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GRANDPARENTS.COM, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge) In this Report, the terms "Company," "we," "us" and "our" refer to
Grandparents.com, Inc. and its subsidiaries, unless the context otherwise
requires.
The following discussion and analysis is based on, should be read with, and is
qualified in its entirety by, the accompanying unaudited condensed consolidated
financial statements and related notes thereto included in this Report. The
following discussion and analysis should also be read in conjunction with the
disclosure under "Cautionary Note Regarding Forward-Looking Statements" and
"Item 1A-Risk Factors" of Part II in this Report. Unless specifically noted
otherwise, this Report reflects the business and operations of the Company after
its completion of the asset contribution transaction with GP.com LLC (as defined
below) on February 23, 2012.
Our website, www.grandparents.com, is a family-oriented social media website
with a core mission of enhancing relationships between the generations and
enriching the lives of grandparents by providing tools to foster connections
among grandparents, parents, and grandchildren. We primarily target the
approximately 65 million grandparents in the U.S., but we also target the
approximately 55 million "boomers" and seniors that are not grandparents. We
believe that our website is one of the leading online communities for our market
and that our website is the premier social media platform targeting active,
involved grandparents. In 2010, Examiner.com ranked our website second among
commercial websites serving the age 50+ demographic markets. As of November 9,
2012, our website has approximately 1.8 million members.
Our website features "Grand Deals" through which our marketing partners offer
discounts and other benefits to our members on a variety of consumer products
and services. Grand Deals was formerly known as the Benefits Club. The Grand
Deals business model is similar to that of AARP Services, Inc., a marketing arm
of AARP. We seek to apply the AARP business model to our business by engaging
marketing partners, particularly in the insurance and financial industries, in a
strategic relationship in which our website will become a co-brand for marketing
insurance and financial products. Other than as described below, we have not
entered into any formal agreements with our marketing partners.
We are authorized to offer and sell insurance products through Grandparents
Health Plans, LLC ("GHP"), which is ninety percent (90%) owned by us and
operated as a joint venture with Denver Management Associates, Inc., which owns
ten percent (10%). On July 30, 2012, GHP entered into a Marketing and
Distribution Agreement with Humana MarketPOINT, Inc. pursuant to which GHP was
granted the right to offer and sell Humana insurance products. We have also
entered into initial discussions with several major long-term care, auto, home
and life insurance companies and also a major national bank to offer annuity,
mutual fund, retirement planning and other financial products and services.
We have also entered into negotiations with Maurice "Hank" Greenberg and C.V.
Starr & Co., Inc., a global insurance and financial services organization,
regarding a strategic business relationship through which Mr. Greenberg or C.V.
Starr will, in their first digital insurance venture, assist the Company in (i)
developing a comprehensive business plan relating to its insurance business,
(ii) designing insurance products to be sold through our website, and (iii)
negotiating with insurance carriers to offer their products through our website.
Should the current negotiations be successfully concluded, it is contemplated
that C.V. Starr & Co., Inc. will have the right to acquire 25% of the
outstanding common stock of the Company and appoint two individuals to serve on
the Board of Directors of the Company. The Company has engaged Mel Harris to
advise the Company in its discussions with Mr. Greenberg and C.V. Starr. In
consideration for Mr. Harris' services to the Company in this regard, Mr. Harris
will be entitled to receive a warrant to acquire up to 3,000,000 shares of the
Company's common stock at an exercise price of $0.60 per share in the event the
Company enters into a binding agreement with Mr. Greenberg or C.V. Starr during
the term of such engagement or within one year thereafter.
On August 9, 2012, we entered into a non-binding letter of intent with Cegedim
Inc. regarding the formation of a joint venture for the purpose of developing
the "Grand Card," a member rewards program that will provide cash rebate
benefits on a debit card when cardholders purchase certain products and
services. On August 24, 2012, we executed a Card Issuance Agreement with JP
Morgan Chase as issuer of the Grand Card as a Chase VISA debit card.
We launched our redesigned website and other new initiatives, including a
mobile-based application, on Grandparents Day, September 9, 2012. We are focused
on attracting new members and developing new revenue streams. Accordingly,
management does not believe past results are indicative of future performance.
Grandparents.com Health Plans
We are authorized to offer and sell insurance products through GHP, which is 90%
owned by us and operated as a joint venture with Denver Management Associates,
Inc. On July 30, 2012, GHP entered into a Marketing and Distribution Agreement
with Humana MarketPOINT, Inc. pursuant to which Humana granted to GHP the right
to offer and sell certain Medicare supplement, major medical, short term
medical, term life, dental and vision insurance products as well as financial
protection products in any area in which Humana is authorized under applicable
law to sell and GHP is licensed under applicable law and appointed by Humana to
sell the products. GHP will receive certain commissions from Humana on sales of
the products. In addition, Humana will pay GHP administrative fees and/or
overrides as consideration for certain administrative services performed by GHP.
The agreement also provides that Humana is responsible for all service
requirements and administration regarding issued products, including, but not
limited to, claims processing, policy issuance, policy changes, pricing, and
sales made through Humana's call center and websites. The agreement became
effective on September 1, 2012 and has a term of three (3) years from that date.
