Notes to the Condensed Consolidated Financial
Statements
(Unaudited)
Note 1 – Organization and Operations
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.
Basis of Presentation - Unaudited
Interim Financial Information
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 September 30, 2016, the results of operations for the three and nine months ended September 30, 2016
and 2015, and the statement of cash flows for the nine months ended September 30, 2016 and 2015. The results of operations for
the three and nine months ended September 30, 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.
Note 2 – Going Concern and Management
Liquidity Plans
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 $1,150,651 and net cash used in operations of approximately $195,694 for the
nine months ended September 30, 2016. In addition, the Company has notes payable in default (see Note 4). 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 8)
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.
Note 3 – Summary of Significant
Accounting Policies
Principles of Consolidation
The Company's wholly-owned consolidated
subsidiaries are as follows:
Name of consolidated subsidiary or entity
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State or other
jurisdiction of
incorporation or
organization
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Date of incorporation or
formation (date of
acquisition, if
applicable)
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Attributable
interest
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Peerlogix Technologies, Inc.
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Delaware
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December 9, 2014
(August 14, 2015)
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100%
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IP Squared Technologies Holdings, LLC
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Delaware
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November 20, 2012
(December 9, 2014)
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100%
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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.
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.
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.
Total shares issuable upon the exercise
of warrants and conversion of convertible promissory notes for the nine months ended September 30, 2016 and 2015 were as follows:
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September 30,
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2016
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2015
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Warrants
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5,051,670
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2,951,669
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Stock options
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12,300,000
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–
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Convertible promissory notes
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5,250,000
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–
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Total
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22,601,670
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2,951,669
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Recently Adopted Accounting Guidance
In April 2015, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest - Imputation
of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs , or ASU 2015-03. ASU 2015-03 amends current
presentation guidance by requiring that debt issuance costs related to a recognized debt liability be presented in the balance
sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Prior to the issuance
of ASU 2015-03, debt issuance costs were required to be presented as an asset in the balance sheet. We adopted the provisions of
ASU 2015-03 on January 1, 2016. No prior period amounts were required to be reclassified to conform to the current period presentation.
The adoption of ASU 2015-03 did not materially impact our condensed consolidated financial position, results of operations or cash
flows.
Recent Accounting Guidance
In February 2016, the FASB issued ASU No.
2016-02, “Leases” (topic 842). The FASB issued this update to increase transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those
fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard on
its condensed consolidated financial statements.
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 is currently evaluating the impact of the new standard on its condensed consolidated financial statements.
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 is currently evaluating the impact of the new standard on its condensed consolidated financial
statements.
In April 2016, the FASB issued ASU No.
2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing” (topic 606). In
March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations
(Reporting Revenue Gross verses Net)” (topic 606). These amendments provide additional clarification and implementation guidance
on the previously issued ASU 2014-09, “Revenue from Contracts with Customers”. The amendments in ASU 2016-10 provide
clarifying guidance on materiality of performance obligations; evaluating distinct performance obligations; treatment of shipping
and handling costs; and determining whether an entity's promise to grant a license provides a customer with either a right to use
an entity's intellectual property or a right to access an entity's intellectual property. The amendments in ASU 2016-08 clarify
how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the
control principle to certain types of arrangements. The adoption of ASU 2016-10 and ASU 2016-08 is to coincide with an entity's
adoption of ASU 2014-09, which we intend to adopt for interim and annual reporting periods beginning after December 15, 2017. The
Company is currently evaluating the impact of the new standard on its condensed consolidated financial statements.
In August 2016, the FASB issued ASU No.
2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments." ASU No. 2016-15
addresses specific cash flow classification issues where there is currently diversity in practice including debt prepayment and
proceeds from the settlement of insurance claims. ASU 2016-15 is effective for annual periods beginning after December 15, 2017,
with early adoption permitted. The Company is currently evaluating the impact of the new standard on its condensed consolidated
financial statements.
There were no other new accounting pronouncements
that were issued or became effective since the issuance of our 2015 Annual Report on Form 10-K that had, or are expected to have,
a material impact on our condensed consolidated 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 condensed
consolidated financial statements, except as disclosed.
