Indicate by check mark if the registrant is
a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes Yes ☐ No ☒
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and
non-voting common equity held by non-affiliates of the registrant based on the closing sales price, or the average bid and asked
price on such stock, as of June 30, 2016 was $1,445,852.
The number of shares of the registrant’s
common stock outstanding as of April 17, 2017 was 32,808,909.
The
information contained in this Annual Report on Form 10-K for year ended December 31, 2016 (the “Report”), including
in documents that may be incorporated by reference into this Report, includes some statements that are not purely historical and
that are “forward-looking statements.” Such forward-looking statements include, but are not limited to, statements
regarding the Company and its management’s expectations, hopes, beliefs, intentions or strategies regarding the future, including
its financial condition and results of operations. In addition, any statements that refer to projections, forecasts or other characterizations
of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,”
“believes,” “continue,” “could,” “estimates,” “expects,” “intends,”
“may,” “might,” “plans,” “possible,” “potential,” “predicts,”
“projects,” “seeks,” “should,” “will,” “would” and similar expressions,
or the negatives of such terms, may identify forward-looking statements, but the absence of these words does not mean that a statement
is not forward-looking.
The
forward-looking statements contained in this Report are based on current expectations and beliefs concerning future developments.
There can be no assurance that future developments actually affecting the Company will be those anticipated. These forward-looking
statements involve a number of risks, uncertainties (some of which are beyond the Company’s control) or other assumptions
that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking
statements, some of which are described in the section of this Report entitled “Risk Factors”.
Should
one or more of these risks or uncertainties materialize, or should any of the Company’s assumptions prove incorrect, actual
results may vary in material respects from those projected in these forward-looking statements. The Company undertakes no obligation
to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except
as may be required under applicable securities laws.
Unless
specifically set forth to the contrary, when used in this Report the terms “PeerLogix,” "we"", "our",
the "Company" and similar terms refer to PeerLogix, Inc., a Nevada corporation and where the context is applicable, to
our business operations, inclusive of those undertaken by our operating subsidiary, PeerLogix Delaware. “PeerLogix Delaware”
refers solely to our wholly-owned subsidiary, PeerLogix Technologies, Inc., a Delaware corporation.
Notes to the Consolidated Financial Statements
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 an advertising technology and data aggregation company. The Company provides a software as a
service (SAAS) platform, which enables the tracking and cataloguing of over-the-top viewership and listenership in order to determine
consumer trends and preferences based upon media consumption. Its platform collects over-the-top data, including Internet Protocol
(IP) addresses of the streaming and downloading parties (location), the name, media type and genre of media watched, listened or
downloaded, and utilizes licensed and publicly available demographic and other databases to further filter the collected data to
provide insights into consumer preferences to digital advertising firms, product and media companies, entertainment studios and
others.
Acquisition of Peerlogix Technolgies,
Inc.
On August 14, 2015, (the “Closing Date”)
the Company and Peerlogix Technologies, Inc. (formerly Peerlogix, Inc.), a privately held company, entered into an Agreement and
Plan of Merger (the “Merger Agreement”). Under the terms of the Merger Agreement, Peerlogix Technologies,
Inc. exchanged all of their shares of common stock for newly issued common shares of the Company (the “Share Exchange”),
with the Company remaining as the surviving corporation (the “Merger”). Following the closing of the Merger,
the Company changed its name to Peerlogix, Inc. The stockholders of the Company before the Share Exchange, after giving effect
to cancellation of 18,000,000 shares of the Company’s common stock, retained 990,000 shares of the Company’s common
stock, which after giving effect to a 4.04 for 1 split of the Company’s common stock (the “Stock Split”), will
have become approximately 3,999,600 shares of Realco common stock. Upon closing the transaction, Peerlogix, Inc. had 21,049,602
shares of common stock outstanding. As a result of this transaction, the former owners of Peerlogix Technologies, Inc. own
approximately 81.0% of Peerlogix, Inc. common stock as of the closing date.
The Share Exchange has been treated as a reverse
merger and recapitalization of Peerlogix Technologies, Inc. for financial accounting purposes and the Company will continue the
existing business operations of Peerlogix Technologies, Inc. as a wholly-owned subsidiary. The historical financial statements
of the Company are those of Peerlogix Technologies, Inc, and of the consolidated entities from the date of merger forward. As a
result of this merger, the equity sections of Peerlogix Technologies, Inc. for all prior periods presented reflect the recapitalization
described above and are consistent with the December 31, 2016 and 2015 consolidated balance sheets presented for the Company. Prior
to the merger, the Company had minimal operations.
Peerlogix Technologies, Inc. was incorporated
on December 9, 2014 under the laws of the State of Delaware for the sole purpose of acquiring all of the outstanding membership
units of IP Squared Technologies Holdings, LLC, an entity organized in 2012. Upon incorporation, the Company issued an aggregate
of 16,000,002 common shares of the newly formed corporation’s common stock to the members of the LLC for all of the outstanding
membership units of IP Squared Technologies Holdings, LLC (the “Recapitalization”).
Simultaneously with the Share Exchange, on
the Closing Date all of the issued and outstanding options and warrants to purchase shares of Peerlogix Technologies Inc. common
stock were exchanged, respectively, into options (the “New Options”) and warrants (the “New Warrants”)
to purchase shares of common stock of the Company. The number of shares of common stock issuable under, and the price per share
upon exercise of, the New Options and the New Warrants were the same as those of the original options and warrants of Peerlogix
Technologies Inc., as a result of a 1 for 1 exchange ratio of securities pursuant to the Share Exchange, which is described in
the Share Exchange Agreement. The New Options are administered under the Company’s 2015 Equity Incentive Plan, which the
Company assumed and adopted on the Closing Date in connection with the Share Exchange. (See Note 9).
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
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 $1.8 million and net cash used in operations of approximately $500,000 for the year ended
December 31, 2016. In addition, the Company has notes payable in default (see Notes 5 and 7). These conditions indicate that there
is substantial doubt about the Company's ability to continue as a going concern within one year from the issuance date of the financial
statements.
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 10)
The Company requires immediate capital to remain
viable. The Company can give no assurance that such financing will be available on terms advantageous to the Company, or at all.
Should the Company not be successful in obtaining the necessary financing to fund its operations, the Company would need to curtail
certain or all of its operational activities. There can be no assurance that such a plan will be successful. The accompanying consolidated
financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going
concern.
