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| EX-31.1 - CERTIFICATION - PeerLogix, Inc. | peerlogix_10k-ex3101.htm |
| EX-32.2 - CERTIFICATION - PeerLogix, Inc. | peerlogix_10k-ex3202.htm |
| EX-32.1 - CERTIFICATION - PeerLogix, Inc. | peerlogix_10k-ex3201.htm |
| EX-31.2 - CERTIFICATION - PeerLogix, Inc. | peerlogix_10k-ex3102.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2017
or
☐ 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: 333-191175
PEERLOGIX, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 46-4824543 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
119 West 24th Street, 4th Floor, New York, New York 10011
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 550-9993
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b–2 of the Exchange Act.
(Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |
| Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based on the closing sales price, or the average bid and asked price on such stock, as June 30, 2017 was $1,854,320.
The number of shares of the registrant’s common stock outstanding as of April 30, 2018 was 46,122,368.
PEERLOGIX, INC.
TABLE OF CONTENTS
| i |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The information contained in this Annual Report on Form 10-K for year ended December 31, 2017 (the “Report”), including in documents that may be incorporated by reference into this Report, includes some statements that are not purely historical and that are “forward-looking statements.” Such forward-looking statements include, but are not limited to, statements regarding the Company and its management’s expectations, hopes, beliefs, intentions or strategies regarding the future, including its financial condition and results of operations. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,” “potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and similar expressions, or the negatives of such terms, may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.
The forward-looking statements contained in this Report are based on current expectations and beliefs concerning future developments. There can be no assurance that future developments actually affecting the Company will be those anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond the Company’s control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements, some of which are described in the section of this Report entitled “Risk Factors”.
Should one or more of these risks or uncertainties materialize, or should any of the Company’s assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
Unless specifically set forth to the contrary, when used in this Report the terms “PeerLogix,” "we"", "our", the "Company" and similar terms refer to PeerLogix, Inc., a Nevada corporation and where the context is applicable, to our business operations, inclusive of those undertaken by our operating subsidiary, PeerLogix Delaware. “PeerLogix Delaware” refers solely to our wholly-owned subsidiary, PeerLogix Technologies, Inc., a Delaware corporation.
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OVERVIEW
PeerLogix, Inc. is an advertising technology and data aggregation company. The Company provides a software as a service (SAAS) platform, which enables the tracking and cataloguing of over-the-top viewership and listenership in order to determine consumer trends and preferences based upon media consumption. Its platform collects over-the-top data, including Internet Protocol (IP) addresses of the streaming and downloading parties (location), the name, media type and genre of media watched, listened or downloaded, and utilizes licensed and publicly available demographic and other databases to further filter the collected data to provide insights into consumer preferences to digital advertising firms, product and media companies, entertainment studios and others.
The Company was incorporated on February 14, 2014 in Nevada under the name of Realco International, Inc. The Company previously offered real estate marketing and sales services to individuals and businesses seeking to purchase international real estate, with a particular focus on the European and Middle Eastern markets.
On August 14, 2015, the Company entered into a share exchange transaction whereby all of the shareholders of PeerLogix Technologies, Inc., a privately held Delaware corporation (“PeerLogix Delaware”), exchanged all of their shares of common stock for newly issued shares of common stock of the Company (the “Share Exchange”). As a result of the Share Exchange, PeerLogix Delaware has become a wholly-owned subsidiary of the Company and its business operations are assumed by the Company. On September 3, 2015, the Company filed a Certificate of Amendment to its Articles of Incorporation changing its name from Realco International, Inc. to PeerLogix, Inc.
Industry Background
Brand advertisers and consumer product companies utilize a broad array of consumer data on which to base advertising decisions. They have traditionally relied upon information collected from legacy media distribution providers to base their research (e.g., Comcast and other cable providers). These traditional methods are inherently inefficient by today’s standards and are often cost-prohibitive due to their fragmented nature, relying upon separate, non-integrated legacy providers for television and music research related to consumer preferences.
Digital surveying methods provide a solution to many of the inefficiencies present with traditional methods. Thus, advertisers, agencies, entertainment studios and others are rapidly adopting digital methodologies to augment their traditional practices. One such digital surveying method yet to be widely implemented is Over-the-Top (“OTT”) measurement, which the Company believes is a significant market opportunity.
In today’s digital world, consumers have access to media, television shows, music, movies, video games and software through a number of growing and fragmented methods and providers. This change in behavior and habits is an evolution resulting from technological innovation, and has resulted in greater choice and democratization amongst consumers. The resulting digital empowerment has directly lead to the birth of platforms providing consumers direct access to media, which often times circumvents legacy providers previously relied upon for distribution (such as traditional cable providers).
One of the more prominent digital platforms to arise has been Over-the-Top (e.g., Popcorn Time, Netflix, Hulu, HBOGO). Over-the-Top broadcast is entertainment content (e.g., audio, video, and other media) transmitted via the Internet without an operator of multiple cable or direct-broadcast satellite television systems controlling or distributing the content (i.e., cable television service providers). Consumers can access Over-the-Top content through Internet-connected devices such as phones (including Android, iPhone, and Windows-type mobile devices), smart TVs (such as Google TV and LG Electronic's Channel Plus), set-top boxes (such as the Fire TV and Roku), gaming consoles (such as the PlayStation 4, Wii U, and Xbox One), and desktop and laptop computers and tablets.
According to MarketsandMarkets, the Over-the-Top market is estimated to grow from USD 28.04 Billion in 2015 to USD 62.03 Billion by 2020 with a CAGR of 17.2%. Thus, because Over-the-Top is so widely used and being rapidly adopted for digital media consumption, demographic data related to its use can provide digital agencies and consumer product companies with a wide variety of critical and yet untapped information about consumers enabling them to target their messages and offerings to such consumers.
Marketing and Advertising Industry Implications
The Company believes data collected from Over-the-Top viewership and listenership represents a substantial improvement over search and other tracking data utilized to obtain marketing insights, as Over-the-Top data reflects actual consumption of media with respect to which the viewing party has taken an affirmative effort to obtain, as opposed to search data, such as Google, which can reflect pure curiosity.
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Through rigorous testing and analysis, the Company has been able to show that on a general basis, the domestic Over-the-Top audiences most commonly reside in middle to upper-middle class households, possessing greater than average levels of discretionary income. The Company sees this demographic skew as a significant opportunity in the marketplace, as the Company’s prospective core client base, digital agencies and consumer product companies, proactively seek new audiences deemed financially worthy of sales and advertising efforts.
PeerLogix Over-The-top Opportunity
Over-the-Top Adoption and Activity
Over-the-top media viewership and listenership represents up to 22% of all worldwide internet traffic, and is used by approximately 140 million people worldwide to consume TV shows, movies, music, pictures, video games, e-books and software online. All major entertainment and media content is available to consumers tuning in via over-the-top media channels. Of this population of tech-savvy consumers, approximately 40 million reside in the United States and 100 million are distributed throughout all major and developing countries of the world.
Over-the-Top media activity represents one of the most significant categories of global Internet usage, comprising up to 22% of all Internet traffic during peak activity. Although Over-the-Top data available at any one point in time is ephemeral and is then lost, the Company has been storing and continues to store all such data in a fully scalable database which has been aggregating the results since approximately January 1, 2014, providing the distinctive ability to provide trend data on the basis of media consumption. The Company’s proprietary platform operates on an automatic basis with little human interaction and continually acquires and catalogues data on Over-the-Top media activity in real time, obtaining millions of data points daily.
PeerLogix Platform
The Company’s proprietary platform enables the tracking and cataloging of over-the-top media in order to determine consumer trends and preferences based upon media consumption. PeerLogix’s patent pending platform collects over-the-top data, including IP addresses of the uploading and downloading parties (e.g., location), the name, file type, media type (whether movie, television, documentary, music, e-books, software, etc.), and genre of media downloaded, and utilizes licensed and publicly available demographic and other databases to further filter the collected data to provide insights into consumer preferences to digital advertising firms, product and media companies, entertainment studios and others.
PeerLogix Application
Market
Understanding customer and target audience information is of the upmost importance for organizations undertaking media planning activities. As marketing becomes increasingly data-centric, the ability to obtain rich insights about consumers’ media preferences is expected to represent a significant competitive advantage for the Company’s clients.
According to International Data Corporation (IDC), the big data technology and services market will grow at a compound annual growth rate (CAGR) of 23.1% over the 2014-2019 forecast period with annual spending reaching $48.6 billion in 2019. This is the market targeted by the Company.
The Company’s platform analyzes its proprietary Media Library of over two billion media downloads and overlays it with select third party demographic and behavioral datasets to determine the degree of likelihood a client’s target audience is to be interested in a specific TV show, musical artist, movie, video game and/or commercial software package. By blending Over-the-Top viewership and listenership data with third party datasets, the Company’s platform enables media pattern identification and tracking and furthermore, enables clients to test assumptions about who their customers really are and the specific media those customers truly value.
Services Offered
The services offered by the Company are two-fold:
1) Data licensing services that provide marketers, publishers and networks custom digital audience segments that match specific advertiser criteria (e.g., specific sporting interests, luxury retail, media genre, etc.). This enables media planners to buy qualified audiences directly, and execute digital campaigns either through the client's ad server or an existing DSP or SSP relationship.
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2) PeerLogix invites select clients to join the Company's reseller marketplace. These clients are able to establish additional revenue streams by reselling their own first party audience data via PeerLogix’s reseller relationships. Data sales which take place are structured as a rev-share between PeerLogix and the respective client.
Product Architecture
Architecture
The client-server cloud-based architecture provides several key advantages for the security, scalability and redundancy of the infrastructure.
Client Security
The Company’s application is a “thin client”, meaning all requests, proprietary data and algorithms reside on the server side. All communications between servers are through encrypted channels.
Server Scalability and Redundancy
All of the Company’s web services are hosted on the Amazon EC2 cloud, which is a web service that provides resizable compute capacity in the cloud. The Company’s current architecture allows it to further scale out (add more servers) and/or scale up (add more capacity to an existing server) within minutes, and its current architecture has been tested successfully under heavy stress tests. Additionally, the Company’s load balancers enable updates and maintenance without any downtime and all of its data is backed up and mirrored between two SQL servers (An SQL server is a Microsoft product used to manage and store information. The aforementioned data stored inside an SQL server will be housed in an archived database).
Server Security
The Company’s web services on Amazon EC2 have gone through a hardening process to enhance their security according to known practices, and all algorithms and data servers are isolated from the internet. Only requests originating from the Company’s Dashboard are delivered to its data servers, with all other connection requests ignored.
Proprietary Peer-to-Peer Monitoring System
The peer-to-peer protocol is a communications protocol that enables computers to share Media Files (e.g., TV shows, movies, music, video games and commercial software). Rather than making a single TCP connection (TCP enables two hosts to establish a connection and exchange streams of data), peer-to-peer enables a single user to download Media Files over many small data requests over different IP connections from a multitude of distributing computers simultaneously, resulting in quicker and more reliable download speeds for the user. A peer-to-peer client utilized by an individual coordinates Media File distribution by locating other computers in any geography of the world sharing part or the entirety of the contents of said Media File. To accomplish this series of actions, the peer-to-peer client running on the distributing/sharing individual’s computer breaks the Media File into a number of smaller but identically sized pieces. Pieces are typically downloaded non-sequentially by the peer-to-peer client on the downloading individual’s computer, and are rearranged into the correct order by the peer-to-peer client on the downloading individual’s computer (see below). Typical Media File sharing architecture utilizing a peer-to-peer protocol (the Company’s technology is not depicted):
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Search Scraper
The Company’s Search Scraper scans websites and message forums to find media files of major entertainment interests (e.g., television shows, movies, music and video games), extracts their web addresses, and subsequently downloads the location of the media files found into a MySQL database (MySQL is an open source relational database management system. Information in a MySQL database is stored in the form of related tables). This process mimics the behavior a person would undertake to obtain Over-the-Top media files on their own. The Company believes its proprietary search technology is capable of finding the vast majority of freely available Over-the-Top files in existence on the internet.
Accuracy & Geo-location
The Company incorporates a third party geo-location service provided by Digital Element to determine authenticity of IP Addresses as well as their physical geographic location to an accuracy of a few hundred yards. IP Addresses deemed to be virtual private networks (VPNs) or using an alternative masking service are flagged, giving the Company the ability to filter them out during later analysis steps, if deemed necessary. Information the Company is able to directly conclude about Over-the-Top households as a result of their IP Address are: Country, Region/State, City, ZIP/Postal Code, Internet Connection Type & Speed, Mobile Carrier (if applicable), Latitude/Longitude (approximate), Internet Service Provider, Home/Business, and Company Name (if applicable).
Consumer Privacy
The Company’s data meets anonymity standards necessary to be classified as non-personally identifiable information (Non-PII), and all contributors have taken an affirmative effort to download, stream, participate in, or contribute to the respective Over-the-Top network containing media files of interest. As a result, the Company’s data collection methods meet or exceed the current accountability and data collection standards of domestic and international government and regulatory agencies.
Market Positioning & Product Expansion
Worldwide Solution
The Company sees its large swath of international data as a significant competitive advantage compared to alternative data offerings. Its data is contributed to by individuals from the vast majority of countries in the world. As a result, the Company has the ability to offer clients information giving them a strategic advantage when entering new markets, such as understanding the cultural preferences of local populations, consequently better positioning products with locally preferred music artists, television or movie content.
Competitive Advantages
The Company, and the data it collects possess three significant competitive advantages to other data sources.
| · | Scale – Over-the-Top audience data, and consequently each data point the Company collects, represent individuals from the vast majority of countries around the world. As a result, the Company is able to measure specific media preferences of populations in most countries, and is not limited to predefined major markets. Clients of the Company are able to gain significant competitive advantages understanding media preferences within new markets they choose to enter with their products (e.g., introducing a new consumer packaged good product into a select province of India or Indonesia). | |
| · | Granularity – The Company’s tracking mechanisms are location agnostic, and its incorporated geo-location service is able to identify the physical location of viewers within the accuracy of a few hundred yards. As a result, the Company’s technology is able to determine media preferences on a neighborhood-by-neighborhood level (e.g., television preferences in Manhattan vs. Brooklyn), providing clients first of its kind abilities previously unattainable with transactional data. | |
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Transactional Data – Each user and data record the Company collects in its database represents an affirmative action taken by an individual to obtain and watch/listen to the content. The Company believes that it is one of only a few organizations able to provide transactional media information on a worldwide basis, in every major and developing country. |
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Expanding Value of OVER-THE-TOP Data
Third Party Datasets
The Company has also collected third party nonproprietary datasets from a multitude of data brokers. These datasets include: Consumer Lifestyles, Sports, Household Characteristics, Financial, Apparel Preferences, Charitable Causes, Political Leanings, Parenting, Hobbies, Food, Travel, Pets, Automotive, Income, Home Market Valuations, Net Worth, Credit Worthiness, Languages, Ethnicities, Gender, Education, Occupation, Children, Marital Status and Religion. All third party data is collected anonymously and aggregated by zip code. By aggregating in this method, the Company is able to overlay information from one or a combination of these datasets to build a profile of popular characteristics associated with Over-the-Top audiences.
The Company believes the following implementations, which further-enhance Over-the-Top analysis, provide significant market opportunities for the Company, as well as unique value propositions not identically available from alternative data solutions. Implemented applications include:
PeerLogix Analytics; Further Value for Clients
Audience Analysis - Clients of the Company are able to select a single musical artist, television show, movie, ebook or video game, and discover generalized audience characteristics of the population of the respective media’s audience (e.g., the demographics of Jay-Z listeners). This analysis has many applications, and provides entertainers, content owners and studios an easier ability to understand the underlying audience characteristics of content they produce. This facilitates simpler and more efficient marketing efforts and better evaluation of potential merchandising opportunities.
Media Analysis – Conversely to the aforementioned Audience Analysis, clients of the Company are able to select a single or multitude of demographics and behaviors from its aggregated third party data, and the PeerLogix Dashboard will calculate highly correlated Over-the-Top media (e.g., television shows and movies) associated with those demographics and behaviors. This enables the determination of preferred media preferences of people exhibiting said characteristics (e.g., soccer fans who have a high degree of credit worthiness prefer watching Breaking Bad and Game of Thrones). This analysis has many applications, including but not limited to determining ideal placement of advertising in respect to television programming, assisting agencies and others to direct advertising spend across campaigns and projects.
