Notes to Condensed Consolidated Financial Statements
March 31, 2014
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by Generally Accepted Accounting Principles for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are considered necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. The results of operations for such periods are not necessarily indicative of the results expected for the full year or for any future period. The December 31, 2013 condensed consolidated balance sheet data was derived from our audited financial statements at that date. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of Findex.com, Inc. included in our Form 10-K for the year ended December 31, 2013.
RECLASSIFACTIONS
Certain accounts in our 2013 financial statements have been reclassified for comparative purposes to conform with the presentation in our 2014 financial statements.
DISCONTINUED OPERATIONS
On May 5, 2011, we entered into a Software Product Line Purchase Agreement with WORDsearch Corp., L.L.C. In accordance with the Software Product Line Purchase Agreement, WORDsearch agreed to acquire from us all of the assets associated with the QuickVerse
®
product line which centered around our industry-leading Bible-study software program. The specific assets conveyed include, among others, the underlying software source code, registered trade names, and existing product inventories. As a result, we have classified this asset as well as all revenues and expenses directly related to the QuickVerse
®
product line as discontinued operations. See Note 10.
INTANGIBLE ASSETS
In accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 350-30,
General Intangibles Other Than Goodwill
, intangible assets with an indefinite useful life are not amortized. Intangible assets with a finite useful life are amortized on the straight-line method over the estimated useful lives, generally three to ten years. All intangible assets are tested for impairment annually during the fourth quarter.
SOFTWARE DEVELOPMENT COSTS
In accordance with ASC 985-20-25,
Costs of Software to Be Sold, Leased, or Marketed
, software development costs are expensed as incurred until technological feasibility and marketability has been established, generally with release of a beta version for customer testing. Once the point of technological feasibility and marketability is reached, direct production costs (including labor directly associated with the development projects), indirect costs (including allocated fringe benefits, payroll taxes, facilities costs, and management supervision), and other direct costs (including costs of outside consultants, purchased software to be included in the software product being developed, travel expenses, material and supplies, and other direct costs) are capitalized until the product is available for general release to customers. We amortize capitalized costs on a product-by-product basis. Amortization for each period is the greater of the amount computed using (i) the straight-line basis over the estimated product life (generally from 12 to 18 months, but up to 60 months), or (ii) the ratio of current revenues to total projected product revenues. We did not recognize any capitalized software development costs or associated accumulated amortization for the three months end March 31, 2014 and 2013, respectively.
Capitalized software development costs are stated at the lower of amortized costs or net realizable value. Recoverability of these capitalized costs is determined at each balance sheet date by comparing the forecasted future revenues from the related products, based on management’s best estimates using appropriate assumptions and projections at the time, to the carrying amount of the capitalized software development costs. If the carrying value is determined not to be recoverable from future revenues, an impairment loss is recognized equal to the amount by which the carrying amount exceeds the future revenues. We did not recognize any impairment expense for the three months ended March 31, 2014 and 2013, respectively.
ASC 730,
Research and Development
, provides accounting and reporting standards for research and development. In accordance with ASC 730-10, costs we incur to enhance our existing products after general release to the public (bug fixes) are expensed in the period they are incurred and included in research and development costs. Research and development costs incurred prior to determination of technological feasibility and marketability and after general release to the public and charged to expense and included in general and administrative expenses of discontinued operations. We did not incur any research and development expenses for the three months ended March 31, 2014 and 2013, respectively.
We capitalize costs related to the development of computer software developed or obtained for internal use in accordance with the ASC 350-40,
Internal-Use Software
. Software obtained for internal use has generally been enterprise level business and finance software that we customize to meet our specific operational needs. We have not sold, leased, or licensed software developed for internal use to our customers and have no intention of doing so in the future.
We capitalize costs related to the development and maintenance of our website in accordance with ASC 350-50,
Website Development Costs
. Accordingly, costs expensed as incurred are as follows:
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planning the website,
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developing the applications and infrastructure until technological feasibility is established,
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developing graphics such as borders, background and text colors, fonts, frames, and buttons, and
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operating the site such as training, administration and maintenance.