Accordingly, the accompanying consolidated
financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America
(“U.S. GAAP”), which contemplates continuation of the Company as a going concern and the realization of assets and
satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in
the consolidated financial statements do not necessarily purport to represent realizable or settlement values. The consolidated
financial statements do not include any adjustment that might result from the outcome of this uncertainty.
Note 3 – Summary of Significant Accounting
Policies
Basis of Presentation
The accompanying consolidated financial statements
and related notes have been prepared in accordance with U.S. GAAP.
Principles of Consolidation
The Company's wholly-owned consolidated subsidiaries
are as follows:
Name of consolidated subsidiary or entity
|
|
State or other
jurisdiction of
incorporation or
organization
|
|
Date of incorporation or
formation (date of
acquisition, if
applicable)
|
|
Attributable
interest
|
|
|
|
|
|
|
|
|
|
Peerlogix Technologies, Inc.
|
|
Delaware
|
|
December 9, 2014
(August 14, 2015)
|
|
|
100%
|
|
IP Squared Technologies Holdings, LLC
|
|
Delaware
|
|
November 20, 2012
(December 9, 2014)
|
|
|
100%
|
|
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.
Reclassifications
Certain items in the prior year financial statements
have been reclassified to conform to the current year presentation. These reclassifications did not have an impact on previously
reported results of operations.
Use of Estimates
The preparation of consolidated financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue
and expenses during the period. Actual results could differ from these estimates. The Company’s significant estimates and
assumptions include the fair value of the Company’s equity instruments, convertible debt, stock-based compensation, and the
valuation allowance relating to the Company’s deferred tax assets.
Concentration of Credit Risk
The Company maintains deposits in a financial
institution which is insured by the Federal Deposit Insurance Corporation (“FDIC”). The balance at times may exceed
federally insured limits.
Cash and Cash Equivalents
The Company considers all highly liquid investments
with an original maturity of three months or less when purchased to be cash equivalents. As of December 31, 2016 and
2015, the Company does not have any cash equivalents.
Income Taxes
Deferred tax assets and liabilities are determined
on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts
(“temporary differences”) at enacted tax rates in effect for the years in which the temporary differences are expected
to reverse. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of these differences
that have been included or excluded in the financial statements or tax returns.
The Company follows a recognition threshold
and measurement process for consolidated financial statement recognition and measurement of a tax position taken or expected to
be taken in a tax return. The guidance also prescribes direction on the recognition, classification, interest and penalties in
interim periods, disclosure and transition.
The Company classifies interest expense and
any related penalties, if any, related to income tax uncertainties as a component of income tax expense. No interest or penalties
have been recognized as of December 31, 2016 and 2015.
Management has evaluated and concluded that
there were no material uncertain tax positions requiring recognition in the Company’s financial statements for the years
ended December 31, 2016 and 2015. The Company does not expect any significant changes in the unrecognized tax benefits within twelve
months of the reporting date.
Convertible Instruments
The Company bifurcates conversion options from
their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The
criteria includes circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument
are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument
that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable
generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate
instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception
to this rule when the host instrument is deemed to be conventional as that term is described under applicable U.S. GAAP.
When the Company has determined that the embedded
conversion options should not be bifurcated from their host instruments, the Company records, when necessary, discounts to convertible
notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value
of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the
note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.
The Company also records, when necessary, deemed dividends for the intrinsic value of conversion options embedded in preferred
shares based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction
and the effective conversion price embedded in the preferred shares.
Accounting for Warrants
The Company classifies as equity any contracts
that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement
in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts
that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event
is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical
settlement or net-share settlement).
The Company assessed the classification of
its common stock purchase warrants as of the date of each equity offering and determined that such instruments met the criteria
for equity classification, as the settlement terms indicate that the instruments are indexed to the entity’s underlying stock.
Research and Development
Research and development (“R&D”)
expenses are charged to operations as incurred.
Advertising
The Company expenses advertising when incurred.
During the years ended December 31, 2016 and 2015, the Company incurred advertising expenses of $4,333 and $28,933, respectively.
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, exercise of stock options and conversion of convertible promissory notes for the year ended December 31, 2016 and 2015
were as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Warrants
|
|
|
8,956,677
|
|
|
|
2,951,669
|
|
Stock options
|
|
|
12,300,000
|
|
|
|
–
|
|
Convertible promissory notes
|
|
|
11,408,333
|
|
|
|
–
|
|
Total
|
|
|
32,665,010
|
|
|
|
2,951,669
|
|
For the year ended December 31, 2016, 1,000,835
warrants were included in basic and diluted loss per share as their exercise price was determined to be nominal.
Share-Based Compensation
The Company measures the cost of services received
in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value
of the award is measured on the grant date and amortized over the respective employment agreements or director service periods.
For non-employees, the fair value of the award is measured on the commitment date and generally re-measured on interim financial
reporting dates until the service period is complete. The fair value amount is then recognized over the period during which services
are required to be provided in exchange for the award, usually the vesting period. Stock-based compensation expense is recorded
by the Company in the same expense classifications in the consolidated statements of operations as if such amounts were paid in
cash. The Company generally issues new shares of common stock to satisfy option and warrant exercises and note conversions.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts payable,
and accrued liabilities approximate fair value due to the short-term nature of these instruments.
The Company measures the fair value of financial
assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements and Disclosures” which defines fair
value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 defines
fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.
ASC 820 describes three levels of inputs that
may be used to measure fair value:
Level 1
|
|
Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
|
|
Level 2
|
|
Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
|
|
|
|
Level 3
|
|
Pricing inputs that are generally unobservable inputs and not corroborated by market data.
|
Level 3 liabilities are valued using unobservable
inputs to the valuation methodology that are significant to the measurement of the fair value of the warrant liabilities. For fair
value measurements categorized within Level 3 of the fair value hierarchy, the Company’s Chief Executive Officer determines
its valuation policies and procedures.
The development and determination of the unobservable
inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s Chief Executive
Officer.
Changes in fair value measurements categorized
within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as
appropriate.
No such items existed as of December 31, 2016
and 2015.
Recently Adopted Accounting Guidance
In June 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-12,
Compensation-Stock Compensation
. The
amendments in this update apply to reporting entities that grant their employees share-based payments in which the terms of the
award provide that a performance target can be achieved after the requisite service period. This Accounting Standards Update is
the final version of Proposed Accounting Standards Update EITF-13D-Compensation-Stock Compensation (Topic 718): Accounting for
Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service
Period, which has been deleted. The amendments require that a performance target that affects vesting and that could be achieved
after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in
Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance
target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in
the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost
attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable
of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized
prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the
requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those
awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible
to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which
includes the period in which the performance target could be achieved) may differ from the requisite service period. The amendments
in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015,
and early adoption is permitted. We adopted the provisions of ASU 2014-12 on January 1, 2016. No prior period amounts were
required to be reclassified to conform to the current period presentation. The adoption of ASU 2014-12 did not materially impact
our consolidated financial position, results of operations or cash flows.