Development Pipeline
The Company plans to expand its product and service offerings by including additional products that cater to the marketing and advertising needs of its core client base. These offerings include:
| – | Digital Advertising Delivery | ||
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· | A data pipeline to Digital Advertising Exchanges (an advertising exchange is an automatic platform for selling and buying online advertising inventories where space buyers (advertisers, media agencies, retargeting networks) and suppliers (networks, publisher) meet. An advertising exchange allows automation for buying / selling phases and campaign implementation), enabling direct advertising to Over-the-Top audiences for clients of said Digital Advertising Exchanges. Utilizing this model, the Company expects that it would receive a royalty payment for each advertising impression shown. The primary advantage of this model is immediate scalability to hundreds (and perhaps thousands) of clients who are already customers of said Digital Advertising Exchanges. | |
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PeerLogix Digital Advertising Server, enabling website owners who are frequented by Over-the-Top households to receive advertising campaigns facilitated by the Company to their websites. Music and entertainment marketers are increasingly appropriating advertising budgets to target users using music streaming services (e.g., Pandora, Spotify), and the Company sees this model as a compliment to such efforts. | ||
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Revenue Model
Revenue from Clients
The Company anticipates that after initial client validation, its solution will be sold on a subscription basis, with estimated annualized revenues per client between $24,000 and $96,000. The Company intends to offer various pricing modules to accommodate Agencies, Entertainment Studios, Trading Desks, and others. As with most subscription based services, the Company intends to offer different subscription packages for ongoing support, such as an ongoing support license. Over time, the Company intends to apply optimization techniques to determine different pricing schemes. Revenues from are invoiced on a per-client basis, and the Company is either engaged with, or is negotiating proposals with clients whom are now deemed recurring.
The Company will offer its clients both online and invoice billing. Online billing will enable easy payment from the client’s business checking account or check card. Invoice billing will require a traditional commercial document being issued by the Company to clients on a monthly basis, typically providing net 30 payment terms.
Foundational Marketing Efforts
Public Relations. The Company intends to generate both international and local media coverage for its services, through a variety of channels, including media articles and interviews with management. To date, we have been approached by representatives of several international media companies expressing interest in covering the Company’s developments through earned media, such as news announcements and content creation. The Company’s proactive efforts will be supported by local public relations agencies. It will attempt to focus its efforts on media channels and publications that target advertising and marketing issues, as well as small cap financial industry publications.
Online Marketing. The Company intends to utilize online campaigns that are designed to direct additional potential customers to its services. Rigorous social media profiles on top platforms will assist in bolstering the Company’s value proposition to the market; top platforms include: Facebook, LinkedIn, Twitter, Wikipedia.
The Company believes in utilizing Earned Media to bolster its value proposition to both client and investor markets. Core areas of concentration will include: publishing company news and industry news via distribution channels, including 1st party blogs and investor relations webpages; social media feeds, including: Facebook, LinkedIn and Twitter; weekly and quarterly newsletters intended to provide proprietary value to companies in the industry (e.g., ADP Quarterly Jobs Report vs PeerLogix Quarterly Media Report).
Thought Leadership. Management intends to develop periodic thought leadership pieces on advertising data and the current and future state of media trends. By participating in industry events and conferences, the Company plans to position itself as a source of imminent and forthcoming insight for emerging trends in media and consumer data sciences. The Company intends to originate much of this messaging from events, both hosted by and participated in by the Company, to then continue the topics and conversation through aforementioned social media channels. These “Community Building” efforts are intended to organically build interest in the Company both in its industry and in the financial markets.
Acquisition Costs
Because the Company offers a software solution, its primary variables in respect to expenses are sales efforts, customer acquisition costs and customer churn.
Customer Acquisition Costs.
The Company continually evaluates its customer acquisition costs with the intent of optimizing its marketing channels and marketing messages. The Company anticipates Investor and Public Relations costs to comprise a noteworthy percentage of its overall budget. Management intends to implement a broadly inclusive plan, with the intention of drawing a significant amount of attention to the Company’s value proposition for client industries, as well as the Company’s compelling investment thesis to the public markets. Furthermore, these efforts are intended to augment efforts undertaken by the Company’s presales partner, Corporate Rain International (see below), to prompt quicker market penetration of the PeerLogix Dashboard. Specific efforts will include, but are not limited to: public relations strategy, media relations, news announcements, content creation, thought leadership development and traditional and digital advertising. As the Company has experienced and continues to have insufficient working capital to effect its business plan, while it planned on allocating approximately $350,000 to customer acquisition, marketing, sales, public relations and investor relations efforts over an initial 12 month period, with further budgeting to be determined thereafter, to date the Company has allocated only approximately $120,000.
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Churn
SaaS churn is the rate at which SaaS customers, such as those who become clients of the Company, cancel their recurring revenue subscription. It is a general indicator of customer dissatisfaction, cheaper and/or better offers from competitors, more successful sales and/or marketing by competitors, or reasons having to do with the customer life cycle. 5-8% annual churn rates are generally experienced by SaaS companies offering analytics products, and management anticipates similar results with its own customer retention.
Customer Support
To ensure customer satisfaction, the Company’s customer support efforts include both proactive and responsive models.
Proactive
The Company has developed an event-driven automatic system that notifies its support to errors faced by clients. Errors that could potentially be present in new releases of the Company’s platform are able to be detected by its support staff immediately after a client experiences them.
Responsive Model
The Company intends to offer online and telephone support for clients to support its products and services.
Intellectual Property
The Company has filed a patent application, including a secondary continuation-in-part (CIP) patent, on its proprietary Over-the-Top tracking technology and business applications. The Company has patent pending status currently in the United States (US 13/847,418), Europe, Australia, Canada, Japan and Israel.
The Company has also filed a PCT (Patent Cooperation Treaty) application in China, India, Brazil and Mexico to preserve its ability to later file in these countries.
In addition to the Company’s patent portfolio, the Company’s proprietary database contains 36 months of Over-the-Top media consumption that cannot be acquired or recreated by new market entrants, as Over-the-Top data is ephemeral and is therefore lost if not captured. By possessing this historical information, the Company is afforded the unique ability to analyze historical trends that a potential future competitor would not be capable of upon entrance to the market.
Competition
The Company’s primary competitors are TruOptik, Muzit, Nielsen, Kantar (a subsidiary of WPP Group) and Rentrak. Secondary competitors include Google’s Trends products and Facebook’s suite of advertising tools. Most of these companies have significantly greater resources than the Company. Nielsen’s and Rentrak’s services are largely based on sampling methodologies with a small sample in each market used to measure television and movie viewing behaviors. These are the standards currently employed for the measurement of television and movie behavior for advertising purposes, referred to often times as the “sample currency.” Facebook’s and Google’s services are based on sampling of their users’ posts and search activity which is used to determine present and emerging curiosity of people who participate on their platforms. TruOptik and Muzit also employ a Over-the-Top sampling methodology, each respectively stating they track Over-the-Top users. TruOptik’s service is principally a Data Management Platform, built for advertisers, and Muzit focuses on providing services to music artists. It is unknown as to the extent or depth of either of their respective technology’s tracking and cataloguing capabilities.
The Company expects to enjoy a unique competitive position, derived from the scale, granularity and the transactional nature of its data. Its services and systems differ from a sampling service (e.g., Nielsen) in that the Company possesses a measurement system based on a massive amount of passively-collected viewing and listening activity. This results in far more granular, reliable and predictable determination of consumers’ actual preferences as compared to either a small, compensated sample approach (e.g., Nielsen) or search engine data which is merely an expression of interest and not listening or viewing intent.
Although the Company believes that it is currently able to compete effectively in the market, it may not be able to do so in the future or be capable of maintaining or further increasing its market share. A failure to compete successfully in its market could adversely affect its business and financial condition.
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Employees
The Company currently has two employees located in the United States, and one independent contractor in New Zealand. The independent contractor and one of the Company’s domestic employees focus on research and development. None of the Company’s employees are represented by a labor union, and the Company considers its employee relations to be good. The Company also utilizes a number of consultants to assist with research and development and commercialization activities, generally on a monthly retainer basis.
The Company intends to hire additional personnel to focus on account management, development, marketing, customer support and technological support.
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”). Reports filed with the Securities and Exchange Commission (the “SEC”) pursuant to the Exchange Act, including annual and quarterly reports, and other reports it files, can be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Investors may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. Investors can request copies of these documents upon payment of a duplicating fee by writing to the SEC. The reports we file with the SEC are also available on the SEC’s website (http://www.sec.gov).
Smaller reporting companies are not required to provide the information required by this Item 1A.
Item 1B. Unresolved Staff Comments.
Not applicable.
Our executive offices are located in leased premises, under a month-to-month agreement, at 119 West 24th Street, 4th Floor, New York, NY 10011 and our phone number is 646-825-8549.
Attia Enterprises, a creditor, has initiated a claim against the Company for $87,500 relating to a loan due of $46,664 including interest currently in default. The Company retained counsel for representation in the matter. Subsequent to December 31, 2017, the company accepted a settlement totaling approximately $90,000 cash and 750,000 shares of stock. The company has accounted for it in accordance with ASC450.
From time to time we may be named in claims arising in the ordinary course of business. Currently, no legal proceedings, government actions, administrative actions, investigations or claims are pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business and financial condition.
We anticipate that we will expend significant financial and managerial resources in the defense of our intellectual property rights in the future if we believe that our rights have been violated. We also anticipate that we will expend significant financial and managerial resources to defend against claims that our products and services infringe upon the intellectual property rights of third parties.
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock was traded on the OTCQB marketplace under the symbol RLQT from June 10, 2015 through September 22, 2015. Our common stock now trades on the OTCQB marketplace under the symbol “LOGX.” The following table sets forth the range of high and low bid prices for our common stock for each of the periods indicated as reported by such marketplaces. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. On March 20, 2018, the closing price of our common stock as reported on the OTC Pink marketplace was $0.065 per share.
|
Quarter Ended |
High |
Low |
| March 31, 2017 | $0.07 | $0.04 |
| June 30, 2017 | $0.12 | $0.04 |
| September 30, 2017 | $0.10 | $0.05 |
| December 31, 2017 | $0.13 | $0.04 |
We consider our common stock to be thinly traded and, accordingly, reported sales prices or quotations may not be a true market-based valuation of our common stock.
Holders
As of April 30, 2018, 46,122,368 shares of Common Stock were issued and outstanding, which were held by approximately 60 holders of record. We also believe there are more owners of our common stock whose shares are held by nominees or in street name.
Dividends
We have not paid any dividends and we do not anticipate paying any cash dividends in the foreseeable future and we intend to retain all of our earnings, if any, to finance our growth and operations and to fund the expansion of our business. Payment of any dividends will be made in the discretion of our Board of Directors, after our taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion.
2016 Amended and Restated Equity Incentive Plan
The Board of Directors and stockholders of the Company adopted the 2015 Equity Incentive Plan, which was amended and restated in 2016, which reserves a total of 15,000,000 shares of Common Stock for issuance under the 2016 Plan. If an incentive award granted under the 2016 Plan expires, terminates, is unexercised or is forfeited, or if any shares are surrendered in connection with an incentive award, the shares subject to such award and the surrendered shares will become available for further awards under the 2016 Plan.
Shares issued under the 2016 Plan through the settlement, assumption or substitution of outstanding awards or obligations to grant future awards as a condition of acquiring another entity are not expected to reduce the maximum number of shares available under the 2016 Plan. In addition, the number of shares of common stock subject to the 2016 Plan, any number of shares subject to any numerical limit in the 2016 Plan, and the number of shares and terms of any incentive award are expected to be adjusted in the event of any change in our outstanding common stock by reason of any stock dividend, spin-off, split-up, stock split, reverse stock split, recapitalization, reclassification, merger, consolidation, liquidation, business combination or exchange of shares or similar transaction.
Administration
It is expected that the Board will administer the 2016 Plan. Subject to the terms of the 2016 Plan, the Board would have complete authority and discretion to determine the terms of awards under the 2016 Plan.
Grants
The 2016 Plan is expected to authorize the grant to 2016 Plan participants of nonqualified stock options, incentive stock options, restricted stock awards, restricted stock units, performance grants intended to comply with Section 162(m) of the Internal Revenue Code (as amended, the “Code”) and stock appreciation rights, as described below:
| · | Options granted under the 2016 Plan entitle the grantee, upon exercise, to purchase a specified number of shares from the Company at a specified exercise price per share. The exercise price for shares of Common Stock covered by an option cannot be less than the fair market value of the Common Stock on the date of grant unless agreed to otherwise at the time of the grant. |
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| · | Restricted stock awards and restricted stock units may be awarded on terms and conditions established by the Board, which may include performance conditions for restricted stock awards and the lapse of restrictions on the achievement of one or more performance goals for restricted stock units. |
| · | The Board may make performance grants, each of which will contain performance goals for the award, including the performance criteria, the target and maximum amounts payable, and other terms and conditions. |
| · | The 2016 Plan authorizes the granting of stock awards. The Board will establish the number of shares of Common Stock to be awarded and the terms applicable to each award, including performance restrictions. |
| · | Stock appreciation rights (“SARs”) entitle the participant to receive a distribution in an amount not to exceed the number of shares of Common Stock subject to the portion of the SAR exercised multiplied by the difference between the market price of a share of Common Stock on the date of exercise of the SAR and the market price of a share of Common Stock on the date of grant of the SAR. |
Duration, Amendment, and Termination
The Board is expected to have the power to amend, suspend or terminate the 2016 Plan without stockholder approval or ratification at any time or from time to time. Unless sooner terminated, the 2016 Plan would terminate ten years after it is adopted.
The table below sets forth information as of December 31, 2017 with respect to compensation plans under which our common stock or options are authorized for issuance.
| Plan category | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights | (b) Weighted-average exercise price of outstanding options, warrants and rights | (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||
| Equity compensation plans approved by security holders | – | $ | – | – | ||||||||
| Equity compensation plans not approved by security holders | 24,550,000 | $ | 0.10 | – | ||||||||
| Total | 24,550,000 | (1) | $ | 0.10 | – | |||||||
____________
(1) 9,550,000 options issued outside of equity compensation plan in 2018
Item 6. Selected Financial Data.
This item is not required for an emerging growth company.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following management’s discussion and analysis should be read in conjunction with our historical financial statements and the related notes. The management’s discussion and analysis contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect” and the like, and/or future tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this Report. The Company’s actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. The Company does not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Report.
As the result of the transactions of which Peerlogix Technologies, Inc. became a wholly-owned subsidiary of the Company and the change in business and operations of the Company from a shell company to a technology company, a discussion of our financial results prior to the Share Exchange is not pertinent, and the financial results of PeerLogix Technologies, Inc., the accounting acquirer, are considered the financial results of the Company on a historical and going-forward basis.
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The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Results of Operations for the Years ended December 31, 2017 and 2016
The following table sets forth the summary income statement for the years ended December 31, 2017 and 2016:
| For the Year Ended | ||||||||
| December 31, 2017 | December 31, 2016 | |||||||
| Revenues | $ | 1,096 | $ | 15,000 | ||||
| Operating Expenses | $ | (1,991,944 | ) | $ | (1,255,777 | ) | ||
| Other Income (Expense), net | $ | (3,096,705 | ) | $ | (607,090 | ) | ||
| Net Loss | $ | (5,087,553 | ) | $ | (1,847,867 | ) | ||
Revenues: From inception through December 31, 2017 the Company has generated $23,616 in revenues.
Operating Expenses: Operating expenses consist primarily of compensation and related costs for personnel and facilities, and include costs related to our facilities, finance, human resources, information technology and fees for professional services. Professional services are principally comprised of outside legal, audit, information technology consulting, marketing, investor relations and outsourcing services.