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Capitalized costs include those incurred to:
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obtain and register an Internet domain name,
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▪
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develop or acquire software tools necessary for the development work,
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▪
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develop or acquire software necessary for general website operations,
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▪
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develop or acquire code for web applications,
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▪
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develop or acquire (and customize) database software and software to integrate applications such as corporate databases and accounting systems into web applications,
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▪
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develop HTML web pages or templates,
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▪
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install developed applications on the web server,
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▪
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create initial hypertext links to other websites or other locations within the website, and
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▪
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test the website applications.
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We amortize website development costs on a straight-line basis over the estimated life of the site, generally 36 months. We did not incur any cumulative website development costs nor any associated accumulated amortization expense, for the three months ended March 31, 2014 and 2013, respectively.
REVENUE RECOGNITION
Within our operations as a whole, including those operations now classified as discontinued operations, we derive revenues from the sale of packaged software products, product support and multiple element arrangements that may include any combination of these items. We recognize software revenue for software products and related services in accordance with ASC 985-605,
Software Revenue Recognition
. We recognize revenue when persuasive evidence of an arrangement exists (generally a purchase order), we have delivered the product, the fee is fixed or determinable and collectability is probable. In some situations, we receive advance payments from our customers. We defer revenue associated with these advance payments until we ship the products or offer the support.
EARNINGS PER SHARE
We follow the guidance of ASC 260,
Earnings Per Share
, to calculate and report basic and diluted earnings per share (“EPS”). Basic EPS is computed by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding for the period. Diluted EPS is computed by giving effect to all dilutive potential shares of common stock that were outstanding during the period. For us, dilutive potential shares of common stock consist of the incremental shares of common stock issuable upon the exercise of stock options and warrants for all periods, convertible notes payable and the incremental shares of common stock issuable upon the conversion of convertible preferred stock.
When discontinued operations, extraordinary items, and/or the cumulative effect of an accounting change are present, income before any of such items on a per share basis represents the “control number” in determining whether potential shares of common stock are dilutive or anti-dilutive. Thus, the same number of potential shares of common stock used in computing diluted EPS for income from continuing operations is used in calculating all other reported diluted EPS amounts. In the case of a net loss, it is assumed that no incremental shares would be issued because they would be anti-dilutive. In addition, certain options and warrants are considered anti-dilutive because the exercise prices were above the average market price during the period. Anti-dilutive shares are not included in the computation of diluted EPS, in accordance with ASC 260-10-45-17.
The following table shows the amounts used in computing earnings per common share and the average number of shares of dilutive potential common stock:
For the Three Months Ended March 31,
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2014
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2013
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Net loss from continuing operations
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$
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(81,735
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)
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$
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(92,727
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)
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Preferred stock dividends
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---
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---
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Net loss available to common shareholders
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$
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(81,735
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)
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$
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(92,727
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)
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Net income from discontinued operations
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$
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---
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$
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---
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Preferred stock dividends
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---
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---
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Net income available to common shareholders
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$
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---
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$
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---
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Basic weighted average shares outstanding
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103,635,060
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103,635,060
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Dilutive effect of:
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Stock options
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---
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---
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Warrants
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---
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---
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Diluted weighted average shares outstanding
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103,635,060
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103,635,060
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RECENT ACCOUNTING PRONOUNCEMENTS
At March 31, 2014, there were no recent accounting pronouncements that we believe would have a material impact on our consolidated financial statements.
NOTE 2 – GOING CONCERN
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles in the United States applicable to a going concern. As of March 31, 2014, we had a net loss of $81,735 and negative working capital of $642,809, and an accumulated deficit of $8,957,250 and $8,875,515 as of March 31, 2014 and December 31, 2013, respectively. Although these factors raise substantial doubt as to our ability to continue as a going concern through December 31, 2014, we are taking several actions intended to mitigate against this risk. These actions include pursuing mergers and acquisitions that will provide profitable operations and positive operating cash flow.
