UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

 

For the quarterly period ended March 31, 2013

 

¨

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

 

For the transition period from ____________ to ____________

 

Commission File Number: 0-21537

 

Grandparents.com, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		93-1211114
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

589 Eighth Avenue, 6th Floor New York, New York		10018
(Address of principal executive offices)		(Zip Code)

 

(646) 839-8800

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 or Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

	Large accelerated filer	¨		Accelerated filer	¨
	Non-accelerated filer	¨ (Do not check if a smaller reporting company)		Smaller reporting company	x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

 

As of May 15, 2013, there were 86,255,814 shares of the registrant’s common stock, $.01 par value per share, outstanding.

 

 

GRANDPARENTS.COM, INC.

 

QUARTERLY REPORT ON FORM 10-Q

MARCH 31, 2013

 

TABLE OF CONTENTS

 

			PAGE
Cautionary Note Regarding Forward-Looking Statements			1
PART I—FINANCIAL INFORMATION
Item 1.		Financial Statements	2
	Condensed Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012		2
	Condensed Consolidated Statements of Operations for the three month periods ended March 31, 2013 and March 31, 2012 (unaudited)		3
	Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2013 and March 31, 2012 (unaudited)		4
	Notes to Condensed Consolidated Financial Statements (unaudited)		5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.		Controls and Procedures	22
PART II—OTHER INFORMATION
Item 1.		Legal Proceedings	22
Item 1A.		Risk Factors	23
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.		Defaults Upon Senior Securities	23
Item 4.		Mine Safety Disclosures	23
Item 5.		Other Information	23
Item 6.		Exhibits	24
SIGNATURES			25

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain information included in this Quarterly Report on Form 10-Q (this “Report”) or in other materials we have filed or will file with the Securities and Exchange Commission (“SEC”) (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements. You can identify these statements by the fact that they do not relate to matters of strictly historical or factual nature and generally discuss or relate to estimates or other expectations regarding future events. In some cases, forward-looking statements may contain terms such as “anticipates,” “believes,” “seeks,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “will,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions intended to identify forward-looking statements. Such statements may include, but are not limited to, information related to: anticipated operating results; relationships with our marketing partners and members; demand for our website and changes in our membership ranks; financial resources and condition; changes in revenues; changes in profitability; changes in accounting treatment; cost of sales; selling, general and administrative expenses; interest expense; the ability to produce the liquidity or enter into agreements to acquire the capital necessary to continue our operations and take advantage of opportunities; legal proceedings and claims. Forward-looking statements reflect our current views with respect to future events and are subject to known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned “Risk Factors” contained herein. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

 

Also, forward-looking statements represent our estimates and assumptions only as of the date of this Report. You should read this Report and the documents that we reference and file or furnish as exhibits to this Report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

 

 

PART I—FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

 

GRANDPARENTS.COM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

		March 31,				December 31,
		2013				2012
ASSETS
Current assets:
Cash		$	190,757			$	249,116
Restricted cash			40,000				40,000
Accounts receivable			110,339				53,295
Other receivable			26,716				33,335
Prepaid expenses			88,694				116,120
Total current assets			456,506				491,866
Property and equipment, net			76,444				79,337
Other assets:
Security deposits			3,701				3,701
Intangibles, net			4,325,092				4,538,477
Total other assets			4,328,793				4,542,178
Total assets		$	4,861,743			$	5,113,381
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,638,510			$	1,399,087
Accrued expenses			131,326				189,623
Deferred officer salary			118,750				-
Notes payable, current maturities			1,278,500				1,078,500
Convertible bridge notes, net			1,182,256				812,363
Liability for stock to be issued			150,000				-
Total current liabilities			4,499,342				3,479,573
Total liabilities			4,499,342				3,479,573
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value, 150,000,000 shares authorized issued and outstanding 86,255,814 and 85,755,814 at March 31, 2013 and December 31, 2012, respectively			862,558				857,558
Additional paid in capital			18,194,133				16,726,140
Accumulated deficit			(18,694,290	)			(15,949,890	)
Total stockholders’ equity			362,401				1,633,808
Total liabilities and stockholders’ equity		$	4,861,743			$	5,113,381

 

See accompanying notes to condensed consolidated financial statements.

 

 

GRANDPARENTS.COM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

		Three Months Ended March 31,
		2013				2012
Revenues:
Advertising revenue		$	122,859			$	66,794
Total revenue			122,859				66,794
Operating Expenses:
Selling and marketing			88,229				40,726
Salaries			492,007				376,408
Rent			42,025				41,000
Accounting, legal, SEC filing fees			133,683				315,891
Consulting			155,835				70,825
Equity-based compensation			1,378,548				217,546
Management fees			-				100,000
Transaction costs			-				2,924,592
Other general and administrative			129,275				247,764
Depreciation and amortization			228,141				210,546
Total operating expenses			2,647,743				4,545,298
Other income (expenses):
Interest income			22				3,226
Interest expense			(219,538	)			(20,922	)
Other income (expense), net			-				3,268
Total other income (expenses)			(219,516	)			(14,428	)
Loss from operations			(2,744,400	)			(4,492,932	)
Preferred return expense			-				14,265
Net loss before income taxes			(2,744,400	)			(4,507,197	)
Provision for income taxes			-				-
Net loss		$	(2,744,400	)		$	(4,507,197	)
Net loss per share-basic and diluted		$	(0.03	)		$	(0.27	)
Weighted average common shares outstanding, basic and diluted			86,255,814				16,836,810

 

See accompanying notes to condensed consolidated financial statements.

 

 

GRANDPARENTS.COM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

		Three Months Ended March 31,
		2013				2012
Cash flows from Operating activities:
Net loss		$	(2,744,400	)		$	(4,507,197	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization			228,141				210,546
Equity-based compensation			1,378,548				217,546
Transaction costs			-				2,924,592
Preferred return expense			-				14,265
Amortization of discount on zero coupon note payable			-				12,268
Amortization of warrants related to bridge notes payable			170,123				-
Change in fair value of warrant derivative liability			-				(62,334	)
(Increase) decrease in:
Accounts receivable, net			(57,044	)			12,267
Other receivable			6,619				-
Prepaid expenses			21,641				142,992
Increase (decrease) in:
Accounts payable			240,103				(22,899	)
Accrued management fees			-				100,000
Accrued expenses			(58,297	)			13,818
Deferred officer salary			118,750				-
Net cash used in Operating activities			(695,816	)			(944,136	)
Cash Flows from Investing activities
Development of intangible assets			(12,543	)			-
Net cash used in Investing activities			(12,543	)			-
Cash Flows from Financing activities
Proceeds from private placement, net			-				2,641,292
Proceeds received for stock to be issued			150,000				-
Proceeds from loans and short-term advances			500,000				-
Proceeds from reverse merger transaction (predecessor cash)			-				1,543,255
Net cash provided by Financing activities			650,000				4,184,547
Net increase (decrease) in cash			(58,359	)			3,240,411
Cash, beginning of period			249,116				347,284
Cash, end of period		$	190,757			$	3,587,695
Supplemental cash flow information
Income taxes paid		$	-			$	-
Cash paid for interest		$	3,750			$	2,500
Conversion of accrued management fees to note payable		$	-			$	512,500
Reclassification of cumulative preferred return as part of reverse acquisition		$	-			$	134,753
Reclassification of warrant derivative liability to equity as part of reverse acquisition		$	-			$	149,311

 

See accompanying notes to condensed consolidated financial statements.

 

 

GRANDPARENTS.COM, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1. Description of Business and Reverse Acquisition

 

Description of Business

Grandparents.com, Inc., together with its consolidated subsidiaries (the “Company”), is a family-oriented social media company that through its website, www.grandparents.com, serves the age 50+ demographic market. The website offers activities, discussion groups, expert advice and newsletters that enrich the lives of grandparents by providing tools to foster connections among grandparents, parents, and grandchildren.