Operating expenses increased by 59% during the year ended December 31, 2017, as compared to the year ended December 31, 2016. The overall $736,167 increase in operating expenses is primarily attributable to the following approximate net increases (decreases) in operating expenses:
| · | An increase of payroll and related expenses of $120,960 due to an increase in officers’ salaries. |
| · | An increase of director fees of $147,949. Director fees include increase in stock based compensation of $163,024, net with reduction in cash compensation. |
| · | An increase in equity-based compensation expense of $319,175. During the year ended December 31, 2017, the Company recognized $398,084 of equity-based compensation as a result of an equity-based award granted to employees and key consultants. During the year ended December 31, 2016, the Company recognized $212,576 of equity- based compensation as a result of an equity-based award granted.. |
| · | An increase in professional fees of $33,210 (excluding equity-based compensation - see above). In the current period the Company incurred an increase in consulting fees related to business development, financial advisory services and investor relations; an increase in accounting and auditing fees related to public filing requirements; and an increase in legal fees related to merger activities partially offset by a substantial decrease in legal fees related to patent costs. |
| · | An increase in computer and internet expenses of $41,224 primarily due to increases in server costs. The Company leases servers on a monthly basis from a third party. |
| · | A decrease in rent expense of $20,231 due to the Company expired lease agreement for its office facility. |
| · | An increase in travel and travel related expenses of $1,976 due to the Company primarily due to an increase in trade show and marketing related activities. |
| · | An increase in advertising of $1,753. |
| · | A decrease in insurance expense of $882. |
Other income (expenses), net: Other income (expense), net consists primarily of interest expense primarily related to the Company’s convertible promissory notes and notes payable and includes non-cash amortization of debt discounts of $1,766,925 and $676,709 and non-cash interest of $1,556,815 and $0 for the years ended December 31, 2017 and 2016, respectively.
In addition, the Company incurred an aggregate of $997,668 loss on settlement of debt in fiscal 2017, primarily from extensions of notes payable as compared to a gain on settlement of debt of $218,768 in fiscal 2016.
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In 2017, the Company issued convertible notes payable with variable conversion features which included embedded derivatives. As such, the Company is required to bifurcate the fair value of the derivative and mark-to-market each reporting period. During the year ended December 31, 2017, the Company recorded a $1,706,590 gain on change in fair value of derivative liabilities as compared to $0 for 2016.
Overall, other income (expense), net - increased by $(2,489,615) to $(3,096,705) during the year ended December 31, 2017 as compared to $(607,090) during the year ended December 31, 2016.
Liquidity and Capital Resources
The following table summarizes total current assets, liabilities and working capital at December 31, 2017 compared to December 31, 2016:
| Year ended | ||||||||||||
| December 31, 2017 | December 31, 2016 | Increase/ (Decrease) | ||||||||||
| Current Assets | $ | 33,156 | $ | 102,891 | $ | (69,735 | ) | |||||
| Current Liabilities | $ | 3,663,157 | $ | 1,038,602 | $ | 2,624,555 | ||||||
| Working Capital Deficit | $ | (3,630,001 | ) | $ | (935,711 | ) | $ | 2,694,290 | ||||
As of December 31, 2017, we had working capital deficit of $3,630,001 as compared to a working capital deficit of $935,711 as of December 31, 2016, an increase of $2,694,290. During the year ended December 31, 2017 we received net proceeds of $901,138 from the issuance of convertible notes and warrants and $11,156 from officer loans. The Company used the proceeds to pay down debt and fund operations during the year. The increase in our working capital deficit is primarily attributable to our historic negative cash flow from operations resulting in our growing accounts payable, accrued liabilities and outstanding debt.
We have incurred net operating losses and operating cash flow deficits since inception, continuing through the first quarter of 2018. We have been funded primarily by debt, to execute on our business plan and for working capital. Our principal source of liquidity is our cash. At December 31, 2017, we had cash totaling approximately $14,086. We believe our existing available cash is insufficient to enable the Company to meet the working capital requirements for the near future. Consequently, we will be required to raise additional capital to complete the development and commercialization of our current product. However, there can be no assurance that we will be able to raise additional capital on terms acceptable to us, or at all. In order to boost sales, we continue to explore potential expansion opportunities in the industry through mergers and acquisitions, enhancement of our existing products, development of new products and expansion into other international markets. We will incur increased costs as a result of being a public company, which could affect our profitability and operating results.
We are obligated to file annual, quarterly and current reports with the SEC pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In addition, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the rules subsequently implemented by the SEC and the Public Company Accounting Oversight Board have imposed various requirements on public companies, including requiring changes in corporate governance practices. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities of ours more time-consuming and costly. We expect to spend between $200,000 and $250,000 in legal and accounting expenses annually to comply with our reporting obligations and Sarbanes-Oxley. These costs could affect profitability and our results of operations.
Management has determined that additional capital will be required in the form of equity or debt securities. In addition, if we cannot raise additional short term capital we will be forced to continue to further accrue liabilities due to our limited cash reserves. There are no assurances that management will be able to raise capital on terms acceptable to the Company. If we are unable to obtain sufficient amounts of additional capital, we may be required to reduce the scope of our planned development, which could harm our business, financial condition and operating results. If we obtain additional funds by selling any of our equity securities or by issuing common stock to pay current or future obligations, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution, or the equity securities may have rights preferences or privileges senior to the common stock. If adequate funds are not available to us when needed on satisfactory terms, we may be required to cease operating or otherwise modify our business strategy.
Going Concern and Management’s Liquidity Plans
As reflected in the consolidated financial statements, the Company had an accumulated deficit at December 31, 2017, a net loss and net cash used in operating activities for the year then ended and has generated only minimal revenues since inception. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year from the issuance date of the consolidated financial statements.
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The ability of the Company to continue its operations is dependent on management’s plans, which include the raising of capital through debt and/or equity markets, with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. The Company may need to incur additional liabilities with certain related parties to sustain the Company’s existence. There can be no assurance that the Company will be able to raise any additional capital.
The Company may also require additional funding to finance the growth of our anticipated future operations as well as to achieve its strategic objectives. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. In that event, the Company would be required to change its growth strategy and seek funding on that basis, if at all.
The Company’s plan regarding these matters is to raise additional debt and/or equity financing to allow the Company the ability to cover its current cash flow requirements and meet its obligations as they become due. There can be no assurances that financing will be available or if available, that such financing will be available under favorable terms. In the event that the Company is unable to generate adequate revenues to cover expenses and cannot obtain additional financing in the near future, the Company may seek protection under bankruptcy laws. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
Financing Transactions
During the year ended December 31, 2017, we sold $1,110,000 of Units to investors. Each Unit was sold at a price of $10,000 per Unit and consisted of one (1) six (6) month, 18% convertible promissory note (36% on an annual basis) with a face value of $10,000 and four year warrants exercisable for an aggregate number of shares of common stock equal to 50% of the shares of common stock into which the Note is initially convertible, exercisable at a price of $0.10 per share. The Offerings Notes are due six months after the issuance of each note, as amended.
Each of the Notes is convertible at an initial price equal to $0.06 per share. In addition, during the two month period commencing on each issuance of the Offering 3 Notes, as amended, the Notes will contain a look-back provision pursuant to which the Notes will be convertible at the lower of $0.06 or the lowest volume weighted average price of the Company’s common stock (the “VWAP”) during any 10 day period during such two (2) month period, provided however, in the event that the VWAP during any such ten (10) day period is less than $0.06, then the reset conversion price of the Notes shall be no lower than $0.03. The Notes also contain a reset provision to the same price as any future offering in the next three (3) years in the event that the conversion or offering price of securities offered in such subsequent offering is less than the Conversion Price of the Notes in this Offering.
Summary Cash flows for the years ended December 31, 2017 and 2016:
| Year Ended | ||||||||
| December 31, 2017 | December 31, 2016 | |||||||
| Net cash used in operating activities | $ | (725,243 | ) | $ | (511,056 | ) | ||
| Net cash used in investing activities | $ | (37,500 | ) | $ | – | |||
| Net cash provided by financing activities | $ | 720,807 | $ | 565,780 | ||||
Cash Used in Operating Activities
Our primary uses of cash from operating activities include payments to consultants for research and development, compensation and related costs, legal and professional fees, computer and internet expenses and other general corporate expenditures.
Cash used in operating activities in 2017 consisted of net loss adjusted for certain non-cash items such as equity-based compensation expense of $1,024,431, amortization of debt discounts of $1,766,925, non-cash interest of $1,442,654, loss on settlement of debt of $936,915, net with gain on change in fair value of derivative liabilities of $1,741,441, as well as the effect of changes in working capital and other activities.
The adjustments for the non-cash items increased from the year ended December 31, 2016 to the year ended December 31, 2017 due primarily to increases in equity-based compensation, debt discount amortization, non-cash interest and loss on debt settlement, net with gain on change in derivative liabilities. In addition, the net increase in cash from changes in working capital activities from the year ended December 31, 2016 to the year ended December 31, 2017 primarily consisted of an increase in accounts payable and accrued expenses primarily due to an increase in accrued payroll and payroll related expenses, accrued legal fees, accrued accounting and auditing fees and accrued consulting fees related to research and development expenses, business development, financial advisory services and investor relations. These increases in cash from changes in working capital activities are offset by an increase in prepaid insurance expense.
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Cash Used in Investing Activities
Cash used in investing activities for the year ended December 31, 2017 consisted in investment in an acquisition target of $37,500 as compared to $0 for 2016.
Cash Provided by Financing Activities
Cash provided by financing activities consists primarily of net proceeds from issuance or repayments of notes payable, convertible promissory notes and related party loans for the year ended December 31, 2017.
Cash provided by financing activities increased from the year ended December 31, 2016 to the year ended December 31, 2017, primarily driven by an increase in proceeds from the issuance of convertible notes and warrants offset by the repayment of notes payable and related party loans.
Recent Accounting Pronouncements
See Note 3 to the consolidated financial statements included elsewhere in this Filing.
Critical Accounting Policies
Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“U.S. GAAP”). U.S. GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to U.S. GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Our significant accounting policies are summarized in Note 3 of our consolidated financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
We believe the following critical accounting policies and procedures, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from these estimates. The Company’s significant estimates and assumptions include the fair value of the Company’s equity instruments, convertible debt, derivative liabilities, stock-based compensation, and the valuation allowance relating to the Company’s deferred tax assets.
Derivative Instrument Liability
The Company accounts for derivative instruments in accordance with ASC 815, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged. At December 31, 2017 and 2016, the Company did not have any derivative instruments that were designated as hedges.
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Accounting for Warrants
The Company accounts for the issuance of common stock purchase warrants issued in connection with debt and equity offerings in accordance with the provisions of ASC 815, Derivative Instruments and Hedging Activities (“ASC 815”). The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
The Company assessed the classification of its common stock purchase warrants as of the date of each equity offering and determined that such instruments met the criteria for equity classification, as the settlement terms indicate that the instruments are indexed to the entity’s underlying stock.
Off Balance Sheet Arrangements:
We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
This item is not required for a smaller reporting company.
Item 8. Financial Statements and Supplementary Data.
Our consolidated financial statements and corresponding notes thereto called for by this item appear at the end of this document commencing on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a) Evaluation of Disclosure and Control Procedures
Under the supervision and with the participation of our management, including our principal executive officer and the principal financial officer, we have conducted an evaluation 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 and Exchange Act of 1934, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were not effective to ensure that the material information required to be included in our Securities and Exchange Commission reports is accumulated and communicated to our management, including our principal executive and financial officer, recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms relating to our company, particularly during the period when this report was being prepared.
(b) Management's Report on Internal Control Over Financial Reporting
This Company’s management is responsible for establishing and maintaining internal controls over financial reporting and disclosure controls. Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive officer and principal financial officer, or persons performing similar functions, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| (1) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; |
| (2) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the registrant; and |
| (3) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements. |
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Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is appropriately recorded, processed, summarized and reported within the specified time periods.
Management has conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017, based on the framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 (“COSO”).
Based on this assessment, management concluded that as of the period covered by this Annual Report on Form 10-K, it had material weaknesses in its internal control procedures.
As of period covered by this Annual Report on Form 10-K, we have concluded that our internal control over financial reporting was ineffective. The Company’s assessment identified certain material weaknesses which are set forth below:
Functional Controls and Segregation of Duties
Because of the Company’s limited resources, there are limited controls over information processing.
There is an inadequate segregation of duties consistent with control objectives. Our Company’s management is composed of a small number of individuals resulting in a situation where limitations on segregation of duties exist. In order to remedy this situation, we would need to hire additional staff to provide greater segregation of duties. Currently, it is not feasible to hire additional staff to obtain optimal segregation of duties. Management will reassess this matter in the following year to determine whether improvement in segregation of duty is feasible.
Accordingly, as the result of identifying the above material weakness we have concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company’s internal controls.
Management believes that the material weaknesses set forth above were the result of the scale of our operations and are intrinsic to our small size. Management believes these weaknesses did not have a material effect on our financial results and intends to take remedial actions upon receiving funding for the Company’s business operations.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report herein.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Not applicable.
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Item 10. Directors, Executive Officers and Corporate Governance.
As of December 31, 2017, our executive officers and directors were as follows:
| Name | Age | Position |
| Ray Colwell | 52 | Chief Executive Officer and Director |
| William Gorfein | 30 | Principal Financial Officer and Director |
| Kevin Richardson | 49 | Director |
Ray Colwell – CEO
On February 21, 2017, the Company entered into an employment agreement with Ray Colwell (“Colwell”), pursuant to which, commencing March 6, 2017, Colwell will serve as the Chief Executive Officer of the Company through March 5, 2019, subject to extension as provided in the employment agreement, and be appointed to the Board of Directors.
Prior to joining PeerLogix, Colwell served as a member of successful executive teams, most recently as VP of Partner Sales at AOL responsible for $100+ million of mobile demand revenue following the AOL acquisition of Millennial Media, where he was then head of Global Business Development, and prior to the acquisition of Nexage by Millennial Media in the same capacity. Colwell has deep experience generating digital media revenue in new businesses in the digital ecosystem, including his role as Chief Revenue Officer at Adelphic, recently acquired by Time Inc., and as Chief Revenue Officer of 4INFO, as well as SVP of Sales and BD for Third Screen Media, a pioneer in the mobile ad serving space acquired by AOL in 2007.
William Gorfein – CEO, Founder of PeerLogix and Director
Mr. Gorfein’s leadership has spanned multiple organizations as he has provided services to companies and clients while functioning in both information technology and financially based roles. Most recently before cofounding PeerLogix, he was the lead solutions engineer for BreezeIT, a subsidiary of Core 3 Technologies in Orange County, CA. While in this capacity, Mr. Gorfein was responsible for overseeing the budget and managing the technical and implementation requirements for the majority of datacenter equipment and architectures sold to customers from the small business to the enterprise level. With over a decade of software and hardware development experience, Mr. Gorfein has developed extensive expertise in the areas of platform development, life-cycle management and server architecture.
Previously the technical lead of two major software initiatives, Mr. Gorfein oversaw the development and implementation of content monitoring software for a rights management group based in Los Angeles, and he has worked on independent software projects relating to O.C.R. (optical character recognition) and employee time management. Mr. Gorfein has hand-picked and managed multiple development teams and has led cross continent collaborations in Egypt, India and China.
Mr. Gorfein’s is experienced in understanding the underlying macro-conditions driving enterprises to adopt Information Technology, and successfully taking advantage of these trends through foresight, creativity and resource management abilities. He received his Bachelor’s degree with a focus on Economy and Industry from the University of Arizona in Tucson, AZ.
Kevin Richardson – Director
Mr. Richardson, age 48, is currently Chairman of the board of directors of SANUWAVE Health, Inc. since August 2005. Mr. Richardson founded Prides Capital LLC and Prides Capital Partners LLC in January 2004 where he is Managing Director. Prides Capital LLC and Prides Capital Partners LLC specialize in strategic block, active investing in small-cap and micro-cap public and private companies. From April 1999 until the end of 2003, Mr. Richardson was a partner at Blum Capital Partners, a $2.5 billion investment firm. Between May 1999 and September 2003, Mr. Richardson was the lead public partner on 18 investments. Prior to joining Blum Capital, Mr. Richardson was an analyst at Tudor Investment Corporation, an investment management firm.