Note 4 – 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.
As of July 28, 2016, the Company was not
compliant with the repayment terms of the January Note and is in default. As of that date, the outstanding principal balance on
the January Note was $131,250. On September 28, 2016, the Company and
Pinewood
entered
into a Forbearance Agreement (“Agreement”). As an inducement to Pinewood to enter into the Agreement, the Company shall
pay to the Lender a forbearance fee in the initial principal amount of $1,000, which fee shall be added to the principal balance
of the Note on the last day of the Forbearance Period, December 31, 2016. Certain covenants of the Agreement require the Company
to pay Pinewood the outstanding accrued interest under the Note from the first $100,000 of any equity or debt raised in connection
with the Company; pay Pinewood 25% of the next $100,000 of equity or debt raised in connection with the Company and pay Pinewood
50% of any equity or debt raised in connection with the Company in excess of the $200,000 previously raised. The interest rate
applicable to amounts due under the Note from July 29, 2016 through and including the date on which all obligations under the Note
have been paid in full shall be 18%. The Company is currently in violation of a repayment covenant and therefore currently in default
of the Agreement, making the entire unpaid principal and interest due and payable. In addition, Pinewood may take possession of
the Collateral without notice or hearing, and sell or dispose of it. The Lender can now institute legal action to enforce its rights
under the Note. As of the date of this report no defaults under the note have been called by Pinewood.
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. As of September 30, 2016, the Company has accrued liquidated damages of $15,565 along with accrued interest
and has been recorded such amounts in interest expense in the condensed consolidated statement of operations.
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 and 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 5 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 5 – Convertible Notes Payable
During the nine months ended September
30, 2016, the Company sold $210,000 of Units to investors. Of the $210,000 in Units issued, $185,000 resulted from the receipt
of cash and the other $25,000 resulted from the conversion of promissory notes. (See Note 4). 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 “Notes”) and 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 during the four
(4) year period commencing on the final closing of this Offering.
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 the final closing of the Offering,
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 reset provision is not yet effective
as of September 30, 2016 because the final closing has not occurred.
The Company assessed the conversion feature
of the Notes on the date of issuance and at the end of the reporting period and concluded the conversion feature of the Notes do
not qualify as a derivative because the instrument is not readily convertible to cash. The Company will reassess the conversion
feature of the Notes for derivative treatment at the end of each subsequent reporting period.
In
addition, to the extent that any investor that acquires Units in this Offering 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 four shares (if the investor invested in the first Prior offering) or five shares
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. The Company issued investors who invested in
prior offerings 2,483,333 shares of common stock and reduced the exercise price of 517,417 warrants as per the terms above. The
incentive shares were recorded as a debt discount on the date of issuance based on the relative fair value of the shares. Because
the warrants issued in prior offerings were not accounted for as derivative liabilities and were accounted for as equity, and
the instruments were not marked to market on each balance sheet date. Upon modification, it is required under ASC 480 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 $29,231 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.
The Company recorded a $132,048 debt discount
relating to 2,483,333 shares of common stock and 1,750,001 warrants issued to investors based on the relative fair value of each
equity instrument. The debt discount is being accreted over the life of the Notes to interest expense. Debt discount in excess
of the face of the Notes was recorded directly to interest expense on the date of issuance.
The conversion feature of the Notes provide
for an effective conversion price that is below market value on the date of issuance. Such feature is normally characterized as
a beneficial conversion feature (“BCF”). When the Company records a BCF, the relative fair value of the BCF is recorded
as a debt discount against the face amount of the respective debt instrument. The Company recorded a BCF and related debt discount
of $77,952, the discount is being accreted over the life of the Notes to interest expense.
As part of the transaction, the Company incurred
placement agent fees based on the aggregate gross proceeds raised through September 30, 2016, or $31,012, which were recorded
as debt issuance costs. Through September 30, 2016, the Company was required to issue the placement agent 157,500 common shares
with a fair value of $21,059 and 350,000 warrants (See Note 9) with a fair value of $46,465 which were recorded as debt issuance
costs. Debt issuance costs in excess of the net face amount of the Notes, after subtracting the debt discount, was recorded directly
to interest expense on the date of issuance.