In August 2014, the FASB issued ASU 2014-15,
Presentation
of Financial Statements-Going Concern.
The Update provides U.S. GAAP guidance on management’s responsibility in
evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related
footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events
that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial
statements are issued. This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2013-300-Presentation
of Financial Statements (Topic 205): Disclosure of Uncertainties about an Entity’s Going Concern Presumption, which has been
deleted. The amendments in this update are effective for the annual period ending after December 15, 2016, and for annual
periods and interim periods thereafter. The adoption of ASU 2014-15 is not expected to have a material impact on our consolidated
financial position, results of operations or cash flows. We adopted the provisions of ASU 2014-15 on January 1, 2016. No prior
period amounts were required to be reclassified to conform to the current period presentation. The adoption of ASU 2014-15 did
not materially impact our consolidated financial position, results of operations or cash flows. See Note 2.
In April 2015, the FASB issued 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 consolidated financial position, results of operations
or cash flows.
Recent Accounting Guidance
In August 2015, the FASB issued ASU No. 2015-14
“Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” (“ASU 2015-14”).The
amendments in this Update defer the effective date of Update 2014-09 for all entities by one year. Public business entities, certain
not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods
beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted
only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting
period. The adoption of ASU 2015-14 is not expected to have a material impact on our consolidated financial position, results of
operations or cash flows.
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
our 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 adoption of ASU 2016-06 is not expected to have a material impact on our consolidated financial position, results of operations
or cash flows.
In April 2016, the FASB issued ASU No. 2016-09,
“Compensation – Stock Compensation” (topic 718). The FASB issued this update to improve the accounting for employee
share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of
the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification
of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated guidance is effective
for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the
update is permitted. The adoption of ASU 2016-09 is not expected to have a material impact on our consolidated financial position,
results of operations or cash flows.
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 adoption of ASU 2016-10
is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
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 our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18
“Statement of Cash Flows (Topic 230), Restricted Cash” which provides guidance on the presentation of restricted cash
and restricted cash equivalents in the statements of cash flows. The new guidance requires restricted cash and restricted cash
equivalents to be included within the cash and cash equivalents balances when reconciling the beginning-of-period and end-of-period
amounts shown on the statements of cash flows. The ASU is effective for reporting periods beginning after December 15, 2017 with
early adoption permitted. The Company is currently evaluating the impact of the new standard on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04
“Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment” which eliminated Step
2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures
to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities)
following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business
combination. Instead, under the amendments in this ASU an entity should perform its annual, or interim, goodwill impairment test
by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the
amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed
the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from
any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.
The ASU also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative
assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment
assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting
unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment
for a reporting unit to determine if the quantitative impairment test is necessary. The ASU is effective for reporting periods
beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed on testing
dates after January 1, 2017. The Company is currently evaluating the impact of the new standard on our 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 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 consolidated financial
statements, except as disclosed.
Note 4 – Demand Loans Payable
On January 24, 2013, a family member of an
officer of the Company advanced $15,000 to the Company.
The proceeds from the non-interest
bearing advance were used for general operating expenses. As of December 31, 2016 and 2015, the Company is reflecting a liability
of $15,000. The Company did not impute interest on the loan as it was deemed to be de minimus to the consolidated financial statements.
On January 30, 2015, an officer of a related
party to the Company advanced $5,500 to the Company.
The proceeds from the non-interest bearing
advance were used for general operating expenses. The Company did not impute interest on the loan as it was deemed to be de minimus
to the consolidated financial statements. On March 5, 2015, the loan was repaid.
Note 5 – Notes Payable
During June and July of 2015, the Company issued
promissory notes in the aggregate principal amount of $17,500 to six lenders. The notes bore aggregate interest at 50%, calculated
monthly, and matured August 1, 2015. If the notes are repaid within the first month, the lenders are to be repaid 50% interest
on the notes (the “Original Issue Discount”), a minimum payment of $26,250. The Original Issue Discount was accreted
to interest expense over the life of the notes. During August and September of 2015, the notes were repaid. Total interest paid
on the notes amounted to $17,500.
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. The forbearance fee was expensed to interest over the term
of the Agreement. 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%. During the year ended
December 31, 2016, the Company paid $26,250 in principal and $6,149 in accrued interest on the Note. The Company is 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.
The outstanding principal balance on the January
Note at December 31, 2016 was $106,000.
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 December 31, 2016, the Company has accrued liquidated damages of $20,000 along with accrued interest
of $1,359 and has recorded such amounts in interest expense in the 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 or ii) an offering of securities of
the Company through WestPark. On September 22, 2016, the promissory note was converted into a convertible note per the contractual
terms of the WestPark Offering. (See Note 6 and Note 9).
As part of the transaction, the Company incurred
placement agent fees of $3,250 which were recorded as debt issuance costs. The debt issuance costs were accreted over the life
of the notes to interest expense.
Note 6 – Convertible Notes Payable
a)
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Senior Unsecured Convertible Notes
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During December 2014, the Company issued Senior
Unsecured Convertible Notes in the aggregate principal amount of $25,000. The notes bore interest at a rate of 5% per annum. Principal
and accrued interest on the notes was due and payable on the earlier of (i) September 12, 2015 and (ii) the date upon which the
Company receives gross proceeds of any offering of indebtedness, equity securities, or other of no less than $200,000 (the “Qualified
Financing”). The notes automatically convert at the effective time of a Qualified Financing under the same terms given to
investors in the Qualified Financing. During the first quarter of 2015, the Company entered into a Qualified Financing and the
notes became convertible. As per the terms of the Qualified Financing, the noteholders converted an aggregate of $25,000 in principal
and were issued 50,000 shares of common stock and 50,000 warrants entitling the holders to purchase one share of common stock for
a five-year period at an exercise price of $0.60 per share.
b)
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Senior Unsecured Convertible Notes
|
During 2014 the Company engaged in an offering
(the “Offering”) of Series A 10% Senior Convertible Promissory Notes in the aggregate principal amount of up to $300,000
with multiple investors (collectively, the “Convertible Notes”). During 2014, the Company received aggregate proceeds
of $58,000 related to the offering.
