See accompanying notes to unaudited condensed consolidated financial statements
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
HISTORY
ROKWADER, INC. (the “Company”),
was organized under the laws of the State of Delaware on March 18, 2005 as a vehicle to seek, investigate and, if such investigation
warrants, acquire a target company or business that primarily desires to seek the perceived advantages of a publicly-held corporation.
On April 23, 2007, Rokwader completed an acquisition of all of the issued and outstanding capital stock of Latigo Shore Music,
Inc. (“Latigo”).
In May and June 2015, the Company underwent
a change of control when it sold an aggregate of 15,250,000 shares of its common stock, together with a warrant to purchase an
additional 5,900,000 shares of its common stock to Coco Partners, LLC (“Coco”). As a result of this transaction and
the change of control of the Company, our business strategies and plan of operations has evolved into two segments: (i) the continuation
of the Latigo music publishing business; and (ii) the investment and acquisition vehicle focused on Rokwader Acquisition Corp.
(“RAC”) supported by Coco.
On May 1, 2016, one the Company’s
subsidiaries, RAC, acquired a number of car wash businesses in Arizona and entered into multiple agreements related to the acquisition
of these businesses. With these acquisitions, the Company has entered the car wash market in Arizona where it plans to establish
itself as the market share leader in that Metropolitan Statistical Area (“MSA”) in the car wash industry. With both
of these acquisitions, the Company has moved from being a vehicle to acquire target companies to a Company with a fully operational
business.
On May 11, 2016, RAC changed its name
to True Blue Car Wash Corp (“True Blue”).
Prior to the acquisition of the car
wash businesses by True Blue, substantially all of the business conducted by Rokwader was through Latigo, its wholly-owned subsidiary.
Subsequently, the Company’s business will be focused on growth through True Blue and its car wash acquisitions. Through its
majority-owned subsidiary, True Blue, the Company intends to acquire additional car washes, and the board of directors of the Company
has authorized the Company to invest cash in True Blue in exchange for additional shares of capital stock in True Blue, for the
purpose of funding the acquisition of True Blue’s car wash portfolio. The Company believes it will need to raise additional
capital in order for True Blue to meet its goal of making acquisitions of several additional car washes in the target MSAs.
BASIS OF PRESENTATION
These unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
for interim financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments
of a normal recurring nature and considered necessary for a fair presentation of its financial condition and results of operations
for the interim periods presented in this Quarterly Report on Form 10-Q have been included. Operating results for the interim periods
are not necessarily indicative of financial results for the full year. These unaudited consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2016.
PRINCIPLES OF CONSOLIDATION
The unaudited condensed consolidated
financial statements include the accounts of Rokwader, Inc. and subsidiaries. All significant inter-company accounts and transactions
have been eliminated. The Company owns 100% of its subsidiary, Latigo Shore Music, Inc. The Company also owns 62.27% of its majority-owned
subsidiary, True Blue Car Wash Corp.
USE OF ESTIMATES IN THE PREPARATION
OF FINANCIAL STATEMENTS
The preparation of these unaudited condensed
consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of these unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates and assumptions.
8
ROKWADER, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily
of cash in banks and highly liquid investments with original maturities of 90 days or less. As of March 31, 2016 and December 31,
2016, the Company had zero cash equivalents.
CONCENTRATIONS OF CREDIT RISK
The Company maintains all cash in deposit
accounts, which at times may exceed federally insured limits. The Company has not experienced a loss in such accounts.
The Company holds more than $250,000
in interest bearing accounts at one bank, thus there is a credit risk related to these cash deposits since these amounts exceed
the current federally insured amount of $250,000 per depositor, per insured bank, for each account ownership category. As of March
31, 2017, the Company had cash balances of $5,846,164 in three banks and the Company had a credit risk of $5,596,164 related to
these cash deposits. As of December 31, 2016, the Company had cash balances of $5,921,197 in three banks and the Company had a
credit risk of $5,671,197.
FINANCIAL CONDITION AND PLAN OF OPERATION
As of March 31, 2017, the Company had
working capital of $4,834,654, including $5,846,164 of cash on hand.
As a result of the acquisition, by True
Blue of the five Express Car Washes (“Express”) from a leading Express Car Wash operator in the Phoenix area, and the
agreements to purchase an additional six Express Car Washes from the same operator, the Company has commenced to generate significant
revenues, including $1,928,973 for the three months ended March 31, 2017. The Company believes this acquisition will help accelerate
growth, amplify valuation, and create liquidity.
Through its subsidiary, True Blue, the
Company intends to acquire additional car washes in select Metropolitan Strategic Areas (“MSAs”) as part of its investment
and operating strategy. True Blue has identified several Express and Full Service Car Washes (“Flex”) that could be
acquired. The Company believes it will incur additional costs associated with the execution of this investment strategy, including
legal, accounting, and consulting fees to fund these prospective acquisitions. The Company will seek additional funds through equity
or debt financing, collaborative or other arrangements with corporate partners, licensees, and from other sources of such additional
financings.
ACCOUNTS RECEIVABLE
The Company reports accounts receivable
net of an allowance for doubtful accounts equal to the estimated collection losses to be incurred. Estimated losses are based on
actual collection experience and management’s evaluation of the current status of existing receivables. The allowance for
doubtful accounts is based on evaluation of various factors influencing the collectability of all receivables. Management anticipates
no problems with collection and no allowance for doubtful accounts is considered necessary as of March 31, 2017 and as of December
31, 2016.
A trade receivable is considered to
be past due if any portion of the receivable balance is outstanding for more than 30 days. No interest is charged on past-due receivables.
PROPERTY AND EQUIPMENT
Property and equipment are stated at
cost and are depreciated using the straight-line method over the estimated useful lives of the respective assets, which are as
follows:
Machinery and Equipment
|
2-15 years
|
Furniture
|
2-10 years
|
Leasehold Improvements
|
15 years
|
9
ROKWADER, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Expenditures for repairs and maintenance
are charged to expense as incurred. The costs of major improvements are capitalized. The cost and related accumulated depreciation
of property and equipment are removed from the accounts upon retirement or other disposition and any resulting gain or loss is
reflected in operations of the period.
BUSINESS COMBINATIONS
The Company accounts for business combinations
using the acquisition method of accounting in accordance with FASB ASC Topic 805 related to Business Combinations, which requires
that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Goodwill
was recorded and it represents the excess of the purchase price over the estimated fair values of net tangible and intangibles
assets acquired. Additionally, Topic 805 requires that identifiable intangible assets acquired in a business combination, separate
from goodwill, be recorded at their acquisition date fair value. In the event the estimated fair value of the assets and liabilities
acquired exceed the purchase price paid, a bargain purchase gain is recorded in the consolidated statement of operations.
LONG-LIVED ASSETS
The recoverability of long-lived assets
is evaluated periodically as events or circumstances indicate a possible inability to recover the carrying amount. Long-lived assets
that will no longer be used in our business are written-off in the period identified since they are no longer expected to generate
any positive cash flows for us. Long-lived assets that continue to be used by us are periodically evaluated for recoverability.
Such evaluation is based on various analyses, including cash flow and profitability projections. The analyses necessarily involve
significant management judgment. In the event the projected undiscounted cash flows are less than net book value of the assets,
the carrying value of the assets is written down to its estimated fair value.
