Peerlogix, Inc. (formerly “Realco International,
Inc.”) (“Peerlogix” or the “Company”) was incorporated in Nevada on February 14, 2014. The Company
is a data aggregation company providing a proprietary software as a service (“SAAS”) platform which enables the tracking
and cataloguing of Torrent files and Torrent networks in order to determine consumer trends and preferences based upon media consumption.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they
do not include all of the information and disclosures required by U.S. GAAP for annual financial statements. In the opinion of
management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary
for a fair presentation of the condensed consolidated financial position of the Company as of March 31, 2016 and the results of
operations and cash flows for the three months ended March 31, 2016 and 2015. The results of operations for the three months ended
March 31, 2016 are not necessarily indicative of the operating results for the full year ending December 31, 2016 or any other
period.
These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and related disclosures of the Company as of December
31, 2015 and for the year then ended, which were filed with the Securities and Exchange Commission (“SEC”) on Form
10-K on April 14, 2016.
The Company has generated minimal revenues
and continues to incur recurring losses from operations and has an accumulated deficit since inception. Accordingly, the accompanying
condensed 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 $376,000 and net cash used in operations of approximately $99,000 for the three
months ended March 31, 2016. These conditions raise substantial doubt about the Company's ability to continue as a going concern.
The Company's primary source of operating funds
since inception has been cash proceeds from the sale of Class A units, common stock and common stock warrants, convertible debentures
and notes payable. 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 7 for financing activities subsequent to March 31, 2016.)
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 condensed
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 condensed consolidated
financial statements have been prepared in conformity with 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 condensed consolidated financial statements do not necessarily purport to represent
realizable or settlement values. The condensed consolidated financial statements do not include any adjustment that might
result from the outcome of this uncertainty.
On August 14, 2015, the
Company and Peerlogix Technologies, Inc. merged. The merger was treated as a reverse merger and recapitalization of Peerlogix
Technologies, Inc. for financial accounting purposes. The historical financial statements of the Company are those of PeerLogix
Technologies, Inc., and of the consolidated entities from the date of merger forward. All significant inter-company balances and
transactions have been eliminated.
The preparation of condensed 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, stock-based compensation,
and the valuation allowance relating to the Company’s deferred tax assets.
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.
Total shares issuable upon the exercise of
warrants and conversion of convertible promissory notes for the three months ended March 31, 2016 and 2015 were as follows:
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 condensed consolidated
financial statements, except as disclosed.
As part of the transaction, the Company recorded
an $18,000 debt discount relating to the 100,000 shares of common stock issued and $26,250 was recorded as an original issue discount
and will be 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.
During the three months ended March 31, 2016,
the Company granted an aggregate of 40,000 common shares to a consultant with a fair value of $8,000. The shares represented a
bonus on a previous investor relations 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 three months ended March 31, 2016, which is a component
of professional fees in the condensed consolidated statements of operations. The shares were valued based on the quoted closing
trading price on the date of issuance.
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 that are deemed material to the
condensed consolidated financial statements as of March 31, 2016 and December 31, 2015.
The Company has an operating lease for its
New York office facility under a month-to-month agreement. Beginning in October 2015, due to an increase in office space, the
Company will pay monthly rental payments of $9,600. The Company will receive a discounted monthly rate of $6,663 for the period
October 2015 through March 2016. Rent expense for the three months ended March 31, 2016 and 2015 totaled $20,231 and $2,700, respectively.
Note 7 – Subsequent Events
Financing Activity
On April 8, 2016 (the “Initial Closing
Date”), we entered into a Securities Purchase Agreement (the “Agreement”) 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, the Investor agreed to purchase senior secured convertible
debentures in the aggregate principal amount of up to $125,000 (together the “Debentures” and each individual issuance
a “Debenture”), bearing interest at a rate of 0% per annum, with maturity on October 8, 2016, extended to April 8,
2017 at the discretion of the Investor. The principal amount of the Debentures shall equal the amount funded by the Investor together
with an original issue discount of 20%. The Debentures are secured by all assets of the Company.
On the Initial Closing Date, we issued and
sold to the Investor, and the Investor purchased from us, a first Debenture in the principal amount of $68,750 for a purchase price
of $55,000. $13,750 was recorded as an original issue discount and will be accreted over the life of the note to interest expense.
In May 2016, we issued and sold to the Investor,
and the Investor purchased from us, a second Debenture in the principal amount of $18,750 for a purchase price of $15,000. $3,750
was recorded as an original issue discount and will be accreted over the life of the note to interest expense.