Previously, Mr. Richardson spent four years at Fidelity Management and Research where he was the assistant portfolio manager of the Fidelity Contra Fund, a registered investment company. Mr. Richardson also managed Fidelity Airline Fund, the Fidelity Aerospace and Defense Fund, and performed research and analysis in a variety of industry sectors (computer services, business services, media, financial services, and healthcare information technology). Mr. Richardson is also a member of the board of directors of As Seen On TV, Inc., a publicly traded multichannel distributor of As Seen On TV products and Pegasus Solutions, Inc., a travel technology company and was previously a board member of Healthtronics, Inc. and QC Holdings, Inc. Mr. Richardson received an undergraduate degree from Babson College and an M.B.A. from Kenan-Flagler Business School at the University of North Carolina.
Board Committees
The Company does not intend to maintain a board of directors that is composed of a majority of “independent” directors. The Company does not expect to appoint an audit committee, nominating committee and/or compensation committee, or to adopt charters relative to each such committees as at the date of this Report, but may adopt such charters and appoint such committees in the future.
| 17 |
Item 11. Executive Compensation
The following table sets forth information regarding each element of compensation that was paid or awarded to the named executive officers of the Company for the periods indicated.
| Name and Principal Position | Year |
Salary ($) |
Bonus ($) |
Stock Awards ($) |
Option Awards ($) |
Non-Equity Incentive Plan Compensation ($) |
All Other Compensation ($) |
Total ($) | |
| Ray Colwell (1) | 2017 | $173,356 | - | (2) | $409,059 | - | - | - | $582,415 |
| 2016 | - | - | - | - | - | - | - | ||
| William Gorfein | 2017 | - | - | - | - | - | - | - | |
| (Principal Financial Officer and director (3) | 2016 | $120,000 |
- |
(4) |
$379,673 |
$499,673 | |||
| Joshua Partridge (5) | 2017 | - | - | - | - | - | - | - | |
| (former COO, Secretary and director) | 2016 | $37,846 | - | - | - | - | - | $37,846 | |
| Charles Gonsher | 2017 | - | - | - | - | - | - | - | |
| (CAO) (6) | 2016 | - | - | - | - | - | - | - |
|
(1) (2) (3) (4) |
Mr. Colwell was appointed on February 21, 2017. On March 6, 2017, Mr. Colwell was granted 7,000,000 options to purchase the Company’s common stock at $0.11 per share and expiring 10 years from issuance. 1,000,000 options vest upon issuance with the remainder with defined market conditions. Mr. Gorfein was appointed on August 13, 2015. On September 28, 2016, Mr. Gorfein was granted 9,000,000 options to purchase the Company’s common stock at $0.11 per share and expiring 10 years from issuance and vesting with defined market conditions. |
| (5) | Mr. Partridge was appointed Chief Operating Officer on September 10, 2015. On April 22, 2016, Joshua Partridge tendered his resignation as Chief Operating Officer. |
| (6) | Mr. Gonsher was appointed Chief Accounting Officer on September 10, 2015. On February 18, 2016, Mr. Gonsher’s employment agreement was terminated. |
Outstanding Equity Awards at Fiscal Year-End
The following table presents the outstanding equity awards held by each of the named executive officers as of the end of the fiscal year ended December 31, 2017.
| Option Awards | ||||||||||||||||||
| Name | Number of Securities Underlying Unexercised Options Exercisable | Number of Securities Underlying Unexercised Options Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Exercised Unearned Options | Option Exercise Price | Option Expiration Date | |||||||||||||
| William Gorfein | 1,000,000 | – | $ | 0.10 | 06/24/2021 | |||||||||||||
| (Principal Financial Officer) | 9,000,000 | – | $ | 0.11 | 09/28,2021 | |||||||||||||
Employment Agreements
On February 21, 2017, the Company entered into an employment agreement with Ray Colwell, pursuant to which, commencing March 6, 2017, Mr. Colwell will serve as the Chief Executive Officer of the Company through March 5, 2019, subject to extension as provided in the employment agreement, and be appointed to the Board of Directors.
| 18 |
Each of the other named executive officers executed employment agreements with the Company in August 2015, which was adopted by us upon closing of the Share Exchange.
Mr. Gorfein’s employment agreement is for a period of three (3) years, after which the agreement is renewable for one (1) year periods, unless the Company or Mr. Gorfein gives six (6) months’ notice of the intention to terminate the agreement. Mr. Gorfein receives a salary of $120,000 per year with annual increases of 10% per year. Mr. Gorfein may also receive an annual cash bonus in an amount to be determined by the Board of Directors.
The Company agrees to promptly reimburse Mr. Gorfein for all reasonable and necessary business expenses, including without limitation, telephone and other charges incurred by them on behalf of the Company. In addition, the Company has agreed to provide Mr. Gorfein and Mr. Partridge with health insurance.
Limits on Liability and Indemnification
We provide directors and officers insurance for our current directors and officers.
Our certificate of incorporation eliminates the personal liability of our directors to the fullest extent permitted by law. The certificate of incorporation further provides that the Company will indemnify its officers and directors to the fullest extent permitted by law. This indemnification covers at least negligence on the part of the indemnified parties. Insofar as indemnification for liabilities under the Securities Act may be permitted to our directors, officers, and controlling persons under the foregoing provisions or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable.
Corporate Governance
The business and affairs of the Company are managed under the direction of our Board of Directors, which as of January 12, 2016, is comprised of Kevin Richardson, William Gorfein and Ray Colwell.
There have been no changes in any state law or other procedures by which security holders may recommend nominees to our board of directors.
Our Board of Directors does not currently have any committees, such as an audit committee or a compensation committee. However, the Board of Directors may establish such committees in the future, and will establish an audit committee and a compensation committee (and any other committees that are required) if the Company seeks to be listed on a national securities exchange.
Term of Office
Directors are appointed to hold office until the next annual general meeting of stockholders or until removed from office in accordance with our bylaws. Our officers are appointed by our Board and hold office until removed by our Board.
All officers and directors listed above will remain in office until the next annual meeting of our stockholders, and until their successors have been duly elected and qualified. Our bylaws provide that officers are appointed annually by our Board and each executive officer serves at the discretion of our Board.
Director Compensation
The Company does not pay members of its Board of Directors any cash compensation and currently compensates the Board through the issuance of stock options. No directors received any compensation as such for the fiscal years ended December 31, 2017 and 2016.
Director Independence
We use the definition of “independence” of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the company or any other individual having a relationship, which, in the opinion of the Company’s Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be considered independent if:
| · | The director is, or at any time during the past three years was, an employee of the company; |
| · | The director or a family member of the director accepted any compensation from the company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service); |
| 19 |
| · | A family member of the director is, or at any time during the past three years was, an executive officer of the company; |
| · | The director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the company made, or from which the company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions); |
| · | The director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the company served on the compensation committee of such other entity; or |
| · | The director or a family member of the director is a current partner of the company’s outside auditor, or at any time during the past three years was a partner or employee of the company’s outside auditor, and who worked on the company’s audit. |
Under such definitions, Mr. Richardson is considered our independent director.
Code of Business Conduct and Ethics Policy
We have not yet adopted a Code of Business Conduct and Ethics that applies to, among other persons, our principal executive officers, principal financial officer, principal accounting officer or controller, and persons performing similar functions.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table shows the beneficial ownership of our Common Stock as of March 21, 2018 held by (i) each person known to us to be the beneficial owner of more than five percent (5%) of our Common Stock; (ii) each director; (iii) each executive officer; and (iv) all directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC, and generally includes voting power and/or investment power with respect to the securities held. Shares of Common Stock subject to options and warrants currently exercisable or which may become exercisable within 60 days of March 21, 2018 are deemed outstanding and beneficially owned by the person holding such options or warrants for purposes of computing the number of shares and percentage beneficially owned by such person, but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person. Except as indicated in the footnotes to this table, the persons or entities named have sole voting and investment power with respect to all shares of our Common Stock shown as beneficially owned by them.
The following table assumes 46,122,368 shares are outstanding as of April 30, 2018.
Unless otherwise indicated, the address of each beneficial holder of our Common Stock is our corporate address.
| Name of Beneficial Owner | Shares of Common Stock Beneficially Owned | % of Shares of Common Stock Beneficially Owned | |||||||
| Walter Ray Colwell | 1,000,000 | (1) | 2.18% | ||||||
| William Gorfein | 3,500,000 | (2) | 7.64% | ||||||
| Kevin Richardson | 2,550,000 | (3) | 5.39% | ||||||
| All directors, director appointees and executive officers as a group (3 persons) | 7,050,000 | 14.29% | |||||||
| 5% or greater stockholder | |||||||||
| Charles Merkel PO Box 1388 Clarksdale, MS 38614 | 5,576,016 | (4) | 11.34% | ||||||
| GSB Holdings 14179 Laurel Trail Wellington, FL 03314 | 8,466,810 | (5) | 16.80% | ||||||
| Gerald Quave 5214 Finisterre Palm City, FL 32408 | 7,624,450 | (6) | 15.41% | ||||||
J&N Investments 124 E 8th St Lakewood, NJ 08701 | 6,341,825 | (7) | 13.38% | ||||||
__________
* Less than 1%
| 20 |
| (1) | Comprised of options to purchase 1,000,000 shares of common stock that are currently exercisable or exercisable within 60 days of April 30, 2018 | |
| (2) | Comprised of 2,500,000 shares of common stock and options to purchase 1,000,000 shares of common stock that are currently exercisable or exercisable within 60 days of April 30, 2018 |
| (3) | Comprised of options to purchase 2,500,000 shares of common stock that are currently exercisable or exercisable within 60 days of April 30, 2018 |
| (4) | Comprised of 1,193,333 shares of common stock, convertible notes that are currently convertible or convertible within 60 days of April 30, 2018 into 2,341,017 shares of common stock and warrants to purchase 2,041,667 shares of common stock that are currently exercisable or exercisable within 60 days of April 30, 2018. | |
| (5) | Comprised of 2,852,185 shares of common stock, convertible notes that are currently convertible or convertible within 60 days of April 30, 2018 into 3,093,792 shares of common stock and warrants to purchase 2,520,833 shares of common stock that are currently exercisable or exercisable within 60 days of April 30, 2018. | |
| (6) | Comprised of 2,950,000 shares of common stock, convertible notes that are currently convertible or convertible within 60 days of April 30, 2018 into 2,199,450 shares of common stock and warrants to purchase 2,475,000 shares of common stock that are currently exercisable or exercisable within 60 days of April 30, 2018. | |
| (7) | Comprised of 3,714,667 shares of common stock, convertible notes that are currently convertible or convertible within 60 days of April 30, 2018 into 1,127,158 shares of common stock and warrants to purchase 1,500,000 shares of common stock that are currently exercisable or exercisable within 60 days of April 30, 2018. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Procedures and Policies
We consider “related party transactions” to be transactions between our Company and (i) a director, officer, director nominee or beneficial owner of greater than five percent of our stock; (ii) the spouse, parents, children, siblings or in-laws of any person named in (i); or (iii) an entity in which one of our directors or officers is also a director or officer or has a material financial interest.
Our Board of Directors is vested with the responsibility of evaluating and approving any potential related party transaction, unless a special committee consisting solely of independent directors is appointed by the Board of Directors. We do not have any formal policies or procedures for related party transactions.
Transactions with Related Parties
During the current and prior periods, one of the Company’s officers made non-interest bearing loans to the Company in the form of cash and payments to vendors on behalf of the Company. The loans are due on demand and unsecured. As of December 31, 2017 and 2016, the Company is reflecting a liability of $9,941 and $34,254, respectively. The Company did not impute interest on the loan as it was deemed to be de minimis to the consolidated financial statements.
On April 8, 2016 (the “Initial Closing Date”), we entered into a Securities Purchase Agreement (the “SPA”) with Attia Investments, LLC, a related party (the “Investor”). A shareholder of the Company who owns in-excess of 5% of the Company’s common stock is the managing member of Attia Investments, LLC. Under the Agreement, we issued and sold to the Investor, and the Investor purchased from us, Debentures in the principal amount of $87,500 for a purchase price of $70,000 (together the “Debentures”), bearing interest at a rate of 0% per annum, with an original maturity on October 8, 2016, further extended to April 8, 2017. The Debentures are secured by all assets of the Company. The Company is currently in default of the SPA, making the entire unpaid principal and interest due and payable. As of the date of this report no defaults under the note have been called by the Investor.
The principal amount of the Debentures can be converted at the option of the Investor into shares of the Company’s common stock at a conversion price per share of the lower of (i) $0.05 or (ii) the price per share in an offering of securities prior to the maturity date.
Item 14. Principal Accounting Fees and Services.
The aggregate fees billed for professional services rendered by Marcum LLP (“Marcum”) for the audit of our annual financial statements and review of financial statements included in the Annual Report on Form 10-K for the years ended December 31, 2017 and 2016 were approximately $111,342 and $95,000.
| 21 |
The following table shows the fees for professional services rendered by Marcum during those periods:
| Fee Category | 2017 | 2016 | ||||||
| Audit Fees | $ | 111,342 | $ | 95,000 | ||||
| Audit-Related Fees | – | – | ||||||
| Tax Fees | – | – | ||||||
| All Other Fees | – | – | ||||||
| Total Fees | $ | 111,342 | $ | 95,000 | ||||
Audit fees consist of fees billed for professional services rendered for the audit of our financial statements and review of the interim financial statements included in quarterly reports and services that are normally provided by the above auditors in connection with statutory and regulatory fillings or engagements. Audit-related fees consist of fees billed for professional services rendered for the review of SEC filings or other reports containing the audited financial statements. Tax fees consist of fees to prepare the Company’s federal and state income tax returns. Other fees relate to advisory services related research on accounting or other regulatory matters.
Pre-Approval Policies and Procedures
Our board of directors is in the process of adopting a policy on pre-approval of audit and permissible non-audit services.
| 22 |
Item 15. Exhibits, Financial Statement Schedules
(a) Financial Statements
Our financial statements as set forth in the Index to Consolidated Financial Statements attached hereto commencing on page F-1 are hereby incorporated by reference.
(b) Exhibits
The following exhibits, which are numbered in accordance with Item 601 of Regulation S-K, are filed herewith or, as noted, incorporated by reference herein:
| Exhibit Number |
Description of Exhibits | |
| 3(i)(1) | Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 as filed with the SEC on March 26, 2014) | |
| 3(i)(2) | Certificate of Incorporation and Amendment (Incorporated by reference to Exhibit 3.3 to the Current Report on Form 8-K as filed with the SEC on August 17, 2015) | |
| 3(i)(3) | Certificate of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K as filed with the SEC on September 10, 2015) | |
| 3(ii)(1) | Bylaws (Incorporated by reference to Exhibit 3.4 to the Current Report on Form 8-K as filed with the SEC on August 17, 2015) | |
| 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 Principal Financial Officer* | |
|
32.1 32.2 |
||
| 101 | Interactive Data Files * | |
| 101.SCH | Extension Schema Document * | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document * | |
| 101.LAB | XBRL Taxonomy Extension Labels Linkbase Document * | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document * | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document * |
__________
* Filed herewith
| 23 |
Peerlogix, Inc.
December 31, 2017 and 2016
Index to the Consolidated Financial Statements
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Peerlogix, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Peerlogix, Inc. (the “Company”) as of December 31, 2017, the related consolidated statements of operations, stockholders’ deficiency and cash flows for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Marcum llp
/s/ Marcum LLP
We have served as the Company’s auditor since 2015.
New York, NY
April 30, 2018
| F-2 |
PEERLOGIX, INC.
