UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒

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

For the quarterly period ended September 30, 2016

☐

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 333-202542

 

GREY CLOAK TECH INC.
(Exact name of registrant as specified in its charter)
Nevada		47-2594704
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
10300 W. Charleston, Las Vegas, NV		89135
(Address of principal executive offices)		(Zip Code)
(702) 201-6450
(Registrant's telephone number, including area code)

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the previous 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 ☒ 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 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ 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. (Check one):

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

  

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

Applicable only to issuers involved in bankruptcy proceedings during the preceding five years:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes _____ No ______

 

Applicable only to corporate issuers:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of September 30, 2016, there were 16,656,276 shares of common stock, $0.001 par value, issued and outstanding.

 

GREY CLOAK TECH INC.

 

TABLE OF CONTENTS 

 

			Page
PART I – FINANCIAL INFORMATION			1
	Item 1. Financial Statements		2
	Item 2. Management's Discussion and Analysis of Financial Condition and Plan of Operation		11
	Item 3. Quantitative and Qualitative Disclosure About Market Risks		15
	Item 4T. Controls and Procedures		15
PART II – OTHER INFORMATION			17
	Item 1. Legal Proceedings		17
	Item 1A. Risk Factors		17
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		17
	Item 3. Defaults Upon Senior Securities		18
	Item 4. Mine Safety Disclosures		18
	Item 5. Other Information		18
	Item 6. Exhibits		19
SIGNATURES			20

 

PART I – FINANCIAL INFORMATION

 

This Quarterly Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on management’s beliefs and assumptions, and on information currently available to management. Forward-looking statements include the information concerning our possible or assumed future results of operations set forth under the heading: “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements also include statements in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “consider” or similar expressions are used.

 

Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. Our future results and shareholder values may differ materially from those expressed in these forward-looking statements. Readers are cautioned not to put undue reliance on any forward-looking statements.

 

ITEM 1 Financial Statements

 

GREY CLOAK TECH INC.

BALANCE SHEETS

(unaudited)

 

		September 30,				DECEMBER 31,
		2016				2015
ASSETS
CURRENT ASSETS
Cash		$	74,001			$	1,536
Accounts receivable			53,500				44,000
Prepaid expenses			4,631				104,824
Total current assets			132,132				150,360
Fixed assets, net of accumulated depreciation of $264 and $877, respectively			1,318				2,663
Website, net of accumulated amortization of $1,400 and $700, respectively			1,400				2,100
Total other assets			2,718				4,763
TOTAL ASSETS		$	134,850			$	155,123
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES
Accounts payable		$	—			$	12,892
Accounts payable - related party			5,799				—
Accrued payroll and taxes			11,881				12,260
Notes payable, net of discount of $621			19,379				—
Notes payable - related party			15,000				—
Convertible debt, net of discount of $93,892			144,607				—
Accrued interest payable			7,217				—
Accrued interest payable - related party			210				—
Derivative liabilities			245,523				—
Total liabilities			449,616				25,152
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.001 par value, 75,000,000 shares authorized,
16,656,276 and 14,731,666 shares issued and outstanding, respectively			16,656				14,732
Additional paid-in capital			1,636,225				766,802
Equity instruments to be issued			98,809				98,809
Accumulated deficit			(2,066,456	)			(750,372	)
Total stockholders' equity (deficit)			(314,766	)			129,971
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)		$	134,850			$	155,123

 

The accompanying notes are an integral part of these financial statements.

 

GREY CLOAK TECH INC.

STATEMENT OF OPERATIONS

(unaudited)

 

		For the				For the				For the				For the
		three months				three months				nine months				nine months
		ended				ended				ended				ended
		September 30,				September 30,				September 30,				September 30,
		2016				2015				2016				2015
REVENUE		$	42,500			$	25,015			$	122,750			$	70,415
OPERATING EXPENSES
Direct cost of revenue			5,231				38,065				16,834				39,320
General and administrative			244,931				170,422				606,028				261,423
General and administrative - related party			44,000				35,000				135,650				117,752
Total operating expenses			294,162				243,487				758,512				418,495
OTHER INCOME (EXPENSE)
Interest expense, net of interest income			(574,114	)			—				(630,449	)			—
Interest expense - related party			(210	)			—				(210	)			—
Change in fair value on derivative			(1,694	)			—				(1,694	)			—
Loss on extinguishment of debt			(47,969	)			—				(47,969	)			—
Total other income (expense)			(623,987	)			—				(680,322	)			—
Net loss before income tax provision			(875,649	)			(218,472	)			(1,316,084	)			(348,080	)
Income tax provision			—				—				—				—
NET LOSS		$	(875,649	)		$	(218,472	)		$	(1,316,084	)		$	(348,080	)
Loss per share - basic and diluted		$	(0.06	)		$	(0.02	)		$	(0.09	)		$	(0.02	)
Weighted average number of shares outstanding - basic and diluted			15,668,614				14,314,818				15,339,720				13,958,791

 

The accompanying notes are an integral part of these financial statements.

