News Column

SEARCHCORE, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 14, 2014

Three and Six Months Ended June 30, 2014 compared to the Three and Six Months Ended June 30, 2013

Results of Operations Revenue



Our sales, cost of sales, operating expenses and operating loss for the three and six months ended June 30, 2014, compared to the three and six months ended June 30, 2013, were as follows:

Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2014 2013 2014 2013 Sales $ 50,373$ 47,032$ 50,373$ 73,923 Cost of sales 25,021 3,122 25,248 3,350 SG&A expenses 419,668 561,052 791,609 1,177,191 Operating loss $ (394,316 )$ (517,142 )$ (766,484 )$ (1,106,618 )



On May 19, 2014, we sold ManufacturedHomes.com along with all of the associated domain names and intellectual property associated with the operations of the website. As a result of our sale of the manufactured home domain names and associated intellectual property, we have terminated employees that previously worked in our Las Vegas, Nevada, office in connection with the development and operation of these domain names, and we did not renew our lease for the Las Vegas office, which expired in April 2014, all of which taken together with the reduction in our debt associated with the assumption of our leaseback obligations by the buyers, have significantly reduced our overhead expenses. Furthermore, in conjunction with the sale of ManufacturedHomes.com, we discontinued the operations of VerticalCore Solutions, Inc., VerticalCore Technologies, Inc., and VerticalCore Media, Inc., which previously oversaw the operations of manufacturedhomes.com and our former Las Vegas office. For comparative purposes, all prior periods presented have been restated to reflect the reclassification of these entities to discontinued operations on a consistent basis. The sale of manufacturedhomes.com marks the Company's complete exit from the finder site business. See Note 4. Asset Sale and Note. 11. Discontinued Operations in the footnotes to the financial statements herewith for more information.

Sales for the three and six months ended June 30, 2014 consisted of sales of manufactured homes at our model home retail centers in Texas. All revenue from our finder sites, including tattoo.com, which we previously operated, have been restated to reflect the reclassification of these entities to discontinued operations on a consistent basis. At June 30, 2014 we had approximately $300,000 in manufactured homes inventory at our model home retail centers located in Tyler, TX and Jacksboro, TX. During August, we increased our inventory to approximately $500,000. Our current sales are using the flooring credit line we have with our existing inventory flooring company. Subsequent to the quarter ending, they increased our flooring credit line to $1.2 million and we immediately ordered an additional $750,000 in inventory which we anticipate arriving in September 2014. Furthermore, subsequent to the quarter ending, we have entered into a lease for a three acre semi-improved lot located in Mr. Pleasant, TX in anticipation of opening our fourth retail center.

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For the six months ended June 30, 2013 as compared to the six months ended June 30, 2014, we experienced a decrease in sales from $73,900 to $50,400. However, it is expected that as our manufactured home inventory continues to grow as a result of the increase in our flooring credit line, that we will see a corresponding increase in our sales. To date, we have experienced a delay in the increase of our sales primarily due to our limited flooring credit line and the limited number of model homes at our retail centers.

The slight increase in sales from $47,000 for the three months ended June 30, 2013, to $50,400 for the three months ended June 30, 2014, an increase of 7%, is due to sales of manufactured homes from our inventory at our Tyler, TX and Jacksboro, TX retail centers during the quarter ended June 30, 2014. Sales in the prior year were from our finders site businesses.

As we continue to expand into the manufactured home retail industry, we expect to continue generating revenues from our manufactured home retail centers that we have opened or taken over during the quarter ending June 30, 2014 through the fiscal year end 2014.

Operating Expenses

Operating Expenses - Our operating expenses decreased during the three and six months ended June 30, 2014, as compared to the three and six months ended June 30, 2013, in general because we have decreased amounts spent on salaries and employee benefits, insurances cost, and consulting and professional fees like legal and accounting following the sale of our finder sites and our expansion into the manufactured home retail centers industry.

The decrease in operating expenses from $1,181,00 for the six months ended June 30, 2013, to $817,000 for the six months ended June 30, 2014, a decrease of 31%, was because we decreased the number of technology specialists, including the number of programmers and engineers whose responsibilities included, but were not limited to, developing software and finder sites. This was accompanied by significant decreases in amounts spent on consultants related to the operations of our former finder sites, including coders, designs and sales staff. This was partially offset by increases in professional fees which included fees for legal and accounting work as well as expenses related to our Securities and Exchange Commission filings and for fees paid to consultants related to business development all of which was due to our efforts to exit the finder site business and expand our operations into the manufactured home retail center industry.