GOODWILL AND INTANGIBLE ASSETS
As required by FASB ASC Topic 350, Intangibles
– Goodwill and Other, The Company tests Goodwill and other indefinite life intangible assets at least annually for impairment
or when circumstances indicate an impairment may exist, in accordance with U.S. Generally Accepted Accounting Principles (“U.S.
GAAP”).
The Company amortizes intangible assets
with finite lives on a straight-line basis over their estimated useful lives. Goodwill and intangible assets with indefinite life
are reviewed, at least annually, for impairment, or when events or circumstances indicate their carrying amount may not be recoverable.
Based on the review of goodwill and the intangible assets, no impairment loss was recorded as of March 31, 2017 or as of December
31, 2016.
REVENUE RECOGNITION
As required by FASB ASC Topic 605, Revenue
Recognition (“ASC 605”), the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery
has occurred, the sales price is fixed or determinable and collection is probable.
Royalty revenues are earned from the
receipt of royalties relating to the licensing of rights in musical compositions. The receipt of royalties principally relates
to amounts earned from the public performance of copyrighted material, the mechanical reproduction of copyrighted material on recorded
media including digital formats, and the use of copyrighted material in synchronization with visual images. Consistent with industry
practice, music publishing royalties generally are recognized as revenue when cash is received. Revenue generally is recognized
net of any taxes collected from customers and subsequently remitted to governmental authorities.
Sales revenue from the Company’s
car wash operations is recognized when earned based on three different scenarios:
|
1.
|
A customer can purchase one individual car wash and revenue is recognized
at the time the car wash is provided.
|
|
2.
|
A customer purchases a monthly membership, the Company recognizes
the revenue when the membership is paid. If a customer requests for their membership to be cancelled, the Company authorizes a
pro-rata refund for the days the membership is not used.
|
|
3.
|
The third scenario is for certain customers that are billed on a
monthly basis. For these customers, revenue is recognized each time the customer comes in for a car wash. They are billed at the
end of the month for services provided during that month.
|
10
ROKWADER, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
The Company determined that the revenue
recognition criteria, from their car wash operations, is met in each of these three different scenarios. An arrangement exists
when a customer uses one of the Company’s car wash facilities. Delivery has occurred when the customer’s car is washed.
The sales price is fixed or determinable when the customer selects a car wash from a number of options offered by the Company.
Each option has a predetermined price associated with it. Lastly, collection is done prior to the car wash service being provided,
in scenarios 1 and 2. Collection in scenario 3 is done after the car wash service is provided only for customers that have established
their credit worthiness.
ADVERTISING EXPENSES
Advertising costs are expensed as incurred
and are included in selling, general, and administrative expenses in the accompanying statement of operations. Total advertising
expenses approximated $1,845 and zero for the three months ended March 31, 2017 and 2016, respectively.
STOCK-BASED COMPENSATION
The Company measures compensation cost
for stock-based awards based on the estimated fair value of the award, and recognize the cost as an expense on a straight line
basis over the employee requisite service period. We estimate the fair value of stock options using a Black-Scholes valuation model.
INCOME TAXES
The Company follows the guidance of
the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740 related to Income Taxes (Topic
740). According to Topic 740, deferred income taxes are recorded to reflect the tax consequences in future years of temporary differences
between the tax basis of the assets and liabilities and their financial amounts at year-end.
For federal income tax purposes, substantially
all expenses incurred prior to the commencement of operations must be deferred and then they may be written off over a 180-month
period. Tax deductible losses can be carried forward for 20 years until utilized for federal tax purposes. The Company will provide
a valuation allowance in the full amount of the deferred tax assets since there is no assurance of future taxable income. Additionally,
the Company may reserve a portion of the deferred tax assets due to restrictions of tax benefits related to changes in ownership.
The Company utilizes the Topic 740 to
account for the uncertainty in income taxes. Topic 740 for Income Taxes clarifies the accounting for uncertainty in income taxes
by prescribing rules for recognition, measurement and classification in financial statements of tax positions taken or expected
to be in a tax return. Further, it prescribes a two-step process for the financial statement measurement and recognition of a tax
position. The first step involves the determination of whether it is more likely than not (greater than 50 percent likelihood)
that a tax position will be sustained upon examination, based on the technical merits of the position. The second step requires
that any tax position that meets the more likely than not recognition threshold be measured and recognized in the financial statements
at the largest amount of benefit that is a greater than 50 percent likelihood of being realized upon ultimate settlement. This
topic also provides guidance on the accounting for related interest and penalties, financial statement classification and disclosure.
The Company’s policy is that any interest or penalties related to uncertain tax positions are recognized in income tax expense
when incurred. The Company has no uncertain tax positions or related interest or penalties requiring accrual at December 31, 2016
and December 31, 2015.
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share
are computed based upon the weighted average number of common shares outstanding during the period. Diluted earnings per share
consists of the weighted average number of common shares outstanding plus the dilutive effects of options and warrants calculated
using the treasury stock method. In loss periods, dilutive common equivalent shares are excluded as the effect would be anti-dilutive.
11
ROKWADER, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
EQUITY BASED PAYMENTS TO NON-EMPLOYEES
The Company applied the Financial Accounting
Standards Board’s Accounting Standards Codification Topic 505 related to Equity Based Payments to Non-Employees to account
for the options and warrants issued, as disclosed in Note 3 of these consolidated financial statements. According to Topic 505,
all transactions in which goods or services are the consideration received for the issuance of equity instruments shall be accounted
for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more
reliably measurable. The Company believes that fair value of these options and warrants is a more reliable measure of the consideration
received for services performed for the Company. We determined the fair value of these equity instruments using the Black-Scholes
option-pricing model. Factors used in the determination of the fair value of these equity instruments include, the stock price
at the grant date, the exercise price, the expected life of the equity instrument, the volatility of the underlying stock, the
expected dividends on it, and the risk-free interest rate over the expected life of the equity instrument.
PREFERRED STOCK
The Board of Directors of True Blue,
a majority-owned subsidiary of the Company, approved the issuance of 2,000,000 shares of Preferred Stock and designates these shares
as Series A 4% Convertible Preferred Stock (“Series A Preferred”). The Series A Preferred has a face amount of $3.75.
The Series A Preferred pays a 4% annual dividend on the face amount, payable quarterly, in arrears. True Blue may defer payment
of the dividend, in the event loan covenants or other financial restrictions prevent payment, but in such event the dividend shall
accrue, and be paid on a Liquidity or Liquidation Event. A Liquidity Event is defined as an initial public offering, a sale, or
a merger. Each issued and outstanding share of Series A Preferred is entitled to have one non-cumulative vote each, at each meeting
of stockholder of True Blue with respect to any and all matters presented to the stockholders of True Blue for their action or
consideration. The stockholders shall have the right at any time to convert outstanding shares of Series A Preferred into fully
paid and nonassessable shares of common stock, at an initial conversion ratio of one share of common stock for each one share of
Series A Preferred surrendered for conversion.
SEGMENT DISCLOSURE
FASB ASC Topic 280, Segment Reporting,
establishes standards for reporting financial and descriptive information about a public entity’s reportable segments. As
of December 31, 2016, the Company operated through two reportable business segments: (1) Latigo music publishing business; and
(2) the investment and acquisition vehicle focused on True Blue. Prior to April 2016, the Company operated through one reportable
business segment; however, with the addition of True Blue in April 2016, the Company segregated its operations into two reporting
segments to assess the performance of its business in the same way that management intends to review our performance and make operating
decisions.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2017, the FASB issued Accounting
Standards Update (ASU) 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment.