 

Grandparents/NorWesTech Reverse Acquisition

On February 23, 2012, Grandparents.com LLC (“GP”) entered into an Asset Contribution Agreement to transfer the net assets that comprise the Grandparents.com business to NorWesTech, Inc., a then “public shell” company, which was accounted for as a reverse acquisition. References to Grandparents.com LLC or GP in these condensed consolidated financial statements refer to transactions that occurred prior to the consummation of the Asset Contribution Agreement.

 

In exchange for the contribution of the net assets of the Grandparents.com business, GP received one (1) share of Series A Convertible Preferred Stock of the Company, representing approximately 65% of the issued and outstanding shares of the Company. The Series A Convertible Preferred Stock automatically converted into 55,887,491 shares of the Company’s Common Stock upon the date on which the Company filed an amendment to its Certificate of Incorporation to increase the number of authorized shares of Common Stock to 150,000,000. In addition, GP received a warrant (“GP Warrant”), with an exercise price of $0.01 per share and exercisable for five (5) years, to purchase additional shares of the Company’s Common Stock, with the number of shares into which the GP Warrant is convertible being subject to adjustment (i) for the Shortfall Amount, as defined in the Asset Contribution Agreement and (ii) to retain GP’s 65% ownership in the event any of the 342,813 warrants issued and outstanding by NorWesTech, Inc. are exercised. As of March 31, 2013, all 342,813 of such warrants have expired unexercised.

 

As compensation for advisory services in connection with the reverse acquisition, the Company granted a warrant (“Advisory Warrant”) to purchase up to 5,588,749 shares of the Company’s Common Stock. The Advisory Warrant has an exercise price of $0.23 per share and a term of five (5) years. The grant date fair value of the Advisory Warrant was estimated using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rate 1.04%; expected term 5.0 years; expected volatility 109%; stock price $0.60. These assumptions resulted in a grant date fair value of the warrant of $2,924,592, which has been reflected as a charge in the condensed consolidated statement of operations for the three-months ended March 31, 2012.

 

Concurrently with the reverse acquisition, the Company sold 3,000,000 shares of Series B Convertible Preferred Stock for total gross proceeds of $3,000,000. The Series B Convertible Preferred Stock automatically converted into 12,897,172 shares of the Company’s Common Stock upon the date on which the Company filed an amendment to its Certificate of Incorporation to increase the number of authorized shares of Common Stock to 150,000,000. In connection with the financing, the Company granted a warrant to the placement agent (“Placement Agent Warrant”) to purchase up to 1,289,711 shares of the Company’s Common Stock. The Placement Agent Warrant has an exercise price of $0.23 per share and a term of five (5) years. The grant date fair value of the Placement Agent Warrant was estimated using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rate 1.04%; expected term 5.0 years; expected volatility 109%; stock price $0.60. These assumptions resulted in a grant date fair value of the warrant of $674,906, which has been reflected in the condensed consolidated balance sheet as a reduction of the gross proceeds raised in the financing.

 

Amendment to the Company’s Certificate of Incorporation

On May 9, 2012, the Company 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 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 automatically converted into 12,897,172 shares of common stock.

 

 

2. Basis of Presentation

 

The condensed consolidated financial statements include the accounts of Grandparents.com, Inc. and its wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company has included the results of NorWesTech, Inc. from the date of the acquisition. Certain prior period amounts have been reclassified to conform to the current period presentation.

 

The accompanying unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of only normal recurring items, which, in the opinion of management, are necessary for a fair statement of the results of operations for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full year or for any future periods.

 

The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses and the related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue, the useful lives of long-lived assets including property and equipment and intangible assets, investment fair values, stock-based compensation, goodwill, income taxes, and contingencies. The Company bases its estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, when these carrying values are not readily available from other sources. Actual results may differ from these estimates.

 

These condensed consolidated financial statements should be read in conjunction with the December 31, 2012 and 2011 financial statements and related notes of the Company included in the Company’s Annual Report on Form 10-K filed April 15, 2013. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The condensed consolidated balance sheet as of December 31, 2012 was derived from the Company’s audited financial statements for the year ended December 31, 2012, but does not include all disclosures required by U.S. GAAP. However, the Company believes the disclosures are adequate to make the information presented not misleading.

 

3. Going Concern

 

As shown in the accompanying condensed consolidated financial statements, the Company has incurred a net loss of approximately $2.7 million and used approximately $696,000 in cash for operating activities during the three-month period ended March 31, 2013. Without additional capital from existing or outside investors or further financing, the Company’s ability to continue to implement its business plan may be limited. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

4. Intangible Assets

 

The Company evaluates the recoverability of goodwill and other indefinite lived intangibles annually and more frequently when events or changes in circumstances indicate that the carrying amount of goodwill and indefinite lived intangibles may not be recoverable. The identification and measurement of impairment involves the estimation of the fair value of the reporting unit and indefinite lived intangibles and contains uncertainty because management must use judgment in determining appropriate assumptions to be used in the measurement of fair value. The estimate of fair value of the reporting unit is based on the best information available as of the date of the assessment and incorporates management’s assumptions about expected future cash flows and contemplates other valuation techniques. Future cash flows can be affected by changes in the industry, a continuing declining economic environment or market conditions.

 

Intangible assets, net, consisted of the following at March 31, 2013 and December 31, 2012:

 

		Estimated Useful				March 31,				December 31,
		Lives (in Years)				2013				2012
URL and trademarks		15				$	5,000,000			$	5,000,000
Website and mobile application development		3					783,025				770,482
Customer relationships		3					1,000,000				1,000,000
							6,783,025				6,770,482
Less: accumulated amortization							(2,457,933	)			(2,232,005	)
Intangible assets, net						$	4,325,092			$	4,538,477

 

 

Amortization expense related to finite lived intangible assets amounted to $225,928 and $208,233 for the three-months ended March 31, 2013 and 2012, respectively. The future amortization expense for each of the five succeeding years related to all finite lived intangible assets that are currently recorded in the balance sheets is estimated as follows at March 31, 2013:

 

For the Years Ending December 31,
2013		$	465,365
2014			426,935
2015			415,549
2016			333,333
2017			333,333
Thereafter			2,350,577
		$	4,325,092

 

5. Notes Payable

 

During 2011, three of GP’s members advanced an aggregate of $126,000 to the Company. The advances bear interest at 5% per annum, and were originally due and payable on December 31, 2012.

 

In June 2011, GP entered into a $300,000 note payable agreement with one of its members. The note bears interest at 5% per annum, with interest-only payments commencing on May 1, 2011 through the maturity date, April 1, 2013. The note was secured by substantially all of GP’s assets.

 

In July 2011, three of GP’s members provided short-term loans to GP in the aggregate amount of $40,000. The loans bear interest at 5% per annum and were scheduled to mature on December 31, 2011. The loans were convertible into Class A Units of GP at a conversion price of $1.60 per unit. The difference between the effective conversion price of the loans into Class A Units, and the fair value of the Class A Units on the date of issuance of the loans, did not result in the recognition of a beneficial conversion feature since the fair value of the Class A Units was significantly lower than the then effective conversion price.

 

In connection with the Asset Contribution Agreement, the terms of the above aggregate indebtedness of $466,000 were amended, as follows:

 

1.

Two Notes payable, each in the amount of $78,543, to the former GP members (shareholders and directors of the Company). The notes bear PIK interest annually at 5% and are due and payable on the earlier of (i) the consummation of a debt or equity financing with gross proceeds to the Company of at least $10,000,000 or (ii) the date subsequent to March 31, 2013 that the Company achieves EBITDA equal to or greater than $2,500,000. The note is subordinate to certain other debt obligations of the Company.