DECEMBER 31, 2017 AND 2016
| 2017 | 2016 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 14,086 | $ | 56,022 | ||||
| Prepaid expenses and other current assets | 19,070 | 46,869 | ||||||
| Total current assets | 33,156 | 102,891 | ||||||
| Total assets | $ | 33,156 | $ | 102,891 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 421,518 | $ | 309,763 | ||||
| Accrued payroll and related expenses | 371,069 | 221,838 | ||||||
| Accrued directors' fees | 95,075 | 40,075 | ||||||
| Other accrued liabilities | 203,719 | 153,186 | ||||||
| Demand loans payable | 15,000 | 15,000 | ||||||
| Notes payable | – | 106,000 | ||||||
| Convertible notes payable-related party | 41,857 | 70,000 | ||||||
| Convertible notes payable-net of debt discount of $277,969 and $512,014, respectively | 1,432,081 | 88,486 | ||||||
| Loans payable-officers | 9,941 | 34,254 | ||||||
| Derivative liabilities | 935,274 | – | ||||||
| Total current liabilities | 3,525,534 | 1,038,602 | ||||||
| Total liabilities | 3,525,534 | 1,038,602 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders 'deficit: | ||||||||
| Preferred stock, par value $0.001; 10,000,000 shares authorized, no shares issued and outstanding as of December 31, 2017 and 2016 | – | – | ||||||
| Common stock, par value $0.001; 100,000,000 shares authorized; 46,122,368 and 26,860,825 shares issued and outstanding as of December 31, 2017 and 2016, respectively | 46,122 | 26,861 | ||||||
| Additional paid in capital | 4,850,445 | 2,430,276 | ||||||
| Accumulated deficit | (8,388,945 | ) | (3,392,848 | ) | ||||
| Total stockholders' deficit | (3,492,378 | ) | (935,711 | ) | ||||
| Total liabilities and stockholders' deficit | $ | 33,156 | $ | 102,891 | ||||
See the accompanying notes to the consolidated financial statements
| F-3 |
PEERLOGIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Revenue | $ | 1,096 | $ | 15,000 | ||||
| Operating expenses: | ||||||||
| General and administrative | 1,981,944 | 1,255,777 | ||||||
| Total operating expenses | 1,981,944 | 1,255,777 | ||||||
| Loss from operations | (1,980,848 | ) | (1,240,777 | ) | ||||
| Other income (expense): | ||||||||
| Interest expense | (3,805,627 | ) | (825,858 | ) | ||||
| Change in fair value of derivative liabilities | 1,741,441 | – | ||||||
| Loss on loan receivable | (37,500 | ) | – | |||||
| (Loss) gain on extinguishment of debt | (913,562 | ) | 218,768 | |||||
| Total other income (expense) | (3,015,249 | ) | (607,090 | ) | ||||
| Net loss | $ | (4,996,097 | ) | $ | (1,847,867 | ) | ||
| Net loss per common share-basic and diluted | $ | (0.12 | ) | $ | (0.08 | ) | ||
| Weighted average common shares outstanding-basic and diluted | 42,366,866 | 24,447,444 | ||||||
See accompanying notes to the consolidated financial statements
| F-4 |
PEERLOGIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE TWO YEARS ENDED DECEMBER 31, 2017
| Additional | ||||||||||||||||||||
| Common stock | Paid in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance, January 1, 2016 | 23,107,535 | $ | 23,108 | $ | 1,245,416 | $ | (1,544,981 | ) | $ | (276,457 | ) | |||||||||
| Common stock issued in connection with promissory notes payable | 100,000 | 100 | 17,900 | – | 18,000 | |||||||||||||||
| Common stock issued in connection with related party notes payable | 175,000 | 175 | 13,085 | – | 13,260 | |||||||||||||||
| Common stock issued in connection with convertible notes payable | 6,229,999 | 6,230 | 182,767 | – | 188,997 | |||||||||||||||
| Common stock issued in settlement of convertible notes payable | 3,333,333 | 3,333 | 479,999 | – | 483,332 | |||||||||||||||
| Common stock issued in settlement of other liabilities | 240,000 | 240 | 27,360 | – | 27,600 | |||||||||||||||
| Cancellation of previously issued common stock | (8,324,084 | ) | (8,324 | ) | 8,324 | – | – | |||||||||||||
| Common stock issued for services | 1,942,042 | 1,942 | 265,840 | – | 267,782 | |||||||||||||||
| Proceeds from sale of common stock | 57,000 | 57 | 1,943 | – | 2,000 | |||||||||||||||
| Fair value of warrants issued in connection with convertible notes payable | – | – | 192,656 | – | 192,656 | |||||||||||||||
| Beneficial conversion feature relating to convertible notes payable | – | – | 261,450 | – | 261,450 | |||||||||||||||
| Repurchase of beneficial conversion feature-extinguishment of convertible notes payable | – | – | (675,418 | ) | – | (675,418 | ) | |||||||||||||
| Modifications of investor warrants | – | – | 81,001 | – | 81,001 | |||||||||||||||
| Stock based compensation | – | – | 327,953 | – | 327,953 | |||||||||||||||
| Net loss | – | – | – | (1,847,867 | ) | (1,847,867 | ) | |||||||||||||
| Balance, December 31, 2016 | 26,860,825 | $ | 26,861 | $ | 2,430,276 | $ | (3,392,848 | ) | $ | (935,711 | ) | |||||||||
| F-5 |
PEERLOGIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE TWO YEARS ENDED DECEMBER 31, 2017
| Additional | ||||||||||||||||||||
| Common stock | Paid in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance, December 31, 2016 | 26,860,825 | $ | 26,861 | $ | 2,430,276 | $ | (3,392,848 | ) | $ | (935,711 | ) | |||||||||
| Common stock issued in connection with notes payable | 8,211,333 | 8,211 | (2,239 | ) | – | 5,972 | ||||||||||||||
| Common stock issued in modification of convertible notes payable, related party | 218,750 | 219 | 12,906 | – | 13,125 | |||||||||||||||
| Common stock issued in settlement of payables | 878,710 | 878 | 82,601 | – | 83,479 | |||||||||||||||
| Common stock issued for services | 5,119,750 | 5,120 | 429,147 | – | 434,267 | |||||||||||||||
| Common stock issued as payment of accrued interest on convertible notes payable | 4,833,000 | 4,833 | 414,347 | – | 419,180 | |||||||||||||||
| Fair value of warrants issued in connection with convertible notes payable | – | – | 18,681 | – | 18,681 | |||||||||||||||
| Warrants issued in connection with extension of convertible notes payable | – | – | 767,936 | – | 767,936 | |||||||||||||||
| Reclassify beneficial conversion feature to derivative liability | – | – | (172,036 | ) | – | (172,036 | ) | |||||||||||||
| Reclassify derivative liability to equity upon payoff of convertible notes payable | – | – | 48,093 | – | 48,093 | |||||||||||||||
| Modifications of investor warrants | – | – | 37,329 | – | 37,329 | |||||||||||||||
| Fair value of warrants due to agent in connection with extension of convertible notes payable | – | – | 188,120 | – | 188,120 | |||||||||||||||
| Stock based compensation | – | – | 595,284 | – | 595,284 | |||||||||||||||
| Net loss | – | – | – | (4,996,097 | ) | (4,996,097 | ) | |||||||||||||
| Balance, December 31, 2017 | 46,122,368 | $ | 46,122 | $ | 4,850,445 | $ | (8,388,945 | ) | $ | (3,492,378 | ) | |||||||||
See accompanying notes to the consolidated financial statements
| F-6 |
PEERLOGIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (4,996,097 | ) | $ | (1,847,867 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock based compensation | 1,024,431 | 361,956 | ||||||
| Amortization of debt discounts | 1,766,925 | 676,709 | ||||||
| Non cash interest | 1,442,654 | – | ||||||
| Change in fair value of derivative liabilities | (1,741,441 | ) | – | |||||
| Loss on loan receivable | 37,500 | |||||||
| Loss (gain) on extinguishment of debt | 936,915 | (218,768 | ) | |||||
| Expenses paid by officer on behalf of Company | – | 31,521 | ||||||
| Modification of investor warrants | 37,329 | 81,001 | ||||||
| Changes in operating assets and liabilities: | – | |||||||
| Prepaid expenses and other current assets | 15,323 | (14,420 | ) | |||||
| Accounts payable | 143,504 | 90,881 | ||||||
| Accrued payroll and related expenses | 149,231 | 198,499 | ||||||
| Accrued director fees | 55,000 | 40,075 | ||||||
| Other accrued liabilities | 403,483 | 89,357 | ||||||
| Net cash used in operating activities | (725,243 | ) | (511,056 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Loan to abandoned acquisition target | (37,500 | ) | – | |||||
| Net cash used in investing activities | (37,500 | ) | – | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from the sale of common stock | – | 2,000 | ||||||
| Proceeds from convertible notes | 901,138 | 438,446 | ||||||
| Proceeds from convertible notes-related party | – | 70,000 | ||||||
| Proceeds from officer loans | 11,156 | 4,032 | ||||||
| Proceeds from notes payable | – | 130,000 | ||||||
| Repayments of notes payable | (106,000 | ) | (26,250 | ) | ||||
| Repayments of notes payable-related party | (50,018 | ) | (17,500 | ) | ||||
| Repayments of officer loans | (35,469 | ) | (34,948 | ) | ||||
| Net cash provided by financing activities | 720,807 | 565,780 | ||||||
| Net change in cash | (41,936 | ) | 54,724 | |||||
| Cash-beginning of period | 56,022 | 1,298 | ||||||
| Cash-end of period | $ | 14,086 | $ | 56,022 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Interest paid | $ | 15,670 | $ | 6,328 | ||||
| Income taxes paid | $ | – | $ | – | ||||
| Supplemental disclosure on non-cash investing and financing activities: | ||||||||
| Debt discount paid in form of common shares and warrants | $ | 24,653 | $ | 709,580 | ||||
| Debt discount recorded on convertible debt accounted for as derivative liabilities | $ | 1,256,460 | $ | – | ||||
| Repurchase of beneficial conversion feature due to reassessment of derivative liability | $ | 172,036 | $ | – | ||||
| Common stock issued in settlement of accrued interest | $ | 419,180 | $ | – | ||||
| Reclassification of derivative liability to equity | $ | 48,093 | $ | – | ||||
| Debt issuance cost paid in form of common stock and warrants | $ | 188,120 | $ | 226,773 | ||||
| Debt issuance cost accrued | $ | 98,885 | $ | 57,500 | ||||
| Common stock issued in connection with settlement of liabilities | $ | 83,479 | $ | – | ||||
| Original issue discount on notes payable | $ | – | $ | 26,250 | ||||
| Original issue discount on convertible notes payable-related party | $ | – | $ | 17,500 | ||||
| Beneficial conversion feature-convertible note | $ | – | $ | 261,450 | ||||
| Conversion of promissory note to convertible note | $ | – | $ | 25,000 | ||||
| Increase in note principal as per forbearance agreement | $ | – | $ | 1,000 | ||||
See accompanying notes to the consolidated financial statements
| F-7 |
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
NOTE 1 – ORGANIZATION AND OPERATIONS
Peerlogix, Inc. (“Peerlogix” or the “Company”) was incorporated in Nevada on February 14, 2014. The Company is an advertising technology and data aggregation company. The Company provides software as a service (SAAS) platform, which enables the tracking and cataloguing of over-the-top viewership and listenership in order to determine consumer trends and preferences based upon media consumption. Its platform collects over-the-top data, including Internet Protocol (IP) addresses of the streaming and downloading parties (location), the name, media type and genre of media watched, listened or downloaded, and utilizes licensed and publicly available demographic and other databases to further filter the collected data to provide insights into consumer preferences to digital advertising firms, product and media companies, entertainment studios and others.
On August 14, 2015, the Company entered into a share exchange transaction whereby all of the shareholders of PeerLogix Technologies, Inc., a privately held Delaware corporation (“PeerLogix Delaware”), exchanged all of their shares of common stock for newly issued shares of common stock of the Company (the “Share Exchange”). As a result of the Share Exchange, PeerLogix Delaware has become a wholly-owned subsidiary of the Company and its business operations are assumed by the Company. On September 3, 2015, the Company filed a Certificate of Amendment to its Articles of Incorporation changing its name from Realco International, Inc. to PeerLogix, Inc.
NOTE 2 – GOING CONCERN AND MANGAGEMENT’S LIQUIDITY PLANS
The Company has generated minimal revenues since inception and continues to incur recurring losses from operations and has an accumulated deficit. Accordingly, the accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred a net loss of approximately $5.0 million and net cash used in operations of approximately $725,000 for the year ended December 31, 2017. In addition, the Company has notes payable in default (see Note 7). These conditions indicate that there is substantial doubt about the Company's ability to continue as a going concern within one year from the issuance date of the consolidated financial statements.
The Company's primary source of operating funds since inception has been cash proceeds from debt and equity financing. The ability of the Company to continue as a going concern is dependent upon its ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of a public or private offering. (See Note 11)
The Company requires immediate capital to remain viable. The Company can give no assurance that such financing will be available on terms advantageous to the Company, or at all. Should the Company not be successful in obtaining the necessary financing to fund its operations, the Company would need to curtail certain or all of its operational activities. There can be no assurance that such a plan will be successful. The accompanying consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
Accordingly, the accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), which contemplates continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the consolidated financial statements do not necessarily purport to represent realizable or settlement values. The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Peerlogix Technologies, Inc. and IP Squared Technologies Holdings, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from these estimates. The Company’s significant estimates and assumptions include the fair value of the Company’s equity instruments, convertible debt, derivative liabilities, stock-based compensation, and the valuation allowance relating to the Company’s deferred tax assets.
| F-8 |
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Reclassifications
Certain prior year amounts in the consolidated financial statements and the notes thereto have been reclassified where necessary to conform to the current year presentation. These reclassifications did not affect the prior period total assets, total liabilities, stockholders’ deficit, net loss or net cash used in operating activities.
Revenue Recognition
The Company recognizes revenue when four basic criteria are met before: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for adjustments are provided for in the same period the related sales are recorded.
At the time of each transaction, management assesses whether the fee associated with the transaction is fixed or determinable and whether or not collection is reasonably assured. The assessment of whether the fee is fixed or determinable is based upon the payment terms of the transaction. Collectability is assessed based on a number of factors, including past transaction history with the client and the creditworthiness of the client.
The Company generates revenue primarily by licensing our Over-the-Top audience dataset to platforms and channel partners. As such, the Company predominantly contracts with Data Management Platforms (DMPs) and Demand Side Platforms (DSPs) (collectively, “Demand Partners”) who license the Company’s solution to use in conjunction with other solutions offered to their advertiser clients, including brands and advertising agencies. When the Company contracts with a Demand Partner, it acts as an agent for a disclosed or undisclosed principal, which is the advertiser. The Company contracts with Demand Partners, including DMPs and DSPs representing advertisers, are generally in the form of a revenue share between the Demand Partner and the Company. Revenue payouts to the Company typically occur within sixty (60) days after the end of each calendar month, and the contracts typically have an initial term of a year. Due to the uncertainly of amount of revenue earned during the process, it is recognized upon payout and receipt of payment. Revenue through December 31, 2017 had been de minimis to the consolidated financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. As of December 31, 2017 and 2016, the Company does not have any cash equivalents.
Convertible Instruments
The Company bifurcates conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria includes 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 otherwise applicable generally accepted accounting principles 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. An exception to this rule when the host instrument is deemed to be conventional as that term is described under applicable U.S. GAAP.
When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, 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.
Accounting for Warrants
The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
| F-9 |
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The Company assessed the classification of its common stock purchase warrants as of the date of each equity offering and determined that such instruments met the criteria for equity classification, as the settlement terms indicate that the instruments are indexed to the entity’s underlying stock.
Concentrations of Credit Risk
Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. The Company places its cash and temporary cash investments with credit quality institutions. At times, such amounts may be in excess of the FDIC insurance limit.
Derivative Liabilities
In connection with the issuance of certain convertible promissory notes, the terms of the convertible notes included an embedded conversion feature which provided for the settlement of certain convertible promissory notes into shares of common stock at a rate which was determined to be variable with no floor. The Company determined that the conversion feature was an embedded derivative instrument pursuant to ASC 815 “Derivatives and Hedging”
The accounting treatment of derivative financial instruments requires that the Company record the conversion option, if applicable, at their fair values as of the inception date of the agreements and at fair value as of each subsequent balance sheet date. Any change in fair value was recorded as a change in the fair value of derivative liabilities for each reporting period at each balance sheet date. The Company reassesses the classification at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.