 

GREY CLOAK TECH INC.

STATEMENT OF CASH FLOWS

(unaudited)

 

		For the				For the
		nine months				nine months
		ended				ended
		September 30,				September 30,
		2016				2015
Cash Flows from Operating Activities:
Net Loss		$	(1,316,084	)		$	(348,080	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization			964				1,058
Loss on disposal of assets			2,664				—
Warrants issued for services			315,019				18,928
Non-cash interest			12,970				—
Change in fair value on derivative liability			1,694				—
Gain on settlement of debt			47,969				—
Changes in operating assets and liabilities:
Accounts receivable			(9,500	)			(25,000	)
Prepaid expenses			1,395				—
Accounts payable			(612,892	)			16,250
Accounts payable - related party			5,799				—
Accrued payroll and taxes			(379	)			25,379
Accrued interest payable			7,217				—
Accrued interest payable - related party			210				—
Net Cash used in Operating Activities			(343,454	)			(311,465	)
Cash Flows from Investing Activities:
Purchase of fixed assets			(1,581	)			(3,550	)
Purchase of website			—				(2,800	)
Cash flows from Investing Activities:			(1,581	)			(6,350	)
Cash Flows from Financing Activities:
Proceeds from issuance of notes payable			35,000				—
Proceeds from issuance of convertible debt, net of original issue discount of $11,000			295,000				—
Proceeds from modification of warrants			50,000				—
Proceeds from issuance of common stock			—				430,000
Proceeds from exercise of warrants			37,500				—
Net Cash provided by Financing Activities			417,500				430,000
Increase in cash			72,465				112,185
Cash at beginning of period			1,536				733
Cash  at end of period		$	74,001			$	112,918
Supplemental disclosure of cash flow information of non-cash financing activities:
Beneficial conversion feature and warrants recognized as a discount		$	260,422			$	—
Conversion of debt for shares of common stock		$	53,804			$	—

 

The accompanying notes are an integral part of these financial statements.

 

GREY CLOAK TECH INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

 (unaudited)

 

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Grey Cloak Tech Inc. (the “Company”) was incorporated in the State of Nevada on December 19, 2014. The Company was formed to engaged in the business of cloud based software to detect advertising fraud on the internet.

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of March 31, 2016 and the results of operations and cash flows for the periods presented. The results of operations for the three months and nine months ended September 30, 2016 are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s form 10-K for the year ended December 31, 2015 filed with the SEC on March 30, 2016.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

Cash

 

Cash includes cash in banks, money market funds, and certificates of term deposits with maturities of less than three months from inception, which are readily convertible to known amounts of cash and which, in the opinion of management, are subject to an insignificant risk of loss in value.

 

GREY CLOAK TECH INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Revenue Recognition

 

We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the product or service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable.

 

The Company will record revenue when it is realizable and earned and the computer programming services or marketing services have been rendered to the customers. Additionally, the Company will record revenue from the sale of its software when the software is delivered to the customer or it will be recognized ratably throughout the term of the contract.

 

Concentration

 

One customer accounted for 100% of total revenue earned during the three and nine months ended September 30, 2016 and 2015. 100% of the accounts receivable is due from this customer at September 30, 2016 and December 31, 2015.

 

Income Taxes

 

The Company accounts for income taxes using the asset and liability method in accordance with ASC 740, “Accounting for Income Taxes”. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. As of September 30, 2016, the Company did not have any amounts recorded pertaining to uncertain tax positions.

 

Fair Value Measurements

 

The Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which  defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.

 

The estimated fair value of certain financial instruments, including cash and cash equivalents are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.

 

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

 

Level 1 — quoted prices in active markets for identical assets or liabilities

 

Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable

 

Level 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

 

The derivative liability in connection with the conversion feature of the convertible debt, classified as a Level 3 liability, is the only financial liability measure at fair value on a recurring basis.