ASU 2017-04 was issued by the Board to determine whether amendments, similar to those in 2014, that allowed private companies an
alternative accounting treatment for subsequently measuring goodwill, should be considered for other entities, including public
business entities and not-for-profit entities. The amendments in this Update state that to simplify the subsequent measurement
of goodwill, the Board eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under
Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities
(including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of
assets acquired and liabilities assumed in a business combination.
Instead, under the amendments in this
Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit
with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the
reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that
reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount
of the reporting unit when measuring the goodwill impairment loss, if applicable.
12
ROKWADER, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
The Board also eliminated the requirements
for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative
test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units.
An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount
of net assets.
This Update also includes amendments
to the Overview and Background Sections of the Codification (as discussed in Part II of the amendments) as part of the Board’s
initiative to unify and improve the Overview and Background Sections across Topics and Subtopics. These changes should not affect
the related guidance in these Subtopics.
An entity should apply the amendments
in this Update on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting
principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first
annual period when the entity initially adopts the amendments in this Update.
A public business entity that is a U.S.
Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill
impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt
the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December
15, 2020. All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for
their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. Early adoption is permitted
for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently assessing
the guidance of this Update for future implementation.
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In January 2017, the FASB issued Accounting
Standards Update (ASU) 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business. ASU 2017-01 was issued
by the Board to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether
transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this Update provide
a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross
assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the
set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met,
the amendments in this Update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive
process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market
participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an
input and a substantive process are present. The framework includes two sets of criteria to consider that depend on whether a set
has outputs. Although outputs are not required for a set to be a business, outputs generally are a key element of a business; therefore,
the Board has developed more stringent criteria for sets without outputs. Lastly, the amendments in this Update narrow the definition
of the term output so that the term is consistent with how outputs are described in Topic 606. Public business entities should
apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those
periods. All other entities should apply the amendments to annual periods beginning after December 15, 2018, and interim periods
within annual periods beginning after December 15, 2019. The amendments should be applied prospectively on or after the effective
date. The Company has assessed the application of this Update and does not anticipate it will have a material impact on the Company’s
Unaudited Condensed Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 was issued
as part of the Board’s Simplification Initiative. The areas for simplification in this Update involve several aspects of
the accounting for share-based payment transactions, Accounting for Income Taxes, Classification of Excess Tax Benefits on the
Statement of Cash Flows, Forfeitures, Minimum Statutory Tax Withholding Requirements, Classification of Employee Taxes Paid on
the Statement of Cash Flows When an Employer Withholds Shares for Tax-Withholding Purposes, Practical Expedient- Expected Term,
and Intrinsic Value. The amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim
periods within those annual periods. The Company is currently assessing this guidance for future implementation.
13
ROKWADER, INC.
AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
In February 2016, the FASB issued ASU
2016-02, Leases (Topic 842). ASU 2016-02 requires entities to recognize lease assets and lease liabilities on the balance sheet
and disclosing key information about leasing arrangements. Topic 842 requires the recognition of lease assets and lease liabilities
by lessees for those leases classified as operating leases under previous GAAP. When measuring assets and liabilities arising from
a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain
to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to
purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is
reasonably certain to exercise that purchase option. In addition, also consistent with the previous leases guidance, a lessee (and
a lessor) should exclude most variable lease payments in measuring lease assets and lease liabilities, other than those that depend
on an index or a rate or are in substance fixed payments.
For leases with a term of 12 months
or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets
and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line
basis over the lease term.
The accounting applied by a lessor is
largely unchanged from that applied under previous GAAP.
The amendments in this Update are effective
for fiscal years and interim periods beginning after December 15, 2018. The Company is currently assessing this guidance for future
implementation.
NOTE 2
– BUSINESS COMBINATIONS
On May 1, 2016, True Blue Car Wash Corp.
(“True Blue”), a majority-owned subsidiary of the Company and formerly known as Rokwader Acquisition Corp, completed
the acquisitions of five car wash businesses in Arizona, collectively known as Clean Freak Car Wash (“Clean Freak”),
and entered into four individual real property lease agreements with each car wash business for use of the premises where these
car wash businesses are located. Additionally, True Blue entered into separate Forward Purchase Agreements with six other car wash
businesses to purchase all of their operations and business property upon satisfaction of certain financial performance metrics.
With these acquisitions, the Company has entered the car wash market in Arizona where it plans to establish itself as a leader
in the car wash industry.
True Blue agreed to purchase from the
shareholders of Clean Freak USA, Inc. 100% of their stock. Clean Freak USA, Inc. is a privately held company. Clean Freak USA,
Inc.’s business is the management, operation, and development of car wash facilities and related uses such as but not limited
to convenient shop, restaurants, and other facilities located within or adjacent to the car wash facility. True Blue agreed to
purchase these shares in consideration of 800,000 shares of True Blue’s Series A 4% convertible preferred stock at a price
of $3.75 per share for a total of $3,000,000.
The consideration will be transferred
to the shareholders of Clean Freak USA, Inc. in two portions. The first portion will be a transfer of 400,000 shares of True Blue’s
Series A 4% convertible preferred stock at April 30, 2016, the closing date of the Stock Purchase Agreement. The remaining 400,000
shares of Series A 4% convertible preferred stock will be treated as contingent consideration and will be transferred to the shareholders
when all the Retained Car Wash Businesses listed in the Stock Purchase Agreement are purchased by True Blue pursuant to Forward
Purchase Agreements in place between True Blue and the Retained Car Wash Businesses.
As part of the acquisition of the Clean
Freak car wash businesses, True Blue entered into Asset Contribution Agreements (“ACA”) with five separate car wash
businesses. True Blue entered into an ACA with CF Car Wash I, LLC in which True Blue agreed to acquire certain assets owned by
CF Car Wash I, LLC, except for real estate, for $1,968,133 of which $888,803 was in cash and $1,079,330 was in True Blue Series
A 4% convertible preferred stock at a price of $3.75 per share.
True Blue also entered into an ACA with
CF Car Wash II, LLC in which True Blue agreed to acquire certain assets owned by CF Car Wash II, LLC, except for real estate, for
$1,284,166 of which $300,943 was in cash and $983,223 was in True Blue Series A 4% convertible preferred stock at a price of $3.75
per share.
A third separate ACA was entered into
by True Blue with CF Car Wash Camelback, LLC to acquire certain assets owned by CF Car Wash Camelback, LLC, except for real estate,
for $1,293,334 of which $633,676 was in cash and $659,658 was in True Blue Series A 4% convertible preferred stock at a price of
$3.75 per share.
14
ROKWADER,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 2
– BUSINESS COMBINATIONS (CONTINUED)
A fourth ACA was entered into by True
Blue with CF Car Wash Chandler, LLC in which True Blue agreed to acquire certain assets owned by CF Car Wash Chandler, LLC, except
for real estate, for $262,500 in cash.
The fifth ACA agreement was with CF
Car Wash Bell, LLC in which True Blue agreed to acquire certain assets owned by CF Car Wash Bell, LLC for $2,602,500 of which $1,882,303
was in cash and $720,197 was in True Blue Series A 4% convertible preferred stock valued at a price of $3.75.