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Grand Card
In late 2011, the "Grand Card" was conceptualized as a member rewards program
that will provide cash rebate benefits on a debit card when cardholders purchase
certain products and services. On August 9, 2012, we entered into a non-binding
letter of intent with Cegedim Inc. regarding the formation of a joint venture
for the purpose of developing the "Grand Card." Cegedim has developed
proprietary processes and technologies which will be customized and adapted to
the Grand Card. On August 24, 2012, we executed a Card Issuance Agreement with
JP Morgan Chase as issuer of the Grand Card as a Chase VISA debit card.
On August 28, 2012, Steve Leber, Joseph Bernstein and Paul Kandle filed a
provisional patent application for the functionality of the Grand Card. On
October 24, 2012, Steve Leber and Joseph Bernstein assigned their rights under
the provisional patent application to Grand Card, LLC, a wholly owned subsidiary
of the Company.
In order for the Grand Card to be implemented, the Company (or the joint
venture) will need to obtain a license from Cegedim to use their processes and
technologies. Although the parties have agreed to negotiate definitive
agreements regarding the proposed joint venture and the license of the Cegedim
technology, there is no guarantee that the parties will enter into such
definitive agreements or licenses.
Grand Corps
We have established the "Grand Corps" which has the purpose of promoting
charitable, educational, philanthropic and other eleemosynary causes. We have
also established the American Grandparents Association. This association will
focus on issues facing "grand families" (those families in which grandparents
raise their grandchildren) and grandparents that are estranged from their
grandchildren. The association is intended to serve as a resource for
grandparents to learn about their legal rights and to share their grandparenting
challenges and experiences with other grandparents. We expect to dedicate a
special section of our website to the association, which will complement and
enhance existing content.
Grandparents.com Book Shop
In the fourth quarter of 2011, we launched the Grandparents.com Book Shop. The
Book Shop features over one million book titles, including e-books, and
approximately 400,000 CD/DVD's. Order fulfillment is done by Baker-Taylor Ltd.,
the largest independent wholesale book distributor in the U.S., under our name.
We receive a commission of 3.5% of all sales through the Book Shop. We have not
generated any significant revenue from the Book Shop.
Mobile Application
We launched our new application for smartphone and other mobile users
simultaneously with the launch of our new website. We believe that a
mobile-based application will help us broaden user engagement and help increase
our user base by making our content more accessible and useful. The mobile-based
application allows users to socially interact with other members by uploading
photos and videos, commenting, following and sharing via the "mobile web." In
addition, mobile users are able to view website articles and other content in a
mobile friendly format.
Asset Contribution Transaction
On February 23, 2012 (the "Closing Date"), we entered into an Asset Contribution
Agreement (the "Contribution Agreement") with GP.com Holding Company, LLC, a
Florida limited liability company formerly known as Grandparents.com LLC
("GP.com LLC"). Under the terms of the Contribution Agreement, GP.com LLC
contributed substantially all of its assets to us in exchange for our assumption
of certain liabilities of GP.com LLC and our issuance to GP.com LLC of one share
of our Series A Convertible Preferred Stock and a warrant to purchase shares of
our common stock (the "Transaction"). As a result of the Transaction, we now own
the grandparents.com domain name, other related domain names, trademarks and
related assets formerly owned by GP.com LLC and GP.com LLC became the holder of
a majority of our voting securities. In addition, our former directors and
officers resigned and the designees of GP.com LLC were appointed to fill the
vacancies created by such resignations. Accordingly, the Transaction resulted in
a change of control of the Company.
Immediately following the Transaction, GP MergeCo, Inc., a wholly owned
subsidiary of the Company, was merged with and into the Company and, in
connection with the merger, we changed our name to Grandparents.com, Inc. We
also changed our corporate address to 589 Eighth Avenue, 6th Floor, New York,
New York and our telephone number to 646-839-8800. In addition, we changed our
fiscal year from June 30 to December 31.
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February Private Placement
On the Closing Date and simultaneously with the closing of the Transaction, we
entered into a Securities Purchase Agreement (the "Securities Purchase
Agreement") with certain accredited investors (collectively, the "Purchasers")
for the issuance and sale in a private placement (the "February Private
Placement") of 3,000,000 shares of the Company's Series B Convertible Preferred
Stock for aggregate gross proceeds to the Company of $3,000,000.
On May 9, 2012, we filed a Second Certificate of Amendment to its Second Amended
and Restated Certificate of Incorporation to increase the total number of
authorized shares of the Company's capital stock to 155,000,000, consisting of
150,000,000 shares of common stock, par value $.01 per share, and 5,000,000
shares of preferred stock, par value $.01 per share (the "Amendment"). Upon
filing of the Amendment, the one share of the Company's Series A Convertible
Preferred Stock issued to GP.com LLC pursuant to the Transaction automatically
converted into 55,887,491 shares of common stock and the 3,000,000 shares of the
Company's Series B Convertible Preferred Stock issued to the Purchasers in the
February Private Placement automatically converted into 12,897,172 shares of
common stock.