The fair values of conversion options that are convertible at a variable conversion price are valued using a Black-Scholes Valuation Model. The Company determined the fair value of the conversion option using either the Black-Scholes Valuation Model or the Binomial Lattice Model to be materially the same.
The Black-Scholes Valuation Model includes subjective input assumptions that can materially affect the fair value estimates. The model was developed for use in estimating the fair value of traded options or warrants. The expected volatility is estimated based on the most recent historical period of time equal to the weighted average life of the instrument granted.
The principal assumptions used in applying the Black-Scholes model were as follows:
| Year Ended | |
| December 31, 2017 | |
| Risk-free interest rate | 0.52 – 2.20% |
| Contractual term | 0.02 - 4.00 years |
| Expected volatility | 200% - 353% |
| Dividends | 0.0% |
At any given time, certain of the Company’s embedded conversion features on debt and outstanding warrants may be treated as derivative liabilities for accounting purposes under ASC 815-40 due to insufficient authorized shares to settle these outstanding contracts. Pursuant to SEC staff guidance that permits a sequencing approach based on the use of ASC 840-15-25 which provides guidance for contracts that permit partial net share settlement. The sequencing approach may be applied in one of two ways: contracts may be evaluated based on (1) earliest issuance date or (2) latest maturity date. Pursuant to the sequencing approach, the Company evaluates its contracts based upon the latest maturity date.
Net Loss Per Share
Basic loss per share was computed using the weighted average number of outstanding common shares. Diluted earnings per share, when presented, includes the effect of dilutive common stock equivalents from the assumed exercise of options, warrants, convertible preferred stock and convertible notes. Common stock equivalents are excluded in the computation of diluted earnings per share since their inclusion would be anti-dilutive.
| F-10 |
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Total shares issuable upon the exercise of warrants, exercise of stock options and conversion of convertible promissory notes for the year ended December 31, 2017 and 2016 were as follows:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Warrants | 36,305,369 | 8,956,677 | ||||||
| Stock options | 24,550,000 | 12,300,000 | ||||||
| Convertible promissory notes and accrued interest | 35,227,200 | 11,408,333 | ||||||
| Total | 96,082,569 | 32,665,010 | ||||||
For the year ended December 31, 2017, 4,269,941 warrants were included in basic and diluted loss per share as their exercise price was determined to be nominal.
Income Taxes
Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability during each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods.
The Company follows a recognition threshold and measurement process for consolidated financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance also prescribes direction on the recognition, classification, interest and penalties in interim periods, disclosure and transition.
The Company classifies interest expense and any related penalties, if any, related to income tax uncertainties as a component of income tax expense. No interest or penalties have been recognized as of December 31, 2017 and 2016.
Management has evaluated and concluded that there was no material uncertain tax positions requiring recognition in the Company’s financial statements for the years ended December 31, 2017 and 2016. The Company does not expect any significant changes in the unrecognized tax benefits within twelve months of the reporting date.
Research and development costs
All research and development costs are charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. The Company incurred minimal research and development expenses for the years ended December 31, 2017 and 2016.
Advertising
The Company follows the policy of charging the costs of advertising to expense as incurred. The Company charged to operations $6,453 and $4,333 as advertising costs for the years ended December 31, 2017 and 2016, respectively.
Stock based compensation
The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Stock-based compensation expense is recorded by the Company in the same expense classifications in the statements of operations, as if such amounts were paid in cash.
| F-11 |
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Fair Value of Financial Instruments
The carrying amounts of cash and accounts payable approximate fair value due to the short-term nature of these instruments.
The Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements and Disclosures” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. 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 market prices available in active markets for identical assets or liabilities as of the reporting date. | |
| Level 2 | Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. | |
| Level 3 | Pricing inputs that are generally unobservable inputs and not corroborated by market data. |
Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the warrant liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s Principal Financial Officer determines its valuation policies and procedures.
The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s Principal Financial Officer.
Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the balance sheets as follows:
| December 31, 2017 | Fair Value Measurement Using | |||||||||||||||||||
| Carrying Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Derivative conversion features | $ | 935,274 | $ | – | $ | – | $ | 935,274 | $ | 935,274 | ||||||||||
| December 31, 2016 | Fair Value Measurement Using | |||||||||||||||||||
| Carrying Value |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Derivative conversion features | $ | - | $ | – | $ | – | $ | - | $ | - | ||||||||||
| F-12 |
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the two years ended December 31, 2017:
| Fair Value Measurement Using Level 3 Inputs | ||||
| Total | ||||
| Balance, December 31, 2016 (and prior) | $ | – | ||
| Reclassification of derivative liability from equity | 172,036 | |||
| Issuances, reassessments and settlements | 2,552,772 | |||
| Reclassification of derivative liability to equity | (48,093 | ) | ||
| Change in fair value | (1,741,441 | ) | ||
| Balance, December 31, 2017 | $ | 935,274 | ||
Changes in the unobservable input values could potentially cause material changes in the fair value of the Company’s Level 3 financial instruments. The significant unobservable inputs used in the fair value measurements are the expected volatility assumption. A significant increase (decrease) in the expected volatility assumption could potentially result in a higher (lower) fair value measurement.
Recently Adopted Accounting Guidance
In March 2016, the FASB issued ASU No. 2016-06, “Derivatives and Hedging” (Topic 815). The FASB issued this update to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The updated guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company adopted the provisions of ASU 2016-06 on January 1, 2017. The adoption of ASU 2016-06 did not materially impact its consolidated financial position, results of operations or cash flows.
In April 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation” (Topic 718). The FASB issued this update to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company adopted the provisions of ASU 2016-09 on January 1, 2017. The adoption of ASU 2016-09 did not materially impact the Company’s consolidated financial position, results of operations or cash flows.
Recently Issued Accounting Guidance
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers” to supersede previous revenue recognition guidance under current U.S. GAAP. The guidance presents a single five-step model for comprehensive revenue recognition that requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Two options are available for implementation of the standard which is either the retrospective approach or cumulative effect adjustment approach. The guidance becomes effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. The Company anticipates using the modified retrospective transition method beginning with the first quarter of fiscal 2019. The adoption of ASU 2014-09 using the modified retrospective transition method in the first quarter of fiscal 2019 is not anticipated to have a material impact on the Company’s financial statements.
In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation” (Topic 718): Scope of Modification Accounting. The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718 Compensation-Stock Compensation. An entity should account for the effects of a modification unless all the following are met: (1.) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. (2.) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. (3.) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.
| F-13 |
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The ASU is effective for all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share” (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity's own stock. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. For public business entities, the amendments in Part I of this update are effective for fiscal years, and years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. The Company is currently assessing the impact that this standard will have on its condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02—Leases (Topic 842), requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented. The Company is evaluating the effect that the updated standard will have on its financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides guidance for eight specific cash flow issues with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. The effective date for ASU 2016-15 is for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact of this new standard on its financial statements.
There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s financial position, results of operations or cash flows.
Subsequent Events
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements, except as disclosed.
NOTE 4 – LOAN RECEIVABLE
During February 2017, the Company loaned $37,500 to a potential merger candidate, for working capital purposes. In March 2017, the Company withdrew its plan of merger and recorded an allowance for loan losses of $37,500 due to the loan deemed uncollectible.
| F-14 |
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
NOTE 5 – NOTES PAYABLE
On January 28, 2016, the Company entered into a Securities Purchase Agreement (“SPA”), Promissory Note (the “January Note”) and Registration Rights Agreement (“RRA”) (collectively, the “Transaction Documents”) with Pinewood Trading Fund, L.P. (“Pinewood”). Pursuant to the SPA, the Company issued 100,000 shares (the “Shares”) of its common stock (the “Common Stock”), in exchange for Pinewood lending $105,000 (“Funding Amount”) to the Company pursuant to the January Note with a principal amount of $131,250 (“Principal Amount”). The January Note was due on July 28, 2016 or earlier in the event that the gross proceeds of any Company offering equals or exceeds $300,000. The January Note is secured by all assets of the Company.
As part of the transaction, the Company recorded an $18,000 debt discount relating to the relative fair value of the 100,000 shares of common stock issued and $26,250 was recorded as an original issue discount and is being accreted over the life of the note to interest expense. The shares were valued based on the quoted closing trading price on the date of issuance. In addition the Company incurred legal fees of $7,418 which will be amortized over the life of the note to interest expense.
The outstanding principal balance on the January Note at December 31, 2016 was $106,000.
During the year ended December 31, 2017, the Company repaid the remaining $106,000 in principal along with outstanding accrued interest of $12,687 on a promissory note which was previously in default. The outstanding principal balance on the note at December 31, 2017 was $0.
Under the terms of the RRA with Pinewood, the Company committed to file a registration statement on or prior to March 31, 2016 or any additional registration statements which may be required pursuant to the terms of the RRA on or prior to the earliest practical date (“Filing Date”), covering, among other things, the resale of all or such portion (as permitted by SEC Guidance and Rule 415) of all of the Shares and any shares of Common Stock issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect to the Shares (the “Registrable Securities”) on such Filing Date that are not then registered on an effective registration statement.
The Company has agreed to use its commercially reasonable best efforts to cause the registration statement to be declared effective under the Securities Act as promptly as practicable after the filing thereof, and use its commercially reasonable best efforts to keep such registration statement continuously effective under the Securities Act until all Registrable Securities covered by such registration statement have been sold, or may be sold without volume restrictions pursuant to Rule 144, as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company’s transfer agent and the Holder (the “Effectiveness Period”).
If the Company fails to file the registration statement on or prior to the Filing Date, or fails to maintain the effectiveness of the registration statement pursuant to the terms of the RRA, the Company may be subject to partial cash liquidated damages, and not as a penalty, equal to $2,500 per month (not to exceed an aggregate of $20,000), pro-rated for periods of less than 30 days. If the Company fails to pay any partial liquidated damages in full within seven (7) days after the date payable, the Company will pay interest, as an addition to the stated original issue discount, thereon at a rate of 18% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to Pinewood, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. As of the date of this report the registration statement has not been filed. For the year ended December 31, 2017 and 2016, the Company has accrued liquidated damages of $0 and $20,000 along with accrued interest of $4,051 and $1,359, respectively, and has recorded such amounts in interest expense in the consolidated statement of operations.
| F-15 |
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
On August 22, 2016, the Company issued an unsecured convertible promissory note in principal amount of $25,000 to an accredited investor through a private placement. The note bears interest at a rate of 12% per annum, with maturity on the earlier of i) September 22, 2016 or ii) an offering of securities of the Company through WestPark. On September 22, 2016, the promissory note was converted into a convertible note per the contractual terms of the WestPark Offering (See Note 6 and Note 9).
As part of the transaction, the Company incurred placement agent fees of $3,250 which were recorded as debt issuance costs. The debt issuance costs were accreted over the life of the notes to interest expense.
NOTE 6 – CONVERTIBLE NOTES PAYABLE
Convertible notes payable are comprised of the following:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Offering 3 | $ | 825,500 | $ | 600,500 | ||||
| Offering 4 | 439,550 | – | ||||||
| Offering 5 | 200,000 | – | ||||||
| Offering 6 | 245,000 | – | ||||||
| Total | 1,710,500 | 600,500 | ||||||
| Less: debt discount | 277,969 | 512,014 | ||||||
| Net | $ | 1,432,081 | $ | 88,486 | ||||
Offering 3, 4,5,6 (collectively referred to as “Offerings”):
During the years ended December 31, 2017 and 2016, the Company sold $1,110,000 and $600,500, respectively, of Units to investors. Each Unit was sold at a price of $10,000 per Unit and consisted of one (1) six (6) month, 18% convertible promissory note (36% on an annual basis) with a face value of $10,000 and four year warrants exercisable for an aggregate number of shares of common stock equal to 50% of the shares of common stock into which the Note is initially convertible, exercisable at a price of $0.10 per share. The Offerings Notes are due six months after the issuance of each note, as amended.
Each of the Notes will be convertible at an initial price equal to $0.06 per share. In addition, during the two month period commencing on each issuance of the Offering 3 Notes, as amended, the Notes will contain a look-back provision pursuant to which the Notes will be convertible at the lower of $0.06 or the lowest volume weighted average price of the Company’s common stock (the “VWAP”) during any 10 day period during such two (2) month period, provided however, in the event that the VWAP during any such ten (10) day period is less than $0.06, then the reset conversion price of the Notes shall be no lower than $0.03. The Notes also contain a reset provision to the same price as any future offering in the next three (3) years in the event that the conversion or offering price of securities offered in such subsequent offering is less than the Conversion Price of the Notes in this Offering.
The conversion feature of the Offerings Notes issued during 2016 was accounted for in the previous year initially as equity. The Company concluded the conversion feature of the Notes did not qualify as a derivative because there was no market mechanism for net settlement and they were not readily convertible to cash.
The Company reassessed the conversion feature of the Offerings Notes issued during 2016 for derivative treatment during January 2017 and concluded its shares were readily convertible to cash based on the current trading volume of the Company’s stock. Due to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability treatment.
The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion feature has been measured at fair value using a Black Scholes and Binomial model at the reassessment date and the period end. The conversion feature, when reassessed, gave rise to a derivative liability of $1,526,300. In accordance with ASC 815, $129,434 was charged to paid in-capital due to the fact a beneficial conversion feature was recorded on the original issue date. In addition the Company recorded a debt discount to the Notes of $90,153 relating to the fair value of the conversion option. The fair value of the conversion option on the date of issuance in excess of the face amount of the note was recorded to interest expense on the date of issuance.
| F-16 |
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The conversion feature of new Notes issued during the year ended December 31, 2017, gave rise to a derivative liability of $1,544,007. The gross proceeds from the sale of the Notes were recorded net of a discount of $1,167,289. The debt discount relates to fair value of the conversion option, issuance costs, any allocated fair value of issued warrants and placement agent warrants. The debt discount is charged to interest expense ratably over the term of the convertible note. The fair value of the conversion option on the date of issuance in excess of the net proceeds of the note was recorded to interest expense on the date of issuance.
In addition, to the extent that any investor that acquires Units in these Offerings had previously acquired securities issued by the Company or its subsidiary in one of the two prior private offerings placed by the Placement Agent (each a “Prior Offering”), which collectively raised gross proceeds of $1,510,000 (each an “Existing Investor”), the Company has agreed to provide additional consideration to each such Existing Investor as follows: (i) if the Existing Investor acquires Units in this Offering in an amount equal to fifty percent (50%) or greater than the amount the Existing Investor invested in a Prior Offering, such Existing Investor will receive (a) an additional 7.33 shares, as amended, (if the investor invested in the first Prior offering) or 9 shares, as amended, of the Company’s common stock (if the investor invested in the second Prior Offering) (each “Incentive Shares”); and (b) the exercise price of each of the warrants purchased by the Existing Investor will be reduced from $0.60 per share (if the investor invested in the first Prior Offering) or $0.72 per share (if the investor invested in the second Prior Offering) to $0.10 per share (the “Incentive Warrant Price Reduction”); and (ii) if the Existing Investor acquires Units in this Offering in an amount equal to less than fifty percent (50%) of the amount the Existing Investor invested in a Prior Offering, such Existing Investor will receive a pro-rata number of Incentive Shares and Incentive Warrant Price Reduction on only a pro-rata portion of the warrants acquired by the Existing Investor in the Prior Offering.
During the year ended December 31, 2017, the Company issued investors who invested in prior offerings 8,211,333 shares of common stock and reduced the exercise price of 954,083 warrants as per the terms above. The incentive shares were recorded as a debt discount of $5,972 on the date of issuance based on the relative fair value of the shares.
Upon modification, it is required to analyze the fair value of the instruments, before and after the modification, recognizing the increase as a charge to the statement of operations. The Company computed the fair value of the warrants directly preceding the modification and compared the fair value to that of the modified warrants with new terms. The Company recorded the increased value of the warrants of $37,329 to interest expense with an offsetting entry to additional paid in capital on the date of the modification.