In addition, on April 30, 2016, True
Blue entered into real property lease agreements with CF Car Wash I, LLC, CF Car Wash II, LLC, CF Car Wash Camelback, LLC, and
CF Car Wash Chandler, LLC to lease the premises where each of the four car wash businesses are located. In June 2016, these properties
were sold to Lifestyle Property Partners, LP and the real property lease agreements were transferred to Lifestyle Property Partners,
LP. Lifestyle Property Partners, LP is a related party and is owned, in part, by the President of the Company. On September 16,
2016, Lifestyle Property Partners, LP assigned ownership of the properties to COCO Partners, LLC and COCO Partners sold the real
estate to Spirit Master Funding X, LLC (“Spirit”), a non-related party. True Blue entered into a new lease agreement
with Spirit and the leases with Lifestyle Property Partners, LP were cancelled.
Additionally, on May 1, 2016, True
Blue entered into a Management Agreement with Wash Management Group, LLC (WMG), an Arizona Limited Liability Company. The purpose
of this Agreement is to hire WMG to serve as the general manager of the first five express car wash businesses acquired by True
Blue, the additional six express car wash business, collectively known as the Retained Car Wash Business, and other car wash operations
defined as an express car wash, acquired or developed, in the future, by True Blue or WMG. Due to the nature of this Management
Agreement, True Blue treated this as a separate transaction and not considered it part of the consideration transferred for the
Clean Freak car washes.
The FASB, in ASC Topic 805, Business
Combinations (Topic 805), defines the acquirer in a business combination as the entity that obtains control of one or more businesses
in a business combination. It also establishes the acquisition date as the date that the acquirer achieves control. The FASB,
in Topic 805, requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest
in the acquiree at the acquisition date, measured at their fair values as of that date. Topic 805 also states that the acquirer
is to recognize contingent consideration at the acquisition date, measured at its fair value at that date.
True Blue allocated the purchase price
to the assets acquired and liabilities assumed based on their estimated fair values at the date of the acquisition. The following
table summarizes the consideration paid for each acquisition and the fair values of the assets acquired and liabilities assumed
at the acquisition date:
|
|
Clean Freak
|
|
CF Car Wash
|
|
CF Car Wash
|
|
|
USA, Inc.
|
|
I, LLC
|
|
II, LLC
|
Consideration:
|
|
|
|
|
|
|
Cash
|
|
$
|
—
|
|
|
$
|
888,803
|
|
|
$
|
300,943
|
|
Fair value of preferred stock
|
|
|
1,500,000
|
|
|
|
1,079,530
|
|
|
|
983,224
|
|
Fair value of contingent consideration
|
|
|
1,264,981
|
|
|
|
—
|
|
|
|
—
|
|
Total Consideration
|
|
$
|
2,764,981
|
|
|
$
|
1,968,333
|
|
|
$
|
1,284,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisionally recognized amounts of identifiable assets acquired and
liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Car Wash Equipment
|
|
$
|
—
|
|
|
$
|
369,774
|
|
|
$
|
614,351
|
|
Car Wash Improvements
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Security Equipment
|
|
|
—
|
|
|
|
35,992
|
|
|
|
11,426
|
|
Machinery & Equipment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Furniture & Equipment
|
|
|
—
|
|
|
|
27,126
|
|
|
|
1,167
|
|
Car Wash Vending Machines
|
|
|
—
|
|
|
|
13,315
|
|
|
|
—
|
|
Office Equipment
|
|
|
—
|
|
|
|
13,793
|
|
|
|
3,056
|
|
Inventory
|
|
|
—
|
|
|
|
3,024
|
|
|
|
3,023
|
|
Gift Cards & Certificates
|
|
|
—
|
|
|
|
(5,500
|
)
|
|
|
(2,500
|
)
|
Trademark
|
|
|
19,044
|
|
|
|
—
|
|
|
|
—
|
|
Goodwill
|
|
|
2,745,937
|
|
|
|
1,510,809
|
|
|
|
653,644
|
|
Gain on Bargain Purchase
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
2,764,981
|
|
|
$
|
1,968,333
|
|
|
$
|
1,284,167
|
|
15
ROKWADER, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 2 – BUSINESS COMBINATIONS
(CONTINUED)
|
|
CF Car Wash
|
|
CF Car Wash
|
|
CF Car Wash
|
|
|
|
|
Camelback, LLC
|
|
Chandler, LLC
|
|
Bell, LLC
|
|
Total
|
Consideration:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
633,676
|
|
|
$
|
262,500
|
|
|
$
|
1,882,303
|
|
|
$
|
3,968,225
|
|
Fair value of preferred stock
|
|
|
659,658
|
|
|
|
—
|
|
|
|
720,197
|
|
|
|
4,942,609
|
|
Fair value of contingent consideration
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,264,981
|
|
Total Consideration
|
|
$
|
1,293,334
|
|
|
$
|
262,500
|
|
|
$
|
2,602,500
|
|
|
$
|
10,175,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisionally recognized amounts of identifiable assets acquired and
liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Car Wash Equipment
|
|
$
|
285,952
|
|
|
$
|
433,645
|
|
|
$
|
282,542
|
|
|
$
|
1,986,264
|
|
Car Wash Improvements
|
|
|
330,957
|
|
|
|
—
|
|
|
|
298,778
|
|
|
|
629,735
|
|
Security Equipment
|
|
|
16,966
|
|
|
|
21,495
|
|
|
|
8,959
|
|
|
|
94,838
|
|
Machinery & Equipment
|
|
|
3,172
|
|
|
|
—
|
|
|
|
30,533
|
|
|
|
33,705
|
|
Furniture & Equipment
|
|
|
3,593
|
|
|
|
4,860
|
|
|
|
19,188
|
|
|
|
55,934
|
|
Car Wash Vending Machines
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,315
|
|
Office Equipment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,849
|
|
Inventory
|
|
|
3,023
|
|
|
|
3,023
|
|
|
|
3,024
|
|
|
|
15,117
|
|
Gift Cards & Certificates
|
|
|
(3,500
|
)
|
|
|
(4,000
|
)
|
|
|
(4,250
|
)
|
|
|
(19,750
|
)
|
Trademark
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,044
|
|
Goodwill
|
|
|
653,171
|
|
|
|
—
|
|
|
|
1,963,726
|
|
|
|
7,527,287
|
|
Gain on Bargain Purchase
|
|
|
—
|
|
|
|
(196,523
|
)
|
|
|
—
|
|
|
|
(196,523
|
)
|
|
|
$
|
1,293,334
|
|
|
$
|
262,500
|
|
|
$
|
2,602,500
|
|
|
$
|
10,175,815
|
|
In accordance with U.S. GAAP, the fair
value of the stock issued as part of the consideration transferred was measured on the closing date of the acquisition based on
agreements between True Blue and third parties. The fair value of contingent consideration was determined by applying an acceptable
model based on a discounted expected payment. The model uses a probability weight which True Blue determined to be 95%. The model
also excludes the dividend cash flow that would not be paid to the sellers until the preferred stock is actually issued discounted
using a 4% rate.