NOTE 3 – INVENTORIES
At March 31, 2014, inventories consisted of the following:
Raw materials
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$
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686
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Finished goods
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616
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Less reserve for obsolete inventory
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(828
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)
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Inventories
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$
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474
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NOTE 4 – RESERVES AND ALLOWANCES
At March 31, 2014, the allowance for doubtful accounts included in Accounts receivable, trade, net, consisted of the following:
Balance December 31, 2013
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$
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400
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Bad debts provision
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---
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Accounts written off
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---
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Collection of accounts previously written off
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---
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Balance March 31, 2014
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$
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400
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At March 31, 2014, the reserve for obsolete inventory included in Inventories consisted of the following:
Balance December 31, 2013
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$
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828
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Provision for obsolete inventory
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---
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Obsolete inventory written off
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---
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Reserve for obsolete inventory from discontinued operations
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---
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Balance March 31, 2014
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$
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828
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At March 31, 2014, the reserve for sales returns included in Other current liabilities consisted of the following:
Balance December 31, 2013
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$
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200
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Return provision – sales
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---
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Return provision – cost of sales
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---
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Returns processed
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---
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Balance March 31, 2014
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$
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200
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NOTE 5 – DEBT
At March 31, 2014, the current portion of debt consisted of the following:
Unsecured term note payable to a former shareholder due January 2012, plus interest at 5% APR. Interest on overdue principal accruing at 10% APR.
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$
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28,783
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Secured term note payable to a current shareholder due September 10, 2014, plus interest at 14% APR.
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10,000
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Current portion of debt
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$
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38,783
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At March 31, 2014, we were in arrears on the unsecured term notes payable to the former shareholder. For the security on the note payable to a current shareholder, we agreed to transfer the domain FormTool.com name to the shareholder to hold in escrow in case of default. The shareholder agreed to maintain the domain name in good standing throughout the term of the note and transfer the domain back to the Company within 30 days following final payment of the note.
NOTE 6 – IMPAIRMENT EXPENSE
During the three months ended March 31, 2014, we did not test for impairment for the intangible asset associated with the FormTool
®
product line. However, we did test for impairment for the intangible asset associated with the FormTool
®
product line during the three months ended March 31, 2013 as we experienced a sharp decline in revenue. Furthermore, during the year ended December 31, 2012, the decision was made to postpone indefinitely the plan to revamp our FormTool.com website due to a lack of available financial and human resources. In accordance with ASC 360-10-35,
Property, Plant, and Equipment, Overall, Subsequent Measurement
, we recognized a total impairment expense of $17,150 during the three months ended March 31, 2013 for the intangible assets. This has been treated as an operating expense and included in Impairment expense on our Condensed Consolidated Statement of Operations.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
We are subject to legal proceedings and claims that may arise in the ordinary course of our business. In the opinion of management, the amount of potential liability we are likely to be found liable for otherwise incur as a result of these actions is not so much as would materially affect our financial condition.
The last employment agreement with our Chief Executive Officer expired on April 14, 2010. This agreement was not extended nor is a new agreement being considered. Our Chief Executive Officer, however, has continued to be employed by us on an at-will basis since the expiration of his employment agreement at the following base annual salary rates:
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Chief Executive Officer
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Base Annual Salary
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$
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75,000
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Although the employment agreement has expired, we have accrued the following for our Chief Executive Officer as of March 31, 2014:
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Accrued Base Salary
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Included in Accrued Payroll at March 31, 2014
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$
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121,106
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We have included third-party technology in FormTool
®
under a contract with a publisher provider that has expired. We are currently pursuing resolution, however, there is no guarantee that we will be able to secure a new agreement, or an extension, and should the publisher demand we cease and desist including their technology, the unknown potential negative impact could be material.
We do not collect sales/use taxes or other taxes with respect to shipments of most of our goods into most states in the U.S. Our fulfillment center and customer service center networks, and any future expansion of those networks, along with other aspects of our evolving business, may result in additional sales/use and other tax obligations. One or more states may seek to impose sales/use or other tax collection obligations on out-of-jurisdiction companies that engage in e-commerce. A successful assertion by one or more states that we should collect sales/use or other taxes on the sale of merchandise or services could result in substantial tax liabilities for past sales, decrease our ability to compete with traditional retailers, and otherwise harm our business.
Currently, decisions of the U.S. Supreme Court restrict the imposition of obligations to collect state and local taxes and use taxes with respect to sales made over the Internet. However, a number of states, as well as the U.S. Congress, have been considering various initiatives that could limit or supersede the Supreme Court’s constitutional concerns and result in a reversal of its current position, we could be required to collect sales and use taxes in additional states. The imposition by state and local governments of various taxes upon Internet commerce could create administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligations on all of our online competitors and decrease our future sales.
NOTE 8 – RISKS AND UNCERTAINTIES
Our future operating results may be affected by a number of factors. We depend upon a number of major inventory and intellectual property suppliers. If a critical supplier had operational problems or ceased making materials available to us, operations could be adversely affected.