Recent Capital Raising Activities
In November 2012, we commenced a private offering (the "Contemplated Private
Placement") to certain accredited investors of a minimum of $250,000 up to a
maximum of $3,500,000 of units, each consisting of a 12% secured convertible
promissory note in the principal amount of $50,000 (collectively, the
"Contemplated Notes") and a warrant to purchase 50,000 shares of our common
stock, par value $.01 per share, at an exercise price of $0.50 per share
(collectively, the "Contemplated Warrants"). The Contemplated Notes will accrue
interest at the rate of 12% per annum and will mature on the earlier of (i) June
1, 2013, or (ii) the closing of a Qualified Financing (the "Maturity Date"),
unless prepaid or converted before such date. Interest and principal shall be
due and payable on the Maturity Date. "Qualified Financing" means the sale by
the Company of shares of common stock, preferred stock or any other equity
financing of the Company to investors in one or more transactions for gross cash
proceeds to the Company of not less than $7,000,000. At the closing of a
Qualified Financing, each holder of a Contemplated Note shall have the option of
(a) being repaid the principal and all accrued interest on such holder's
Contemplated Note, or (b) converting such holder's Contemplated Note (principal
and interest) into the securities being offered in connection with the Qualified
Financing, provided that such holder shall be entitled to convert such holder's
Contemplated Note based on a conversion price equal to a 25% discount to the
offering price of the securities in the Qualified Financing. If a holder of a
Contemplated Note elects to convert such holder's Contemplated Note, such holder
will have the same registration rights as investors in the Qualified Financing.
The Contemplated Notes will be secured by a first priority security interest in
all assets of the Company and will be jointly and severally guaranteed by Steven
Leber, Joseph Bernstein and Dr. Robert Cohen, provided that the amount
guaranteed is limited to $1 million in the aggregate. Each Contemplated Warrant
will initially be exercisable for that number of shares of the Company's common
stock determined by dividing the principal amount of the Contemplated Note
purchased by such investor by an initial per share exercise price of $0.50.
However, the number of shares for which such Contemplated Warrant is exercisable
will be automatically reduced by 50% if such investor's Contemplated Note is
repaid in full or if such investor does not convert such investor's Contemplated
Note in connection with a Qualified Financing.
The Company intended to commence the Contemplated Private Placement in October.
However, due to disruptions caused by Hurricane Sandy, the launch of the
Contemplated Private Placement was delayed and the Company, pending raising
funds in the Contemplated Private Placement, borrowed $450,000 in November 2012,
from two individuals, Vanessa de Oliveira ($250,000) and Mel Harris ($200,000),
on an unsecured basis, to be repaid from the proceeds of the Contemplated
Private Placement. Each of the lenders entered into a promissory note (the
"Bridge Notes") with the Company evidencing the loans. The Bridge Note between
the Company and Ms. Oliveira matures on December 24, 2012 and the Bridge Note
between the Company and Mr. Harris matures on February 1, 2013. Each Bridge Note
is due and payable before maturity upon the earlier of the Company's receipt of
$1 million in aggregate gross proceeds from the Contemplated Private Placement
or the occurrence of an Event of Default (as defined in the applicable Bridge
Note). In addition, the Bridge Notes include certain reset provisions in the
event of subsequent debt issuances by the Company that contain more favorable
terms. The two loans are personally guaranteed by the Company's Co-Chief
Executive Officers, Steve Leber and Joseph Bernstein, and the Company has
executed an indemnification in their favor should they have to pay the lenders
under their guarantees.
Summary for the Three and Nine Month Periods Ended September 30, 2012
Revenue for the three months ended September 30, 2012 was $70,195, which
reflected a decline of $12,900, or 15.5%, compared to revenue of $83,095 for the
comparable period in 2011. Revenue for the nine months ended September 30, 2012
was $224,330, which reflected a decline of $96,926, or 30.2%, compared to
revenue of $321,256 for the comparable period in 2011. Two customers represented
approximately 34.0% of revenues earned during the three months ended September
30, 2012 and 45.0% of revenues earned during the nine months ended September 30,
2012. Four customers represented approximately 70% of accounts receivable as of
September 30, 2012.
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Total operating expenses for the three months ended September 30, 2012 increased
$1,719,079, or 241.1%, to $2,432,057 compared to $712,978 for the comparable
period in 2011. Total operating expenses for the nine months ended September 30,
2012 increased $6,557,211, or 286.6%, to $8,845,157 compared to $2,287,946 for
the comparable period in 2011. The increase in operating expenses for the three
months ended September 30, 2012 was due to increases in selling and marketing,
salary, rent, equity-based compensation, consulting and other general and
administrative expenses. The increase in operating expenses for the nine months
ended September 30, 2012 was primarily attributable to expenses of $2,924,592
incurred in connection with the Transaction as well as increases in selling and
marketing, salary, rent, equity-based compensation, consulting and other general
and administrative expenses.
We incurred net losses of $2,384,292 and $8,699,974 for the three and nine
months ended September 30, 2012, respectively. We used $3,770,000, $229,041 and
$275,000 in cash for operating, investing and financing activities,
respectively, during the nine months ended September 30, 2012, offset by
$4,246,935 in cash provided by the February Private Placement, the Transaction
and option exercises during the period. We had a working capital deficit of
$1,577,301 as of September 30, 2012.