The assets acquired and liabilities
assumed have been measured at their fair values as of April 30, 2016. The excess of the purchase price over the fair value of the
net tangible assets and identifiable intangible assets was recorded as goodwill. The fair values of the net assets acquired were
determined using valuation techniques specified in the fair value hierarchy in FASB ASC 820,
Fair Value Measurements
(FASB
ASC 820). The fair values of the acquired net assets are based on inputs that are not observable in the market, and therefore qualify
as Level 3 inputs according to FASB ASC 820. True Blue obtained independent third-party appraisals to determine the fair value
of the net assets acquired. From the appraisal, True Blue determined that the proper fair value of these assets would be best derived
using an income valuation technique, which derives a value indication from the property’s capacity to generate revenue. True
Blue determined that using this approach would be more reliable as most owners would be focused on the potential income that could
be generated from the assets.
Subsequent to the provisional allocation
of the purchase price to the assets acquired and liabilities assumed, the Company recorded an adjustment to goodwill resulting
in a net decrease to goodwill of $1,187,282. This decrease was due to the final fair value valuation of the acquired assets. This
was the result of an internal analysis performed by the Company that properly identified certain acquired assets as expenditures
rather than assets.
16
ROKWADER, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 2 – BUSINESS COMBINATIONS
(CONTINUED)
The following is a reconciliation of
the assets acquired and liabilities assumed:
|
|
Provisional
|
|
|
|
Final
|
|
|
Valuation
|
|
Adjustments/
|
|
Valuation
|
|
|
at April 30, 2016
|
|
Reclassifications
|
|
at April 30, 2016
|
Car Wash Equipment
|
|
|
1,057,545
|
|
|
|
928,719
|
|
|
|
1,986,264
|
|
Machinery and Equipment
|
|
|
34,990
|
|
|
|
(1,285
|
)
|
|
|
33,705
|
|
Car Wash Vending Machine
|
|
|
3,938
|
|
|
|
9,377
|
|
|
|
13,315
|
|
Car Wash Improvements
|
|
|
505,846
|
|
|
|
123,889
|
|
|
|
629,735
|
|
Furniture and Equipment
|
|
|
29,599
|
|
|
|
26,335
|
|
|
|
55,934
|
|
Office Equipment
|
|
|
6,175
|
|
|
|
10,674
|
|
|
|
16,849
|
|
Security Equipment
|
|
|
5,265
|
|
|
|
89,573
|
|
|
|
94,838
|
|
Inventory
|
|
|
15,117
|
|
|
|
—
|
|
|
|
15,117
|
|
Gift Cards & Certificates
|
|
|
(19,750
|
)
|
|
|
—
|
|
|
|
(19,750
|
)
|
Trademark
|
|
|
19,044
|
|
|
|
—
|
|
|
|
19,044
|
|
Goodwill
|
|
|
8,714,569
|
|
|
|
(1,187,282
|
)
|
|
|
7,527,287
|
|
|
|
|
10,372,338
|
|
|
|
—
|
|
|
|
10,372,338
|
|
The fair value of the
acquired assets and liabilities assumed from CF Car Wash Chandler, LLC acquisition exceeded the total consideration paid. Therefore,
the Company recognized a gain on bargain purchase of $196,523 which was reported on the Company’s unaudited condensed consolidated
statement of operations. Prior to the recognition of the gain on bargain purchase, the Company reassessed the fair value of the
acquired assets and liabilities assumed in the acquisition. The Company believes it was able to acquire those assets of CF Car
Wash Chandler, LLC for less than their fair value due to the seller’s built-in low margin for increased competition in their
location.
Acquisition related expenses from the
Clean Freak car washes acquisition totaled $215,003 and $17,000 for the three months ended March 31, 2017 and 2016, respectively.
These costs are primarily related to legal, accounting, and consulting services.
NOTE 3 – STOCKHOLDERS’ EQUITY
The dividend yield reflects that the
Company has not paid any cash dividends since inception and does not intend to pay any cash dividends in the foreseeable future.
The following assumptions were used
to determine the fair value of the options as of:
|
|
December 31, 2015
|
Dividend Yield
|
|
|
0
|
|
Expected Volatility
|
|
|
100
|
%
|
Risk-Free Interest Rate
|
|
|
0.49
|
|
Term in Years
|
|
|
1
|
|
Stock Price
|
|
|
0.4
|
|
Option Exercise Price
|
|
|
0.75
|
|
17
ROKWADER, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 3 – STOCKHOLDERS’ EQUITY
(CONTINUED)
A summary of warrants activity as is
presented below:
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
Shares
|
|
Price
|
|
Life (Years)
|
|
Value
|
Outstanding at December 31, 2015
|
|
|
6,158,333
|
|
|
$
|
0.68
|
|
|
|
4.10
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
|
(25,000
|
)
|
|
$
|
0.75
|
|
|
|
—
|
|
|
$
|
—
|
|
Expired/Cancelled
|
|
|
(233,333
|
)
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding at December 31, 2016
|
|
|
5,900,000
|
|
|
$
|
0.68
|
|
|
|
3.60
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
|
(100,000
|
)
|
|
$
|
0.60
|
|
|
|
—
|
|
|
$
|
—
|
|
Expired/Cancelled
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding at March 31, 2017
|
|
|
5,800,000
|
|
|
$
|
0.68
|
|
|
|
3.00
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2017
|
|
|
5,800,000
|
|
|
$
|
0.68
|
|
|
|
3.00
|
|
|
$
|
—
|
|
As of March 31, 2017, all warrants are vested.
On March 17, 2017, Coco Partners, LLC exercised 100,000 of
its vested warrants at an exercise price of $0.60 per share for a total of $60,000.
On December 20, 2016, Mr. William Barnett exercised 25,000
of his vested stock options at an exercise price of $0.75 per share for a total of $18,750.
On August 16, 2016, the Company’s
majority-owned subsidiary True Blue Car Wash Corp. (“True Blue”) authorized the issuance of 150,000 restricted common
stock shares of True Blue stock to Gateway Advisors, Inc. (“GA”), in exchange for the contribution of Intellectual
Property by GA, including the non-exclusive right to use GA’s business plan and acquisition model for the roll-up of the
car wash industry. These 150,000 restricted common stock shares of True Blue are subject to a vesting contingency which requires
a liquidity event, defined as an effective initial public offering in an amount not less than $5,000,000, a sale of True Blue,
or a merger of True Blue. Because of the inability, at this time, to estimate when, if ever, the Company would be able to meet
any of the liquidity events for the shares to vest, the value for this issuance has been determined to be “de minimis.”
Also on August 16, 2016, the Company’s
subsidiary True Blue authorized the issuance of 365,000 restricted common stock shares of True Blue stock to COCO Partners, LLC
(“COCO”) in exchange for the contribution to True Blue of the Letter of Intent for the purchase of Clean Freak car
washes and other work related to the acquisition of Clean Freak car washes. These 365,000 restricted common stock shares of True
Blue are subject to a vesting contingency which requires a liquidity event, defined as an effective initial public offering in
an amount not less than $5,000,000, a sale of True Blue, or a merger of True Blue. Because of the inability, at this time, to estimate
when, if ever, the Company would be able to meet any of the liquidity events for the shares to vest, the value for this issuance
has been determined to be “de minimis.”
In May 2015, Coco and the Company entered
into an agreement pursuant to which Coco would purchase (i) a maximum of 15,250,000 shares of our common stock and (ii) a warrant
to purchase an aggregate of 5,900,000 shares of our common stock (the “Warrant”) for an aggregate maximum purchase
price of $6,100,000 (the “Purchase Price”). The Purchase Price is payable as follows: (a) $3,050,000 for 7,625,000
shares and the Warrant upon the closing (the “Closing”) and (b) an additional 7,625,000 shares for $3,050,000 on or
before June 30, 2015. The Closing occurred on May 7, 2015 and the Company received the initial purchase price of $3,050,000 and
the second $3,050,000 for an additional 7,625,000 shares was received on June 30, 2015.