The outstanding principal balance on the
Notes at September 30, 2016 was $210,000.
The convertible note agreements, warrant
documents and stock certificates pertaining to the above Offering were issued to investors and the placement agent subsequent to
September 30, 2016. The Company accounted for the convertible notes, warrants and shares of common stock as per the terms of the
executed private placement memorandum and executed subscription agreements.
Note 6 – 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 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, which can be 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.
During the nine months ended September
30, 2016, 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. $17,500 was recorded as an original issue discount and is being accreted over the life of the
Debentures 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 were issued 175,000 shares of Company common stock. The Company recorded a $13,260 debt
discount relating to the common stock issued and such amount is being accreted over the life of the notes to interest expense.
The shares were valued based on the quoted closing trading price on the dates of issuance. The Company analyzed the conversion
feature and deemed that such feature did not represent an embedded derivative, because the instrument was not readily convertible
to cash.
The conversion feature of the first Debenture
issued provides for an effective conversion price that is below market value on the date of issuance. Such feature is normally
characterized as a BCF. When the Company records a BCF the relative fair value of the BCF is recorded as a debt discount against
the face amount of the respective debt instrument. The Company recorded a BCF and related debt discount of $42,602, the discount
is being accreted over the life of the first Debenture to interest expense. The Company analyzed the second Debenture issued for
a BCF and deemed no BCF existed.
The Agreement provides that, the shares
of Company common stock and stock options held by the CEO and 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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On September 27, 2016, the
SPA
was amended. The determination date, by the Board of Directors, in consultation with the Investor, of the status of the operations
of the Company has been extended to September 22, 2017. As per the terms of the amended SPA, on October 2, 2016 8,324,084 shares
originally issued to the Company’s founders were cancelled.
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.
Note 7 – Loans Payable –
Officers
During
the nine months ended September 30, 2016 and in 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 September 30, 2016, and December 2015 the Company is reflecting a liability of $46,284, and $33,648, respectively. The Company
did not impute interest on the loan as it was deemed to be de minimis to the condensed consolidated financial statements.
Note 8 – 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.
Common
stock issued for services
During the nine months ended September
30, 2016, the Company granted an aggregate of 206,666 common shares to a consultant with a fair value of $18,000. 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 $18,000 in stock-based compensation expense for the nine months ended September 30, 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.
During the nine months ended September
30, 2016, the Company granted an aggregate of 675,000 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. (See Note 8). These shares vested immediately
on the date of issuance. The Company has recorded $67,500 in stock-based compensation expense for the nine months ended September
30, 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.
During the nine months ended September
30, 2016, the Company granted an aggregate of 157,500 common shares to a placement agent with a fair value of $21,059. (See Note
5). The shares were granted as compensation to the placement agent for Units sold in the Offering during the nine months ended
September 30, 2016. The shares were valued based on the quoted closing trading price on the date of issuance.
Common
stock issued with convertible notes
During the nine months ended September
30, 2016, the Company granted an aggregate of 2,483,333 common shares to investors as part of a private placement of the Company’s
debt and equity securities. (See Note 5).
Stock options issued for services
During the nine months ended September
30, 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 will be expensed over the derived
service period as computed by a Monte Carlo pricing model.
During the nine months ended September
30, 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.
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 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 and Monte Carlo option pricing models to options granted, the Company used the following assumptions:
|
|
For the Three and Nine Months Ended September 30, 2016
|
|
Risk free interest rate
|
|
|
0.87 - 1.57%
|
|
Dividend yield
|
|
|
0.00%
|
|
Expected volatility
|
|
|
59.00 - 83.71%
|
|
Expected life in years
|
|
|
5 - 10
|
|
Forfeiture rate
|
|
|
0.00%
|
|
Since the Company has limited trading history,
volatility was determined by averaging volatilities of 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.