 

The change in Level 3 financial instrument is as follows:

 

Balance, January 1, 2016		$	—
Issued during the nine months ended September 30, 2016			611,073
Change in fair value recognized in operations			1,694
Converted during the nine months ended September 30, 2016			(367,244	)
Balance, September 30, 2016		$	245,523

 

GREY CLOAK TECH INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Convertible Instruments

 

The Company evaluates and account for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities”.

 

Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

The Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: The Company records when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.

 

The Company accounts for the conversion of convertible debt when a conversion option has been bifurcated using the general extinguishment standards. The debt and equity linked derivatives are removed at their carrying amounts and the shares issued are measured at their then-current fair value, with any difference recorded as a gain or loss on extinguishment of the two separate accounting liabilities. During the nine months ending September 30, 2016, the Company recognized a gain on extinguishment of $5,123 from the conversion of convertible debt with a bifurcated conversion option.

 

Common Stock Purchase Warrants

 

The Company classifies as equity any contracts that require physical settlement or net-share settlement or provide a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as defined in ASC 815-40 ("Contracts in Entity's Own Equity"). The Company classifies as assets or liabilities any contracts that require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control) or give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification is required.

 

GREY CLOAK TECH INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

 

NOTE 3 – GOING CONCERN

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has generated minimal revenues from operations. Since its inception, the Company has been engaged substantially in financing activities and developing its business plan and incurring start up costs and expenses. As a result, the Company incurred accumulated net losses from Inception (December 19, 2014) through the period ended September 30, 2016 of $2,066,456. In addition, the Company’s development activities since inception have been financially sustained through equity financing. Management plans to seek funding through debt and equity financing.

 

NOTE 4–RELATED PARTY

 

For the three and nine months ended September 30, 2016, the Company had expenses totaling$24,000 and $80,000, respectively, to an officer and director for salaries, which is included in general and administrative expenses – related party on the accompanying statement of operations. As of September 30, 2016, there was $0 in accounts payable – related party.

 

For the three and nine months ended September 30, 2016, the Company had expenses totaling$20,000 and $55,650 to a company owned by an officer and director for consulting fees, which is included in general and administrative expenses – related party on the accompanying statement of operations. As of September 30, 2016, there was $799 in accounts payable – related party.

 

For the three and nine months ended September 30, 2015, the Company paid $35,000 and $117,752, respectively, to a an officer and director and a company owned by the officer and director for consulting fees, which is included in general and administrative expenses – related party on the accompanying statement of operations.

 

NOTE 5 – NOTES PAYABLE

 

On June 9, 2016, the Company executed a promissory note for $20,000. The loan bears interest at 18% per annum and is due on December 9, 2016. The Company issued 60,000 shares of common stock to the lender as part of this note. The fair value of the shares were recorded as a debt discount and amortized over the life of the loan.

 

During the nine months ended September 30, 2016, the Company recorded interest expense of $907 and amortization of debt discount of $12,579.

 

NOTE 6 – NOTES PAYABLE – RELATED PARTY

 

On July 28, 2016, the Company received a loan of $15,000 from an officer and director of the Company. The loan bears interest at 8% per annum and due the earlier of January 27, 2017 or when the Company receives financing of over $45,000.

 

GREY CLOAK TECH INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

 

NOTE 7– CONVERTIBLE DEBT

 

On January 23, 2016, the Company executed a convertible promissory note for $50,000. The loan had an original issue discount of $6,000 and legal fees of $1,000. The loan bears interest at 8% per annum and is due on January 23, 2017. The lender has the right to convert the principal amount and unpaid interest of the loan on or after 180 days to convert at a rate of 56% of the lowest trading price during the prior 20 days of conversion. On July 21, 2016, the Company allowed the lender to transfer the principal balance and accrued interest to three entities. The principal balance of the loan was increased to include the accrued interest to date. Once the lender had the right to convert, the Company recorded a derivative liability. On August 22, 2016, one of the lenders agreed to convert their entire amount of principal and interest of $38,735 into 576,406 shares of common stock.

 

On March 7, 2016, the Company executed a convertible promissory note for $100,000. The loan bears interest at 10% per annum and is due on December 7, 2016. The lender has the right to convert the principal amount and unpaid interest of the loan at $0.10 per share if the market price is greater than $0.25. If the market price is less than or equal to $0.25 but greater than $0.10, then the conversion price is $0.05. If the market price is less than or equal to $0.10 then the conversion price is $0.02. On May 5, 2016, the Company amended the terms of the note and issued 600,000 warrants as part of the loan agreement which was effective as of March 7, 2016. The Company calculated the debt discount based on the allocated fair value of the beneficial conversion feature and the fair value of the warrants. The Company recorded a debt discount of $100,000 which was capped at the principal amount of the loan. On September 30, 2016, the Company received $50,000 from the lender and extension of the maturity date of the loan and in exchange agreed to modify the conversion rate and the exercise price of the warrants. The Company agreed to reduce the exercise price of the warrants from $0.80 to $0.10.