The principal amount of the Debentures can
be converted at the option of the Investor into shares of our 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. In order to induce Investors to invest
in the Debentures, the Investors will be issued two shares of Company common stock for each $1.00 invested.
The Agreement provides that, the shares
of Company common stock and stock options held by William Gorfein, CEO and Joshua Partridge, former COO (the “Founders
Shares”), together with medallion guaranteed stock powers relating thereto, shall be placed into an escrow account
established by the Investor and shall be held pending a determination by the Board of Directors, in consultation with the
Investor, of the status of the operations of the Company. Within 45 days following the Initial Closing Date the Company shall
deliver to the escrow agent a written notice which shall state that the board of directors of the Company, in consultation
and agreement with the Investor, have made one of the following determinations:
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(a)
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adequate funding, on terms and conditions acceptable to both the Company and the Investor, is made available to the Company and is sufficient to ensure that the Company can execute its business plan; or
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(b)
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such funding is not available to the
Company, in which case the Company intends to structure a transaction as a result of which either (i) the shares of the
Company and a wholly-owned subsidiary of the Company, and the operations thereof shall be returned to the CEO and former COO
and the Founders Shares shall be cancelled, but the Company shall be entitled to a 10% royalty on sales generated by such
operation for five years or (ii) the operations thereof shall be sold to a third party, and the CEO and former COO shall
become employees thereof or, if not so employed, the unemployed individual shall accept from the Company a cash payment
in lieu of such employment equal to $25,000.
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The Company can give no assurance that such
funding will be available on terms and conditions acceptable to both the Company and the Investor, or at all.
Placement Agent and Finders Agreements
In April 2016,
the Company entered into a Financial Advisory and Investment Banking Agreement with WestPark Capital, Inc. (“WestPark”)
(the “WestPark Advisory Agreement”). 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 up
to $750,000 of the Company’s debt and/or equity securities (the “Securities”) to take place between April 2016
and June 2016.
There can be no assurance that such financing will take place, or be on terms
acceptable to the Company.
The Company upon 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.
In addition, in April 2016, the Company issued
to WestPark 675,000 shares of the Company’s common stock and will issue 750,000 shares of the Company’s common stock
for every $1,000,000 raised in the Financing on a pro-rata basis. The aforementioned shares will have standard registration rights.
Advisory Board Agreement
On May 1, 2016, the
Company entered into an advisory board agreement with David Millili. The term of the agreement is for a period of 12 months commencing
on May 1, 2016. Pursuant to the agreement, Mr. Millili is to be issued a non-qualified stock option to purchase 100,000 shares
of the Company’s common stock.
As of the date of the filing of this report the terms
of the options were not finalized.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion
should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein. In connection
with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation
Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in
this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange
Commission. Forward looking statements are statements not based on historical information and which relate to future operations,
strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are
beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward
looking statements made by, or on our behalf. We disclaim any obligation to update forward looking statements.
Overview
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.
The
discussion and analysis of our financial condition and results of operations are based on our condensed 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.
We
qualify as an “emerging growth company” under the JOBS Act. As a result, we are permitted to, and intend to, rely on
exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:
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·
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have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
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·
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comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);
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·
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submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay” and “say-on-frequency;” and
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·
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disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation.
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In
addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition
period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words,
an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to
private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements
may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
We
will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first
fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated
filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our ordinary
shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal
quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year
period.
We
also qualify as a smaller reporting company under Rule 12b-2 of the Securities Exchange Act of 1934, as amended. As a smaller reporting
company and so long as we remain a smaller reporting company, we benefit from similar exemptions and exclusions as an emerging
growth company. In the event that we cease to be an emerging growth company as a result of a lapse of the five year period, but
continue to be a smaller reporting company, we would continue to be subject to similar exemptions available to emerging growth
company until such time as we were no longer a smaller reporting company.
There is very little historical
financial information about us upon which to base an evaluation of our performance. We are an early stage corporation and have
generated minimal revenues from operations. We cannot guarantee we will be successful in our business operations. Our business
is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources and possible
cost overruns due to price and cost increases in products.
We have not been subject
to any bankruptcy, receivership or similar proceeding.