Without additional capital from existing or outside investors or further
financing, our ability to continue to implement our business plan may be
limited. These conditions raise substantial doubt about our ability to continue
as a going concern. Our condensed consolidated financial statements included in
this Report do not include any adjustments that might result from the outcome of
this uncertainty.
Sources of Revenue
Historically, we have generated revenue through the sale of advertisements on
our website. We intend to expand our revenue sources to include commissions,
fees or royalties on offerings by our insurance, financial services and other
marketing partners.
We expect that Grand Deals, particularly insurance and financial products, will
be our primary revenue source in the future. However, as of the date of this
Report, we have not yet generated any revenue from this program. In 2011, in
order to accelerate the buildup of marketing partners, we accepted pilot
programs and waived revenue sharing arrangements. Through this pilot program, we
attracted more than 300 marketing partners as of the date of this Report. As we
build our membership base, we will seek to enter into revenue sharing
arrangements with existing and new marketing partners. We expect that each
revenue sharing arrangement will be negotiated based on the category of the
product and service and the accompanying discount or benefits offered to our
members.
As discussed above, GHP entered into a Marketing and Distribution Agreement with
Humana pursuant to which GHP will receive certain commissions, administrative
fees and overrides from Humana on sales of Humana insurance products. However,
there can be no guarantee that we will be able to enter into similar agreements
or other revenue arrangements with other insurance, financial services or other
marketing partners or that, if we are, the terms of such arrangements will be on
terms advantageous to us. To the extent we are able to enter into revenue
sharing agreements, revenues, if any, from such arrangements may be limited in
the near term.
In addition, we hope to derive revenue from the Grand Card. However, the can be
no guarantee that we will be able to further develop this concept or, that if we
are able to do so, that we will be able to generate significant revenue from it.
Although we have entered into a non-binding letter of intent with Cegedim, there
can be no guarantee that the parties will enter into definitive agreements with
respect to the Grand Card concept.
Certain Factors Affecting our Performance
In addition to the Risk Factors discussed elsewhere in this Report, we consider
the following to be significant factors affecting our future performance and
financial results.
Our Ability to Attract and Retain Members. We must attract and retain members in
order to increase revenue and achieve profitability. We expect revenue to be
generated in part from the purchase of products and services by our members and
advertisements on our website. If we are unable to attract and retain members,
we may not be able to attract marketing and commercial sponsors or advertisers
to our website.
Volatility or Declines in Insurance Premiums. GHP will derive revenue from
commissions and fees for its insurance agency and brokerage services. Commission
and fees are based, in part, on a percentage of insurance premiums paid by
customers for insurance products. Accordingly, such commissions are dependent on
insurance premium rates charged by insurance companies. Insurance premiums are
cyclical in nature and may vary widely based on market conditions. Our brokerage
revenues and profitability can be volatile or remain depressed for significant
periods of time. In addition, insurance companies may seek to further minimize
their expenses by reducing the commission rates payable to insurance agents or
brokers. The reduction of these commission rates, along with general volatility
and/or declines in premiums, may significantly affect our margins.
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Our Ability to Enter into Revenue Sharing Agreements with our Marketing
Partners. We must attract, retain and enter into revenue sharing agreements with
marketing and commercial sponsors in order to increase revenue and achieve
profitability. If marketing and commercial sponsors do not find our marketing
and promotional services effective or do not believe that utilizing our website
provides them with increases in customers, revenue or profit, they may not make,
or continue to make, offers through our website in which case we may sell fewer
products and services through the our website.
Competition. We compete with companies in the social networking industry such as
Facebook, Twitter and Google and other companies that specifically target the
age 50+ market, in particular AARP. These competitors compete with us for
visitor traffic, members, advertising dollars and partners, including marketing
and commercial sponsors, and many of our competitors have competitive advantages
over us. It is also possible that new competitors may emerge and acquire
significant market share. In addition, the insurance intermediary business in
which GHP operates is highly competitive and numerous firms actively compete for
customers and insurance partners.
Additional Financing. To effectively implement our business plan, we need to
obtain additional financing. If we obtain financing, we would expect to
accelerate our business plan and increase our advertising and marketing budget,
hire additional staff members and increase our office space and operations all
of which we believe would result in the generation of revenue and development of
our business. Inability to obtain additional financing may delay the
implementation of our business plan and may cause us to reduce our budget and
capital expenditures.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates including, among others, those
affecting revenue, the allowance for doubtful accounts, and the useful lives of
tangible and intangible assets. We base our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form our basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions, or if management made different judgments or utilized
different estimates.
Included in our Amendment No. 3 on Form 8-K/A dated February 27, 2012 and filed
with the SEC on June 18, 2012, as may be further amended (the "Form 8-K/A"), for
the year ended December 31, 2011, we identified four of our accounting policies
that we consider critical to our business operations and an understanding of our
results of operations:
· revenue recognition;
· fair value of measurements;
· equity-based compensation; and
· impairment of long-lived assets.