The following is a summary of the Company’s
stock option activity during the nine months ended September 30, 2016:
|
|
|
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/Cancelled
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Outstanding - September 30, 2016
|
|
|
|
12,300,000
|
|
|
$
|
0.11
|
|
|
|
5.89
|
|
|
Exercisable - September 30, 2016
|
|
|
|
2,250,000
|
|
|
$
|
0.10
|
|
|
|
7.56
|
|
At September 30, 2016, the aggregate intrinsic
value of options outstanding and exercisable was $1,802,500 and $214,750, respectively.
Stock-based compensation for stock options
has been recorded in the condensed consolidated statements of operations and totaled $36,328 and $105,406, for the three and nine
months ended September 30, 2016, respectively.
The following is a summary of the Company’s
warrant activity during the nine months ended September 30, 2016:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
Outstanding - January 1, 2016
|
|
|
2,951,669
|
|
|
$
|
0.66
|
|
|
|
4.54
|
|
Granted
|
|
|
2,100,001
|
|
|
|
0.10
|
|
|
|
4.00
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited/Cancelled
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding and exercisable at - September 30, 2016
|
|
|
5,051,670
|
|
|
$
|
0.31
|
|
|
|
3.79
|
|
At September 30, 2016, the aggregate intrinsic
value of warrants outstanding and exercisable was $292,555.
Note 9 – Commitments and Contingencies
Litigations, Claims and Assessments
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 September 30, 2016 and December 31, 2015.
Payroll Tax Liabilities
As of September 30, 2016 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 deemed de minimis to the condensed consolidated financial statements as of September 30, 2016 and December 31,
2015.
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”) initially proposed to take place between April 2016
and June 2016. On September 20, 2016, the terms of the Financing were finalized and the offering period is to take place from September
20, 2016 through October 31, 2016. Subsequent to September 30, 2016, the Financing was extended to November 25, 2016.
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. The Placement Agent Warrants will have: (a) a nominal exercise price of $0.001 per share, and (b) a cashless
exercise provision. The shares underlying the Placement Agent Warrants will have standard piggyback registration rights.
In April 2016, the Company issued to WestPark
675,000 shares of the Company’s common stock (see Note 8) for entering into the agreement. In addition the Company 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. (See
Note 5). The aforementioned shares will have standard registration rights.
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. Rent expense for the three months
ended September 30, 2016 and 2015 totaled $0 and $7,800, respectively. Rent expense for the nine months ended September 30, 2016
and 2015 totaled $20,231 and $13,208, respectively.
Note 10 - Subsequent Events
Subsequent to September 30, 2016, the Company
sold an additional 16 Units for gross proceeds of $160,500. As additional consideration for entering in the private placement
offering, the investors were granted a total of 1,200,000 shares of common stock and 1,337,502 warrants to purchase common stock.
As part of the transaction, the Company incurred placement agent fees of $20,865. In addition, the placement agent was granted
a total of 120,375 shares of common stock and 267,500 warrants to purchase common stock at an exercise price of $0.001. (See Note
9).
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 are an advertising
technology and 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. We have recently developed and deployed a proprietary mobile and digital ad serving platform utilizing
such data to provide highly targeted placement of digital advertisements. Our patent pending platform collects Torrent 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.
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.
Results of Operations for the Three
Months Ended September 30, 2016 and 2015
The following table
sets forth the summary income statement for the three months ended September 30, 2016 and 2015:
|
|
For the Three Months Ended
|
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Operating Expenses
|
|
$
|
(170,505
|
)
|
|
$
|
(428,713
|
)
|
Interest Expense, net
|
|
$
|
(195,376
|
)
|
|
$
|
(19,071
|
)
|
Net Loss
|
|
$
|
(365,881
|
)
|
|
$
|
(447,784
|
)
|
Revenues:
From
inception through September 30, 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
decreased by 60% during the three months ended September 30, 2016, as compared to the three months ended September 30, 2015. The
overall $258,208 decrease in operating expenses is primarily attributable to the following approximate net increases (decreases)
in operating expenses:
|
·
|
A decrease of payroll and related expenses of $75,404 due to a decrease in officers’ salaries. In April 2016, the Company’s Chief Operating Officer resigned.