Results of Operations for the Three Months
Ended March 31, 2016 and 2015
The following table sets
forth the summary income statement for the three months ended March 31, 2016 and 2015:
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For the Three Months Ended
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March 31,
2016
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March 31,
2015
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Revenues
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$
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–
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$
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–
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Operating Expenses
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$
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(357,781
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)
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$
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(97,649
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)
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Other Expense
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$
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(18,171
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)
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$
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(1,658
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)
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Net Loss
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$
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(375,952
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)
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$
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(99,307
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)
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Revenues:
From inception
through March 31, 2016 the Company has generated minimal 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 266% during the three months ended March 31, 2016, as compared to the three months ended March 31, 2015. The overall $260,132
increase in operating expenses is primarily attributable to the following approximate net increases (decreases) in operating expenses:
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·
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An increase of payroll and related expenses of $108,000 due to an increase in officers’ salaries and the hiring of a Chief Accounting Officer (“CAO”) and a project manager and a project manager assistant. In February 2016, the employment of the CAO was terminated.
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·
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A
decrease of research and development expenses of $21,000. Research and development expenses consist primarily of payments to third
parties for the development of software. We expense research and development costs as incurred until such time that technological
feasibility of our product has been established. Technological feasibility of our product was attained during the 4th quarter
of 2015.
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·
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An increase of software
maintenance expenses of $26,000. Technological feasibility of our product was attained during the 4th quarter of 2015. Software
maintenance expenses consist of costs incurred to maintain our software, improve functionality and customer support.
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·
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An increase in
equity-based compensation expense of $8,000. During the three months ended March 31, 2016, the Company recognized $8,000 of
equity-based compensation as a result of an equity-based bonus award granted to a consultant. During the three months ended
March 31, 2015, the Company recognized $0 of equity- based compensation.
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·
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An increase in professional fees of $119,500 (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, auditing fees and legal fees related to public filing requirements.
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·
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A decrease in computer and internet expenses of $11,400 primarily due to the termination of an agreement with one of the two service providers the Company uses to host its servers. The Company leases servers on a monthly basis from a third party.
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·
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An increase in rent expense of $17,500 due to the Company entering into a new lease agreement for its office facility.
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Other expenses:
Other expense consists primarily of interest expense primarily related to the Company’s notes payable.
Other expense - increased
by $16,513 to $(18,171) during the three months ended March 31, 2016 as compared to $(1,658) during the three months ended March
31, 2015.
Liquidity and Capital Resources
The following table summarizes
total current assets, liabilities and working capital at March 31, 2016 compared to December 31, 2015:
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March 31,
2016
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December 31,
2015
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Increase/
(Decrease)
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Current Assets
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$
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12,249
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$
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21,271
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$
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(9,022
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)
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Current Liabilities
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$
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638,658
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$
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297,728
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$
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340,930
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Working Capital Deficit
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$
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(626,409
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)
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$
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(276,457
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)
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$
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(349,952
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)
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As of March 31, 2016, we
had working capital deficit of $626,409 as compared to a working capital deficit of $276,457 as of December 31, 2015, an increase
of $349,952. During the three months ended March 31, 2016 we received proceeds of $105,000 from the issuance of notes payable.
The Company used the proceeds to fund operations during the current period. The increase in our working capital deficit is primarily
attributable to our historic negative cash flow from operations resulting in our growing accounts payable and accrued liabilities.
We
have incurred net operating losses and operating cash flow deficits since inception, continuing through the first quarter of 2016.
We have been funded primarily by a combination of equity issuances and debt, to execute on our business plan and for working capital.
Our principal source of liquidity is our cash.
At March 31, 2016, we had a cash overdraft
of approximately $1,900.
Consequently, we will be required to raise additional capital to complete the development and commercialization
of our current product and to fund operations. 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 condensed
consolidated financial statements, the Company had an accumulated deficit at March 31, 2016, a net loss and net cash used in operating
activities for the three months 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.
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
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 sold 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 Note with a principal amount of $131,250 (“Principal Amount”).
The January Note
is 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.
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 Pinewood (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 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 the filing of this report, the registration statement has not been filed. Subsequent to March
31, 2016 and through the date of the filing of this report the Company has incurred cash liquidated damages of approximately $4,400
along with accrued interest.
On April 8, 2016 (the “Initial
Closing Date”), we entered into a Securities Purchase Agreement (the “Agreement”) 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, the Investor agreed to purchase senior secured convertible
debentures in the aggregate principal amount of up to $125,000 (together the “Debentures” and each individual issuance
a “Debenture”), bearing interest at a rate of 0% per annum, with maturity on October 8, 2016, extended to April 8,
2017 at the discretion of the Investor. The principal amount of the Debentures shall equal the amount funded by the Investor together
with an original issue discount of 20%. The Debentures are secured by all assets of the Company.