Certain amounts in the 2011 condensed consolidated financial statements have
been reclassified for comparative purposes to conform to the presentation in the
current period condensed consolidated financial statements. These
reclassifications had no effect on previously reported results.
We included in our Form 8-K/A a brief discussion of some of the judgments,
estimates and uncertainties that can impact the application of these policies
and the specific dollar amounts reported on our financial statements. This is
neither a complete list of all of our accounting policies, nor does it include
all the details surrounding the accounting policies we identified, and there are
other accounting policies that are significant to us. For detailed information
and discussion on our critical accounting policies and estimates, see our
financial statements and the accompanying notes included in this Report and in
our Form 8-K/A. Many of our estimates or judgments are based on anticipated
future events or performance, and as such are forward-looking in nature, and are
subject to many risks and uncertainties, including those discussed below and
elsewhere in this Report and in our Form 8-K/A. We do not undertake any
obligation to update or revise this discussion to reflect any future events or
circumstances. See "Cautionary Note Regarding Forward-Looking Statements"
contained in this Report.
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Results of Operations
The Transaction has been accounted for as a reverse acquisition whereby GP.com
LLC is deemed to be the accounting acquirer (legal acquiree) and the Company to
be the accounting acquiree (legal acquirer). The financial statements before the
Transaction are those of GP.com LLC with the results of the Company being
consolidated from the Closing Date.
Three Month Periods ended September 30, 2012 and 2011
Revenue
Revenue for the three months ended September 30, 2012 decreased $12,900, or
15.5%, to $70,195 compared to $83,095 for the comparable period in 2011. We
experienced a decrease in direct sales in the third quarter of 2012 compared to
the comparable period in 2011. As a result, our average CPM (cost per thousand
views) rate decreased during the third quarter of 2012 compared to the
comparable period in 2011. We also experienced a decrease in website traffic in
the third quarter of 2012, which resulted in less inventory available for
advertising compared to the third quarter of 2011. We typically experience less
website traffic in the third quarter compared to other quarters.
Operating Expenses
Total operating expenses for the three months ended September 30, 2012 increased
$1,719,079, or 241.1%, to $2,432,057 compared to $712,978 for the comparable
period in 2011.
Selling and marketing. Selling and marketing expense increased $441,248, or
1964.2%, to $463,712 for the three months ended September 30, 2012 compared to
$22,464 for the comparable period in 2011. In the third quarter of 2012, the
Company significantly increased its marketing expenditures in order to attract
new members to the website.
Salaries. Salary expense increased $452,749, or 263.5%, to $624,550 for the
three months ended September 30, 2012 compared to $171,801 for the comparable
period in 2011. The increase was primarily due to salary paid to our Co-Chief
Executive Officers and other officer salaries and an increase in staff headcount
compared to the comparable 2011 period. In connection with the closing of the
Transaction, we entered into employment agreements with each of Messrs. Leber
and Bernstein pursuant to which each of Messrs. Leber and Bernstein receives a
monthly salary of approximately $18,750. Prior to the closing of the
Transaction, GP.com LLC did not pay salary directly to Messrs. Leber or
Bernstein and instead paid a monthly management fee to an entity controlled by
Messrs. Leber and Bernstein. As discussed below, payment of the monthly
management fee ceased upon closing of the Transaction. Salary expense includes
$148,260 paid to certain advisors to the Company as well as $5,121 in recurring
consulting expense during the three months ended September 30, 2012. We did not
engage any advisors or consultants during the comparable period in 2011.
Rent. Rent expense increased $668, or 1.7%, to $40,668 for the three months
ended September 30, 2012 compared to $40,000 for the comparable period in 2011.
Equity-based compensation. Equity-based compensation expense increased $348,229,
or 2744.6%, to $360,917 for the three months ended September 30, 2012 compared
to $12,688 for the comparable period in 2011. In the first nine months of 2012,
the Company granted options to purchase 7,035,000 shares of its common stock and
awarded 50,000 shares of restricted stock to its management, employees, advisors
and consultants pursuant to the Grandparents.com, Inc. 2012 Stock Incentive Plan
(the "2012 Plan"). The compensation expense recognized under the 2012 Plan was
$318,995 for the three months ended September 30, 2012.
At September 30, 2012, GP.com LLC had outstanding options to purchase 466,667
Class A units of GP.com LLC under its 2010 Stock Option Plan. In addition,
GP.com LLC had outstanding warrants to purchase 437,500 Class A units of GP.com
LLC. Since the employees and consultants to whom these options and warrants were
granted continue to provide services to the Company, the Company continued to
record an equity compensation charge of $28,582 during the three months ended
September 30, 2012.
Management fees. We did not pay any management fees during the three months
ended September 30, 2012. For the three months ended September 30, 2011, we paid
management fees of $150,000. GP.com LLC paid a monthly management fee to LBG (as
defined below) for management services provided to GP.com LLC prior to the
closing of the Transaction. No payments were payable for the three months ended
September 30, 2012 compared to three payments of $50,000 each payable during the
comparable period in 2011. The payments ceased upon the closing of the
Transaction.