 

On August 22, 2016, the Company executed a convertible promissory note for up to $300,000 and has received a total of $30,000 with an original issue discount of $5,000 in the first tranche. The loan bears interest at 8% per annum. The first tranche is due on August 22, 2017. In the event of default, the interest rate increases to 22% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan at a rate of 56% of the lowest trading price during the prior 20 days of conversion. However, if the stock price is below $0.10 then the loan can convert at a rate of 46% of the lowest trading price during the prior 20 days of conversion. Additionally, the Company issued 60,000 warrants as part the convertible promissory note. The warrants have an exercise price of $0.50 and can be exercised for 5 years. The fair value of the warrants were recorded as a debt discount and amortized over one year.

 

On August 26, 2016, the Company executed a convertible promissory note for $55,000. The loan bears interest at 12% per annum. The loan is due on May 1, 2017. In the event of default, the interest rate increases to 22% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan on or after 180 days to convert at a rate of either the lesser of $0.20 or 50% of the lowest trading price during the prior 20 days of conversion. On September 7, 2016, the Company and the lender mutually agreed to remove the waiting period on the conversion and the Company recorded a derivative liability. During the nine months ended September 30, 2016, the lender converted $15,000 plus accrued interest of $69 into 259,484 shares of common stock.

 

On September 7, 2016, the Company executed a convertible promissory note for $50,000. The loan bears interest at 12% per annum and interest payments are due monthly. The loan is due on September 6, 2017. In the event of default, the interest rate increases to 20% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan on or after 180 days to convert at a rate of either the lesser of $0.40 or 50% of the lowest trading price during the prior 20 days of conversion.

 

On September 22, 2016, the Company executed a convertible promissory note for $5,000. The loan bears interest at 12% per annum. The loan is due on December 31, 2016. In the event of default, the interest rate increases to 22% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan on or after 180 days to convert at a rate of either the lesser of $0.20 or 50% of the lowest trading price during the prior 20 days of conversion.

 

On September 22, 2016, the Company executed a convertible promissory note for $5,000. The loan bears interest at 12% per annum. The loan is due on December 31, 2016. In the event of default, the interest rate increases to 22% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan on or after 180 days to convert at a rate of either the lesser of $0.20 or 50% of the lowest trading price during the prior 20 days of conversion.

 

During the nine months ended September 30, 2016, the Company recorded interest expense of $4,412 and amortization of debt discount of $84,645.

 

The Company has determined that the conversion feature embedded in the notes referred to above that contain a potential variable conversion amount constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt.

 

GREY CLOAK TECH INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

 

NOTE 8– STOCKHOLDERS’ EQUITY

 

Authorized Stock

 

The Company has authorized 75,000,000 common shares with a par value of $0.001 per share.  Each common share entitles the holder to one vote on any matter on which action of the stockholders of the corporation is sought.

 

Common Share Issuances

 

On January 5, 2016, the Company issued 10,000 shares of common stock to an investor that exercised their warrants for cash totaling $5,000.

 

On February 2, 2016, the Company issued 484,183 shares of common stock for the cashless exercise of 650,000 warrants.

 

On April 20, 2016, the Company issued 65,000 shares of common stock to investors that exercised their warrants for cash totaling $32,500.

 

On June 9, 2016, the Company agreed to issue 60,000 shares of common stock to the lender as part of the note payable.

 

On August 22, 2016, the Company issued 576,406 shares of common stock for the conversion of debt totaling $38,735 and gain on settlement of debt of $3,016.

 

On September 9, 2016, the Company issued 259,484 shares of common stock for the conversion of debt totaling $15,069.

 

On September 30, 2016, the Company issued 469,537 shares of common stock for the cashless exercise of 600,000 warrants with an exercise price of $0.10.

 

Warrant Issuances

 

On September 28, 2015, the Company granted 650,000 warrants to an individual for consulting services. The warrants can purchase 650,000 shares of common stock with an exercise price of $0.25 and expire on September 28, 2018. Of the total, 350,000 warrants vest immediately and the remaining 300,000 warrants will vest 33.33% upon the acquisition of 17 million IP addresses, 33.33% upon the acquisition of additional 17 million IP addresses and 33.33% upon the acquisition of additional 16 million IP addresses. On February 2, 2016, the Company agreed to waive the vesting provision and the individual executed a cashless exercise of 650,000 warrants and received 484,183 shares of common stock.