 

2.

Note payable in the amount of $308,914 to the former GP member (shareholder of the Company). The note bears PIK interest annually at 5% and is due and payable on the earlier of (i) the consummation of a debt or equity financing with gross proceeds to the Company of at least $10,000,000 or (ii) April 1, 2013. However, no payments are required to be paid until the Company achieves EBITDA equal to or greater than $2,500,000.

 

In July 2011, GP issued a zero coupon note payable to a consultant. The note provided $225,000 to GP 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 is convertible into Class A Units of GP at a conversion price of $1.60 per unit, provided the note is not repaid in full on the maturity date. This note was assumed by the Company in connection with the Asset Contribution Agreement. This note was repaid in full on the maturity date.

 

In December 2011, the Company consummated a $500,000 Bridge Loan with NorWesTech, Inc. and executed a Letter of Intent with that company for a contribution of all the assets and liabilities of the Company into the public entity in a transaction to be accounted for as a reverse acquisition. The public entity’s assets consisted exclusively of $2.3 million in cash (unaudited). The Company simultaneously executed an engagement agreement with an investment bank to effect a private placement of $3 million, on a best efforts basis, in a secondary offering of the public company’s common shares, to be closed at the same time as the reverse acquisition. The acquisition and private placement transactions were consummated on February 23, 2012, with the Bridge Loan being repaid out of the closing cash received from NorWesTech, Inc. See Note 1.

 

 

During the year ended December 31, 2011, GP paid a fee of $50,000 per month to one of its members for management services provided to GP. A total of $600,000 was charged to expense for the year ended December 31, 2011, of which $87,500 was paid and $512,500 was recorded as accrued management fees in the balance sheet at December 31, 2011. In connection with the Asset Contribution Agreement, management fees accrued through the transaction date totaling $612,500 were converted into a promissory note payable to the GP member. The notes bear PIK interest annually at 5% and are due and payable on the earlier of (i) the consummation of a debt or equity financing with gross proceeds to the Company of at least $10,000,000 or (ii) the date subsequent to March 31, 2013 that the Company achieves EBITDA equal to or greater than $2,500,000. The note is subordinate to certain other debt obligations of the Company.

 

In November 2012, the Company issued two (2) separate promissory notes totaling $450,000 (the “November Notes”). The November Notes are unsecured and accrue interest at 10% per annum. One of the November Notes in the principal amount of $250,000 was paid in full prior to maturity in December 2012. The other November Note, in the principal amount of $200,000, has been amended and restated and currently matures on July 1, 2013.

 

In December 2012 and January 2013, the Company issued five (5) separate 12% Secured Convertible Notes totaling $950,000 pursuant to a note purchase agreement dated December 7, 2012. Two (2) of these notes (in the aggregate principal amount of $100,000, were issued in January 2013. All of the 12% Secured Convertible Notes accrue interest at 12% per annum. The 12% Secured Convertible Notes are contingently convertible into shares of the Company’s common stock at a conversion price of 75% of the price per share issued by the Company in a Qualified Financing (defined as an equity financing of not less than $7,000,000). The difference between the effective conversion price of the convertible notes into shares of the Company’s common stock, and the fair value of the Company’s common stock on the date of issuance of the convertible notes, resulted in a beneficial conversion feature in the amount of $287,500. In accordance with ASC 470-20, because the 12% Secured Convertible Notes are convertible upon the occurrence of a contingent future event (the Qualified Financing), the contingent beneficial conversion feature has been measured at the issuance date, but is not reflected in the statement of operations until the occurrence of the contingent event.

 

In February 2013, the Company issued four (4) promissory notes totaling $400,000 (the “February Notes”). The February Notes are unsecured, accrue interest at a rate of 10% per annum and mature on the earlier of March 1, 2014 or the closing of a single transaction (whether debt, equity or a combination of both) that results in aggregate gross proceeds to the Company of $10,000,000.

 

In connection with the issuances of the 12% Secured Convertible Notes and the February Notes, the Company granted five-year warrants to purchase an aggregate of 1,350,000 shares of the Company’s common stock at an exercise price of $0.50 per share. The Company has accounted for the warrants issued in connection with the 12% Secured Convertible Notes and the February Notes in accordance with the provisions of ASC 370-20 “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”. The warrants were valued at their fair value of $0.15 to $0.27 per warrant using the Black-Scholes method with the following assumptions: share price = $0.17 to $0.30, volatility = 156%, risk-free rate = 1.82%. The relative fair values of the warrants, based on an allocation of the value of the notes payable and the value of the warrants issued in connection with the notes payable, was recorded as a debt discount (with a corresponding increase to additional paid-in capital) in the amount of $404,515, and is being amortized to interest expense over the expected term of the notes payable. The interest expense for the quarter ended March 31, 2013 attributable to the debt discount of new warrants was $20,201, and total interest expense during the quarter attributable to all debt discounts for the quarter was $170,123.

 

Interest expense charged to operations amounted to $219,538 and $20,922 for the three-months ended March 31, 2013 and 2012, respectively. The future principal maturities related to all notes payable obligations is estimated as follows at March 31, 2013:

 

For the Years Ending December 31,
2013		$	2,228,500
2014			400,000
		$	2,628,500

 

6. Stockholders’ Equity

 

On February 23, 2012, the Board of Directors approved an amendment to the Corporation’s Second Amended and Restated Certificate of Incorporation to increase the number of authorized shares of the Company’s Common Stock from 30,000,000 to 150,000,000 shares. As of March 31, 2013, the Company has 86,255,814 shares of common stock issued and outstanding.

 

On February 23, 2012, in connection with the Asset Contribution Agreement, the Company issued one (1) share of Series A Convertible Preferred Stock, representing 65% of the Company’s issued and outstanding shares of common Stock, on an as-converted basis of the Series A and Series B Convertible Preferred Stock. The Series A Convertible Preferred Stock automatically converted into 55,887,491 shares of the Company’s Common Stock on May 9, 2012, the date on which the Company filed the amendment to its Certificate of Incorporation.

 

 

On February 23, 2012, the Company completed the Private Placement of 3,000,000 shares of newly designated Series B Convertible Preferred Stock for aggregate gross proceeds to the Company of $3,000,000. The Series B Convertible Preferred Stock automatically converted into 12,897,172 shares of the Company’s Common Stock on May 9, 2012, the date on which the Company filed the amendment to its Certificate of Incorporation to increase the number of authorized shares of Common Stock.

 

A pending stock sale agreement was completed on April 1, 2013 for 600,000 shares of common stock valued at $150,000. This pending sale is reflected in the condensed consolidated balance sheet as Liability for stock to be issued.

 

7. Stock Based Compensation

 

2012 Stock Incentive Plan

On February 23, 2012, the Company approved the Board of Directors’ recommendation to adopt the 2012 Stock Incentive Plan (“2012 Plan”), which provides for 10,317,691 shares of the Company’s common stock, to be eligible for issuance to employees, officers, directors, consultants, agents, advisors, and independent contractors who provide services to the Corporation under the 2012 Plan.

 

The Company granted options to purchase 7,535,000 shares of common stock under the 2012 Plan to its officers, directors, employees and consultants during the year ended December 31, 2012. The options had exercise prices ranging from $0.30 to $0.63 per share and a grant date fair value ranging from $0.27 to $0.56 per option. The options expire ten years from the date of grant.

 

The Company did not grant any options to purchase shares of common stock under the 2012 Plan to its officers, directors, employees and consultants during the three-months ended March 31, 2013.

 

The weighted average grant date fair value of options to be granted during 2012 were estimated on the date of grant using the Black-Scholes option-pricing model with the assumptions noted in the following table. Expected volatility was estimated using the volatility of the Company. The expected term of the options represents the period of time that options granted are expected to be outstanding and is derived from historical terms.