Other general and administrative.Other general and administrative expense
increased $626,771, or 635.0%, to $725,482 for the three months ended September
30, 2012 compared to $98,711 for the comparable period in 2011. The increase in
other general and administrative expense was primarily attributable to legal,
accounting and other professional fees incurred as a result of being a public
company. GP.com LLC was not a public company and therefore did not incur similar
expenses in the comparable 2011 period.
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Depreciation and amortization.Depreciation and amortization decreased $586, or
0.3%, to $216,728 for the three months ended September 30, 2012 compared to
$217,314 for the comparable period in 2011.
Other Expense
We had other expense of $22,430 for the three months ended September 30, 2012
compared to other expense of $8,279 for the comparable period in 2011. Other
expense for the three months ended September 30, 2012 was attributable to
interest expense of $22,439, offset by $9 of interest income.
Loss from Operations
Loss from operations for the three months ended September 30, 2012 was
$2,384,292 compared to $638,162 for the comparable period in 2011.
Preferred Return Expense
We had no preferred return expense for the three months ended September 30, 2012
compared to $23,602 for the comparable period in 2011, which reflects preferred
returns payable by GP.com LLC prior to the closing of the Transaction with
respect to its Class A Preferred units.
Net Loss
Net loss for the three months ended September 30, 2012 was $2,384,292 compared
to $661,764 for the comparable period in 2011.
Nine Month Periods ended September 30, 2012 and 2011
Revenue
Revenue for the nine months ended September 30, 2012 decreased $96,926, or
30.2%, to $224,330 compared to $321,256 for the comparable period in 2011. Two
advertising campaigns that commenced in the fourth quarter of 2010 continued to
generate revenue in the first quarter of 2011. However, there was no such
carryover effect from the fourth quarter of 2011 into the first quarter of 2012.
Also, we experienced a decrease in direct sales in the first nine months of 2012
compared to the comparable period in 2011. As a result, our average CPM (cost
per thousand views) rate decreased during the first nine months of 2012 compared
to the comparable period in 2011.
Operating Expenses
Total operating expenses for the nine months ended September 30, 2012 increased
$6,557,211, or 286.6%, to $8,845,157 compared to $2,287,946 for the comparable
period in 2011.
Selling and marketing. Selling and marketing expense increased $773,274, or
1206.3%, to $837,376 for the nine months ended September 30, 2012 compared to
$64,102 for the comparable period in 2011. In the first nine months of 2012, we
engaged a public relations firm and paid $13,000 upon execution of the
agreement. In addition, we significantly increased our marketing expenditures in
the first nine months of 2012 in order to attract new members to our website.
Salaries. Salary expense increased $974,878, or 160.2%, to $1,583,395 for the
nine months ended September 30, 2012 compared to $116,707 for the comparable
period in 2011. The increase was primarily due to salary paid to our Co-Chief
Executive Officers other officers and an increase in staff headcount compared to
the comparable 2011 period. In connection with the closing of the Transaction,
we entered into employment agreements with each of Messrs. Leber and Bernstein
pursuant to which each of Messrs. Leber and Bernstein receives a monthly salary
of approximately $18,750. Prior to the closing of the Transaction, GP.com LLC
did not pay salary directly to Messrs. Leber or Bernstein and instead paid a
monthly management fee to an entity controlled by Messrs. Leber and Bernstein.
As discussed below, payment of the monthly management fee ceased upon closing of
the Transaction. Salary expense includes $271,524 paid to certain advisors and
$110,563 in recurring consulting expense during the nine months ended September
30, 2012. We did not engage any advisors during the comparable period in 2011
but had recurring consulting expense of $695 during such period.
Rent. Rent expense increased $5,661 or 4.9%, to $122,368 for the nine months
ended September 30, 2012 compared to $116,707 for the comparable period in 2011.
18
Consulting. Non-recurring consulting expense was $14,325 for the nine months
ended September 30, 2012. We had no non-recurring consulting expenses for the
comparable period in 2011. During the first nine months of 2012, we engaged
marketing, financial and other consultants which were not engaged in the
comparable 2011 period.
Equity-based compensation. Equity-based compensation expense increased $819,828,
or 1622.8%, to $870,346 for the nine months ended September 30, 2012 compared to
$50,518 for the comparable period in 2011. In the first nine months of 2012, we
granted options to purchase 7,035,000 shares of its common stock and awarded
50,000 shares of restricted stock to its management, employees, advisors and
consultants pursuant to the 2012 Plan. In addition, options to purchase 330,000
shares of common stock previously granted under the 2012 Plan were forfeited
during the nine months ended September 30, 2012. The compensation expense
recognized under the 2012 Plan was $710,285 for the nine months ended September
30, 2012.
At September 30, 2012, GP.com LLC had outstanding options to purchase 466,667
Class A units of GP.com LLC under its 2010 Stock Option Plan. In addition,
GP.com LLC had outstanding warrants to purchase 437,500 Class A units of GP.com
LLC. Since the employees and consultants to whom these options and warrants were
granted continue to provide services to the Company, the Company continued to
record an equity compensation charge of $85,746 during the nine months ended
September 30, 2012.