|
|
|
|
|
·
|
A decrease of
research and development expenses of $40,133. 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. Because of the Company’s capitalization issues, management has not incurred any significant
development costs.
|
|
|
|
|
·
|
An increase of software maintenance expenses of $10,330. 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.
|
|
|
|
|
·
|
An increase in equity-based compensation expense of $46,287. During the three months ended September 30, 2016, the Company recognized $46,287 of equity-based compensation as a result of equity-based awards granted to board members, consultants and advisory board members. During the three months ended September 30, 2015, the Company recognized $0 of equity- based compensation.
|
|
|
|
|
·
|
An increase in director fees of $15,000 (excluding equity-based compensation - see above). In the current year the Company’s board approved the payment of quarterly fees to board members retroactive to the quarter ending December 31, 2015. In prior periods, board members were not compensated for board services.
|
|
|
|
|
·
|
A decrease in professional fees of $169,035 (excluding equity-based compensation - see above). In the current period the Company incurred a decrease in consulting fees related to business development, financial advisory services and investor relations and a decrease in auditing fees and legal fees related to public filing requirements.
|
|
|
|
|
·
|
A decrease in computer and internet expenses of $1,757 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. Monthly server costs fluctuate based on usage and data collection.
|
|
|
|
|
·
|
A decrease in rent expense of $7,808 due to the Company cancelling its office lease in March 2016.
|
Other expenses:
Other expense consists primarily of interest expense primarily related to the Company’s notes payable.
Interest expense -
increased by $176,305 to $195,376 during the three months ended September 30, 2016 as compared to $19,071 during the three months
ended September 30, 2015 due to the issuance of new notes subsequent to September 30, 2015.
Results of Operations for the Nine Months
Ended September 30, 2016 and 2015
The following table
sets forth the summary income statement for the nine months ended September 30, 2016 and 2015:
|
|
For the Nine Months Ended
|
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Operating Expenses
|
|
$
|
(871,395
|
)
|
|
$
|
(910,116
|
)
|
Interest Expense, net
|
|
$
|
(279,256
|
)
|
|
$
|
(24,919
|
)
|
Net Loss
|
|
$
|
(1,150,651
|
)
|
|
$
|
(935,035
|
)
|
Revenues:
From
inception through September 30, 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
decreased by 4% during the nine months ended September 30, 2016, as compared to the nine months ended September 30, 2015. The overall
$38,721 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 $19,015 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 and in April 2016, the Company’s Chief Operating Officer resigned. In addition, the project manager and project manager’s assistant were terminated in March 2016.
|
|
|
|
|
·
|
A decrease of
research and development expenses of $268,215. 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. Because of the Company’s capitalization issues, management has not incurred any significant
development costs.
|
|
|
|
|
·
|
An increase of software maintenance expenses of $59,618. 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.
|
|
|
|
|
·
|
An increase in equity-based compensation expense of $191,706. During the nine months ended September 30, 2016, the Company recognized $191,706 of equity-based compensation as a result of an equity-based bonus award granted to a consultant and equity-based compensation issued to board members and advisory board members. During the nine months ended September 30, 2015, the Company recognized $0 of equity- based compensation.
|
|
|
|
|
·
|
An increase in director fees of $60,075 (excluding equity-based compensation - see above). In the current period the Company’s board approved the payment of quarterly fees to board members retroactive to the quarter ending December 31, 2015. In prior periods, board members were not compensated for board services.
|
|
|
|
|
·
|
An decrease in professional fees of $107,255 (excluding equity-based compensation - see above). In the current period the Company incurred an decrease in consulting fees related to business development, financial advisory services, auditing fees and legal fees related to public filing requirements; these decreases were offset by an increases in accounting fees.
|
|
|
|
|
·
|
A decrease in computer and internet expenses of $7,949 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. Monthly server costs fluctuate based on usage and data collection.
|
|
|
|
|
·
|
An increase in rent expense of $7,023 due to the Company entering into a new lease agreement for its office facility during October 2015. The Company cancelled the lease in March 2016.
|
Other expenses:
Other expense consists primarily of interest expense primarily related to the Company’s notes payable.