 

Risk-free interest rate			1.04	%
Expected life (years)			2 - 10
Expected volatility			109	%
Dividend yield			-

 

A summary of option activity and changes under the 2012 Plan during the three-months ended March 31, 2013 and the year-ended December 31, 2012 is presented below:

 

										Weighted Average
						Weighted Average				Remaining Contractual				Aggregate
		Number of Shares				Exercise Price				Term  (Years)				Intrinsic Value
Outstanding at December 31, 2011			-			$	-
Granted			7,535,000				0.56
Exercised			-				-
Expired			-				-
Forfeited			(330,000	)			0.56
Outstanding at December 31, 2012			7,205,000			$	0.56
Granted			-				-
Exercised			-				-
Expired			-				-
Forfeited			(290,000	)			0.52
Outstanding at March 31, 2013			6,915,000			$	0.56				9.00			$	-
Exercisable at March 31, 2013			2,648,477			$	0.51				9.00			$	-

 

 

The compensation expense recognized under the Plan was $321,556 and $90,774for the three-months ended March 31, 2013 and 2012, respectively. As of March 31, 2013 and 2012, there was $2,005,676 and $3,016,424 of total unrecognized compensation cost related to non-vested equity-based compensation arrangements granted under the Plan. That cost is expected to be recognized over the remaining vesting period of 32 months.

 

Other

At both March 31, 2013 and 2012, GP had outstanding options to purchase 466,667 Class A units of GP under its 2010 Stock Option Plan. In addition, GP had outstanding warrants to purchase 437,500 Class A units of GP. Since the employees and consultants to whom these options and warrants were granted continue to provide services to the Company, the Company recorded an equity compensation charge of $21,590 and $28,582 during the three-months ended March 31, 2013 and 2012, respectively. The remaining unrecognized compensation cost of $114,446 related to non-vested equity-based compensation arrangements granted by GP continue to be recognized by the Company over the remaining vesting period of 18 months.

 

As of March 31, 2013, NorWesTech, Inc. (predecessor) had 300,000 options outstanding under its 2005 Stock Incentive Plan. In accordance with the terms of the Asset Contribution Agreement, these options became fully vested and exercisable as of the date of the transaction (February 23, 2012). Due to the immediate vesting provision, and since these employees no longer provide services to the Company, the Company recorded a charge in the amount of $98,190 during the three-months ended March 31, 2012. There is no remaining unrecognized compensation charge related to these options.

 

8. Income Taxes

 

ASC 740-10 “Accounting for Uncertainty in Income Taxes” (“ASC 740-10”) requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. Management evaluates Company tax positions on an annual basis and has determined that as of March 31, 2013, no accrual for income taxes is necessary for current operations during 2013.

 

The Company provides for income taxes at the end of each interim period based on the estimated effective tax rate for the full fiscal year. Cumulative adjustments to the Company’s estimate are recorded in the interim period in which a change in the estimated annual effective rate is determined.

 

The Company has estimated its effective tax rate to be 0%, based primarily on losses incurred and the uncertainty of realization of the tax benefit of such losses.

 

9. Commitments

 

The Company leases an office facility in New York, NY under a three-year operating lease. The lease requires monthly payments of $13,333 and includes an annual escalation of 2.5%. The future minimum lease payments required under the office facility operating lease as of March 31, 2013, are as follows:

 

For the Years Ending December 31,
2013		$	170,275
2014			178,100
2015			136,500
		$	484,875

 

GP has issued a letter of credit totaling $40,000, which is held as collateral for performance under the operating lease. The letter of credit is secured by deposits at a financial institution, and has been recorded as restricted cash in the condensed consolidated balance sheets at March 31, 2013 and December 31, 2012.

 

Rent expense recognized under operating leases was $42,025 and $41,000 for the three-months ended March 31, 2013 and 2012, respectively.

 

During May 2012, the Company entered into an agreement with an investor relations firm, to provide investor relations services to the Company. The agreement is for a term of three-months, from May 2012 to July 2012, and requires 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 provides the Company with options for three (3) 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. The Company valued the 75,000 restricted shares at their fair value of $33,000, which amount is being charged to expense over the three-month term of the agreement. The Company did not exercise its renewal option.

 

 

On July 30, 2012, Grandparents Health Plans, LLC (“GHP”), a majority-owned subsidiary of the Company, and Humana MarketPOINT, Inc. (“Humana”) entered into a Marketing and Distribution Agreement (the “Marketing Agreement”), effective as of September 1, 2012, 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 (collectively, the “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 (the “Service Area”).

 

Pursuant to the Marketing Agreement, GHP will receive certain commissions from Humana on sales of the Products in the Service Area. In addition, Humana will pay GHP administrative fees and/or overrides as consideration for certain administrative services performed by GHP. The Marketing 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 term of the Marketing Agreement is three (3) years from September 1, 2012.

 

The Marketing Agreement contains customary confidentiality obligations of GHP in favor of Humana relating to the use of information obtained by GHP regarding the business of Humana and its affiliates. In addition, in accordance with the applicable requirements of the Privacy and Security Rules under the Health Insurance Portability and Accountability Act of 1996 and the rules and regulations promulgated thereunder (“HIPAA”), GHP is required to protect the privacy and security of any protected health information (as defined in HIPAA) created or received by GHP from or on behalf of Humana. Furthermore, GHP is required to comply with Humana’s information technology security requirements.

 

The Marketing Agreement also contains customary representations and warranties of GHP and Humana as well as mutual indemnification obligations relating to (i) the breach of any representation, warranty, or agreement contained in the Marketing

Agreement, (ii) willful misconduct or negligence in the performance (or non-performance) of the Marketing Agreement, (iii) violations of applicable federal or state insurance laws or regulations, or (iv) an actual or alleged direct or indirect omission or commission that causes an indemnified party to violate any applicable law. In addition, the Marketing Agreement contains customary termination rights, including the right of either party to terminate the Marketing Agreement upon thirty (30) calendar days’ written notice in the event of an uncured “material breach” (as defined in the Marketing Agreement) or upon ninety (90) calendar days’ written notice without cause.

 

On January 8, 2013, the Company entered into a Strategic Alliance Agreement (the “Starr Agreement”) with Starr Indemnity & Liability Company (“Starr”), a wholly owned subsidiary of Starr International Company, Inc., under which Starr agreed to provide certain services to the Company, including developing strategic business and investment relationships for the Company and providing business consulting services to the Company. In exchange for the services, the Company agreed to pay Starr a monthly fee of $80,000 during the term of the Starr Agreement, which commenced in March 2013, as well as fees to be agreed upon by the Company and Starr for Starr’s arranging agreements with insurance companies. The initial term of the Starr Agreement extends until February 28, 2014 and will automatically renew for subsequent one-year periods each year thereafter unless either party terminates the agreement prior to the expiration of the then-current term.

 

Effective as of March 28, 2013, Grand Card, LLC (“Grand Card”), a wholly owned subsidiary of the Company, entered into an Alliance Agreement (the “Cegedim Agreement”) with Cegedim Inc. (OPUS HEALTH Division) (“Cegedim”) pursuant to which the parties formed an exclusive strategic alliance (the “Alliance”) to develop member benefit programs (the “Programs”) that provide cash rebates and other rewards on the “Grand Card” debit card. The Cegedim Agreement provides that all costs for marketing and promoting the Programs will be borne by Grand Card and that all other costs and funding of the Programs, subject to certain exceptions, shall be borne 75% by Grand Card and 25% by Cegedim. The Cegedim Agreement further provides that revenues derived from the Alliance (after deduction for certain operating costs borne by the parties) shall be allocated 75% to Grand Card and 25% to Cegedim. The terms of the Agreement also provide that Cegedim shall have an option to purchase a 25% ownership interest in Grand Card at any time within one year of March 28, 2013. The term of the Cegedim Agreement commenced on March 28, 2013 and will continue for an initial term of four (4) years and will automatically renew for successive four-year terms unless fewer than 500,000 cards have been issued at the time of such renewal or either party provides written notice to the other party of its intent not to renew within 120 days of the end of the then-current term.