Salaries And Employee Benefits - During the three and six months ended June 30, 2014 and 2013, salaries and employee benefits were $81,400 and $345,100, respectively, and $308,500 and $590,800, respectively.

Professional Fees - During the three and six months ended June 30, 2014 and 2013, professional fees were $261,400 and $104,700, respectively, and $374,700 and $360,300, respectively. The increase during the six months ended June 30, 2014 as compared to 2013 was a a result of more spending on consulting, business development and professional fees related to our efforts to expand our operations in Texas serving the manufactured home industry and to a lesser extent for accounting and legal fees related to our SEC filings.

General And Administrative Expenses - During the three and six months ended June 30, 2014 and 2013, general and administrative expenses were $44,500 and $84,100, respectively, and $73,700 and $172,700, respectively. The decrease in these expenses was primarily attributable to decreases in spending on rent, insurance and advertising costs related to our former finder site businesses.

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Liquidity and Capital Resources

Our cash, current assets, intangible assets, total assets, current liabilities, and total liabilities as of June 30, 2014 and December 31, 2013 were as follows:

June 30, December 31, Percentage 2014 2013 Change (unaudited) (audited) Cash $ 93,000$ 93,000 - Total current assets 1,601,000 1,412,000 13.4 % Intangible assets 146,000 421,000 (65.3 )% Total assets 3,546,000 3,383,000 4.8 % Total current liabilities 2,792,000 2,589,000 7.8 % Total long term liabilities 216,000 776,000 (72.2 )% Total liabilities $ 3,008,000$ 3,365,000 (10.6 )%



Our intangible assets at June 30, 2014 consisted of the domain names www.TravelTrailer.com and www.ToyHaulers.com and the advertising rights pursuant to our sale of www.ManufacturedHomes.com. Our intangible assets decreased by $275,000 as a result of our sale of the following domain names: www.manufacturedhome.com, www.manufacturedhomes.comwww.manufacturedhouse.com, www.manufacturedhomes.net, and www.modularhomes.com. Pursuant to the terms of the sale, the buyer assumed all of our obligations under the Lease Agreement we had with Domain Capital, LLC. See Financial Statements, Note 4. Asset Sale for more information.

Our current liabilities increased by $203,000, from $2,589,000 at December 31, 2013 to $2,792,000 at June 30, 2014, primarily as a result of $865,100 in additional loans which was offset by $226,200 in payments on notes payable and our recent sale of domain names, and to a lesser extent $98,000 in reduction of our federal taxes payable and $54,000 in reduction of our deferred tax liability both as a result of utilizing our net operating losses, as well as for $440,000 that had been accrued during 2013 for consulting services that we paid in noncash stock based payments.

Our total long-term liabilities decreased by $560,000, from $776,000 at December 31, 2013 to $216,000 at June 30, 2014, primarily as a result the Assignment Agreement with a third party entity pursuant to which we assigned and transferred the premium domain names Karate.com and Rodeo.com along with the associated $400,000 in debt, the sale of ManufacturedHomes.com and the associated domain names and intellectual property pursuant to which the buyer assumed all of our obligations under the Lease Agreement we had with Domain Capital, LLC which included $96,000 in long term debt, and to a lesser extent reclassifying noncurrent debt to current. See Financial Statements, Note 4. Asset Sale for more information.

During the six months ended June 30, 2014, we recognized a non-cash gain of $847,400 on the sale of manufacturedhomes.com, the associated domain names and intellectual property. See Financial Statements, Note 4. Asset Sale for more information.