Interest expense –
increased by $254,337 to $279,256 during the nine months ended September 30, 2016 as compared to $24,919 during the nine months
ended September 30, 2015 due to the issuance of new notes subsequent to September 30, 2015.
Liquidity and Capital Resources
The following table
summarizes total current assets, liabilities and working capital at September 30, 2016 compared to December 31, 2015:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
Increase/
(Decrease)
|
|
Current Assets
|
|
$
|
150,748
|
|
|
$
|
21,271
|
|
|
$
|
129,477
|
|
Current Liabilities
|
|
$
|
1,004,332
|
|
|
$
|
297,728
|
|
|
$
|
706,604
|
|
Working Capital Deficit
|
|
$
|
(853,584
|
)
|
|
$
|
(276,457
|
)
|
|
$
|
(577,127
|
)
|
As of September 30,
2016, we had working capital deficit of $853,584 as compared to a working capital deficit of $276,457 as of December 31, 2015,
an increase of $577,127. During the nine months ended September 30, 2016 we received proceeds of $255,000 from the issuance of
convertible notes payable and $130,000 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 third 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 September 30, 2016, we had a cash
of approximately $150,000.
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 September 30, 2016, a net loss and net cash
used in operating activities for the nine 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 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 of July 28, 2016,
the Company was not compliant with the repayment terms of the January Note and is in default. As of that date, the outstanding principal
balance on the January Note was $131,250. On September 28, 2016, the Company and
Pinewood
entered into a Forbearance Agreement (“Agreement”). As an inducement to Pinewood to enter into the Agreement,
the Company shall pay to the Lender a forbearance fee in the initial principal amount of $1,000, which fee shall be added to the
principal balance of the Note on the last day of the Forbearance Period, December 31, 2016. Certain covenants of the Agreement
require the Company to pay Pinewood the outstanding accrued interest under the Note from the first $100,000 of any equity or debt
raised in connection with the Company; pay Pinewood 25% of the next $100,000 of equity or debt raised in connection with the Company
and pay Pinewood 50% of any equity or debt raised in connection with the Company in excess of the $200,000 previously raised. The
interest rate applicable to amounts due under the Note from July 29, 2016 through and including the date on which all obligations
under the Note have been paid in full shall be 18%. The Company is currently in violation of a repayment covenant and therefore
currently in default of the Agreement, making the entire unpaid principal and interest due and payable. In addition, Pinewood may
take possession of the Collateral without notice or hearing, and sell or dispose of it. The Lender can now institute legal action
to enforce its rights under the Note. As of the date of this report no defaults under the note have been called by Pinewood.
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 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. Through the date
of the filing of this report the Company has incurred cash liquidated damages of approximately $ 20,225 along with accrued interest.
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, 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.
During the nine months
ended September 30, 2016, 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. $17,500 was recorded as an original issue discount and is being accreted over the life
of the Debentures 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 were issued 175,000 shares of Company common stock. The Company recorded a
$13,260 debt discount relating to the common stock issued and such amount is being accreted over the life of the notes to interest
expense. The shares were valued based on the quoted closing trading price on the dates of issuance. The Company analyzed the conversion
feature and deemed that such feature did not represent an embedded derivative, because the instrument was not readily convertible
to cash.
On August 22, 2016,
the Company issued an unsecured convertible promissory note in principal amount of $25,000 to an investor. The note bears interest
at a rate of 12% per annum, with maturity on the earlier of i) September 22, 2016 and ii) an offering of securities of the Company
through WestPark. On September 22, 2016, the promissory note was converted into a convertible note as part of the WestPark Offering.
During the nine months
ended September 30, 2016, the Company sold $210,000 of Units to investors. Of the $210,000 in Units issued, $185,000 resulted from
the receipt of cash and the other $25,000 resulted from the conversion of promissory notes. 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 “Notes”) and 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 during the four
(4) year period commencing on the final closing of this Offering.
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 the final closing
of the Offering, 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 reset provision is not
yet effective as of September 30, 2016 because the final closing has not occurred.