On the Initial Closing
Date, we issued and sold to the Investor, and the Investor purchased from us, a first Debenture in the principal amount of $68,750
for a purchase price of $55,000. $13,750 was recorded as an original issue discount and will be accreted over the life of the note
to interest expense.
In May 2016, we issued
and sold to the Investor, and the Investor purchased from us, a second Debenture in the principal amount of $18,750 for a purchase
price of $15,000. $3,750 was recorded as an original issue discount and will be accreted over the life of the note to interest
expense.
The principal amount of
the Debentures can be converted at the option of the Investor into shares of our 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. In order to induce
Investors to invest in the Debentures, the Investors will be issued two shares of Company common stock for each $1.00 invested.
The Agreement
provides that, the shares of Company common stock and stock options held by William Gorfein, CEO and Joshua Partridge, former
COO (the “Founders Shares”), together with medallion guaranteed stock powers relating thereto, shall be placed
into an escrow account established by the Investor and shall be held pending a determination by the Board of Directors, in
consultation with the Investor, of the status of the operations of the Company. Within 45 days following the Initial Closing
Date the Company shall deliver to the escrow agent a written notice which shall state that the board of directors of the
Company, in consultation and agreement with the Investor, have made one of the following determinations:
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(a)
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adequate funding, on terms and conditions acceptable to both the Company and the Investor, is made available to the Company and is sufficient to ensure that the Company can execute its business plan; or
|
|
(b)
|
such funding is
not available to the Company, in which case the Company intends to structure a transaction as a result of which either
(i) the shares of the Company and a wholly-owned subsidiary of the Company, and the operations thereof shall be returned
to the CEO and former COO and the Founders Shares shall be cancelled, but the Company shall be entitled to a 10% royalty
on sales generated by such operation for five years or (ii) the operations thereof shall be sold to a third party, and
the CEO and former COO shall become employees thereof or, if not so employed, the unemployed individual shall accept from
the Company a cash payment in lieu of such employment equal to $25,000.
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The Company can give no
assurance that such funding will be available on terms and conditions acceptable to both the Company and the Investor, or at all.
Placement Agent and Finders Agreements
In
April 2016, the Company entered into a Financial Advisory and Investment Banking Agreement with WestPark Capital, Inc. (“WestPark”)
(the “WestPark Advisory Agreement”). 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 up
to $750,000 of the Company’s debt and/or equity securities (the “Securities”) to take place between April 2016
and June 2016.
There can be no assurance that such financing will take place, or be on terms
acceptable to the Company.
The Company upon 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.
In addition, in April
2016, the Company issued to WestPark 675,000 shares of the Company’s common stock at the onset of the Securities offering
and 750,000 shares of the Company’s common stock for every $1,000,000 raised in the Financing on a pro-rata basis. The aforementioned
shares will have standard registration rights.
Summary Cash flows for the three months
ended March 31, 2016 and 2015:
|
|
Three Months Ended
|
|
|
|
March 31,
2016
|
|
|
March 31,
2015
|
|
Net cash used in operating activities
|
|
$
|
(98,880
|
)
|
|
$
|
(103,961
|
)
|
Net cash provided by financing activities
|
|
$
|
97,582
|
|
|
$
|
385,753
|
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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 consist of net loss adjusted for certain non-cash items, primarily equity-based compensation expense, amortization of
debt discount, and amortization of debt issuance costs during the three months ended March 31, 2016, as well as the effect of changes
in working capital and other activities.
The adjustments for the
non-cash items increased from the three months ended March 31, 2015 to the three months ended March 31, 2016 due primarily to an
increase in equity based compensation and amortization of the debt discount and debt issuance costs recorded on the notes payable
entered into during the current period. In addition, the net increase in cash from changes in working capital activities from the
three months ended March 31, 2015 to the three months ended March 31, 2016 primarily consisted of an increase in accounts payable
and accrued expenses primarily due to an increase in accrued payroll and payroll related expenses, accrued accounting and auditing
fees and accrued consulting fees, business development, financial advisory services and investor relations.
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, related
party loans and proceeds from the issuance of common stock and warrants of the Company.
Cash provided by financing
activities decreased from the three months ended March 31, 2015 to the three months ended March 31, 2016, primarily driven by
a decrease in proceeds from the issuance of common stock and warrants.