18
ROKWADER, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 3 – STOCKHOLDERS’ EQUITY
(CONTINUED)
The terms of the Warrant provide that
Coco has the right to purchase, at any time after the Closing until April 1, 2020, up to (i) 5,000,000 shares of our common stock
at an exercise price of $0.60 per share, (ii) 500,000 shares of our common stock at an exercise price of $1.000 per share and (iii)
400,000 shares of our common stock at an exercise price of $1.25 per share. The Warrant includes certain anti-dilution adjustments
to the exercise prices in the event of payment of dividend, subdivision and combination with respect to outstanding shares of our
common stock. On
The Transaction resulted in a change
of control of the Company. With the purchase of the 15,250,000 shares, Coco acquired approximately 83.8% of the outstanding shares
of our common stock (this does not include any potential exercise of the Warrant). Upon the Closing, Mr. Robert Wallace, who has
a controlling interest in Coco, was appointed Chief Executive Officer, Chief Financial Officer, and Corporate Secretary and as
a member of our Board of Directors (the “Board”).
NOTE 4 – RELATED PARTY TRANSACTIONS
The Company has a payable to Wash Management
Group, LLC, a related party, in the amount of $108 as of March 31, 2017 and zero as of December 31, 2016. Wash Management Group,
LLC is beneficially controlled by the sellers of the Clean Freak car washes. The sellers additionally own a noncontrolling interest
in True Blue Car Wash Corp., the Company’s majority owned subsidiary.
The company has a loan payable to Coco
Partners, LLC, a related party, in the amount of $329,567 as of March 31, 2017 and zero at December 31, 2016. Coco Partners, LLC
is primarily owned by the President of the Company.
The company has a loan payable to Gateway
Advisors, Inc., a related party, in the amount of $14,500 March 31, 2017 and as of December 31, 2016. The President of the Company
has an ownership stake in the stock of Gateway Advisors, Inc.
On May 1, 2016, True Blue entered
into a Management Agreement with Wash Management Group, LLC (WMG), an Arizona Limited Liability Company. The purpose of this Agreement
is to hire WMG to serve as the general manager of the first five express car wash businesses acquired by True Blue, the additional
six express car wash business, collectively known as the Retained Car Wash Business, and other car wash operations defined as an
express car wash, acquired or developed, in the future, by True Blue or WMG. WMG is beneficially controlled by the sellers of the
Clean Freak car washes. The sellers additionally own a noncontrolling interest in True Blue.
On February 16, 2016, the Company’s
Board of Directors approved for its subsidiary, True Blue Car Wash Corp. to sell to Coco Partners, LLC, up to 6,650,000 shares
of True Blue stock for $4,322,500. Also, in exchange for the contribution to True Blue of the LOI for the purchase of Clean Freak
Holdings and other work related to the acquisition of Clean Freak Holdings, the Company approved for True Blue to issue to Coco
365,000 restricted common shares of True Blue, subject to a vesting contingency which requires a liquidity event, defined as an
initial public offering, a sale, or a merger. The Company’s Board of Directors also approved the reimbursement of acquisition
related expenses of Coco. The President of the Company is also the President and majority member of Coco. In accordance with this
approval, on December 1, 2016, True Blue sold 6,133,846 shares of its common stock to Coco for $3,987,000.
NOTE 5 – GOODWILL AND INTANGIBLES
As part of the business acquisitions
that the Company’s subsidiary made on May 1, 2016, the Company acquired all rights, title and interest in a Trademark valued
at $19,044. The Trademark is for the management, maintenance, operation, and development of Clean Freak car wash facilities. The
Company determines that the Trademark will have an infinite life and therefore it will not amortize the intangible asset. It will
instead test its Trademark for impairment at least annually in accordance with U.S. GAAP.
Additionally, the Company’s acquisition
of the car wash businesses resulted in the recognition of Goodwill in the amount of $7,527,287. In accordance with U.S. GAAP, Goodwill
is calculated as the excess of the purchase price paid over the fair value of the net identifiable assets recognized. The Goodwill
recorded as part of the Clean Freak car washes acquisition primarily reflects the value of adding the Clean Freak brand to the
Company. Goodwill has an indefinite life and will be tested, at least annually, for impairment.
19
ROKWADER, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 5 – GOODWILL AND INTANGIBLES
(CONTINUED)
On December 17, 2010, Latigo, a wholly
owned subsidiary of the Company, acquired all right, title and interest in 50 musical compositions from the Gary Harju music catalog
to the extent of his writer’s and publisher’s share for a cost of $15,000 paid in cash on the closing date of December
17, 2010. The Harju Catalog (including copyrights and publishing rights) consists of 50 original songs written in whole or in part
by Mr. Gary Harju. Some of the songs are owned outright by Latigo as a result of the acquisition, and others are and will continue
to be subject to publishing agreements with various music publishers, who will continue to collect the publisher’s share
of royalties. The other parties who have partial interests in the catalog will continue to receive their share of royalties and
other income. The Company will amortize the costs of the Harju Catalog over its estimated useful life based on projected net revenues.
The Company projects to generate revenues from the Harju Catalog for an estimate of 20 years based on Mr. Harju’s past accomplishments
and the ability of the recorded music to generate revenues for long periods of time. Therefore, the Company estimated the useful
life of the Harju Catalog to be 20 years.
On June 1, 2013, Latigo, a wholly owned
subsidiary of the Company, acquired all right, title and interest in Andrew Dorff’s “writer’s share” of
certain musical compositions written and/or co-written by him for a cost of $40,000 paid in cash. The musical compositions include
106 songs total. The Company currently owns the publishing rights from these musical compositions. Some of the songs are owned
outright by Latigo as a result of the acquisition, and others are and will continue to be subject to publishing agreements with
various music publishers, who will continue to collect the publisher’s share of royalties and other income. The Company will
amortize the costs of Andrew Dorff’s “writer’s share” over its estimated useful life based on projected
net revenues. The Company projects to generate revenues from Andrew Dorff’s “writer’s share” for an estimate
of 20 years based on Andrew Dorff’s past accomplishments and the ability of the recorded music to generate revenues for long
periods of time.
Following is a summary of goodwill and
intangibles assets:
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
Gross
|
|
Accumulated
|
|
Net Carrying
|
|
Gross
|
|
Accumulated
|
|
Net Carrying
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amount
|
|
Amortization
|
|
Amount
|
Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable Intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
Harju Music Catalog
|
|
$
|
15,000
|
|
|
$
|
(7,764
|
)
|
|
$
|
7,236
|
|
|
$
|
15,000
|
|
|
$
|
(7,514
|
)
|
|
$
|
7,486
|
|
Dorff's Writer's Share
|
|
|
40,000
|
|
|
|
(9,762
|
)
|
|
|
30,238
|
|
|
|
40,000
|
|
|
|
(9,158
|
)
|
|
|
30,842
|
|
|
|
|
55,000
|
|
|
|
(17,526
|
)
|
|
|
37,474
|
|
|
|
55,000
|
|
|
|
(16,672
|
)
|
|
|
38,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortizable Intangibles
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets
|
|
$
|
55,000
|
|
|
$
|
(17,526
|
)
|
|
$
|
37,474
|
|
|
$
|
55,000
|
|
|
$
|
(16,672
|
)
|
|
$
|
38,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
19,044
|
|
|
$
|
—
|
|
|
$
|
19,044
|
|
|
$
|
19,044
|
|
|
$
|
—
|
|
|
$
|
19,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
7,527,287
|
|
|
$
|
—
|
|
|
$
|
7,527,287
|
|
|
$
|
7,527,287
|
|
|
$
|
—
|
|
|
$
|
7,527,287
|
|
For the three months ended March 31,
2017 and 2016, amortization expense was $854 and $888, respectively.