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Cash Requirements

We had approximately $93,100 in cash and cash equivalents as of June 30, 2014. Our operating loss for the six months ended June 30, 2014 was $766,500. We had net income for the six months ended June 30, 2014 of $58,000 which was based on a non-cash one-time gain on the sale of manufacturedhomes.com and the associated intellectual property. We had a working capital deficit of approximately $1.19 million at June 30, 2014. During the six months ended June 30, 2014, our principal source of liquidity was cash generated from our then-current operations, cash received pursuant to notes payables with third parties, as well as payments we received pursuant to the sale of the finder site weedmaps.com which during the six months ended June 30, 2014 totaled $600,000 and will continue for $100,000 a month for a total of eleven (11) more months ($600,000 for the remainder of the year ended December 31, 2014 and $515,500 for the year ended December 31, 2015), which are reflected in our statements of cash flows under the section changes in operating assets and liabilities: other assets. At our current burn rate, our current level of revenue generated from operations, our cash on hand, together with the $100,000 per month that we will receive pursuant to the sale of our finder site weedmaps.com, is insufficient to cover our monthly expenses. We have had to, and will continue to, seek financing in the form of debt or stock sales to finance our operations until we reach break-even.

Sources and Uses of Cash Operations



We had net cash used in operating activities of $415,500 for the six months ended June 30, 2014, as compared to net cash used in operating activities of $338,900 for the six months ended June 30, 2013. For the six months ended June 30, 2014, the net cash used by operating activities consisted primarily of net income of $58,000 which included a one-time non-cash gain of $847,400 on the sale of manufacturedhomes.com and the associated intellectual property, non-cash expense of $440,000 in stock based compensation, non-cash expense of $22,200 in stock issued as additional interest expense, $296,600 loss related to discontinued operations, and a decrease in accounts payable and accrued liabilities of $302,000, a decrease in prepaid expenses and deposits of $60,000, plus non-cash depreciation expense of $2,200. For the six months ended June 30, 2013, the net cash used by operating activities consisted primarily of a net loss of $338,900 which included a $139,400 loss related to discontinued operations, and a slight decrease in accounts payable and accrued liabilities of $3,500, an increase in prepaid expenses and deposits of $240,000, plus non-cash amortization and depreciation expense of $71,600 and $3,600, respectively.

Investments

During the six months ended June 30, 2014, we had $1,300 cash flows from investing activities as compared to $117,500 for the six months ended June 30, 2013. For the six months ended June 30, 2014, the net cash used in investing activities was primarily related to purchases of computers and other equipment of $1,300.

Financing

We had net cash from financing activities of $416,800 for the six months ended June 30, 2014, as compared to net cash used in financing activities of $7,000 for the six months ended June 30, 2013. For the six months ended June 30, 2014, our net cash used in financing activities consisted of payments on notes payable, which were offset by new convertible notes from third parties, in addition to a $41,500 demand note from James Pakulis, one of our officers and directors. For the six months ended June 30, 2013, our net cash used in financing activities consisted of payments on notes payable related to our domain name acquisitions as well as payments on notes payable, which were offset by new convertible notes from third parties

Debt Instruments, Guarantees, and Related Covenants

We have no disclosure required by this Item.

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Critical Accounting Estimates Goodwill



In accordance with Goodwill and Other Intangible Assets, goodwill is defined as the excess of the purchase price over the fair value assigned to individual assets acquired and liabilities assumed and is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis in our fourth fiscal quarter or more frequently if indicators of impairment exist. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of our reporting units with each respective reporting unit's carrying amount, including goodwill. The fair value of reporting units is generally determined using the income approach. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, the second step of the goodwill impairment test is performed to determine the amount of any impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. No amortization is recorded for goodwill with indefinite useful life. No goodwill impairment was recognized during the six months ended June 30, 2014 and 2013, respectively.

Intangible Assets

In accordance with Goodwill and Other Intangible Assets, intangible assets that are determined not to have an indefinite useful life are subject to amortization. We amortize intangible assets using the straight-line method over their estimated useful lives.

Impairment of Long-Lived and Intangible Assets

In accordance with Accounting for the Impairment or Disposal of Long-Lived Assets, we review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We assess the recoverability of the long-lived and intangible assets by comparing the carrying amount to the estimated future undiscounted cash flow associated with the related assets. No impairment of intangible assets was recognized during the six months ended June 30, 2014. No impairment of long-lived assets was recognized during the six months ended June 30, 2014.

Net Loss

For the six months ended June 30, 2014 we had an operating loss of $766,500. We had net income for the six months ended June 30, 2014 of $58,000 which was based on a one-time non-cash gain on the sale of manufacturedhomes.com and the associated intellectual property. For the six months ended June 20, 2013 we had a net loss of $1,234,000. The operating loss we experienced during the six months ended June 30, 2014 was a result of our efforts to expand our operations in the manufactured home retail center business.

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