In addition,
to the extent that any investor that acquires Units in this Offering 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 four shares (if the investor
invested in the first Prior offering) or five shares 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. The Company issued investors who invested in prior offerings 2,483,333 shares
of common stock and reduced the exercise price of 517,417 warrants as per the terms above.
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.
The Company granted
investors in the Offering 2,483,333 shares of common stock and 1,750,001 warrants through September 30, 2016.
The Company granted
the placement agent 157,500 shares of common stock and 350,000 warrants through September 30, 2016.
On September 9, 2016,
the Company sold 57,000 shares of common stock to an investor for proceeds of $2,000.
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”) initially proposed to take place between
April 2016 and June 2016. On September 20, 2016, the terms of the Financing were finalized and the offering period is to take place
from September 20, 2016 through October 31, 2016. Subsequent to September 30, 2016, the Financing was extended to November 25,
2016.
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. The Placement Agent Warrants will have: (a) a nominal exercise price of $0.001 per share,
and (b) a cashless exercise provision. The shares underlying the Placement Agent Warrants will have standard piggyback registration
rights.
In April 2016, the
Company issued to WestPark 675,000 shares of the Company’s common stock for entering into the agreement. In addition the
Company 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.
Summary Cash flows for the nine months
ended September 30, 2016 and 2015:
|
|
Nine Months Ended
|
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
Net cash used in operating activities
|
|
$
|
(195,694
|
)
|
|
$
|
(834,200
|
)
|
Net cash provided by financing activities
|
|
$
|
344,506
|
|
|
$
|
1,190,078
|
|
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 nine months ended September 30, 2016, as well as the effect of
changes in working capital and other activities.
The adjustments for
the non-cash items increased from the nine months ended September 30, 2015 to the nine months ended September 30, 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 nine months ended September 30, 2015 to the nine months ended September 30, 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
fees, accrued director’s 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 nine months ended September 30, 2015 to the nine months ended September 30, 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 (along with new accounting pronouncements) 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.
Recently Issued Accounting Pronouncements
See Note 3 to our condensed
consolidated financial statements for the nine months ended September 30, 2016, included elsewhere in this document.
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 September 30, 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 September 30, 2016, that materially affected, or are reasonably likely to materially affect, our internal control 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 September
8, 2016, the Company issued 166,000 shares of common stock to a consulting firm for services at a fair value of $10,000. The shares
were valued based on the quoted closing trading price on the date of issuance.
On September 30, 2016,
the Company granted 157,500 shares of common stock to a Placement Agent for services at a fair value of $21,059. 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.
Issuance of Stock Options for Services
On September 28, 2016,
the Company issued three board members an aggregate of 10,350,000 common stock options for services at a fair value of $476,459.
The Company valued these issuances at fair value, utilizing a Monte Carlo model.
Convertible Debt Issuances
During the nine months
ended September 30, 2016, the Company sold $210,000 of Units to investors. Of the $210,000 in Units issued, $185,000 resulted from
the receipt of cash and the other $25,000 resulted from the conversion of promissory notes. 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 “Notes”) and 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 during the four
(4) year period commencing on the final closing of this Offering.
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 the final closing
of the Offering, 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 reset provision is not
yet effective as of September 30, 2016 because the final closing has not occurred.
In addition, to the
extent that any investor that acquires Units in this Offering 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 four shares (if the investor invested in the first Prior offering) or five shares 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. The Company issued investors who invested in prior offerings 2,483,333 incentive shares and reduced
the exercise price of 517,417 warrants as per the terms above.
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.
The Company granted
investors in the Offering 2,483,333 shares of common stock and 1,750,001 warrants through September 30, 2016.
The Company granted
the placement agent 157,500 shares of common stock and 350,000 warrants through September 30, 2016.
The issuance of the
foregoing notes and the corresponding common shares and warrants 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.
|
31.1
|
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
|
|
|
|
|
32.1
|
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
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 November 21, 2016.
|
PEERLOGIX, INC.
By:
/s/ William Gorfein
William Gorfein
Chief Executive Officer
Principal Executive Officer and
Principal Financial Officer
|