 

On March 4, 2016, the Company entered into a consulting services agreement to provide business development services and issued 600,000 warrants. The warrants allow the holder to purchase 600,000 shares of common stock at an exercise price of $0.80 per share and are exercisable for 2 years. On May 5, 2016, the Company and the consultant agreed to rescind the agreement.

 

On August 1, 2016, the Company entered into a consulting services agreement with a third party entity for an indefinite period of time. The services will continue until either party provides thirty days written notice of termination. The compensation for the agreement is 6,500,000 cashless exercise warrants. The warrants are exercisable at $0.12 per share and have a life of three years. The first 500,000 warrants vest immediately and the remaining 6,000,000 warrants vest upon consummation of a transaction as defined in the agreement, during the term of the consulting agreement or the six month period after the termination.

 

On August 22, 2016, the Company granted 60,000 warrants as part of convertible debt. The warrants allow the holder to purchase 60,000 shares of common stock at an exercise price of $0.51 per share and are exercisable for 5 years.

 

As of September 30, 2016, there were 12,996,250 warrants outstanding, of which 4,996,250 are fully vested.

 

NOTE 9– SUBSEQUENT EVENTS

 

On November 11, 2016, the Company and its lender agreed to amend the conversion rate and agreed to allow the entire amount of principal and interest into 3,000,000 shares of common stock for the entire amount of principal of $100,000 and accrued interest through the pay off date. The lender agreed to extend the due date of the loan to March 31, 2017.

 

On October 5, 2016, the Company executed a convertible promissory note in the principal amount of $25,000. The loan bears interest at 12% per annum. The loan is due on December 31, 2016. In the event of default, the interest rate increases to 22% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan on or after 180 days at a conversion price of the lesser of $0.20 or 50% of the lowest trading price during the 20 trading days prior to conversion.

 

On October 26, 2016, the Company received its second tranche of funds of $30,000 with an original issue discount of $5,000 less legal fees of $2,750. The funds were part of the convertible promissory note for up to $300,000 dated on August 22, 2016.

 

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

 

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.

 

Although the forward-looking statements in this Quarterly Statement reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

 

The following discussion and analysis of financial condition and results of operations of the Company is based upon, and should be read in conjunction with, its unaudited financial statements and related notes elsewhere in this Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States.

 

Summary Overview

 

We were formed in December 2014. We are developing a cloud based software to detect advertising fraud on the internet. We had revenues of approximately $116,000 in the year ended December 31, 2015, approximately 85% of which was from a single customer. We had revenues of $42,500 for the three months ended September 30, 2016, nearly all of which was from the same customer.

 

Going Concern

 

As a result of our financial condition, we have received a report from our independent registered public accounting firm for our financial statements for the period from inception (December 19, 2014) through December 31, 2014, and the year ended December 31, 2015, that includes an explanatory paragraph describing the uncertainty as to our ability to continue as a going concern. In order to continue as a going concern we must effectively balance many factors and begin to generate revenue so that we can fund our operations from our sales and revenues. If we are not able to do this we may not be able to continue as an operating company. At our current revenue and burn rate, our cash on hand will last less than one month, and thus we must raise capital by issuing debt or through the sale of our stock. However, there is no assurance that our existing cash flow will be adequate to satisfy our existing operating expenses and capital requirements.

 

Results of Operations for the Three and Six Months Ended June 30, 2016 and 2015

 

Introduction

 

We had revenues of $42,500 for the three months ended September 30, 2016, compared to $25,015 for the three months ended September 30, 2015. Our operating expenses were $294,161 for the three months ended September 30, 2016, compared to $243,487 for the three months ended September 30, 2015, an increase of $50,674, or 21%.

 

We had revenues of $122,750 for the nine months ended September 30, 2016, compared to $70,415 for the nine months ended September 30, 2015. Our operating expenses were $758,511 for the nine months ended September 30, 2016, compared to $418,495 for the nine months ended September 30, 2015, an increase of $340,016, or 81%.

 

Our operating expense consisted mainly of consulting fees of $416,822 and legal and professional fees of $58,700 for the nine months ended September 30, 2016.