The Convertible Notes bore interest at the
rate of 10% per annum, matured on various dates through September 2016, and were convertible at the option of the holder thereof
into shares of membership interests in the Company based on a $10 million pre-conversion valuation. At the effective time of a
merger, the Convertible Notes shall be automatically converted without any prior action by any holder into securities offered in
a qualified financing at 20% discount to the qualified financing. For purposes of Note 6 (c) qualified financing means the sale
for cash by the Company or any successor in interest to the Company by means of merger, share exchange, asset acquisition or otherwise,
of equity or equity derivative securities (e.g., convertible indebtedness, preferred stock, warrants, etc.), or any combination
thereof, generating aggregate gross proceeds of at least $1,500,000 (including the amount of any Notes which convert into securities
issued in the qualified financing) as described herein, provided, that the Company shall effect a qualified transaction (e.g.,
merge, sell all or substantially all of its assets, etc.) substantially simultaneously with the consummation of such qualified
financing.
During the third quarter of 2015, as a result
of the Merger Agreement and a qualified financing (as defined), the Convertible Notes became convertible. As per the terms of the
qualified financing, the noteholders converted an aggregate of $58,000 in principal and $8,162 in accrued interest and were issued
124,566 shares of common stock.
c)
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Unsecured Convertible Notes
|
During the year ended December 31, 2016, the
Company sold $600,500 of Units to investors (“Offering 3”). Of the $600,500 in Units issued, $575,500 resulted from
the receipt of cash and the other $25,000 resulted from the conversion of promissory notes. (See Note 5). 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 February 15, 2017, the date of the final closing.
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 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 7.33 shares, as amended, (if the investor invested in the first Prior offering) or 9 shares, as amended, of the Company’s
common stock (if the investor invested in the second Prior Offering) (each “Incentive Shares”); and (b) the exercise
price of each of the warrants purchased by the Existing Investor will be reduced from $0.60 per share (if the investor invested
in the first Prior Offering) or $0.72 per share (if the investor invested in the second Prior Offering) to $0.10 per share (the
“Incentive Warrant Price Reduction”); and (ii) if the Existing Investor acquires Units in this Offering in an amount
equal to less than fifty percent (50%) of the amount the Existing Investor invested in a Prior Offering, such Existing Investor
will receive a pro-rata number of Incentive Shares and Incentive Warrant Price Reduction on only a pro-rata portion of the warrants
acquired by the Existing Investor in the Prior Offering. The Company issued investors who invested in prior offerings 9,563,332,
as amended, shares of common stock and reduced the exercise price of 1,187,584 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. 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 $81,001 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 $381,653 debt discount
relating to 6,229,999 shares of common stock and 5,004,173 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 $218,848, 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 December 31, 2016, or $122,386, which were recorded as
debt issuance costs. Through December 31, 2016, the Company issued the placement agent 450,375 common shares with a fair value
of $65,385 and 1,000,835 warrants (See Note 10) with a fair value of $161,388 which were recorded as debt issuance costs. In-addition,
the Company accrued a liability of $57,500 for the fair value of 500,000 common shares which were earned by the placement agent
in December of 2016 upon the Company receiving proceeds from Offering 3 of $500,000. The placement agent warrants have an exercise
price of $0.001 per share, have a four (4) year term and vest immediately. 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.
Amendment to Offering 3
On November 29, 2016, the Company entered
into an amendment to Offering 3. Under the amendment Existing Investor incentive shares were modified as follows:
·
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If the Existing Investor acquires Units in this Offering in an amount equal to fifty percent (50%) or greater than the amount the Existing Investor invested in a Prior Offering, such Existing Investor will receive (a) an additional 7.33 shares (if the investor invested in the first Prior offering). Prior to the amendment the Existing Investor received an additional 4 shares.
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·
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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 9 shares (if the investor invested in the second Prior offering). Prior to the amendment the Existing Investor received an additional 5 shares.
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In accordance with ASC 470, since the present
value of the cash flows under the new debt instrument was at least ten percent different from the present value of the remaining
cash flows under the terms of the original debt instrument, the Company accounted for the amendment to Offering 3 as a debt extinguishment.
Accordingly, the Company wrote off the remaining debt discount on the original loan of $248,383.
Due to the amendment the Company issued an
additional 3,333,333 incentive shares to Existing Investors with a fair value of $483,332. The Company recorded a debt discount
of $296,666 and recorded $186,667 to extinguishment expense for the value of the additional incentive shares.
In accordance with ASC 470, the Company measured
the intrinsic value of the conversion option on the date of extinguishment as part of allocating extinguishment proceeds to the
reacquisition of the BCF. Accordingly, on the date of extinguishment, the Company recorded a decrease to additional paid-in capital
of $675,418 on reacquisition of the beneficial conversion feature resulting in a gain of $675,418.
As a result of the amendment, the Company recorded
an overall $240,368 gain on extinguishment of debt in the consolidated statement of operations.
The outstanding principal balance on the Notes
at December 31, 2016 was $600,500.
Certain convertible note agreements, warrant
documents and stock certificates pertaining Offering 3 were issued to investors and the placement agent subsequent to December
31, 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 7 – Convertible Notes Payable
– Related Party
On December 1, 2013, the Company issued a Senior
Unsecured Note in the principal amount of $2,433 to a shareholder of the Company. The note bore interest at a rate of 5% per annum.
Principal and accrued interest on the note was due and payable on the earlier of (i) June 30, 2015 and (ii) the date upon which
the Company receives gross proceeds of any offering of indebtedness, equity securities, or other of no less than $500,000. During
2014, the Company received additional advances under the note totaling $53,725. At December 31, 2014, the principal balance on
the note was $56,158. Note principal and interest in the aggregate of $55,585 was repaid on March 6, 2015, at which time, the remaining
outstanding principal and interest on the note in the amount of $2,577 was forgiven and accounted for as contributed capital.
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. The Company is currently in default of the SPA, making the entire unpaid principal and interest due and payable. As
of the date of this report no defaults under the note have been called by the Investor.
During the year ended December 31, 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 was 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
was 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. As of the date of the Agreement, no options were held
by the CEO or former COO.
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.
During the year ended December 31, 2016, the
Company repaid $17,500 in principal on the Debentures. The outstanding principal balance on the Debentures at December 31, 2016
was $70,000.
Note 8 – Loans Payable – Officers
During
the year ended December 31, 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
December 31, 2016, and December 2015 the Company is reflecting a liability of $34,254, and $33,648, respectively. The Company did
not impute interest on the loan as it was deemed to be de minimis to the consolidated financial statements.