 

 

10. Concentrations

 

As of and for the three-months ended March 31, 2013, four (4) customers represented approximately 70% of GP’s accounts receivable and approximately 64% of GP’s revenues earned. As of December 31, 2012, four (4) customers represented approximately 59% of GP’s accounts receivable and approximately 54% of GP’s revenues earned during 2012.

 

The Company maintains cash in four (4) insured commercial accounts at a major financial institution. Cash balances did not exceed Federal Deposit Insurance Corporation (FDIC) limits at March 31, 2013 or December 31, 2012.

 

11. Subsequent Events

 

In April 2013, the Company issued 1,900,000 shares of common stock at a per share price of $0.25 in separate private transactions with four accredited investors for an aggregate purchase price of $475,000. In connection with such issuances, the Company issued five-year warrants to purchase an aggregate of 475,000 shares of common stock at an exercise price of $0.25 per share.

 

In April 2013, the Company commenced a private offering (the “Current Offering”) of up to $7.5 million of units, each consisting of a 12% convertible promissory note in the principal amount of $50,000 (collectively, the “New Bridge Notes”) and a five-year warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $0.50 per share (collectively, the “New Bridge Warrants”). The New Bridge Notes will accrue interest at the rate of 12% per annum and, unless previously prepaid or converted, principal and interest under the New Bridge Notes is payable on the earlier of (i) June 1, 2014 or (ii) the closing of an equity financing by the Company for gross cash proceeds to the Company of not less than $10,000,000. Proceeds from this offering are expected to be used, in part, to repay the Existing Bridge Notes to the extent the Existing Bridge Notes are not repaid or converted.

 

In April 2013, the Company and Starr entered into an amendment to the Starr Agreement. The amendment provides for additional compensation payable to Starr under the agreement in the form of a warrant to acquire up to 25% of the outstanding equity of the Company based on the number of shares of the Company’s common stock outstanding as of January 8, 2013. The amendment provides that the warrant will vest as follows: (i) one-fourth of the warrant will immediately vest upon issuance, and (ii) the unvested portion of the warrant will immediately vest in three equal annual installments commencing on March 1, 2014, provided, that the unvested portion of the warrant will immediately cease to vest upon the termination or expiration of the agreement, as amended. The warrant has not yet been issued.

 

 

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

 

In this Report, the terms “Company,” “we,” “us” and “our” refer to Grandparents.com, Inc. and its subsidiaries, unless the context otherwise requires. In addition, the term “Annual Report” refers to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the SEC on April 16, 2013.

 

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 the risk factors contained in our Annual Report.

 

Our Business

 

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 70 million grandparents in the U.S., but we also target the approximately 50 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. As of the date of this Report, our website now has nearly 2 million registered members with approximately 890,000 unique monthly visits according to Google Analytics. In addition to operating our website, we plan to offer and sell Medicare and other insurance products.

 

Like most developing companies, we face substantial financial challenges. We continue to focus on creating more significant revenue opportunities in the insurance area, advertising and e-commerce. Although we have not been able to generate significant revenue from these endeavors to date, we expect our efforts will begin to come to fruition in the future. While we have made a strong effort to reduce our overhead, we have incurred additional expenses in connection with our obligations under our strategic alliance agreements. We continue to seek capital to fund ongoing operations. Since the beginning of the fourth quarter of 2012, we raised $950,000 under a secured bridge loan, $450,000 pursuant to promissory notes (of which $250,000 was repaid), and an additional $400,000 on an unsecured basis from members of our Board of Directors and an advisor to the Company. In April 2013, we raised $475,000 from the issuance of our common stock to four accredited investors. Going forward, we will need to raise significant capital in order to successfully implement our business plans.

 

Revenue for the three months ended March 31, 2013 was $122,859, which reflected an increase of $56,065, or 83.9%, compared to revenue of $66,794 for the comparable period in 2012. Total operating expenses for three months ended March 31, 2013 decreased $1,897,555, or 41.7%, to $2,647,743 compared to $4,545,298 for the comparable period in 2012. The decrease in operating expenses during the three months ended March 31, 2013 was primarily attributable to that fact that we incurred $2,924,592 in transaction costs during the three months ended March 31, 2012 in connection with the asset contribution transaction described below, which were not present in the comparable 2013 period. In addition, a signification portion of our operating expenses for the three months ended March 31, 2013 was attributable to non-cash charges related to equity-based compensation.

 

We incurred net losses of $2,744,400 in the three months ended March 31, 2013 compared to $4,507,197 in the comparable period in 2012. During the three months ended March 31, 2013, we used $695,816 in cash for operating activities and $12,543 in cash for investing activities, offset by $650,000 in cash provided by financing activities. We had a working capital deficit of $4,042,836 as of March 31, 2013.

 

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 consolidated financial statements included in this Report do not include any adjustments that might result from the outcome of this uncertainty.

 

Grand Deals

 

Our website features our “Grand Deals” program which offers discounts and other benefits to our members on a variety of consumer products and services including insurance, financial and other products and services provided by our marketing partners. 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. The lines we intend to market through our Grandparents Insurance Plans® division will include traditional insurance products with group discounts such as health, life, personal lines and specialty, and over time, we plan to develop and market family-oriented insurance products, with family discounts.

 

 

Insurance

 

We plan to offer and sell Medicare and other health insurance products offered by Humana through Grandparents Health Plans, LLC (“GHP”), which is 90% owned by us and operated as a joint venture with Denver Management Associates, Inc. We also plan to offer and sell all other insurance products through Grandparents Insurance Plans LLC, which is our wholly owned subsidiary, or one or more of our other wholly owned subsidiaries.

 

In January 2013, we entered into a strategic alliance agreement with Starr under which Starr agreed to provide certain services to the Company, including developing strategic business and investment relationships for the Company and providing business consulting services to the Company. In exchange for the services, the Company agreed to pay Starr a monthly fee of $80,000 during the term of the agreement, which commenced in March 2013, as well as fees to be agreed upon by the Company and Starr for Starr’s arranging agreements with insurance companies. The initial term of the agreement extends until February 28, 2014 and will automatically renew for subsequent one-year periods each year thereafter unless either party terminates the agreement prior to the expiration of the then-current term.

 

In April 2013, we entered into an amendment to the strategic alliance agreement which provides for additional compensation payable to Starr in the form of a warrant to acquire up to 25% of the outstanding equity of the Company based on the number of shares of the Company’s common stock outstanding as of January 8, 2013. The amendment provides that the warrant will vest as follows: (i) one-fourth of the warrant will vest upon issuance, and (ii) the unvested portion of the warrant will vest in three equal annual installments commencing on March 1, 2014, provided, that the unvested portion of the warrant will immediately cease to vest upon the termination or expiration of the strategic alliance agreement. The warrant has not yet been issued.

 

Pursuant to our Marketing and Distribution Agreement with Humana MarketPoint, Inc., 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. No commissions have been earned to date from Humana, however we expect that open-enrollment period commencing in October 2013 will be a significant opportunity to generate commissions.

 

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 pharmaceutical products and consumer goods and services offered participating merchants. In March 2013, Grand Card, LLC, our wholly owned subsidiary, entered into an alliance agreement with Cegedim, Inc. (U.S. subsidiary of Cegedim, S.A.) regarding the formation of an alliance 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 for rebate programs.