Amortization of the remaining intangible
assets is expected to be $16,906 from 2017 through 2021, and $20,568 in aggregate for years thereafter through 2032.
20
ROKWADER, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 6 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
Gross
|
|
Accumulated
|
|
Net Carrying
|
|
Gross
|
|
Accumulated
|
|
Net Carrying
|
|
|
Amount
|
|
Depreciation
|
|
Amount
|
|
Amount
|
|
Depreciation
|
|
Amount
|
Property and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
Musical Equipment
|
|
$
|
4,692
|
|
|
$
|
(1,642
|
)
|
|
$
|
3,050
|
|
|
$
|
4,692
|
|
|
$
|
(1,408
|
)
|
|
$
|
3,284
|
|
Computer Equipment
|
|
|
1,396
|
|
|
|
(466
|
)
|
|
|
930
|
|
|
|
1,396
|
|
|
|
(396
|
)
|
|
|
1,000
|
|
Car Wash Equipment
|
|
|
2,076,779
|
|
|
|
(708,545
|
)
|
|
|
1,368,234
|
|
|
|
2,029,195
|
|
|
|
(471,669
|
)
|
|
|
1,557,526
|
|
Car Wash Improvements
|
|
|
629,735
|
|
|
|
(54,660
|
)
|
|
|
575,075
|
|
|
|
629,735
|
|
|
|
(39,044
|
)
|
|
|
590,691
|
|
Car Wash Vending Machine
|
|
|
13,315
|
|
|
|
(3,832
|
)
|
|
|
9,483
|
|
|
|
13,315
|
|
|
|
(2,671
|
)
|
|
|
10,644
|
|
Furniture and Equipment
|
|
|
82,859
|
|
|
|
(28,239
|
)
|
|
|
54,620
|
|
|
|
82,859
|
|
|
|
(18,301
|
)
|
|
|
64,558
|
|
Security Equipment
|
|
|
98,694
|
|
|
|
(8,991
|
)
|
|
|
89,703
|
|
|
|
98,694
|
|
|
|
(6,395
|
)
|
|
|
92,299
|
|
|
|
$
|
2,907,470
|
|
|
$
|
(806,375
|
)
|
|
$
|
2,101,095
|
|
|
$
|
2,859,886
|
|
|
$
|
(539,884
|
)
|
|
$
|
2,320,002
|
|
Depreciation expense
for the three months ended Mach 31, 2017 and 2016 was $266,491 and $490, respectively.
NOTE 7 - LEASES
Additionally, the Company’s subsidiary,
True Blue Car Wash Corp., leases the property in which its car wash businesses operate. True Blue entered into a lease agreement
with Spirit Master Funding X, LLC (“Spirit”) for an initial term of 20 years. True Blue has the option to extend the
initial term for four additional successive periods of five years each. Under the leases, True Blue is required to pay an initial
base annual rent of $1,200,000 with an annual adjustment of 2% of the base annual rental in effect. In addition, under these lease
agreements, True Blue shall pay to Spirit any applicable state sales, excise or rent tax and any applicable county or local sales,
excise or rent tax.
Minimum annual rental commitments under
the Company’s non-cancelable leases having initial or remaining lease terms in excess of one year are as follows:
December 31,
|
|
Amount
|
2017
|
|
|
906,000
|
|
2018
|
|
|
1,230,120
|
|
2019
|
|
|
1,254,722
|
|
2020
|
|
|
1,279,817
|
|
2021
|
|
|
1,305,413
|
|
Thereafter
|
|
|
22,580,771
|
|
Total minimum future rental payments
|
|
$
|
28,556,843
|
|
Total rent expense for the three months
ended March 31, 2017 and 2016 was $382,242 and $3,483, respectively.
21
ROKWADER, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Also, as part of the acquisition of
the car wash businesses that took place on May 1, 2016, True Blue entered into a binding Forward Purchase Agreements to acquire
another six express car wash sites (collectively the “Retained Car Wash Businesses”) in Arizona. Each proposed purchase
is subject to the particular express car wash attaining certain financial performance metrics. There is no assurance that the performance
requirements will be met and that any of the six express car wash sites will be acquired.
On May 1, 2016, True Blue entered
into a Management Agreement with Wash Management Group, LLC (WMG), an Arizona Limited Liability Company. The purpose of this Agreement
is to hire WMG to serve as the general manager of the first five express car wash businesses acquired by True Blue, the additional
six express car wash business, collectively known as the Retained Car Wash Business, and other car wash operations defined as
an express car wash, acquired or developed, in the future, by True Blue or WMG.
The Company is subject to federal and
state environmental regulations, including rules relating to air and water pollution and the storage and disposal of gasoline,
oil, other chemicals, and waste. The Company believes that it complies with all applicable laws relating to its business.
NOTE 9 - SEGMENT INFORMATION
Operating segments are defined as components
of an enterprise about which separate financial information is available that is evaluated regularly by the Company’s chief
operating decision maker in deciding how to allocate resources and in assessing performance. The Company currently operates in
two segments:
Car Wash Business
With the car wash business, the Company
has entered the car wash industry. The Company will focus its business on the management, operation, and development of car wash
facilities. While focusing on developing its brand, the Company will continue to identify other potential car wash operations to
acquire in order to grow its portfolio of car wash facilities.
Music Publishing Business
The Company’s music publishing
business comprises of copywriting musical compositions that are written by various songwriters and composers. Music publishers
exploit the copyrights to produce revenues via sales of recordings and other musical usages such as commercials, radio plays and
television shows.