Note 9 – Stockholders’ Deficit
Amendment to the Certificate of Incorporation
On August
19, 2015, the Company filed with the Secretary of State of the State of Nevada an amendment to its Certificate of Incorporation
increasing the number of shares of common stock that the Company is authorized to issue from 25,000,000 shares of common stock,
par value $0.00001 per share, to 100,000,000 shares of common stock, par value $0.001 per share. In addition the Company is authorized
to issue 10,000,000 shares of preferred stock, par value $0.001 per share, issuable in series with rights, preferences, privileges
and restrictions as determined by the Company’s board of directors. The amendment was approved by the written consent of
the holders of a majority of the outstanding shares of common stock of the Company
.
Common stock issued for cash
During
February and March 2015 (“Offering 1”), the Company sold $500,000 of Units to investors. Each Unit was sold at a price
of $0.50 per Unit and consisted of one (1) share of common stock, par value $0.001 per share, and one (1) warrant entitling the
holder to purchase one share of common stock for a five-year period at an exercise price of $0.60 per share. An aggregate of 1,000,000
shares and 1,000,000 warrants were issued to such investors. The placement agent received as compensation for its services $50,000
(10% commission) and warrants to purchase 50,000 Units at a price of $0.01 per Unit, with each Unit consisting of one share of
common stock and one warrant to purchase a share of common stock at a price of $0.60 per Share. The value of the warrants was a
direct cost of the private placement and has been recorded as an increase and decrease to additional paid in capital. In addition,
the Company incurred legal and other miscellaneous costs in the amount of $14,263 related to the transaction, which were offset
against equity.
During
August and September 2015 (“Offering 2”), the Company sold 1,683,333 Units at a price of $0.60 per Unit. Each Unit
consists of one share of Common Stock and a warrant to purchase one share of Common Stock. The warrants (the “Investor Warrants”)
are exercisable for a period of five years at a purchase price of $0.72 per share of Common Stock. The investors in the closing
collectively purchased 1,683,333 Units for total cash consideration of $1,010,000. The placement agent received as compensation
for its services $101,000 (10% commission) and warrants to purchase 168,333 Units at a price of $0.60 per Unit, with each Unit
consisting of one share of common stock and one warrant to purchase a share of common stock at a price of $0.60 per Share. The
placement agent warrants are exercisable for a period of five years. The value of the warrants was a direct cost of the private
placement and has been recorded as an increase and decrease to additional paid in capital. The placement agent also received payment
of a 3% non-accountable expense allowance in the amount of $30,300. In addition the Company incurred legal and other miscellaneous
costs in the amount of approximately $66,000 related to the transaction, which were offset against equity.
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 year ended December 31, 2015, the Company granted an aggregate of 250,000 restricted common shares to a consultant with a fair
value of $150,000. The restricted shares vested immediately on the dates of issuance. The Company has recorded $150,000 in stock-based
compensation expense for the year ended December 31, 2015, which is a component of professional fees in the consolidated statements
of operations. The shares were valued based on recent sales of its common stock to independent qualified investors.
During
the year ended December 31, 2016, the Company granted an aggregate of 40,000 restricted common shares to a consultant with a fair
value of $8,000. The shares represented a bonus on a previous investor and public relations agreement. These shares vested immediately
on the date of issuance. The Company has recorded $8,000 in stock-based compensation expense for the year ended December 31, 2016,
which is a component of professional fees in the consolidated statements of operations. The shares were valued based on the quoted
closing trading price on the date of issuance.
During the year ended December 31, 2016, the
Company granted an aggregate of 500,000
restricted
common shares to a consultant with
a fair value of $56,667. The shares were issued as per the terms of an investor and public relations agreement. These shares vested
immediately on the date of issuance. The Company has recorded $56,667 in stock-based compensation expense for the year ended December
31, 2016, which is a component of professional fees in the consolidated statements of operations. The shares were valued based
on the quoted closing trading price on the date of issuance.
During the year ended December 31, 2016, the
Company issued an aggregate of 166,667
restricted
common shares to a consultant with
a fair value of $50,000. The shares were issued as per the terms of an investor and public relations agreement. These shares vested
immediately on the date of issuance. The Company has recorded $50,000 in stock-based compensation expense for the year ended December
31, 2016, which is a component of professional fees in the consolidated statements of operations. The shares were valued based
on the most recent sales of its common stock to independent qualified investors on the grant date.
During the year ended December 31, 2016, the
Company issued an aggregate of 10,000
restricted
common shares to a consultant with
a fair value of $6,000. The shares were issued as per the terms of an investor and public relations agreement. These shares vested
immediately on the date of issuance. The Company has recorded $6,000 in stock-based compensation expense for the year ended December
31, 2016, which is a component of professional fees in the consolidated statements of operations. The shares were valued based
on the most recent sales of its common stock to independent qualified investors on the grant date.
During the year ended December 31, 2016, the
Company granted an aggregate of 100,000
restricted
common shares to a consultant with
a fair value of $14,200. The shares were issued as per the terms of a board advisory agreement. These shares vested immediately
on the date of issuance. The value of the shares will be expensed on a straight-line basis over the term of the agreement. The
Company has recorded $1,754 in stock-based compensation expense for the year ended December 31, 2016, which is a component of professional
fees in the consolidated statements of operations. The shares were valued based on the quoted closing trading price on the date
of issuance.
During the year ended December 31, 2016, the
Company granted an aggregate of 675,000
restricted
common shares to a placement agent
with a fair value of $67,500. The shares were issued upon entering into a Financial Advisory and Investment Banking Agreement.
(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 year ended December 31, 2016, which is a component of professional fees in the consolidated statements of operations.
The shares were valued based on the quoted closing trading price on the date of issuance.
During the year ended December 31, 2016, the
Company granted an aggregate of 450,375
restricted
common shares to a placement agent
with a fair value of $65,385. (See Note 5). The shares were granted as compensation to the placement agent for Units sold in the
Offering during the year ended December 31, 2016. The shares were valued based on the quoted closing trading price on the date
of issuance.
Common stock
issued with convertible notes
During the year ended December 31, 2016, the
Company granted an aggregate of 6,229,999
restricted
common shares to investors as
part of a private placement of the Company’s debt and equity securities. (See Note 6).
Common stock
issued with convertible notes - related party
During the year ended December 31, 2016, the
Company granted an aggregate of 175,000
restricted
common shares to a related party
investor as part of a private placement of the Company’s debt and equity securities. (See Note 7).