 

Under the terms of the alliance agreement, Grand Card will act as primary marketer and lead contractor in concluding agreements and arrangements with participating sponsors and other customers and has primary responsibility for marketing and promotion of the programs, membership procurement and procurement of business partners and sponsors. Cegedim will act as the “back-end” provider and shall have primary responsibility for management of sponsor data and the related processing of rebate claims. Revenues derived from the alliance (after deduction for certain operating costs borne by the parties) shall be allocated 75% to Grand Card and 25% to Cegedim. The Agreement further provides that all costs for marketing and promoting will be borne by Grand Card and that all other costs and funding, subject to certain exceptions, shall be borne 75% by Grand Card and 25% by Cegedim. The terms of the Agreement also provide that Cegedim shall have an option to purchase a 25% ownership interest in Grand Card at any time within one year of the Effective Date, in which event each party will have equal voting rights over Grand Card and the business and operations of the Alliance will be conducted as an entity controlled 75% of by the Company and 25% by Cegedim.

 

 

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. All registered members of the website are automatically registered as members of Grand Corps and the American Grandparents Association.

 

Recent Capital Raising Activities

 

In December 2012 and January 2013, we issued an aggregate of $950,000 of our 12% secured convertible promissory notes (the “Existing Bridge Notes”) and warrants to purchase an aggregate of 950,000 shares of our common stock (the “Existing Bridge Warrants”) in a private offering. The Existing Bridge Notes accrue interest at the rate of 12% per annum and, unless previously prepaid or converted, principal and interest under the New Bridge Notes is payable on the earlier of (i) June 1, 2013, or (ii) the closing of an equity financing by the Company for gross cash proceeds to the Company of not less than $7,000,000. At the closing of an equity financing for $7,000,000, each holder of an Existing Bridge Note shall have the option of being repaid the principal and all accrued interest on such holder’s Existing Bridge Note, or converting such holder’s Existing Bridge Note (principal and interest) into the securities being offered in connection with such financing, provided that such holder shall be entitled to convert such holder’s Existing Bridge Note based on a conversion price equal to a 25% discount to the offering price of the securities in the financing. If a holder of an Existing Bridge Note elects to convert in connection with a qualified financing, such holder will have the same registration rights as investors in such financing. The Existing Bridge Notes are secured by a first priority security interest in all assets of the Company and are jointly and severally guaranteed by Steven Leber, Joseph Bernstein and Dr. Robert Cohen (the “Existing Bridge Notes Guaranty”). The Company executed an indemnification in favor or Messrs. Leber, Bernstein and Dr. Cohen indemnifying them against losses incurred in connection with the Existing Bridge Notes Guaranty (the “Guaranty Indemnification Agreement”). Each Existing Bridge Warrant is exercisable for a period of five years from the date of issuance at an exercise price of $0.50 per shares. However, the number of shares for which an Existing Bridge Warrant is exercisable will be automatically reduced by 50% if such investor’s Existing Bridge Note is repaid in full or if such investor does not convert such investor’s Existing Bridge Note in connection with a Qualified Financing. The Company terminated this offering in February 2013.

 

In February 2013, we entered into a promissory note (each, a “February Note” and collectively, the “February Notes”) with each of Steven Leber, the Company’s Chairman and Co-Chief Executive Officer, Joseph Bernstein, the Company’s Co-Chief Executive Officer, Chief Financial Officer and Treasurer, Dr. Robert Cohen, a member of the Company’s Board of Directors, and Mel Harris, a current security holder and advisor to the Company evidencing loans made by each lender to the Company to fund operations. Each February Note was issued in the original principal amount of $100,000. Accordingly, the Company received an aggregate of $400,000 from the lenders upon issuance of the February Notes. The February Notes are unsecured, accrue interest at a rate of 10% per annum and mature on the earlier of March 1, 2014 or the closing of a single transaction (whether debt, equity or a combination of both) that results in aggregate gross proceeds to the Company of $10,000,000. In connection with the issuance of the February Notes, the Company issued to each lender a five-year warrant to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.50 per share. The February Notes will convert into securities issued in the Company’s Current Offering, as described below, at a conversion price equal to the price per such securities paid by the other investors in the Current Offering. The Company may not prepay the February Notes without the holder’s consent.

 

In April 2013, the Company sold 1,900,000 shares of common stock at a price per share of $0.25 in separate private transactions with four accredited investors for an aggregate purchase price of $475,000. In connection with such sales, the Company issued five-year warrants to purchase an aggregate of 475,000 shares of common stock at an exercise price of $0.25 per share.

 

The Company is in the process of commencing a private offering (the “Current Offering”) of up to $7.5 million of units, each consisting of a 12% convertible promissory note in the principal amount of $50,000 (collectively, the “New Bridge Notes”) and a five-year warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $0.50 per share (collectively, the “New Bridge Warrants”). The New Bridge Notes will accrue interest at the rate of 12% per annum and, unless previously prepaid or converted, principal and interest under the New Bridge Notes is payable on the earlier of (i) June 1, 2014 or (ii) the closing of an equity financing by the Company for gross cash proceeds to the Company of not less than $10,000,000. At the closing of an equity financing for $10,000,000, each holder of a New Bridge Note shall have the option of being repaid the principal and all accrued interest on such holder’s New Bridge Note, or converting such holder’s New Bridge Note (principal and interest) into the securities being offered in connection with such financing, provided that such holder shall be entitled to convert such holder’s New Bridge Note based on a conversion price equal to a 25% discount to the offering price of the securities in the financing. If a holder of a New Bridge Note elects to convert in connection with a qualified financing, such holder will have the same registration rights as investors in such financing. Proceeds from this offering are expected to be used, in part, to repay the Existing Bridge Notes to the extent the same are not previously repaid or converted. Upon repayment or conversion of the Existing Bridge Notes, the New Bridge Notes will become secured by a first priority security interest in all assets of the Company. The Company does not contemplate that the New Bridge Notes will be guaranteed. Each New Bridge Warrant will be exercisable for a period of five years from the date of issuance at an exercise price of $0.50 per shares. We have not raised any capital from the Current Offering as of the date of this Report and there can be no guarantee that we will be able to do so. Even if we are able to raise capital from the Current Offering, the proceeds may not be sufficient to fund our operating needs for an extended period, particularly if we raise less than the maximum amount offered.

 

 

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, we entered into a Strategic Alliance Agreement with Starr and GHP entered into a Marketing and Distribution Agreement with Humana. However, we have not received any revenue to date with respect to these agreements nor can there be any guarantee that we will be able to do so. Even if we are able to generate revenue, such revenue may be limited in the near term. Furthermore, 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 such 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.

 

Certain Factors Affecting our Performance

 

In addition to the risk factors discussed in our Annual 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. Our insurance business will derive revenue from commissions and fees from 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.

 

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 our insurance business 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.

 

Asset Contribution Transaction

 

On February 23, 2012, we entered into an Asset Contribution Agreement (the “Contribution Agreement”) with Grandparents.com LLC, a Florida limited liability company, now known as GP.com Holding Company, 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, 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.

 

Simultaneously with the closing of the Transaction, we entered into a Securities Purchase Agreement with certain accredited investors 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 amended our Amended and Restated Certificate of Incorporation to increase the total number of authorized shares of our 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. Upon filing 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.

 

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 (“GAAP”). 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.

 

We have identified below some of our accounting policies that we consider critical to our business operations and the understanding of our results of operations. For detailed information and discussion on our critical accounting policies and estimates, see our financial statements and the accompanying notes included in this Report. 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. 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.

 

Included in our Annual Report, 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.

 

We included in our Annual Report 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 Annual Report. 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 Annual Report. 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.

 

Certain amounts in the 2012 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.

 

Results of Operations for Three-Month Periods Ended March 31, 2013 and 2012

 

Revenue

 

Revenue for the three months ended March 31, 2013 increased $56,065, or 83.9%, to $122,859 compared to $66,794 for the comparable period in 2012. Revenue for each period was derived solely from advertisements on our website. The increase in revenue for the current year period was due to two advertising contracts which were not in place in the prior year period.