 

Revenues and Net Operating Loss

 

Our revenue, operating expenses, net operating loss, and net loss for the three and nine months ended September 30, 2016 and 2015 were as follows:

 

		Three Months				Three Months								Nine months				Nine months
		September 30,				September 30,				Increase/				September 30,				September 30,				Increase /
		2016				2015				(Decrease)				2016				2015				(Decrease)
Revenue		$	42,500			$	25,015			$	17,485			$	122,750			$	70,415			$	52,335
Operating expenses:
Direct cost of revenue			5,231				38,065				(32,834	)			16,834				39,320				22,486
General and administrative			244,931				170,422				74,509				606,028				261,423				344,605
General and administrative - related party			44,000				35,000				9,000				135,650				117,752				17,898
Total operating expenses			294,162				243,487				50,675				758,511				418,495				340,016
Net operating loss			251,662				218,472				33,190				635,762				348,080				287,682
Total other expenses			(623,987	)			—				(623,987	)			(680,322	)			—				(680,322	)
Net loss		$	875,649			$	218,472			$	657,177			$	1,316,084			$	348,080			$	968,004

 

Revenues

 

Revenues were $42,500 for the three months ended September 30, 2016, compared to $25,015 for the three months ended September 30, 2015, an increase of $17,485, or 70%. Nearly all of the total revenue came from a single customer.

 

Revenues were $122,750 for the nine months ended September 30, 2016, compared to $70,415 for the nine months ended September 30, 2015, an increase of $52,335, or 74%. Nearly all of the total revenue came from a single customer

 

Direct Cost of Revenue

 

Direct cost of revenue expenses was $5,231 for the three months ended September 30, 2016, compared to $38,065 for the three months ended September 30, 2015.

 

Direct cost of revenue expenses was $16,834 for the nine months ended September 30, 2016, compared to $39,320 for the nine months ended September 30, 2015.

 

General and Administrative

 

General and administrative expenses were $244,931 for the three months ended September 30, 2016, compared to $170,422 for the three months ended September 30, 2015, an increase of $74,509, or 44%. General and administrative expenses – related party were $44,000 for the three months ended September 30, 2016, compared to $35,000 for the three months ended September 30, 2015, an increase of $9,000, or 26%.

 

General and administrative expenses were $606,028 for the nine months ended September 30, 2016, compared to $261,423 for the nine months ended September 30, 2015, an increase of $344,605, or 132%. A significant increase was due to an increase in consulting fees of which a portion related to the removal of the vesting provision of the warrants and the amortization of the fair value of the warrants. General and administrative expenses – related party were $135,650 for the nine months ended September 30, 2016, compared to $117,752 for the nine months ended September 30, 2015, an increase of $17,898, or 15%.

 

Operating Loss

 

Net operating loss was $251,662 for the three months ended September 30, 2016, compared to $218,472 for the three months ended September 30, 2015, an increase of $33,190. Net operating loss increased, as set forth above, primarily due to an increase in general and administrative expenses.

 

Net operating loss was $635,762 for the nine months ended September 30, 2016, compared to $348,080 for the nine months ended September 30, 2015, an increase of $287,682. Net operating loss increased, as set forth above, primarily due to an increase in general and administrative expenses.

 

Other Income (Expense)

 

Other expense was $623,987 for the three months ended September 30, 2016, compared to other income of $0 for the three months ended September 30, 2015, an increase of $623,987. Other expense consisted of interest expense, net of interest income. The increase of other expense is attributable to derivative liabilities associated with new debt issuances.

 

Other expense was $680,322 for the nine months ended September 30, 2016, compared to other income of $0 for the nine months ended September 30, 2015, an increase of $680,322. Other expense consisted of interest expense, net of interest income. The increase of other expense is attributable to derivative liabilities associated with new debt issuances.

 

Net Loss

 

Net loss was $875,649 for the three months ended September 30, 2016, or $0.06 per share, compared to $218,472 for the three months ended September 30, 2015, or $0.02 per share, an increase of $657,177. Net loss increased, as set forth above, primarily due to an increase in interest expense from new debt issuances and an increase in general and administrative expenses.

 

Net loss was $1,316,084 for the nine months ended September 30, 2016, or $0.09 per share, compared to $348,080 for the nine months ended September 30, 2015, or $0.02 per share, an increase of $968,004. Net loss increased, as set forth above, primarily due to an increase in interest expense from new debt issuances and an increase in general and administrative expenses.

 

Liquidity and Capital Resources

 

Introduction

 

During the three months ended September 30, 2016, because we generated only nominal revenues, we had negative operating cash flows. Our cash on hand as of September 30, 2016 was $74,001, which was derived from the exercise of warrants and the sale of stock, notes and convertible promissory notes to investors. Our monthly cash flow burn rate for 2016 was approximately $39,500. Although we have moderate short term cash needs, as our operating expenses increase we will face strong medium to long term cash needs. We anticipate that these needs will be satisfied through the issuance of debt or the sale of our securities until such time as our cash flows from operations will satisfy our cash flow needs.