Common stock
issued with promissory notes
During the year ended December 31, 2016, the
Company granted an aggregate of 100,000
restricted
common shares to an investor as
part of a private placement of the Company’s debt and equity securities. (See Note 5).
Common stock
issued in connection with extinguishment of convertible notes
During the year ended December 31, 2016, the
Company granted an aggregate of 3,333,333
restricted
common shares to investors related
to the modification of the terms of existing convertible notes. (See Note 6).
Common stock
issued in connection with settlement of vendor liabilities
During the year ended December 31, 2016, the
Company granted an aggregate of 240,000
restricted
common shares with a fair value
of $27,600 to a vendor to settle a liability in the amount of $6,000. The Company has recorded a loss of $21,600 for the year ended
December 31, 2016, which is a component of other income (expense) in the consolidated statements of operations. The shares were
valued based on the quoted closing trading price on the date of issuance.
Cancellation
of common stock
On October 2, 2016, 8,324,084 shares originally
issued to the Company’s founders were cancelled. (See Note 7).
Preferred
Stock
The Company is authorized to issue up to 10,000,000
shares of preferred stock, par value $0.001 per share. No shares of its preferred stock are issued or outstanding.
2016 Amended and Restated Equity Incentive
Plan
The Board of Directors and stockholders of
the Company adopted the 2015 Equity Incentive Plan prior to the closing of the Share Exchange, which was amended and restated in
2016, which reserves a total of 15,000,000 shares of Common Stock for issuance under the 2016 Plan. If an incentive award granted
under the 2016 Plan expires, terminates, is unexercised or is forfeited, or if any shares are surrendered in connection with an
incentive award, the shares subject to such award and the surrendered shares will become available for further awards under the
2016 Plan.
Shares issued under the 2016 Plan through the
settlement, assumption or substitution of outstanding awards or obligations to grant future awards as a condition of acquiring
another entity are not expected to reduce the maximum number of shares available under the 2016 Plan. In addition, the number of
shares of common stock subject to the 2016 Plan, any number of shares subject to any numerical limit in the 2016 Plan, and the
number of shares and terms of any incentive award are expected to be adjusted in the event of any change in our outstanding common
stock by reason of any stock dividend, spin-off, split-up, stock split, reverse stock split, recapitalization, reclassification,
merger, consolidation, liquidation, business combination or exchange of shares or similar transaction. As of December 31, 2016,
there were 2,700,000 shares remaining available for future issuance under equity.
Stock options issued for services
During the year ended December 31, 2016, the
Company granted three board members an aggregate of 12,100,000 stock options for services rendered, having a total grant date fair
value of approximately $546,000. 2,200,000 options vest immediately and expire between 2021 and 2026. 2,700,000 options vest in
the event that the average volume weighted average price of the Company’s common stock over any 10 day period is greater
than or equal to $0.25 and expire between 2021 and 2026. 2,700,000 options vest in the event that the average volume weighted average
price of the Company’s common stock over any 10 day period is greater than or equal to $0.50 and expire between 2021 and
2026. 2,250,000 options vest in the event that the average volume weighted average price of the Company’s common stock over
any 10 day period is greater than or equal to $0.75 and expire in 2021. 2,250,000 options vest in the event that the average volume
weighted average price of the Company’s common stock over any 10 day period is greater than or equal to $1.00 and expire
in 2021. 1,750,000 of the options contain only service conditions and will be expensed on a straight-line basis over the service
period of the agreement. The remaining options contain market conditions and are being expensed over the derived service period
as computed by a Monte Carlo pricing model.
During the year ended December 31, 2016, the
Company granted of an aggregate of 200,000 stock options to two advisory board members, having a total grant date fair value of
approximately $9,600. The options have an exercise price ranging from $0.06 to $0.10 per share, have a ten (10) year term and a
vesting period of 1 year. These options will be revalued at the end of each reporting period until they vest and will be expensed
on a straight-line basis over the term of the agreements.
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
Year Ended
December 31,
2016
|
|
Risk free interest rate
|
|
|
0.87 - 2.45%
|
|
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 year ended December 31, 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 - December 31, 2016
|
|
|
|
12,300,000
|
|
|
$
|
0.11
|
|
|
|
5.64
|
|
Exercisable - December 31, 2016
|
|
|
|
2,300,000
|
|
|
$
|
0.10
|
|
|
|
7.36
|
|
At December 31, 2016, the aggregate intrinsic
value of options outstanding and exercisable was $1,066,510 and $217,510, respectively.
Stock-based compensation for stock options
has been recorded in the consolidated statements of operations and totaled $166,565, for the year ended December 31, 2016.
The Company used the Black-Scholes model to
determine the fair value of warrants granted during the year ended December 31, 2016. In applying the Black-Scholes option pricing
model to warrants granted, the Company used the following assumptions:
|
|
For the
Year Ended
December 31,
2016
|
Risk free interest rate
|
|
|
1.13 - 1.92%
|
Dividend yield
|
|
|
0.00%
|
Expected volatility
|
|
|
68.46 - 84.00%
|
Contractual term
|
|
|
3.3 - 4
|
Forfeiture rate
|
|
|
0.00%
|
The following is a summary of the Company’s
warrant activity during the years ended December 31, 2016 and 2015:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Outstanding - December 31, 2014
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Granted
|
|
|
2,951,669
|
|
|
|
0.66
|
|
|
|
5.00
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited/Cancelled
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding - December 31, 2015
|
|
|
2,951,669
|
|
|
$
|
0.66
|
|
|
|
4.54
|
|
Granted
|
|
|
6,005,008
|
|
|
|
0.10
|
|
|
|
4.00
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited/Cancelled
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding and Exercisable at – December 31, 2016
|
|
|
8,956,677
|
|
|
$
|
0.20
|
|
|
|
3.65
|
|
At December 31, 2016, the aggregate intrinsic
value of warrants outstanding and exercisable was $782,214.
At December 31, 2015, the aggregate intrinsic
value of warrants outstanding and exercisable was $0.
The following is additional information with respect to the Company's
warrants as of December 31, 2016:
|
|
|
|
|
|
|
Number of
Warrants
|
|
Exercise
Price
|
|
Weighted Average
Remaining
Contractual Life
(In Years)
|
|
Currently
Exercisable
|
1,000,835
|
|
$0.001
|
|
3.80
|
|
1,000,835
|
50,000
|
|
$0.01
|
|
3.22
|
|
50,000
|
6,191,757
|
|
$0.10
|
|
3.79
|
|
6,191,757
|
548,333
|
|
$0.10
|
|
3.36
|
|
548,333
|
1,165,752
|
|
$0.72
|
|
3.67
|
|
1,165,752
|
8,956,677
|
|
|
|
|
|
8,956,677
|
Note 10 – 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 consolidated financial statements
as of December 31, 2016 and December 31, 2015.