 

Operating Expenses

 

Total operating expenses for the three months ended March 31, 2013 decreased $1,897,555, or 41.7%, to $2,647,743 compared to $4,545,298 for the comparable period in 2012.

 

Selling and marketing. Selling and marketing expense increased $47,503, or 116.6%, to $88,229 for the three months ended March 31, 2013 compared to $40,726 for the comparable period in 2012. In the three months ended March 31, 2013, we significantly increased our marketing expenditures in order to attract new members to our website.

 

Salaries. Salary expense increased $115,599, or 30.7%, to $492,007 for the three months ended March 31, 2013 compared to $376,408 for the comparable period in 2012. The increase was primarily due to salary paid to our executive officers. In connection with the closing of the Transaction, we entered into employment agreements with each of Messrs. Leber and Bernstein which provide for 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. In addition, the increase in salary expense for the three months ended March 31, 2013 was partially due to salary paid to an officer who was not an employee of the Company during the comparable period in 2012. Salary expense for the three months ended March 31, 2013 includes $118,750 in salary deferred during the period by members of management.

 

Rent. Rent expense increased $1,025, or 2.5%, to $42,025 for the three months ended March 31, 2013 compared to $41,000 for the comparable period in 2012.

 

Accounting, legal, and SEC Filing Fees. Accounting, legal, and SEC filing expense decreased $182,208, or 57.7%, to $133,683 for the three months ended March 31, 2013 compared to $315,891 for the comparable period in 2012. We incurred significant legal, compliance and accounting expenses in the first three months of 2012 in connection with the Transaction, our capital raising activities and by virtue of being a public company.

 

Consulting. Non-recurring consulting expense was $155,835 for the three months ended March 31, 2013 compared to $70,825 for the comparable period in 2012. The increase was due in part to consulting fees paid in March 2013 pursuant to the alliance agreement with Starr.

 

Equity-based compensation. Equity-based compensation expense increased $1,161,002, or 553.7%, to $1,378,548 for the three months ended March 31, 2013 compared to $217,546 for the comparable period in 2012. The increase was comprised primarily of a charge of $802,500 incurred in connection with the issuance of warrants for services rendered during the period. The increase also relates to recurring charges incurred in connection with equity awards granted during fiscal 2012 under our 2012 Stock Incentive Plan which are expensed over the life over the grant.

 

 

At March 31, 2013, 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 for the three months ended March 31, 2013.

 

At March 31, 2013, there were 300,000 options outstanding under our 2005 Stock Incentive Plan. In accordance with the terms of the Contribution Agreement, these options became fully vested and exercisable as of February 23, 2012, the closing date of the Transaction. 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 three months ended March 31, 2012. There is no remaining unrecognized compensation charge related to these options and therefore no such charge was recorded for the comparable period in 2013.

 

Management fees. We had no management fees expense for the three months ended March 31, 2013 compared to $100,000 for the comparable period in 2012. GP.com LLC paid a management fee to an entity controlled by Messrs. Leber and Bernstein for management services provided to GP.com LLC prior to the closing of the Transaction. Two payments of $50,000 each were payable in 2012 prior to the Transaction. The payments ceased upon the closing of the Transaction.

 

Transaction costs. We incurred $2,924,592 in transaction costs for the three months ended March 31, 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 2013.

 

Other general and administrative. Other general and administrative expense decreased $118,489, or 47.8%, to $129,275 for the three months ended March 31, 2013 compared to $247,764 for the comparable period in 2012. During the first three months of 2013, we implemented a cost-cutting program and consolidated certain operations which resulted in a decrease in other general and administrative expenses. The decrease was primarily attributable to decreases in insurance expense, commissions paid on advertising sales and other miscellaneous expenses.

 

Depreciation and amortization. Depreciation and amortization increased $17,595, or 8.4%, to $228,141 for the three months ended March 31, 2013 compared to $210,546 for the comparable period in 2012.

 

Other Expense

 

We had other expense of $219,516 for the three months ended March 31, 2013 compared to other expense of $14,428 for the comparable period in 2012, an increase of $205,088 or 1421.5%. Other expense for the three months ended March 31, 2013 was primarily attributable to $219,538 of interest expense, offset by interest income. For the comparable period in 2012, interest expense was $20,922, offset by interest income of $3,226 and other income of $3,268.

 

Loss from Operations

 

Loss from operations for the three months ended March 31, 2013 was $2,744,400 compared to $4,492,932 for the comparable period in 2012.

 

Preferred Return Expense

 

Preferred return expense was $14,265 for the three months ended March 31, 2012, which reflects preferred returns payable by GP.com LLC prior to the closing of the Transaction with respect to its Class A Preferred units. There was no preferred return expense for the comparable period in 2013.

 

Net Loss

 

Net loss for the three months ended March 31, 2013 was $2,744,400, or $0.03 per share, compared to $4,507,197, or $0.27 per share, for the comparable period in 2012.

 

 

Liquidity and Capital Resources

 

As of March 31, 2013, we had unrestricted cash of $190,757. 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.

 

Capital Raising Efforts

 

In December 2012 and January 2013, we raised $950,000 in connection with the issuance of the Existing Bridge Notes. The Existing Bridge Notes accrue interest at a rate of 12% per annum and mature on the earlier to occur of June 1, 2013 or the consummation of an equity financing for gross proceeds to the Company of $7,000,000. The Existing Bridge Notes are secured by a first priority security interest in all of the Company’s assets and are guaranteed by Messrs. Leber and Bernstein and Dr. Cohen.

 

In February 2013, we borrowed an aggregate of $400,000 from Messrs. Leber and Bernstein, Dr. Cohen and Mel Harris, a current security holder and advisor to the Company, as evidenced by the February Notes. The February Notes accrue interest at a rate of 10%, are unsecured, and mature on the earlier of March 1, 2014 or the closing of a single transaction (whether debt, equity or a combination of both) that results in aggregate gross proceeds to the Company of $10,000,000. The February Notes will automatically convert into securities issued in the Company’s Current Offering, as described below.

 

In April 2013, the Company sold 1,900,000 shares of common stock at a price per share of $0.25 in separate private transactions with four accredited investors for an aggregate purchase price of $475,000. In connection with such sales, the Company issued five-year warrants to purchase an aggregate of 475,000 shares of common stock at an exercise price of $0.25 per share.

 

The Company is in the process of commencing a private offering (the “Current Offering”) of up to $7.5 million of units consisting of New Bridge Notes and New Bridge Warrants. The New Bridge Notes will accrue interest at the rate of 12% per annum will mature on the earlier of June 1, 2014 or the consummation of an equity financing for gross proceeds to the Company of $10,000,000. Proceeds from this offering are expected to be used, in part, to repay the Existing Bridge Notes to the extent the same are not repaid or converted. Upon repayment or conversion of the Existing Bridge Notes, the New Bridge Notes will become secured by a first priority security interest in all assets of the Company. The Company does not contemplate that the New Bridge Notes will be guaranteed. We have not raised any capital from the Current Offering as of the date of this Report and there can be no guarantee that we will be able to do so. Even if we are able to raise capital from the Current Offering, the proceeds may not be sufficient to fund our operating needs for an extended period, particularly if we raise less than the maximum amount offered.

 

Outstanding Indebtedness

 

As noted above, $950,000 in principal amount is outstanding under the Existing Bridge Notes, which are due on June 1, 2013, $200,000 in principal amount is outstanding under a $200,000 promissory note issued in November 2012, which is due on July 1, 2013, and $400,000 is outstanding under the February Notes, which we expect will convert into New Bridge Notes in connection with the Current Offering.