 

Our cash, current assets, total assets, current liabilities, and total liabilities as of September 30, 2016 and December 31, 2015, respectively, are as follows:

 

		September 30,				December 31,
		2016				2015				Change
Cash		$	74,001			$	1,536			$	72,465
Total Current Assets			132,132				150,360				(18,228	)
Total Assets			134,850				155,123				(20,273	)
Total Current Liabilities			449,616				25,152				424,464
Total Liabilities		$	449,616			$	25,152			$	424,464

 

Our cash increased because we were able to raise capital from the sale of warrants, notes and convertible notes. Our total current assets decreased primarily because of a reduction in prepaid expenses. Our total current liabilities increased primarily because of the sale of notes and convertible notes. Our stockholders’ deficit increased by $1,316,084 to $2,066,456.

 

In order to repay our obligations in full or in part when due, we will be required to raise significant capital from other sources. There is no assurance, however, that we will be successful in these efforts.

 

Cash Requirements

 

Our cash on hand as of September 30, 2016 was $74,001. Based on our nominal revenues and current monthly burn rate of approximately $39,500 per month, we will need to continue to fund operations by raising capital from the sale of our stock and debt financings.

 

Sources and Uses of Cash

 

Operating Activities

 

We had net cash used in operating activities of $343,454 for the nine months ended September 30, 2016, compared to $311,465 for the nine months ended September 30, 2015. For the nine months ended September 30, 2016, the net cash used in operating activities consisted primarily of our net loss of $1,358,819, offset primarily by warrants issued for services expenses of $315,019. For the nine months ended September 30, 2015, the net cash used in operating activities consisted primarily of our net loss of $348,080, increased by an increase in accounts receivable of $25,000 and offset by an increase in accounts payable and accrued liabilities of $41,629.

 

Investing Activities

 

We had $1,581 net cash used in investing activities for the nine months ended September 30, 2016, and $6,350 net cash used in investing activities for the nine months ended September 30, 2015.

 

Financing Activities

 

Our net cash provided by financing activities for the nine months ended September 30, 2016 was $417,500, all of which was proceeds from notes payable, convertible notes payable, the modification of warrants and the exercise of warrants, compared to $430,000 for the nine months ended September 30, 2015, all of which was proceeds from the issuance of common stock.

 

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk

 

As a smaller reporting company, we are not required to provide the information required by this Item.

 

ITEM 4 Controls and Procedures

 

(a)       Disclosure Controls and Procedures

 

We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of September 30, 2016, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2016, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described in our Annual Report on Internal Control Over Financial Reporting filed in our Annual Report on Form 10-K.

 

Our principal executive officers do not expect that our disclosure controls or internal controls will prevent all errors and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive officers have determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

(b)       Changes in Internal Control over Financial Reporting

 

No change in our system of internal control over financial reporting occurred during the period covered by this report, the three month period ended September 30, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1 Legal Proceedings

 

We are not a party to or otherwise involved in any legal proceedings.

 

In the ordinary course of business, we are from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of our management, other than as set forth herein, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.

 

ITEM 1A Risk Factors

 

As a smaller reporting company, we are not required to provide the information required by this Item.

 

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds

 

On August 1, 2016, the Company entered into a consulting services agreement with a third party entity for an indefinite period of time. The services will continue until either party provides thirty days written notice of termination. The compensation for the agreement is 6,500,000 cashless exercise warrants. The warrants are exercisable at $0.12 per share and have a life of three years. The first 500,000 warrants vest immediately and the remaining 6,000,000 warrants vest upon consummation of a transaction as defined in the agreement, during the term of the consulting agreement or the six month period after the termination.

 

On August 16, 2016, we executed a Convertible Promissory Note in the principal amount of $55,000. The loan bears interest at 12% per annum. The loan is due on May 1, 2017. In the event of default, the interest rate increases to 22% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan on or after 180 days at a conversion price of the lesser of $0.20 or 50% of the lowest trading price during the 20 trading days prior to conversion. On September 7, 2016, the Company and the lender mutually agreed to remove the waiting period on the conversion and the Company recorded a derivative liability. During the nine months ended September 30, 2016, the lender converted $15,000 plus accrued interest of $69 into 259,484 shares of common stock. The issuance of the note was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, and the investor was accredited and familiar with our operations, and there was no solicitation in connection therewith.