As of September 30, 2012, there were 300,000 options outstanding under the 2005
Stock Incentive Plan. In accordance with the terms of the Contribution
Agreement, these options became fully vested and exercisable as of the date of
the Closing Date. Due to the immediate vesting provision, and since these
employees no longer provide services to us, we recorded a charge in the amount
of $98,190 during the nine months ended September 30, 2012. There is no
remaining unrecognized compensation charge related to these options.
In May 2012, we entered into an agreement with an investor relations firm to
provide services. The agreement was for a term of three months, from May 2012 to
July 2012, and required a cash payment of $10,000 per month and the issuance of
a total of 75,000 restricted shares of the Company's common stock. The agreement
also provided us with options for three additional three-month renewal periods,
in exchange for a cash payment of $10,000 per month and an additional 75,000
restricted shares per renewal. We valued the 75,000 restricted shares at their
fair value of $33,000, which amount was charged to expense over the three-month
term of the agreement. We did not exercise our renewal option upon expiration of
the initial three-month term in July 2012.
Management fees. Management fees decreased $350,000, or 77.8%, to $100,000 for
the nine months ended September 30, 2012 compared to $450,000 for the comparable
period in 2011. GP.com LLC paid a monthly management fee to LBG (as defined
below) for management services provided to GP.com LLC prior to the closing of
the Transaction. Two payments of $50,000 each were payable for the first nine
months of 2012 compared to nine payments of $50,000 each payable during the
comparable period in 2011. The payments ceased upon the closing of the
Transaction.
Transaction costs. We incurred $2,924,592 in transaction costs for the nine
months ended September 30, 2012 due to the issuance of warrants to our
investment banking advisor in connection with the Transaction. There were no
transaction costs for the comparable period in 2011.
Other general and administrative. Other general and administrative expense
increased $1,408,773, or 407.0%, to $1,754,935 for the nine months ended
September 30, 2012 compared to $346,162 for the comparable period in 2011. The
increase in other general and administrative expense was primarily attributable
to legal, accounting and other professional fees incurred in connection with the
Transaction and as a result of being a public company.
Depreciation and amortization.Depreciation and amortization decreased $14,120,
or 2.2%, to $637,820 for the nine months ended September 30, 2012 compared to
$651,940 for the comparable period in 2011.
Other Expense
We had other expense of $13,623 for the nine months ended September 30, 2012
compared to other expense of $11,432 for the comparable period in 2011. Other
expense for the nine months ended September 30, 2012 was attributable to $69,735
of interest expense, offset by income attributable to accrued revenues from
prior periods of $52,852 and interest income of $3,260.
Loss from Operations
Loss from operations for the nine months ended September 30, 2012 was $8,634,450
compared to $1,978,122 for the comparable period in 2011.
19
Preferred Return Expense
Preferred return expense was $14,265 for the nine months ended September 30,
2012 compared to $70,806 for the comparable period in 2011. Preferred return
expense for the nine months ended September 30, 2012 reflects preferred returns
payable by GP.com LLC prior to the closing of the Transaction with respect to
its Class A Preferred units.
Income Taxes
For the nine months ended September 30, 2012, we incurred and accrued for
$51,259 of tax expense related to a prior period gain resulting from the sale of
substantially all of our operating assets to Emerald Star Holdings, LLC in
September 2011. There was no such accrual in the comparable period in 2011.
Net Loss
Net loss for the nine months ended September 30, 2012 was $8,699,974 compared to
$2,048,928 for the comparable period in 2011.
Liquidity and Capital Resources
We raised approximately $3,000,000 in gross proceeds in the February Private
Placement, but before deducting any expenses incurred by us in connection with
the February Private Placement. After deducting expenses, we received $2,667,629
in net proceeds from the February Private Placement. We had cash of $1,549,306
as of the closing of the Transaction prior to the net proceeds from the February
Private Placement. As of September 30, 2012, we had unrestricted cash of
$320,178.
We expect to finance our operations over the next twelve months primarily
through our existing cash and our operations and offerings of our equity or debt
securities or through bank financing. However, our operations have not yet
generated positive cash flows. To effectively implement our business plan, we
will need to obtain additional financing. If we obtain financing, we would
expect to accelerate our business plan and increase our advertising and
marketing budget, hire additional staff members and increase our office space
and operations all of which we believe would result in the generation of revenue
and development of our business. We cannot be certain that financing will be
available on acceptable terms, or available at all. To the extent that we raise
additional funds by issuing debt or equity securities or through bank financing,
our stockholders may experience significant dilution. If we are unable to raise
funds when required or on acceptable terms, we may have to significantly scale
back, or discontinue, our operations. As noted above, the Company commenced the
Contemplated Offering and entered into the Bridge Notes in November 2012.
Pursuant to the Contribution Agreement, on the Closing Date we entered into
promissory notes with certain of our newly appointed directors and officers with
respect to certain liabilities of GP.com LLC that we assumed in connection with
the Transaction. Specifically, we entered into the following:
· Amended and Restated Promissory Note in favor of Steven E. Leber, a Managing
Director of GP.com LLC and current Chairman and Co-Chief Executive Officer of
the Company, in the principal amount of $78,543 (the "Leber Note"). The Leber
Note reflects amounts outstanding under a promissory note previously issued by
GP.com LLC to Mr. Leber and a revolving note issued by GP.com LLC to Mr. Leber
and Joseph Bernstein that we assumed in connection with the Transaction.