|
|
Music Publishing
|
|
Car Wash
|
|
|
|
|
|
|
Business
|
|
Business
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended March 31, 2017:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
103
|
|
|
$
|
1,928,870
|
|
|
$
|
—
|
|
|
$
|
1,928,973
|
|
Gross Profit
|
|
|
103
|
|
|
|
1,422,291
|
|
|
|
—
|
|
|
|
1,422,394
|
|
Selling, General and Administrative
|
|
|
(10,781
|
)
|
|
|
(685,501
|
)
|
|
|
(68,353
|
)
|
|
|
(764,635
|
)
|
Rent Expense
|
|
|
—
|
|
|
|
(382,242
|
)
|
|
|
—
|
|
|
|
(382,242
|
)
|
Acquisition Related Expenses
|
|
|
—
|
|
|
|
(114,307
|
)
|
|
|
(100,696
|
)
|
|
|
(215,003
|
)
|
Interest Income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Interest Expense
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
(525
|
)
|
|
|
(545
|
)
|
Depreciation and Amortization
|
|
|
(1,293
|
)
|
|
|
(266,052
|
)
|
|
|
—
|
|
|
|
(267,345
|
)
|
Net Loss
|
|
|
(14,145
|
)
|
|
|
(38,180
|
)
|
|
|
(206,591
|
)
|
|
|
(258,916
|
)
|
22
ROKWADER, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 9 - SEGMENT INFORMATION (CONTINUED)
|
|
Music Publishing
|
|
Car Wash
|
|
|
|
|
|
|
Business
|
|
Business
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended March 31, 2016:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
112
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
112
|
|
Gross Profit
|
|
|
112
|
|
|
|
—
|
|
|
|
—
|
|
|
|
112
|
|
Selling, General and Administrative
|
|
|
(60,106
|
)
|
|
|
—
|
|
|
|
(47,726
|
)
|
|
|
(107,832
|
)
|
Rent Expense
|
|
|
(3,483
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,483
|
)
|
Acquisition Related Expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
(17,000
|
)
|
|
|
(17,000
|
)
|
Interest Income
|
|
|
—
|
|
|
|
—
|
|
|
|
1,494
|
|
|
|
1,494
|
|
Interest Expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Depreciation and Amortization
|
|
|
(1,378
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,378
|
)
|
Net Loss
|
|
|
(64,855
|
)
|
|
|
—
|
|
|
|
(63,232
|
)
|
|
|
(128,087
|
)
|
NOTE 10 – INCOME TAXES
The current year provision for income
taxes includes income taxes currently payable and those deferred due to temporary differences between financial statement and tax
basis of assets and liabilities. The provision for income taxes consists of the following:
|
|
March 31, 2017
|
|
March 31, 2016
|
Current
|
|
|
|
|
Federal
|
|
$
|
44,113
|
|
|
$
|
—
|
|
State
|
|
|
8,411
|
|
|
|
—
|
|
|
|
|
52,524
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,524
|
|
|
$
|
—
|
|
The following reconciles the federal statutory income tax
rate to the effective rate of the provision for income taxes.
|
|
March 31, 2017
|
|
March 31, 2016
|
Federal Statutory Rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State Taxes
|
|
|
-4.08
|
%
|
|
|
0.00
|
%
|
Meals & Entertainment
|
|
|
-0.67
|
%
|
|
|
0.00
|
%
|
Change in Valuation Allowance
|
|
|
-51.91
|
%
|
|
|
-34.00
|
%
|
Effect of Arizona Tax Rate Change
|
|
|
-2.85
|
%
|
|
|
0.00
|
%
|
Other
|
|
|
0.06
|
%
|
|
|
0.00
|
%
|
Effective Rate
|
|
|
-25.45
|
%
|
|
|
0.00
|
%
|
23
ROKWADER, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 10 – INCOME TAXES (CONTINUED)
Deferred income tax assets (liabilities)
are as follows:
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
Property, Plant and Equipment
|
|
|
(239,144
|
)
|
|
|
(309,134
|
)
|
Trademarks
|
|
|
(354
|
)
|
|
|
(239
|
)
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
|
(239,498
|
)
|
|
|
(309,373
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Start-Up Expenses
|
|
|
38,337
|
|
|
|
40,594
|
|
Intangible Assets
|
|
|
15,523
|
|
|
|
16,544
|
|
Net Operating Loss Carryforward
|
|
|
448,729
|
|
|
|
463,947
|
|
Charitable Contributions Carryforward
|
|
|
186
|
|
|
|
188
|
|
Acquisition Related Expenses
|
|
|
498,368
|
|
|
|
431,271
|
|
Deferred Rent
|
|
|
48,001
|
|
|
|
24,257
|
|
Accrued Interest Payable
|
|
|
496
|
|
|
|
296
|
|
Goodwill
|
|
|
261,495
|
|
|
|
300,507
|
|
Accrued PTO
|
|
|
17,132
|
|
|
|
13,396
|
|
Less Valuation Allowance
|
|
|
(1,088,769
|
)
|
|
|
(981,627
|
)
|
|
|
|
239,498
|
|
|
|
309,373
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
As of March 31, 2017, the Company had
incurred $294,400 of start-up expenses amortizable over 15 years. Also, the Company acquired certain intangible assets in the amount
of $187,464 amortizable over 15 years. With the acquisition of the Clean Freak car washes, the Company acquired trademarks of $19,044
which are amortizable over 15 years. Additionally, it acquired Goodwill of $7,527,287 of which $2,745,937 is not deductible for
tax purposes.
Additionally, the Company has net operating
loss carry forwards of approximately $1,176,560 and $1,505,753 for both federal and state purposes, respectively. These federal
and state carry forwards are scheduled to expire beginning 2027. The Company is no longer subject to examination by the Internal
Revenue Service for years prior to 2012 and by the Franchise Tax Board for years prior to 2011. There could be certain limitation,
imposed by Internal Revenue Code Section 382, on the utilization of these loss carry forwards if there were more than a 50 percent
change of control.
24
ROKWADER, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 11 – SUBSEQUENT EVENTS
On April 28, 2017, the Board of Directors
of the Company approved a plan for the sale of the Company’s music publishing business held by its wholly-owned subsidiary,
Latigo Shore Music, Inc. (“Latigo”). Due to the Company’s shift in business strategies from the music publishing
business to being an investment and acquisition vehicle to acquire operating car wash businesses, the Company deemed necessary
for the disposal of its music publishing segment in order to concentrate its full efforts in carrying on its new business strategy.
As such, the Board has instructed the management of the Company to execute a plan for the sale of Latigo’s music publishing
business. The Company expects to sell Latigo’s music publishing business at a price that is reasonable in relation to its
current fair value and expects the sale to be completed within a year from the date of the Board approval. The following table
identifies the major classes of assets and liabilities included as part of the disposal of Latigo’s music publishing business.
|
|
As of
|
|
As of
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Carrying amounts of major classes of assets included
|
|
|
|
|
as part of the sale of Latigo's music publishing business
|
|
|
|
|
Cash
|
|
$
|
—
|
|
|
$
|
215
|
|
Property and Equitpment, Net of Accumulated Depreciation
|
|
|
5,780
|
|
|
|
6,219
|
|
Intangible Assets, Net of Accumulated Amortization
|
|
|
37,474
|
|
|
|
38,328
|
|
|
|
|
|
|
|
|
|
|
Total major classes of assets included as part of the sale
|
|
|
|
|
|
|
|
|
of Latigo's music publishing busines
|
|
$
|
43,254
|
|
|
$
|
44,762
|
|
|
|
|
|
|
|
|
|
|
Carrying amounts of major classes of liabilities included
|
|
|
|
|
|
|
|
|
as part of the sale of Latigo's music publishing business
|
|
|
|
|
|
|
|
|
Bank Overdraft
|
|
$
|
561
|
|
|
$
|
—
|
|
Accrued Interest Payable
|
|
|
47
|
|
|
|
27
|
|
Income Tax Payable
|
|
|
15,867
|
|
|
|
12,729
|
|
Related Party Note Payable
|
|
|
13,500
|
|
|
|
13,500
|
|
|
|
|
|
|
|
|
|
|
Total major classes of liabilities included as part of the sale
|
|
|
|
|
|
|
|
|
of Latigo's music publishing business
|
|
$
|
29,975
|
|
|
$
|
26,256
|
|
In addition, on April 28, 2017, the
Board of Directors of the Company authorized management to change the name of the Company from Rokwader, Inc. to True Blue Holdings,
Inc.
Management has evaluated subsequent
events through the date of this report and all events have been appropriately disclosed and/or reflected in the consolidated financial
statements.
25