The Company will have the ability to extend the Notes for an additional six (6) months (the “Extended Term”) and if so extended shall be referred to herein as the “Extended Notes”. The Extended Notes, upon maturity, will pay interest at a six (6) month rate of 18% (36% annualized) at the termination of the Extended Term. The Extended Notes, to the extent extended pursuant to their terms for the Extended Term, will carry an additional 50% warrant coverage (e.g. such warrant to be exercisable for an additional 50% of the number of shares into which the Extended Note is initially convertible (the “Extended Warrants”). The Extended Warrants shall be exercisable at a price equal to $0.10. The Extended Warrants will expire four (4) years from the Extended Term and shall contain customary anti-dilution rights (for stock splits, stock dividends and sales of substantially all the Company’s assets) and the shares underlying the Extended Warrants will contain registration rights.
During the year ended December 31, 2017, the Company issued warrants to acquire an aggregate of 11,883,331 shares of the Company’s common stock at $0.10 per share for four years in connection with the extension of the above described notes. The determined fair value at the date of issuance of $890,372 was charged as loss on extinguishment of debt.
As part of the transactions, the Company incurred placement agent fees based on the aggregate gross proceeds raised during the year ended December 31, 2017, or $208,862, which were recorded as debt issuance costs. In addition, during the year ended December 31, 2017, the Company issued the placement agent warrants an aggregate of 3,219,106 common shares and was obligated to issue an additional 1,333,467 warrants (See Note 11). The placement agent warrants have an exercise price of $0.001 per share, have a seven (7) year term and vest immediately.
NOTE 7 – CONVERTIBLE NOTES PAYABLE – RELATED PARTY
On April 8, 2016 (the “Initial Closing Date”), we entered into a Securities Purchase Agreement (the “SPA”) with Attia Investments, LLC, a related party (the “Investor”). A shareholder of the Company who previously owned in-excess of 5% of the Company’s common stock is the managing member of Attia Investments, LLC. Under the Agreement, we issued and sold to the Investor, and the Investor purchased from us, Debentures in the principal amount of $87,500 for a purchase price of $70,000 (together the “Debentures”), bearing interest at a rate of 0% per annum, with an original maturity on October 8, 2016, further extended to April 8, 2017. The Debentures are secured by all assets of the Company. The Company is currently in default of the SPA, making the entire unpaid principal and interest due and payable. The investor has initiated a claim against the Company for payment of a loan in default. Subsequent to December 31, 2017, the company accepted a settlement totaling approximately $90,000 cash and 750,000 shares of stock. The company has accounted for it in accordance with ASC450.
| F-17 |
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The principal amount of the Debentures can be converted at the option of the Investor into shares of the Company’s common stock at a conversion price per share of the lower of (i) $0.05 or (ii) the price per share in an offering of securities prior to the maturity date.
The Company assessed the conversion feature of the Debentures on the date of issuance and at the end of each subsequent reporting period through December 31, 2016 and concluded the conversion feature of the Debentures did not qualify as a derivative because there was no market mechanism for net settlement and they were not readily convertible to cash.
The Company reassessed the conversion feature of the Notes for derivative treatment during January 2017 and concluded its shares were readily convertible to cash based on the current trading volume of the Company’s stock. Due to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares.
The conversion feature has been measured at fair value using a Black Scholes model at the reassessment date and the period end. The conversion feature, when reassessed, gave rise to a derivative liability of $154,100. In accordance with ASC 815, $42,602 was charged to paid-in-capital since a beneficial conversion feature was recorded on the original issue date. In addition, the Company recorded a debt discount to the Notes of $70,000 relating to the fair value of the conversion option. The fair value of the conversion option on the date of issuance in excess of the face amount of the note was recorded to interest expense on the date of issuance.
Amendment
On March 16, 2017, the Company entered into an amendment to the SPA. The SPA was modified as follows:
| · | The maturity date of the Debentures was extended to April 8, 2017; |
| · | The default interest rate was set at 18%. |
As consideration for the amendment, the Company increased the principal amount on the Debentures from $65,000 to $86,875 and issued the Investor 218,750 shares of common stock with a fair value of $13,125. All remaining terms of the Debentures remained the same.
In accordance with ASC 470, since the present value of the cash flows under the new debt instrument was at least ten percent different from the present value of the remaining cash flows under the terms of the original debt instrument, the Company accounted for the amendment to SPA as a debt extinguishment. Accordingly, the Company wrote off the remaining debt discount on the original Debentures of $17,312. The Company recorded a loss on extinguishment of debt of $52,312 on the amendment date.
During the year ended December 31, 2017, the Company repaid $50,018 in principal and $2,982 in accrued interest on certain convertible notes to related parties. Upon repayment derivative liabilities in the amount of $48,093 were reclassified to equity. The outstanding principal balance on the Debentures at December 31, 2017 and 2016 was $41,857 and $70,000, respectively.
NOTE 8 – LOANS PAYABLE - OFFICERS
During the current and prior periods, one of the Company’s officers made non-interest bearing loans to the Company in the form of cash and payments to vendors on behalf of the Company. The loans are due on demand and unsecured. As of December 31, 2017 and 2016, the Company is reflecting a liability of $9,941 and $34,254, respectively. The Company did not impute interest on the loan as it was deemed to be de minimis to the consolidated financial statements.
NOTE 9 – STOCKHOLDERS’ DEFICIT
Common stock issued for cash
On September 9, 2016, the Company sold 57,000 shares of common stock to an investor for proceeds of $2,000.
| F-18 |
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Common stock issued for services
During the year ended December 31, 2016, the Company issued an aggregate of 40,000 restricted common shares to a consultant with a fair value of $8,000. The shares represented a bonus on a previous investor and public relations agreement. These shares vested immediately on the date of issuance. The Company has recorded $8,000 in stock-based compensation expense for the year ended December 31, 2016, which is a component of professional fees in the consolidated statements of operations. The shares were valued based on the quoted closing trading price on the date of issuance.
During the year ended December 31, 2016, the Company issued an aggregate of 500,000 restricted common shares to a consultant with a fair value of $56,667. The shares were issued as per the terms of an investor and public relations agreement. These shares vested immediately on the date of issuance. The Company has recorded $56,667 in stock-based compensation expense for the year ended December 31, 2016, which is a component of professional fees in the consolidated statements of operations. The shares were valued based on the quoted closing trading price on the date of issuance.
During the year ended December 31, 2016, the Company issued an aggregate of 166,667 restricted common shares to a consultant with a fair value of $50,000. The shares were issued as per the terms of an investor and public relations agreement. These shares vested immediately on the date of issuance. The Company has recorded $50,000 in stock-based compensation expense for the year ended December 31, 2016, which is a component of professional fees in the consolidated statements of operations. The shares were valued based on the most recent sales of its common stock to independent qualified investors on the grant date.
During the year ended December 31, 2016, the Company issued an aggregate of 10,000 restricted common shares to a consultant with a fair value of $6,000. The shares were issued as per the terms of an investor and public relations agreement. These shares vested immediately on the date of issuance. The Company has recorded $6,000 in stock-based compensation expense for the year ended December 31, 2016, which is a component of professional fees in the consolidated statements of operations. The shares were valued based on the most recent sales of its common stock to independent qualified investors on the grant date.
During the year ended December 31, 2016, the Company issued an aggregate of 100,000 restricted common shares to a consultant with a fair value of $14,200. The shares were issued as per the terms of a board advisory agreement. These shares vested immediately on the date of issuance. The value of the shares will be expensed on a straight-line basis over the term of the agreement. The Company has recorded $1,754 in stock-based compensation expense for the year ended December 31, 2016, which is a component of professional fees in the consolidated statements of operations. The shares were valued based on the quoted closing trading price on the date of issuance.
During the year ended December 31, 2016, the Company issued an aggregate of 675,000 restricted common shares to a placement agent with a fair value of $67,500. The shares were issued upon entering into a Financial Advisory and Investment Banking Agreement. These shares vested immediately on the date of issuance. The Company has recorded $67,500 in stock-based compensation expense for the year ended December 31, 2016, which is a component of professional fees in the consolidated statements of operations. The shares were valued based on the quoted closing trading price on the date of issuance.
During the year ended December 31, 2016, the Company issued an aggregate of 450,375 restricted common shares to a placement agent with a fair value of $65,385. The shares were granted as compensation to the placement agent for Units sold in the Offering during the year ended December 31, 2016. The shares were valued based on the quoted closing trading price on the date of issuance.
In August 2017, the Company entered into an agreement with a consulting firm to provide investor and public relations services. As compensation for the services, the Company was to pay the consultant $30,000 and issue 750,000 restricted common shares. The term of the agreement was for three months. During the three months ended September 30, 2017, the Company canceled the agreement without any payment or obligation.
During the year ended December 31, 2017, the Company issued an aggregate of 4,300,000 restricted common shares to consultants with a fair value of $304,830. These shares vested immediately on the date of issuance. The Company has recorded $304,830 in stock-based compensation expense for the year ended December 31, 2017, which is a component of professional fees in the consolidated statements of operations. The shares were valued based on the quoted closing trading price on the date of issuance.
| F-19 |
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
During the year ended December 31, 2017, the Company issued an aggregate of 819,750 restricted common shares to a placement agent with a fair value of $126,287 (See Note 6). The shares were granted as compensation to the placement agent for Units sold in Offering 3 during the year ended December 31, 2017. The shares were valued based on the quoted closing trading price on the date of issuance.
Common stock issued with convertible notes
During the year ended December 31, 2016, the Company issued an aggregate of 6,229,999 restricted common shares to investors as part of a private placement of the Company’s debt and equity securities (See Note 6).
During the year ended December 31, 2017, the Company issued an aggregate of 8,211,333 restricted common shares to investors as part of a private placement of the Company’s debt and equity securities (See Note 6).
Common stock issued with convertible notes - related party
During the year ended December 31, 2016, the Company issued an aggregate of 175,000 restricted common shares to a related party investor as part of a private placement of the Company’s debt and equity securities (See Note 7).
During the year ended December 31, 2017, the Company issued an aggregate of 218,750 restricted common shares to an investor related to the modification of the terms of an existing convertible note (See Note 7).
Common stock issued with promissory notes
During the year ended December 31, 2016, the Company issued an aggregate of 100,000 restricted common shares to an investor as part of a private placement of the Company’s debt and equity securities (See Note 5).
Common stock issued in connection with settlement of vendor liabilities
During the year ended December 31, 2017, the Company issued an aggregate of 878,710 restricted common shares to vendors to settle liabilities in the amount of $83,479. The shares were valued based on the quoted closing trading price on the vesting date. In connection with the settlement, the Company recorded a gain on settlement of vendor debt of $29,122.
Common stock issued in payment of interest on convertible notes payable
During the year ended December 31, 2017, the Company issued an aggregate of 4,833,000 restricted common shares in settlement of accrued interest on convertible notes payable in the amount of $289,980. The shares were valued based on the quoted closing trading price on the vesting date of $419,180. In connection with the settlement, the Company recorded the excess of fair value of common stock and settled interest as a reduction in the derivative liability.
Preferred Stock
The Company is authorized to issue up to 10,000,000 shares of preferred stock, par value $0.001 per share. No shares of its preferred stock are issued or outstanding.
2016 Amended and Restated Equity Incentive Plan
The Board of Directors and stockholders of the Company adopted the 2015 Equity Incentive Plan prior to the closing of the Share Exchange, which was amended and restated in 2016, which reserves a total of 15,000,000 shares of Common Stock for issuance under the 2016 Plan. If an incentive award granted under the 2016 Plan expires, terminates, is unexercised or is forfeited, or if any shares are surrendered in connection with an incentive award, the shares subject to such award and the surrendered shares will become available for further awards under the 2016 Plan.
Shares issued under the 2016 Plan through the settlement, assumption or substitution of outstanding awards or obligations to grant future awards as a condition of acquiring another entity are not expected to reduce the maximum number of shares available under the 2016 Plan. In addition, the number of shares of common stock subject to the 2016 Plan, any number of shares subject to any numerical limit in the 2016 Plan, and the number of shares and terms of any incentive award are expected to be adjusted in the event of any change in outstanding common stock by reason of any stock dividend, spin-off, split-up, stock split, reverse stock split, recapitalization, reclassification, merger, consolidation, liquidation, business combination or exchange of shares or similar transaction. As of December 31, 2017, no shares remain available for future issuance under the 2016 Plan.
| F-20 |
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Stock options issued for services
During the year ended December 31, 2016, the Company granted three board members an aggregate of 12,100,000 stock options for services rendered, having a total grant date fair value of approximately $546,000. 2,200,000 options vest immediately and expire between 2021 and 2026. 2,700,000 options vest in the event that the average volume weighted average price of the Company’s common stock over any 10 day period is greater than or equal to $0.25 and expire between 2021 and 2026. 2,700,000 options vest in the event that the average volume weighted average price of the Company’s common stock over any 10 day period is greater than or equal to $0.50 and expire between 2021 and 2026. 2,250,000 options vest in the event that the average volume weighted average price of the Company’s common stock over any 10 day period is greater than or equal to $0.75 and expire in 2021. 2,250,000 options vest in the event that the average volume weighted average price of the Company’s common stock over any 10 day period is greater than or equal to $1.00 and expire in 2021. 1,750,000 of the options contain only service conditions and will be expensed on a straight-line basis over the service period of the agreement. The remaining options contain market conditions and are being expensed over the derived service period as computed by a Monte Carlo pricing model.
During the year ended December 31, 2016, the Company granted of an aggregate of 200,000 stock options to two advisory board members, having a total grant date fair value of approximately $9,600. The options have an exercise price ranging from $0.06 to $0.10 per share; have a ten (10) year term and a vesting period of 1 year. These options will be revalued at the end of each reporting period until they vest and will be expensed on a straight-line basis over the term of the agreements.
During the year ended December 31, 2017, the Company granted its interim Chief Executive Officer an aggregate of 7,000,000 stock options with an exercise price of $0.11 for services rendered, having a total grant date fair value of approximately $409,000. 1,000,000 options vest immediately and expire in 2027. 1,500,000 options vest in the event that the average volume weighted average price of the Company’s common stock over any 10 day period is greater than or equal to $0.25 and expire between in 2027. 1,500,000 options vest in the event that the average volume weighted average price of the Company’s common stock over any 10 day period is greater than or equal to $0.50 and expire in 2027. 1,500,000 options vest in the event that the average volume weighted average price of the Company’s common stock over any 10 day period is greater than or equal to $0.75 and expire in 2027. 1,500,000 options vest in the event that the average volume weighted average price of the Company’s common stock over any 10 day period is greater than or equal to $1.00 and expire in 2027. 1,000,000 of the options contain only service conditions and will be expensed on a straight-line basis over the service period of the agreement. The remaining options contain market conditions and are being expensed over the derived service period as computed by a Monte Carlo pricing model.
During the year ended December 31, 2017, the Company granted its Chairman of the Board an aggregate of 5,250,000 stock options with an exercise price of $0.07 for services rendered, having a total grant date fair value of approximately $128,525. 1,750,000 options vest immediately and expire in 2027. 1,750,000 options vest in the event that the average volume weighted average price of the Company’s common stock over any 10 day period is greater than or equal to $0.20 and expire between in 2027. 1,750,000 options vest in the event that the average volume weighted average price of the Company’s common stock over any 10 day period is greater than or equal to $0.40 and expire in 2027. 1,750,000 of the options contain only service conditions and will be expensed on a straight-line basis over the service period of the agreement. The remaining options contain market conditions and are being expensed over the derived service period as computed by a Geometric Brownian pricing model.
The Company uses the Black-Scholes model to determine the fair value of awards granted that contain typical service conditions that affect vesting. The Company uses the Monte Carlo or Geometric Brownian model to determine the fair value of awards granted that contain complex features such as market conditions because the Company believes the method accounts for multiple embedded features and contingencies in a superior manner than a simple Black Scholes model. In other words, simple models such as Black-Scholes may not be appropriate in many situations given complex features and differing terms. In applying the Black-Scholes, Monte Carlo or Geometric Brownian option pricing models to options granted, the Company used the following assumptions:
|
For the Year Ended December 31, 2017 |
For the Year Ended December 31, 2016 |
|||||
| Risk free interest rate | 1.83-1.92% | 0.087-2.45% | ||||
| Dividend yield | 0.00% | 0.00% | ||||
| Expected volatility | 70.00-298.88% | 59.00-83.71% | ||||
| Expected life in years | 10 | 5-10 | ||||
| Forfeiture rate | 0.00 | 0.00% | ||||
| F-21 |
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Since the Company has limited trading history in 2016 and 2017, volatility was determined by averaging volatilities of comparable companies in addition to its historical trading history. The Company determined it did not have sufficient data to estimate the volatility using the only Company’s own historical stock prices as compared to comparable companies.