 

In addition, pursuant to the Contribution Agreement, we entered into promissory notes with respect to certain liabilities of GP.com LLC that we assumed in connection with the Transaction. Specifically, we entered into the following promissory notes:

 

·

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 current Director, Co-Chief Executive Officer, Chief Financial Officer and Treasurer of the Company, 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 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.

 

The Leber Note, the Bernstein Note, the Meadows Note and the LBG Note are collectively referred to herein as the “Initial Promissory Notes.” The Initial Promissory Notes accrue interest at the rate of 5% per annum and mature upon the earlier of (i) the Company having EBITDA of at least $2,500,000 as reflected on its quarterly or annual financial statements filed with the SEC, or (ii) the Company closing a financing with gross proceeds to the Company of at least $10 million. Payment of the Initial 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 Initial Promissory Notes are secured.

 

Cash Flow

 

Net cash flow from operating, investing and financing activities for the periods below were as follows:

 

		March 31,
		2013				2012
Cash provided by (used in):
Operating activities		$	(695,816	)		$	(944,136	)
Investing activities			(12,543	)			-
Financing activities			650,000				4,184,547
Net (decrease) increase in cash		$	(58,359	)		$	3,240,411

 

Cash Used In Operating Activities

 

For the three months ended March 31, 2013, net cash used in operating activities of $695,816 consisted of net loss of $2,744,400, offset by $170,123 in changes in amortization of warrants related to bridge notes payable, $228,141 in adjustments for depreciation and amortization expense, $1,378,548 in adjustments for equity-based compensation expense and $271,772 in cash provided by changes in working capital and other activities.

 

For the three months ended March 31, 2012, net cash used in operating activities of $944,136 consisted of net loss of $4,507,197 and $62,334 in changes in fair value of warrant derivative liability, offset by $210,546 in adjustments for depreciation and amortization expense, $217,546 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, $12,268 in adjustments for amortization of discount on zero coupon note payable and $246,178 in cash provided by changes in working capital and other activities.

 

Cash Provided by Investing Activities

 

For the three months ended March 31, 2013, net cash provided by investing activities of $12,543 from development of intangible assets.

 

The Company did not use or generate any cash from investing activities during the comparable period in 2012.

 

 

Cash Provided By Financing Activities

 

For the three months ended March 31, 2013, net cash provided by financing activities of $650,000 consisted of $100,000 from the issuance and sale of Existing Bridge Notes, $400,000 from the issuance of the February Notes and $150,000 in proceeds from the sale of stock to be issued.

 

For the three months ended March 31, 2012, net cash provided by financing activities of $4,184,547 consisted of $2,641,292 in net proceeds from a private placement which closed in February 2012 and $1,543,255 in predecessor cash that remained in the Company following the Transaction.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

Smaller reporting companies are not required to provide the information required by this item.

 

Item 4.

Controls and Procedures.

 

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including our principal executive officers and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues if any, within a company have been detected.

 

As of the end of the period covered by this Report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. This evaluation was carried out under the supervision and with the participation of management, including our principal executive officers and principal financial officer. Based upon that evaluation, our principal executive officers and principal financial officer concluded that our disclosure controls and procedures were not effective at March 31, 2013 due to material weaknesses in our internal control over financial reporting. The material weaknesses primarily consisted of the following: (i) we do not have written documentation of our internal control policies and procedures; (ii) we do not have sufficient segregation of duties within accounting functions; (iii) we do not have adequate staff and supervision within our accounting function; and (iv) we lack a sufficient process for periodic financial reporting, including timely preparation and review of financial reports and statements.

 

We intend to remediate the material weaknesses discussed above, however, as of the end of the period covered by this Report, we have not taken substantive steps in this regard. We intend to begin the process documenting internal controls and procedures in 2013. We also intend to implement procedures to ensure timely filing of our periodic financial reports filed with the SEC in the future. However, due to our size and nature, segregation of duties within our internal control system may not always be possible or economically feasible. Likewise, we may not be able to engage sufficient resources to enable us to have adequate staff and supervision within our accounting function.

 

A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

 

During the period covered by this Report, there were no changes in our internal controls or in other factors that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

 

PART II—OTHER INFORMATION

 

Item 1.

Legal Proceedings.

 

Currently there are no material legal proceedings pending or threatened against the Company. However, from time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

 

 

Item 1A.

Risk Factors.

 

The risks described in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2012, could materially and adversely affect our business, financial condition and results of operations. These risk factors do not identify all risks that we face. Our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. For the three months ended March 31, 2013, there are no material changes in our risk factors as previously described in our Annual Report on Form 10-K.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

Reference is made the Company’s Current Reports on Form 8-K dated January 6, 2013, January 29, 2013 and February 26, 2013 for information regarding the unregistered sale of equity securities during the period covered by this Report.

 

Item 3.

Defaults Upon Senior Securities.

 

None.

 

Item 4.

Mine Safety Disclosures.

 

Not applicable.

 

Item 5.

Other Information.

 

None.

 

 

Item 6.

Exhibits.

 

Certain of the agreements filed as exhibits to this Report contain representations and warranties by the parties to the agreements that have been made solely for the benefit of the parties to the agreement. These representations and warranties:

 

·

may have been qualified by disclosures that were made to the other parties in connection with the negotiation of the agreements, which disclosures are not necessarily reflected in the agreements;

·

may apply standards of materiality that differ from those of a reasonable investor; and

·

were made only as of specified dates contained in the agreements and are subject to subsequent developments and changed circumstances.

 

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date that these representations and warranties were made or at any other time. Investors should not rely on them as statements of fact.

 

Exhibit Number		Description
10.1		Strategic Alliance Agreement with Starr Indemnity & Liability Company dated January 8, 2013 (1)
10.2		Amended and Restated Promissory Note between the Company and Mel Harris (2)
10.3		Form of February Note (3)
10.4		Form of Warrant issued to holders of February Notes (4)
10.5		Alliance Agreement with Cegedim Inc. dated March 29, 2013 (5)
10.6		Form of First April 2013 Securities Purchase Agreement (6)
10.7		Form of Warrant issued pursuant to First April 2013 Securities Purchase Agreement (7)
10.8		Second Amended and Restated Promissory Note between the Company and Mel Harris (8)
10.9		First Amendment to Strategic Alliance Agreement with Starr Indemnity & Liability Company dated April 11, 2013 (9)
10.10		Form of Second April 2013 Securities Purchase Agreement (10)
10.11		Form of Warrant issued pursuant to Second April 2013 Securities Purchase Agreement (11)
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 *		Certification of Principal Executive Officer and Principal Financial Officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS **		XBRL Instance Document
101.SCH **		XBRL Taxonomy Schema
101.CAL **		XBRL Taxonomy Calculation Linkbase
101.DEF **		XBRL Taxonomy Definition Linkbase
101.LAB **		XBRL Taxonomy Label Linkbase
101.PRE **		XBRL Taxonomy Presentation Linkbase

 

(1)	Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 8, 2013.
(2)	Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 29, 2013.
(3)	Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 26, 2013.
(4)	Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated February 26, 2013.
(5)	Incorporated herein by reference to Exhibit 10.38 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
(6)	Incorporated herein by reference to Exhibit 10.39 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
(7)	Incorporated herein by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
(8)	Incorporated herein by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
(9)	Incorporated herein by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
(10)	Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 26, 2013.
(11)	Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated April 26, 2013.

 

 

* Furnished herewith in accordance with SEC Release 33-8238.

** Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Report shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.

 

SIGNATURES

 

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

 

Dated: May 20, 2013

 

	/s/ Steven E. Leber
	Steven E. Leber
	Co-Chief Executive Officer
	(Principal Executive Officer)
	/s/ Joseph Bernstein
	Joseph Bernstein
	Co-Chief Executive Officer, Chief Financial Officer and Treasurer
	(Principal Financial and Accounting Officer)