 

On August 22, 2016, we issued 576,406 shares of common stock to an investor that exercised its conversion rights under a Convertible Promissory Note. The issuance of the securities was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, and the investors were accredited and familiar with our operations, and there was no solicitation in connection therewith.

 

On August 22, 2016, we executed a Convertible Promissory Note in the principal amount of up to $300,000 and, as of the date hereof, have received the first tranche of $30,000 with an original issue discount of $5,000. The loan bears interest at 8% per annum. The first tranche is due on August 22, 2017. In the event of default, the interest rate increases to 22% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan at a rate of 56% of the lowest trading price during the 20 days prior to conversion. However, if the stock price is below $0.10 then the loan can convert at a rate of 46% of the lowest trading price during the 20 trading days prior to conversion. Additionally, the Company issued 60,000 warrants as part the convertible promissory note. The warrants have an exercise price of $0.50 and can be exercised for 5 years. The issuance of the note and warrants was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, and the investor was accredited and familiar with our operations, and there was no solicitation in connection therewith.

 

On September 7, 2016, we executed a Convertible Promissory Note in the principal amount of $50,000. The loan bears interest at 12% per annum and is due on September 6, 2017. The conversion price is the lesser of $0.40 or 56% of the lowest trading price during the 20 trading days prior to conversion. The issuance of the note was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, and the investor was accredited and familiar with our operations, and there was no solicitation in connection therewith.

 

On September 22, 2016, we executed a Convertible Promissory Note in the principal amount of $5,000. The loan bears interest at 12% per annum. The loan is due on December 31, 2016. In the event of default, the interest rate increases to 22% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan on or after 180 days at a conversion price of the lesser of $0.20 or 50% of the lowest trading price during the 20 trading days prior to conversion. The issuance of the note was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, and the investor was accredited and familiar with our operations, and there was no solicitation in connection therewith.

 

On September 22, 2016, we executed a Convertible Promissory Note in the principal amount of $5,000. The loan bears interest at 12% per annum. The loan is due on December 31, 2016. In the event of default, the interest rate increases to 22% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan on or after 180 days at a conversion price of the lesser of $0.20 or 50% of the lowest trading price during the 20 trading days prior to conversion. The issuance of the note was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, and the investor was accredited and familiar with our operations, and there was no solicitation in connection therewith.

 

On October 5, 2016, we executed a Convertible Promissory Note in the principal amount of $25,000. The loan bears interest at 12% per annum. The loan is due on December 31, 2016. In the event of default, the interest rate increases to 22% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan on or after 180 days at a conversion price of the lesser of $0.20 or 50% of the lowest trading price during the 20 trading days prior to conversion. The issuance of the note was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, and the investor was accredited and familiar with our operations, and there was no solicitation in connection therewith.

 

ITEM 3 Defaults Upon Senior Securities

 

 There have been no events which are required to be reported under this Item.

 

ITEM 4 Mine Safety Disclosures

 

Not applicable.

 

ITEM 5 Other Information

 

None.

 

ITEM 6 Exhibits

 

(a)       Exhibits

 

Exhibit Number		Name and/or Identification of Exhibit
3.1	(1)	Articles of Incorporation of Grey Cloak Tech Inc.
3.2	(1)	Bylaws of Grey Cloak Tech Inc.
4.1	(1)	Form of Warrant Certificate
4.2	(1)	Form of Warrant Agreement
10.1		Consulting Services Agreement dated August 1, 2016
10.2		Convertible Promissory Note dated August 12, 2016
10.3		Convertible Promissory Note dated August 16, 2016
10.4		Convertible Promissory Note dated September 7, 2016
10.5		Convertible Promissory Note dated September 22, 2016
10.6		Convertible Promissory Note dated September 22, 2016
10.7		Convertible Promissory Note dated October 5, 2016
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1		Chief Executive Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Chief Financial Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
100.INS		XBRL Instance Document
100.SCH		XBRL Schema Document
100.CAL		XBRL Calculation Linkbase Document
100.DEF		XBRL Definition Linkbase Document
100.LAB		XBRL Labels Linkbase Document
100.PRE		XBRL Presentation Linkbase Document

 

(1)

Incorporated by reference from our Registration Statement on Form S-1 dated and filed with the Commission on March 6, 2015.

 

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.

 

 

	Grey Cloak Tech, Inc.
Dated:  November 21, 2016	/s/ Fred Covely
	By: Fred Covely
	Its: Chief Executive Officer

 

 

 

 

  

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