The Company uses the simplified method to calculate expected term of share options and similar instruments issued to employees as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The contractual term is used as the expected term for share options and similar instruments issued to non-employees and for options valued using the Monte Carlo or Geometric Brownian model.
The following is a summary of the Company’s stock option activity during the two years ended December 31, 2017:
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | ||||||||||
| Outstanding-January 1, 2016 | – | $ | – | – | ||||||||
| Granted | 12,300,000 | 0.11 | 5.94 | |||||||||
| Exercised | – | – | – | |||||||||
| Forfeited/Canceled | – | – | – | |||||||||
| Outstanding – December 31, 2016 | 12,300,000 | $ | 0.11 | 5.64 | ||||||||
| Granted | 12,250,000 | 0.09 | 10.00 | |||||||||
| Exercised | – | – | – | |||||||||
| Forfeited/Cancelled | – | – | – | |||||||||
| Outstanding – December 31, 2017 | 24,550,000 | $ | 0.10 | 7.03 | ||||||||
| Exercisable – December 31, 2017 | 5,150,000 | $ | 0.09 | 8.10 | ||||||||
At December 31, 2017, the aggregate intrinsic value of options outstanding and exercisable was $0.
Stock-based compensation for stock options has been recorded in the consolidated statements of operations and totaled $450,413 and $166,565, for the years ended December 31, 2017 and 2016, respectively.
As of December 31, 2017, stock-based compensation of $487,684 remains unamortized and is expected to be amortized over the weighted average remaining period of 2.75 years.
Warrants
The Company used the Black-Scholes model to determine the fair value of warrants granted during the years ended December 31, 2017 and 2016. In applying the Black-Scholes option pricing model to warrants granted, the Company used the following assumptions:
| Year Ended December 31, 2017 |
Year Ended December 31, 2016 | ||||
| Risk free interest rate | 1.10 – 2.14% | 1.13 – 1.92% | |||
| Dividend yield | 0.00% | 0.00% | |||
| Expected volatility | 65.32-316.98% | 68.46 – 84.00% | |||
| Contractual term (years) | 3.1-5 | 3.3 - 4 | |||
| F-22 |
The following is a summary of the Company’s warrant activity during the two years ended December 31, 2017:
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | ||||||||||
| Outstanding-January 1, 2016 | 2,951,669 | $ | 0.66 | 4.54 | ||||||||
| Granted | 6,005,008 | 0.10 | 4.00 | |||||||||
| Exercised | – | – | – | |||||||||
| Forfeited/Canceled | – | – | – | |||||||||
| Outstanding – December 31, 2016 | 8,956,677 | $ | 0.20 | 3.65 | ||||||||
| Granted | 27,348,692 | 0.09 | 4.11 | |||||||||
| Exercised | – | – | – | |||||||||
| Forfeited/Canceled | – | – | – | |||||||||
| Outstanding and Exercisable – December 31, 2017 | 36,305,369 | $ | 0.11 | 3.74 | ||||||||
At December 31, 2017, the aggregate intrinsic value of warrants outstanding and exercisable was $217,317.
The following is additional information with respect to the Company's warrants as of December 31, 2017:
| Number of Warrants |
Exercise Price |
Weighted Average Remaining Contractual Life (In Years) |
Currently Exercisable | |||
| 4,219,941 | $0.001 | 6.37 | 4,219,941 | |||
| 50,000 | $0.01 | 2.18 | 50,000 | |||
| 1,000,000 | $0.06 | 4.28 | 1,000,000 | |||
| 27,842,093 | $0.10 | 3.34 | 27,842,093 | |||
| 1,000,000 | $0.12 | 4.28 | 1,000,000 | |||
| 1,000,000 | $0.18 | 4.28 | 1,000,000 | |||
| 418,333 | $0.60 | 2.35 | 418,333 | |||
| 775,002 | $0.72 | 2.62 | 775,002 | |||
| 36,305,369 | 36,305,369 |
In April 2017, in exchange for services rendered, the Company issued 1,000,000, 1,000,000 and 1,000,000 warrants to purchase shares of the Company’s common stock with exercise prices of $0.06, $0.12 and $0.18 per share, respectively that vested immediately. The fair value on the grant date of the warrants was $112,717 was charged to operations as services.
During the year ended December 31, 2017, the Company issued an aggregate of 9,246,257 warrants to purchase the Company’s common stock at $0.10 per share, expiring four years from issuance, in connection with the issuance of convertible notes payable. In addition, the Company issued 3,219,106 warrants to purchase the Company’s common stock at $0.001 per share, expiring seven years from issuance for placement agent services.
During the year ended December 31, 2017, the Company issued an aggregate of 11,883,329 warrants to purchase the Company’s common stock at $0.10 per share, expiring four years from issuance, in connection with the six month extension of previously issued convertible notes payable. The fair value on the grant date of the warrants was $767,936 was charged to operations as loss on extinguishment of debt.
| F-23 |
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Litigations, Claims and Assessments
Attia Enterprises, a creditor, has initiated a claim against the Company for $87,500 relating to a loan due of $46,664 including interest currently in default. The Company retained counsel for representation in the matter. Subsequent to December 31, 2017, the company accepted a settlement totaling approximately $90,000 cash and 750,000 shares of stock. The company has accounted for it in accordance with ASC450.
On January 31, 2017, the Company entered into a mutual general release and settlement agreement (the "Settlement Agreement") with Microcap Headlines, Inc. (“Microcap”) to settle a judgment against the Company in the sum of $17,042 entered pursuant to a lawsuit filed by Microcap against the Company (the "Action") in the New York County, New York, Superior Court (Index No. 653105/2016). In the Action, the plaintiff alleged that the Company owed the plaintiff past due amounts for investor relations services provided to the Company. Pursuant to the Settlement Agreement, the Company agreed to pay Microcap $14,700 upon execution of the Settlement Agreement. The Settlement Agreement also contains a general release by Microcap of the Company relating to the Action, such release however is predicated on the Company making payments pursuant to the Settlement Agreement. Pursuant to the Settlement Agreement, after receipt of the full $14,700 by Microcap, the Company and Microcap shall execute a written stipulation to set aside the default and judgment against the Company and dismiss the Action with prejudice. As of December 31, 2016, the Company had accrued a liability of $17,042 related to the Settlement Agreement which has been included in other accrued liabilities at December 31, 2016 in the accompanying consolidated Balance Sheet. On February 2, 2017, the Company paid the settlement in full.
The Company may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. There are no such matters other than described above that are deemed material to the consolidated financial statements as of December 31, 2017 and 2016.
Employment Agreements
On February 21, 2017, the Company entered into an employment agreement with an individual, pursuant to which, commencing March 6, 2017, the individual will serve as the Interim Chief Executive Officer of the Company and, commencing 90 days thereafter, shall serve as Chief Executive Officer of the Company through March 5, 2019, subject to extension as provided in the employment agreement, and be appointed to the Board of Directors. The agreement calls for an annual salary of $250,000 per annum and a bonus in the amount of 10% of all incremental gross revenue generated by the Company, which bonus shall be determined and be payable quarterly. In addition, pursuant to the employment agreement, the Company granted to the individual certain stock options (See Note 9).
On March 6, 2017, William Gorfein resigned as the Company’s Chief Executive Officer and was named the Company’s Chief Strategy Officer and Principal Financial Officer. No changes were made to Mr. Gorfein’s existing employment agreement.
Payroll Tax Liabilities
As of December 31, 2017, and through the date of this report, the Company has not filed certain federal and state income and payroll tax returns nor has it paid the payroll tax amounts and related interest and penalties relating to such returns. Amounts due under these returns with respect to penalties and interest are estimated to be $10,118 and $10,493 as of December 31, 2017 and 2016, respectively which have been included in other accrued liabilities at December 31, 2017 and 2016 in the accompanying consolidated Balance Sheets.
Placement Agent and Finders Agreements
In 2016 and 2017, the Company entered into a Financial Advisory and Investment Banking Agreements with WestPark Capital, Inc. (“WestPark”) (the “WestPark Advisory Agreements”). Pursuant to the WestPark Advisory Agreement, WestPark shall act as the Company’s financial advisor and placement agent in connection with a best efforts private placement (the “Financing”) of the Company’s debt and/or equity securities (the “Securities”).
The Company, upon each closing of the Financing will pay consideration to WestPark, in cash, a fee in an amount equal to 10% of the aggregate gross proceeds raised in the Financing from the sale of Securities placed by WestPark and warrants in the amount of 10% of the aggregate gross proceeds. The Company will also pay all WestPark legal fees and expenses as well as a 3% non-accountable expense allowance of the aggregate gross proceeds raised in the Financing. The Placement Agent Warrants will have: (a) a nominal exercise price of $0.001 per share, (b) a seven year term, and (c) a cashless exercise provision. The shares underlying the Placement Agent Warrants will have standard piggyback registration rights.
During the year ended December 31, 2017, in addition to the cash fees, the Company issued 1,319,750 shares and 3,219,106 warrants to acquire the Company’s common stock at $0.001 per share for seven years as placement agent fees as per the terms of the WestPark Advisory Agreements. In addition, as of December 31, 2017, the Company is obligated to issue an additional 1,333,467 warrants for placement agent fees with an exercise price of $0.001, expiring seven years from issuance date.
| F-24 |
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Operating Lease
The Company had an operating lease for its New York office facility under a month-to-month agreement which ended on March 31, 2016. The Company is not currently a party to any operating lease agreements. Rent expense for the year ended December 31, 2017 and 2016 totaled $0 and $20,231, respectively.
NOTE 11 – RELATED PARTY TRANSACTIONS
On March 9, 2015, the Company engaged with a lead generation and presales outsourcing firm, Corporate Rain International (“CRI”). Tim Askew, a member of the Company’s Board of Directors, is the founder and CEO of CRI. CRI will be compensated $6,000 per month along with a flat commission of $500 for each customer referred by CRI to the Company per the terms of the engagement. The Company recorded compensation expense to CRI of $30,000 during the year ended December 31, 2015. As of December 31, 2015, the Company had an outstanding balance due to CRI of $6,000. During the year ended December 31, 2016 $6,000 was forgiven.
See Notes 7 and 8.
NOTE 12 – INCOME TAXES
The tax effects of temporary differences that give rise to deferred tax assets as of December 31, 2017 and 2016 are presented below:
The income tax provision (benefit) consists of the following:
| 2017 | 2016 | |||||||
| Federal | ||||||||
| Current | $ | – | $ | – | ||||
| Deferred | (94,974 | ) | (377,200 | ) | ||||
| State and local | ||||||||
| Current | – | – | ||||||
| Deferred | (42,630 | ) | (104,600 | ) | ||||
| Change in valuation allowance | 137,604 | 481,800 | ||||||
| Income tax provision (benefit) | $ | – | $ | – | ||||
The reconciliation between the statutory federal income tax rate and the Company’s effective rate for the years ended December 31, 2017 and 2016 is as follows:
| 2017 | 2016 | |||||||
| U.S. Federal statutory rate | (34.0% | ) | (34.0% | ) | ||||
| State tax, net of federal tax benefit | (9.4 | ) | (9.42 | ) | ||||
| Federal tax rate change | 10.9 | – | ||||||
| Stock based compensation | 8.9 | 10.33 | ||||||
| Non-deductible interest expense | 27.9 | 6.46 | ||||||
| Other permanent differences | (7.0 | ) | 0.56 | |||||
| Change in valuation allowance | 2.7 | 26.07 | ||||||
| Income tax provision (Benefit) | 0.0% | 0.0% | ||||||
As of December 31, 2017 and 2016 the deferred tax assets consisted of the following:
| 2017 | 2016 | |||||||
| Deferred Tax Assets: | ||||||||
| Net operating loss carryovers | $ | 1,269,504 | $ | 1,131,900 | ||||
| Total deferred tax asset | 1,269,504 | 1,131,900 | ||||||
| Valuation allowance | (1,269,504 | ) | (1,131,900 | ) | ||||
| Net Deferred Tax Asset, net of valuation allowance | $ | – | $ | – | ||||
| F-25 |
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The Company is required to file its income tax returns in the U.S. federal jurisdiction and the state of New York and such returns are subject to examination by tax authorities. Tax returns for the years ended December 31, 2015, 2016 and 2017 remain open to Internal Revenue Service and State audits.
The Company is in the process of filing its federal and state tax returns for the years ended December 31, 2017, 2016, 2015 and 2014. The Net operating losses (“NOLs”) for these years will not be available to reduce future taxable income until the returns are filed. Assuming these returns are filed, as of December 31, 2017, the Company had approximately $4.2 million of federal and state net operating losses that may be available to offset future taxable income. The net operating loss carryforwards will begin to expire in 2035 unless utilized. In accordance with Section 382 of the Internal Revenue Code, deductibility of the Company’s U.S. net operating carryovers may be subject to an annual limitation in the event of a change of control as defined the regulations. A Section 382 analysis has not been prepared and the Company’s NOLs could be subject to limitation.
The Company assesses the likelihood that deferred tax assets will be realized. To the extent that realization is not likely, a valuation allowance is established. Based upon the Company’s losses since inception, management believes that it is more likely than not that the future benefits of its deferred tax assets will not be realized and has therefore established a full valuation allowance.
On December 22, 2017, new legislation was signed into law, informally titled the Tax Cuts and Jobs Act, which included, among other things, a provision to reduce the federal corporate income tax rate to 21%. Under ASC 740, Accounting for Income Taxes, the enactment of the Tax Act also requires companies, to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. There is no further change to its assertion on maintaining a full valuation allowance against its U.S. deferred tax assets. The Company’s gross deferred tax assets have been revalued from 34% to 21% with a corresponding offset to the valuation allowance and any potential other taxes arising due to the Tax Act will result in reductions to its net operating loss carryforward and valuation allowance. Deferred tax assets of approximately $1,800,000 have been revalued to approximately $1,300,000 with a corresponding decrease to the Company’s valuation allowance. Therefore, there was no net impact on the Company’s financial statements for the year ended December 31, 2017.
On December 22, 2017, the SEC Staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of ASC Topic 740 in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act. The Company is complete with its accounting for the effects of the Tax Act, however, as additional guidance and interpretation may be issued by the U.S. Treasury Department, the IRS and other standard setting bodies, the Company may be required to make adjustment and/or additional disclosure relating to its gross deferred tax assets in 2018.
NOTE 13 – SUBSEQUENT EVENTS
Financing
In 2018, the Company sold an aggregate of $111,900 of Units to five investors under Offering 6. Each Unit was sold at a price of $10,000 per Unit and consisted of one (1) six (6) month, 18% convertible promissory note (36% on an annual basis) with a face value of $10,000 (the “Offering 6 Notes”) and four year warrants exercisable for an aggregate number of shares of common stock equal to 50% of the shares of common stock into which the Offering 6 Note is initially convertible, exercisable at a price of $0.06 per share. The Offering 6 Notes are due six months after the issuance of each note. In connection with the sale of $91,500 of Units, the Company issued an aggregate of 932,500 four year warrants.
| F-26 |
Pursuant to the requirements of Section 13 or 15(d) 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.
PeerLogix, Inc. | ||
| By: | /s/ Ray Colwell | |
| Ray Colwell | ||
| Chief Executive Officer | ||
| By: | /s/ William Gorfein | |
| William Gorfein | ||
| Principal Financial Officer | ||
Dated: April 30, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Ray Colwell |
Chief Executive Officer and Director (Principal Executive Officer) |
April 30, 2018 | ||
| /s/William Gorfein | Principal Financial Officer and Director | April 30, 2018 | ||
| /s/ Kevin Richardson | Chairman of the Board | April 30, 2018 | ||
| Kevin Richardson | ||||
| 24 |