On January 31, 2017, the Company entered into
a mutual general release and settlement agreement (the "Settlement Agreement") with Microcap Headlines, Inc. (“Microcap”)
to settle a judgment against the Company in the sum of $17,042 entered pursuant to a lawsuit filed by Microcap against the Company
(the "Action") in the New York County, New York, Superior Court (Index No. 653105/2016). In the Action, the plaintiff
alleged that the Company owed the plaintiff past due amounts for investor relations services provided to the Company. Pursuant
to the Settlement Agreement, the Company agreed to pay Microcap $14,700 upon execution of the Settlement Agreement. The Settlement
Agreement also contains a general release by Microcap of the Company relating to the Action, such release however is predicated
on the Company making payments pursuant to the Settlement Agreement. Pursuant to the Settlement Agreement, after receipt of the
full $14,700 by Microcap, the Company and Microcap shall execute a written stipulation to set aside the default and judgment against
the Company and dismiss the Action with prejudice. As of December 31, 2016 the Company had accrued a liability of $17,042 related
to the Settlement Agreement which has been included in other accrued liabilities at December 31, 2016 in the accompanying consolidated
Balance Sheet. On February 2, 2017 the Company paid the settlement in full.
Employment Agreements
On August 13, 2015 the Company entered into
an employment agreement with Joshua Partridge as the Company’s Head of Business Development and Secretary. The agreement
calls for a three year term, an annual salary of $120,000 per annum with annual 10% increases and a payment upon termination in
an amount equal to any and all unpaid salary through the end of the term. On September 10, 2015, the Company entered into a new
employment agreement with Mr. Partridge solely to reflect Mr. Partridge’s new position as the Company’s Chief Operating
Officer. On April 22, 2016 Mr. Partridge resigned from the Company.
On August 13, 2015 the Company entered into
an employment agreement with William Gorfein as the Company’s Chief Executive Officer. The agreement calls for a three year
term, an annual salary of $120,000 per annum with annual 10% increases and a payment upon termination in an amount equal to any
and all unpaid salary through the end of the term. On March 6, 2017, Mr. Gorfein stepped down as the Company’s Chief Executive
Officer and was named the Company’s Chief Strategy Officer. The terms of his employment agreement remain the same.
On August 31, 2015 the Company entered into
an employment agreement with Charles Gonsher as the Company’s Chief Accounting Officer. The agreement called for a two year
term, an annual salary of $90,000 per annum. In addition, Mr. Gonsher was to be granted an option to purchase 240,000 shares of
the Company’s common stock. As of December 31, 2015 the terms of the options were not finalized. On February 18, 2016 Mr.
Gonsher’s employment agreement was terminated. Mr. Gonsher’s stock options were not granted prior to his termination.
Registration Rights Agreement
All of the securities issued in connection
with Offering 1, Offering 2, and the Share Exchange (collectively the “Transactions”) are “restricted securities,”
and as such are subject to all applicable restrictions specified by federal and state securities laws. In connection with Offering
1, Offering 2, and the Share Exchange, the Company entered into registration rights agreements with all of its shareholders. Under
the terms of the registration rights agreements, the Company has committed to file a registration statement covering the resale
of (i) all shares of common stock outstanding as of August 14, 2015, the closing date of the Share Exchange; (ii) all of the shares
of common stock underlying the Investor Warrants in Offering 2 and the warrants that were included in the Offering 1 units; (iii)
all of the shares issuable upon exercise of the placement agent warrants (and the shares underlying the warrants issuable upon
exercise of such placement agent warrants) issued in Offering 1 and Offering 2 within 60 days from August 14, 2015 (the “Filing
Deadline”), and shall use commercially reasonable efforts to cause the registration statement to become effective no later
than 90 days after it is filed (the “Effective Deadline”).
The Company has agreed to use reasonable efforts
to maintain the effectiveness of the registration statement through the one year anniversary of the date the registration statement
is declared effective by the Securities and Exchange Commission (“SEC’), or until Rule 144 of the Securities Act is
available to investors in the Offering with respect to all of their shares, whichever is earlier.
The holders of any registrable securities removed
from the Registration Statement a result of a Rule 415 or other comment from the SEC shall have “piggyback” registration
rights for the shares of Common Stock or Common Stock underlying such warrants with respect to any registration statement filed
by the Company following the effectiveness of the registration statement which would permit the inclusion of these shares.
In connection with Offering 3, the Company
has agreed to file a registration statement covering the resale of the shares of common stock issuable upon exercise of the Investor
Warrants in Offering 3, the Placement Agent Warrants in Offering 3 and upon conversion of the Notes in Offering 3. The Company
has agreed to use commercially reasonable efforts to have the registration statement declared effective within ninety (90) days
after the registration statement is filed. The Company has agreed to use reasonable efforts to maintain the effectiveness of the
registration statement through the one year anniversary of the date the registration statement is declared effective by the SEC.
As of the date of the filing of this report,
a registration statement has not been filed. The registration rights agreements do not contain a penalty clause for the failure
to file a registration statement within the period agreed upon. However, we do not exclude the possibility that our shareholders
may bring litigations against us in connection with claims arising out of our failure to file a registration statement pursuant
to the registration rights agreements and seek remedies under the common law.
Payroll Tax Liabilities
As of December 31, 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 estimated to be $10,493 as of December 31, 2016 which has been included in other accrued liabilities at December
31, 2016 in the accompanying consolidated Balance Sheet. Penalties and interest were deemed to be de minimus to the consolidated
financial statements as of 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 was to take place from September 20, 2016 through October
31, 2016. Subsequent to October 31, 2016, the Financing was extended to November 25, 2016, extended to December 30, 2016 and extended
to January 30, 2017. The final closing of the Financing took place on February 15, 2017.
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 9) 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, 500,000
shares of the Company’s common stock upon $500,000 being raised in the Financing and 651,000 shares of the Company’s
common stock upon $825,000 being raised in the Financing. The aforementioned shares will have standard registration rights. (See
Note 6). The aforementioned shares will have standard registration rights. Subsequent to December 31, 2016, 1,151,000 shares were
issued to the placement agent.
Operating Lease
The Company had an operating lease for its
New York office facility under a month-to-month agreement which ended on March 31, 2016. The Company is not currently a party to
any operating lease agreements. Rent expense for the year ended December 31, 2016 and 2015 totaled $20,231 and $33,125, respectively.