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 condensed 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 condensed consolidated financial statements:
Use of Estimates
The preparation of condensed
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, stock-based
compensation, and the valuation allowance relating to the Company’s deferred tax assets.
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We are a smaller reporting
company and are not required to provide the information under this item pursuant to Regulation S-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management maintains “disclosure
controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange
Act”), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such
information is accumulated and communicated to management, including our Chief Executive Officer/Chief Financial Officer, to allow
timely decisions regarding required disclosure.
In connection with the
preparation of this quarterly report on Form 10-Q, an evaluation was carried out by management, with the participation of our Chief
Executive Officer/Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2016.
Based on that evaluation,
management concluded, as of the end of the period covered by this report, that our disclosure controls and procedures were not
effective in recording, processing, summarizing, and reporting information required to be disclosed, within the time periods specified
in the Securities and Exchange Commission’s rules and forms due to the existence of certain material weaknesses identified
in the “Risk Factors and Special Considerations” section in Form 10-K as filed by the Company with the SEC on April
14, 2016.
Changes in Internal Controls over Financial
Reporting
As of the end of the period
covered by this report, there have been no changes in the internal controls over financial reporting during the quarter ended
March 31, 2016, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
In February 2016, the employment of our Chief Accounting
Officer (“CAO”) was terminated. The termination of our CAO did not have an impact on our internal controls over financial
reporting.
PART II. OTHER INFORMATION
Item
1. Legal Proceedings
We are not currently a
party to any legal proceeding, nor are we aware of any threatened actions.
Item
1A. Risk Factors
As a smaller reporting
company, we are not required to provide the information required by this Item.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuance of Common Stock in Exchange
for Services
On January 23, 2016, the
Company issued 40,000 shares of common stock to a consultant for services at a fair value of $8,000. The shares were valued based
on the quoted closing trading price on the date of issuance.
On April 25, 2016,
the Company issued 675,000 shares of common stock to a consulting firm for services at a fair value of $67,500. The shares were
valued based on the quoted closing trading price on the date of issuance.
The foregoing issuances
of the shares of common stock was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended,
by virtue of Section 4(a)(2) thereof, as transactions by an issuer not involving a public offering.
Convertible Debt Issuances
On April 8, 2016 (the
“
Initial Closing Date
”), we entered into a Securities Purchase Agreement (the
“
Agreement
”) 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, the Investor agreed to purchase senior secured convertible debentures in the aggregate
principal amount of up to $125,000 (together the “Debentures” and each individual issuance a
“Debenture”), bearing interest at a rate of 0% per annum, with maturity on October 8, 2016, extended to April 8,
2017 at the discretion of the Investor. The principal amount of the Debentures shall equal the amount funded by the
Investor together with an original issue discount of 20%. The Debentures are secured by all assets of the Company.
On the Initial Closing
Date, we issued and sold to the Investor, and the Investor purchased from us, a first Debenture in the principal amount of $68,750
for a purchase price of $55,000.
In May 2016, we issued
and sold to the Investor, and the Investor purchased from us, a second Debenture in the principal amount of $18,750 for a purchase
price of $15,000.
The principal amount of
the Debentures can be converted at the option of the Investor into shares of our 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. In order to induce
Investors to invest in the Debentures, the Investors will be issued two shares of Company common stock for each $1.00 invested.
The issuance of the foregoing
notes and the corresponding common shares was deemed to be exempt from the registration requirements of the Securities Act of 1933,
as amended, by virtue of Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
The recipients of the securities
in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate legends were placed upon the stock certificates issued
in these transactions.
Item
3. Defaults upon Senior Securities
None.
ITEM
4. mine safety disclosures
Not applicable.
Item
5. Other Information
None.
Item
6. Exhibits
The following exhibits
are included with this report.
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31.1
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Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
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|
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|
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32.1
|
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
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101.INS
|
XBRL Instance Document
|
|
|
|
|
101.SCH
|
XBRL Schema Document
|
|
|
|
|
101.CAL
|
XBRL Calculation Linkbase Document
|
|
|
|
|
101.DEF
|
XBRL Definition Linkbase Document
|
|
|
|
|
101.LAB
|
XBRL Label Linkbase Document
|
|
|
|
|
101.PRE
|
XBRL Presentation Linkbase Document
|
SIGNATURES
Pursuant to the requirements
of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on May 23, 2016.
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PEERLOGIX, INC.
By:
/s/ William Gorfein
William Gorfein
Chief Executive Officer
Principal Executive Officer and
Principal Financial Officer
|