· Amended and Restated Promissory Note in favor of Joseph Bernstein, a Managing
Director of GP.com LLC and our current Director, Co-Chief Executive Officer,
Chief Financial Officer and Treasurer, in the principal amount of $78,543 (the
"Bernstein Note"). The Bernstein Note reflects amounts outstanding under a
promissory note previously issued by GP.com LLC to Mr. Bernstein and a
revolving note issued by GP.com LLC to Messrs. Leber and Bernstein that we
assumed in connection with the Transaction.
· Amended and Restated Promissory Note in favor of Meadows Capital, LLC
("Meadows"), an entity controlled by Dr. Robert Cohen, a Managing Director of
GP.com LLC and a current Director of the Company, in the principal amount of
$308,914 (the "Meadows Note"). The Meadows Note reflects amounts outstanding
under promissory notes previously issued by GP.com LLC to Meadows that we
assumed in connection with the Transaction.
· Promissory Note in favor of Leber-Bernstein Group, LLC, an entity controlled by
Messrs. Leber and Bernstein ("LBG"), in the principal amount of $612,500 (the
"LBG Note"). The LBG Note reflects the amount of accrued but unpaid management
fees of GP.com LLC payable to LBG that we assumed in connection with the
Transaction.
20
The Leber Note, the Bernstein Note, the Meadows Note and the LBG Note are
collectively referred to herein as the "Promissory Notes." The Promissory Notes
accrue interest at the rate of 5% per annum and mature upon the earlier of (i)
our attainment of EBITDA of at least $2,500,000 as reflected on our quarterly or
annual financial statements filed with the SEC, but in no event earlier than
April 1, 2013, or (ii) the closing a financing with gross proceeds to us of at
least $10 million. Payment of the Promissory Notes is guaranteed by GP.com LLC.
In addition, payment of the Meadows Note is guaranteed by Messrs. Leber and
Bernstein. The Leber Note, Bernstein Note and LBG Note are subordinate in right
of payment to the Meadows Note and rank pari passu with each other. The Meadows
Note is secured by a first priority security interest in the assets of GP.com
LLC. Other than the Meadows Note, none of the Promissory Notes are secured.
In addition, pursuant to the Contribution Agreement, on the Closing Date the
Company assumed GP.com LLC's obligations under a zero coupon note issued by
GP.com LLC in July 2011 to a consultant. The note provided $225,000 to GP.com
LLC in exchange for repayment of $275,000 on August 30, 2012, the maturity date
of the note. The discount from the maturity value of $275,000, initially
$50,000, is being amortized to interest expense by the effective interest method
over the life of the note, with an effective interest rate of 20.04%. The note
was paid in full on the maturity date.
Cash Flow
Net cash flow from operating, investing and financing activities for the periods
below were as follows:
Nine months ended September 30,
2012 2011
Cash provided by (used in):
Operating Activities $ (3,770,000 ) $ (649,592 )
Investing Activities (229,041 ) 858
Financing Activities 3,971,935 691,000
Net (decrease) increase in cash: (27,106 ) 42,266
Cash Used In Operating Activities
For the nine months ended September 30, 2012, net cash used in operating
activities of $3,770,000 consisted of net loss of $8,699,974, $62,334 in changes
in fair value of warrant derivative liability and a $52,776 gain on
extinguishment of indebtedness, offset by $637,820 in adjustments for
depreciation and amortization expense, $864,561 in adjustments for equity-based
compensation expense, $2,924,592 in adjustments for transaction costs incurred
in connection the Transaction, $14,265 in adjustments for preferred return
expense, $34,119 in adjustments for amortization of discount on zero coupon note
payable and $569,727 in cash provided by changes in working capital and other
activities. For the nine months ended September 30, 2011, net cash used in
operating activities of $649,592 consisted of net loss of $2,048,928, offset by
$651,940 in adjustments for depreciation and amortization expense, $50,518 in
adjustments for equity-based compensation expense, $70,806 in adjustments for
preferred return expense and $626,072 in cash provided by changes in working
capital and other activities.
Cash Provided or Used In Investing Activities
For the nine months ended September 30, 2012, net cash used in investing
activities of $229,041 consisted of $173,981 for development of intangible
assets and $55,060 for purchases of property and equipment. For the nine months
ended September 30, 2011, net cash provided by investing activities of $858
consisted of $4,105 in proceeds from the disposal of property and equipment,
offset by $3,247 for purchases of property and equipment.
Cash Provided By Financing Activities
For the nine months ended September 30, 2012, net cash provided by financing
activities of $3,971,935 consisted of $2,667,629 in net proceeds from the
February Private Placement, $1,549,306 in predecessor cash that remained in the
Company following the Transaction and $30,000 from the exercise of options,
offset by $275,000 in payments on notes payable. For the nine months ended
September 30, 2011, net cash provided by financing activities of $691,000
consisted of $565,000 in net proceeds from a private placement and $126,000 in
loans and short-term advances.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
21
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