All options issued pursuant to the Directors’ Plan vest at a rate of 1/48 per month for 48 months following the date of the grant of the option, or in the event the grant was delayed pending compliance by the Company with certain securities law requirements, the date from which the grant was delayed.
The table below shows the compensation paid to the Company's non-employee directors during 2013.
(1)
See note 8 to the Company's audited Consolidated Financial statements included in Item 8
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the ownership of the Company’s Common Stock as of March 31, 2014 by: (i) each director; (ii) each named executive officer; and (iii) all those known by the Company to be beneficial owners of more than five percent of its Common Stock.
BENEFICIAL OWNERSHIP (1)
(1)
This table is based upon information supplied by officers, directors and principal stockholders and Schedules 13D and 13G, if any, filed with the Securities and Exchange Commission (the “SEC”). Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, the Company believes that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned.
(2)
In Company Stock options exercisable currently or within 60 days after March 31, 2014, as follows: Ms. Hambrecht, 5,000 shares; Robert Hambrecht, 2,500 shares; Mr. Rice, 5,000 shares; and Mr. Thurston, 5,000 shares.
(3)
Applicable percentages are based on 2,021,895 shares outstanding on March 31, 2014 adjusted as required by rules promulgated by the SEC.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. William R Hambrecht, Chief Executive Officer, is a shareholder in Salon Media Group, Inc. owning 22.6% and a Director and shareholder at Truett-Hurst, Inc owning 7.0%.
Ms. Elizabeth Hambrecht, Chief Financial Officer, is currently the interim Chief Financial Officer of Salon Media Group, Inc. Ms. Hambrecht formerly served as President and Chief Executive Officer of Salon Media Group, Inc. Ms. Hambrecht is also the sister of a member of the Board of Directors, and is the daughter of the Chief Executive Officer.
PART III - (Continued)
To meet its cash needs during the year 2013, the Company borrowed $123,000 from Mr. William R Hambrecht, Chief Executive Officer, at the same interest rate charged by First Republic Bank on its line of credit. Interest is payable to Mr. Hambrecht monthly. On December 31, 2013 the Company combined all the various notes payable, which were issued at various times to Mr. William R. Hambrecht, to one note for $182,000 at 7.75% interest, with a December 31, 2014 maturity.
Prior to December 31, 2013, the Company received $230,000 from certain new investors and certain of its existing investors, including related parties, pursuant to a stock purchase agreement. Under the stock purchase agreement, 131,429 shares of Ironstone’s Common Stock would be sold at a share price of $1.75 in exchange for these funds. As of December 31, 2013, the purchase agreement had not been finalized and the funds were held in the consolidated balance sheets as cash and cash equivalents and advances for future stock issuance.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate audit fees billed by our independent registered accountant for the years ended December 31, 2012 and December 31, 2013 were $21,135 and $22,650, respectively. There were no audit-related fees, tax fees or other fees paid to our independent registered accountant in the last two fiscal years.
Since the Board of Directors does not have an audit committee, the principal auditor is engaged by the Chief Executive Officer and the Chief Financial Officer on behalf of the Company’s Board of Directors.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
1.
Financial Statements
The information concerning Ironstone's consolidated financial statements and the Reports of Burr Pilger Mayer, Inc. and Madsen & Associates CPA's, Inc., Ironstone’s independent auditors, required by this item, is incorporated by reference herein to the section of this Report in Item 8, entitled “Financial Statements and Supplementary Data”
2.
Financial Statement Schedules
None
3.
Exhibits
The following Exhibits are filed as part of, or incorporated by reference into, this Report.
Exhibit
Number
Description
10.1 Secured Promisory Note issued by the Registrant to Shea Ventures, LLC, dated March 31, 2012.
10.2 Security and Stock Pledge Agreement between the Registrant and Shea Ventures, LLC, dated March 31, 2012.
10.3 Warrant Agreement between Registrant and Shea Ventures, LLC, dated March 31, 2012.
10.4 Stock Purchase Agreement dated January 2, 2014.
10.5 Ironstone Group, Inc. Equity Incentive Plan dated January 29, 2013.
10.6 Ironstone Group, Inc. Stock Option Agreement dated January 29, 2013.
10.7 Promissory Note issued by the Registrant to William R. Hambrecht dated December 31, 2013.
21.1
Subsidiaries of Ironstone Group, Inc.
31.1
Section 302 - Principal Executive Officer Certification
31.2
Section 302 - Principal Financial Officer Certification
32.1
Section 1350 - Certification - Chief Executive Officer
32.2
Section 1350 - Certification - Chief Financial Officer
101.INS*
XBRL Instance Document.
101.SCH*
XBRL Taxonomy Extension Schema Document.
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.
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 on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
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.
Signature
Title
Date
/s/ William R. Hambrecht
Director, Chief Executive Officer,
April 14, 2014
William R. Hambrecht
(Principal Executive Officer)
/s/ Elizabeth Hambrecht
Chief Financial Officer,
April 14, 2014
Elizabeth Hambrecht
(Principal Financial and Accounting Officer)
s/ Denis T. Rice
Director
April 14, 2014
Denis T. Rice
/s/ Robert H. Hambrecht
Director
April 14, 2014
Robert H. Hambrecht