NOTE 9 – RELATED PARTY TRANSACTIONS
Our executive officers and employees, from time to time, make purchases of materials and various expense items (including business related travel) in the ordinary course of business via their personal credit cards in lieu of a corporate check for COD orders and/or prior to establishment of a line of credit with a vendor. We do not provide our employees or executive officers with corporate credit cards and reimburse these purchases as quickly as possible. The unpaid expense account balances are included in Accounts payable, related parties on our Consolidated Balance Sheets.
After the divesture of the QuickVerse
®
product line in 2011 and as a result largely leaving the Christian publishing space, our Chief Executive Officer entered into a license agreement for an updated version of the ClickArt software program. Given the shift in the company's strategy to focus largely on acquiring or merging with another company and to develop its remaining software assets outside of the Christian space, the board of directors had no objection to the CEO entering into such agreement and felt there was no conflict of interest.
For the fiscal year ended December 31, 2013 and for the three months ended March 31, 2014, we have accrued $25,000 and $10,000, respectively, in contract fees for the preparation and filing of our annual and quarterly reports. The contractor who performed the work is our one part-time employee as well as the spouse of the Company’s CEO.
During the three months ended March 31, 2014, we experienced an increase in our accounts payable due to related parties of approximately $41,000 from approximately $53,000 for the year ended December 31, 2013 to approximately $94,000 for the three months ended March 31, 2014. In large part, this increase is attributed to certain vendor payments made directly by our sole outside director, including our auditors and our transfer agent, via his personal credit card. It was agreed at the time that all accounts payable due to related parties, including those due to these vendor payments, will be reimbursed as quickly as possible.
NOTE 10 – DISCONTINUED OPERATIONS
On May 5, 2011, we entered into a Software Product Line Purchase Agreement to sell our QuickVerse
®
product line to WORDsearch Corp., L.L.C. In accordance with the Software Product Line Purchase Agreement, WORDsearch agreed to acquire from us all of the assets associated with our QuickVerse
®
product line for $975,000 in cash at closing and the assumption of up to $140,000 of our then-existing liabilities at closing.
On June 30, 2011, closing of the asset sale transaction governed by the Software Product Line Purchase Agreement, which is transitional in nature and expected to be ongoing through approximately the end of April, 2012, commenced. As one of the initial parts of the closing, on July 1, 2011 WORDsearch assumed possession of the physical assets conveyed in the transaction as well as control and responsibility of the business operations related to the QuickVerse
®
product line, including, among many other things, the receipt of revenues for sales in exchange for partial payment of the cash portion of the purchase price being paid to us. On April 13, 2012, we determined that the final closing conditions under the Software Product Line Purchase Agreement had been met, which meant that we were able to deliver to WORDsearch the last in a series of officer’s certificates required thereunder. Having delivered such certificate to WORDsearch on April 13, 2012, the sale of the QuickVerse
®
product line to WORDsearch was complete.
As a result of the decision to sell the QuickVerse
®
product line, we have classified the QuickVerse
®
product line as discontinued operations for the three months ended March 31, 2014 and the fiscal year ended December 31, 2013. We have recorded the remaining class of liabilities for the QuickVerse
®
product line as presented below:
Other current liabilities from discontinued operations:
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March 31, 2014
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|
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December 31, 2013
|
|
Accrued royalties
|
|
$
|
114,368
|
|
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$
|
114,368
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|
Other current liabilities from discontinued operations
|
|
$
|
114,368
|
|
|
$
|
114,368
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|
For the three months ended March 31, 2014 and 2013 we did not have any operations to record as discontinued operations.
NOTE 11 – SUBSEQUENT EVENTS
On May 1, 2014, we completed a private offering of securities to a single individual investor. The securities sold in the offering consisted of 6,000,000 shares of common stock, representing 5.7% of our total issued and outstanding common stock. The purchase price was $0.005 per share, representing a 23% discount to then quoted market price for our common stock, and the aggregate proceeds amounted to $30,000, all of which was paid in cash.
The date to which events occurring after March 31, 2014, the date of the most recent balance sheet, have been evaluated for possible adjustment to the financial statements or disclosure is May 19, 2014, which is the date on which the financial statements were available to be issued.