Note 11 – Income Taxes
The tax
effects of temporary differences that give rise to deferred tax assets as of December 31, 2016 and 2015 are presented below:
The income tax provision (benefit) consists
of the following:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Federal
|
|
|
|
|
|
|
Current
|
|
$
|
–
|
|
|
$
|
–
|
|
Deferred
|
|
|
(377,200
|
)
|
|
|
(492,800
|
)
|
State and local
|
|
|
|
|
|
|
|
|
Current
|
|
|
–
|
|
|
|
–
|
|
Deferred
|
|
|
(104,600
|
)
|
|
|
(146,500
|
)
|
Change in valuation allowance
|
|
|
481,800
|
|
|
|
639,300
|
|
Income tax provision (benefit)
|
|
$
|
–
|
|
|
$
|
–
|
|
The reconciliation between the statutory federal
income tax rate and the Company’s effective rate for the years ended December 31, 2016 and 2015 is as follows:
|
|
2016
|
|
|
2015
|
|
U.S. Federal statutory rate
|
|
|
(34.0%
|
)
|
|
|
(34.0%
|
)
|
State tax benefit, net of federal tax
|
|
|
(9.42
|
)
|
|
|
(10.11
|
)
|
Stock based compensation
|
|
|
10.33
|
|
|
|
–
|
|
Non-deductible interest expense
|
|
|
6.46
|
|
|
|
–
|
|
Other permanent differences
|
|
|
0.56
|
|
|
|
2.07
|
|
Change in valuation allowance
|
|
|
26.07
|
|
|
|
42.04
|
|
Income tax provision (Benefit)
|
|
|
0.0%
|
|
|
|
0.0%
|
|
As of December 31, 2016 and 2015 the deferred
tax asset consisted of the following:
|
|
2016
|
|
|
2015
|
|
Deferred Tax Asset
|
|
|
|
|
|
|
|
|
Net operating loss carryovers
|
|
$
|
1,131,900
|
|
|
$
|
650,100
|
|
Total deferred tax asset
|
|
|
1,131,900
|
|
|
|
650,100
|
|
Valuation allowance
|
|
|
(1,131,900
|
)
|
|
|
(650,100
|
)
|
Net Deferred Tax Asset, net of valuation allowance
|
|
$
|
–
|
|
|
$
|
–
|
|
The Company
is required to file its income tax returns in the U.S. federal jurisdiction and the state of New York and such returns are subject
to examination by tax authorities. Tax returns for the year ended December 31, 2014, 2015 and 2016 remain open to Internal Revenue
Service and State audits.
The
Company is in the process of filing its federal and state tax returns for the years ended December 31, 2016 and 2015. The Net
operating losses (“NOLs”) for these years will not be available to reduce future taxable income until the
returns are filed. Assuming these returns are filed, as of December 31, 2016, the Company had approximately $2.6 million of
federal and state net operating losses that may be available to offset future taxable income. The net operating loss
carryforwards will begin to expire in 2034 unless utilized. In accordance with Section 382 of the Internal Revenue Code,
deductibility of the Company’s U.S. net operating carryovers may be subject to an annual limitation in the event of a
change of control as defined the regulations. A full Section 382 analysis has not been prepared and the Company’s
NOLs could be subject to limitation under Section 382.
The Company
assesses the likelihood that deferred tax assets will be realized. To the extent that realization is not likely, a valuation allowance
is established. Based upon the Company’s losses since inception, management believes that it is more likely than not
that the future benefits of its deferred tax assets will not be realized and has therefore established a full valuation allowance.
Note 12 – Related Party Transactions
On March
9, 2015, the Company engaged with a lead generation and presales outsourcing firm, Corporate Rain International (“CRI”).
Tim Askew, a member of the Company’s Board of Directors, is the founder and CEO of CRI. CRI will be compensated $6,000 per
month along with a flat commission of $500 for each customer referred by CRI to the Company per the terms of the engagement.
The
Company recorded compensation expense to CRI of $30,000 during the year ended December 31, 2015. As of December 31, 2015, the Company
had an outstanding balance due to CRI of $6,000. During the year ended December 31, 2016 $6,000 was forgiven.
In December
2015, the Company and CRI suspended the engagement to reassess sales strategies.
Note 13 - Subsequent Events
Subsequent to December 31, 2016, the Company
sold an additional 22.5 Units for gross proceeds of $225,000. As additional consideration for entering in the private placement
offering, the investors were granted a total of 4,478,334 shares of common stock and 1,875,003 warrants to purchase common stock.
As part of the transaction, the Company incurred placement agent fees of $59,278. In addition, the placement agent was granted
a total of 168,750 shares of common stock and 375,001 warrants to purchase common stock at an exercise price of $0.001. (See Note
10).
On January 27, 2017, the Company issued 150,000
restricted common shares to a marketing consultant with a fair value of $30,000. The shares were valued based on the quoted
closing trading price on the date of issuance.
On February 21, 2017, the Company entered into
an employment agreement with Ray Colwell (“Colwell”), pursuant to which, commencing March 6, 2017, Colwell will serve
as the Interim Chief Executive Officer of the Company and, commencing 90 days thereafter, shall serve as Chief Executive Officer
of the Company through March 5, 2019, subject to extension as provided in the employment agreement, and be appointed to the Board
of Directors. The agreement calls for an annual salary of $250,000 per annum and a bonus in the amount of 10% of all incremental
gross revenue generated by the Company, which bonus shall be determined and be payable quarterly. In addition, pursuant to the
employment agreement, the Company granted to Colwell stock options exercisable for an aggregate of 7,000,000 shares of common stock,
subject to vesting, exercisable for ten years at the exercise price of $0.11 per share, subject to adjustment as provided therein.
On March 6, 2017, William Gorfein stepped down as the Company’s
Chief Executive Officer and was named the Company’s Chief Strategy Officer and Principal Financial Officer. No changes were
made to Mr. Gorfein’s existing employment agreement.
On April 13, 2017, the Company sold 166,667
shares of common stock to an investor for proceeds of $10,000. As of the date of this filing the shares have not been issued.
On March 1, 2017, the Company reached an agreement
with a consulting firm to provide non-exclusive digital marketing advisory services. As compensation for the services, the Company
shall pay the consultant $5,000 and is obligated to issue an aggregate of 3,000,000 shares of the Company common stock. The term
of the agreement is for three months. As of the date of this filing such shares have not been issued.