Note 2 – Going Concern and Management
Liquidity Plans
The Company has generated minimal revenues
since inception and continues to incur recurring losses from operations and has an accumulated deficit. Accordingly, the accompanying
condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The
Company has incurred a net loss of approximately $1.5 million and net cash used in operations of approximately $183,000 for the
three months ended March 31, 2017. 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 condensed consolidated 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 11)
The Company requires immediate capital to remain
viable. The Company can give no assurance that such financing will be available on terms advantageous to the Company, or at all.
Should the Company not be successful in obtaining the necessary financing to fund its operations, the Company would need to curtail
certain or all of its operational activities. There can be no assurance that such a plan will be successful. The accompanying condensed
consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue
as a going concern.
Accordingly, the accompanying condensed consolidated
financial statements have been prepared in conformity with U.S. GAAP, which contemplates continuation of the Company as a going
concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts
of assets and liabilities presented in the consolidated financial statements do not necessarily purport to represent realizable
or settlement values. The condensed consolidated financial statements do not include any adjustment that might result from the
outcome of this uncertainty.
Note 3 – Summary of Significant Accounting
Policies
Principles of Consolidation
The accompanying condensed consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries, Peerlogix Technologies, Inc. and IP Squared Technologies
Holdings, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of condensed consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the period. Actual results could differ from these estimates. The Company’s significant estimates
and assumptions include the fair value of the Company’s equity instruments, convertible debt, derivative liabilities, stock-based
compensation, and the valuation allowance relating to the Company’s deferred tax assets.
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.
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 three months ended March 31, 2017 and
2016 were as follows:
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Warrants
|
|
|
11,206,681
|
|
|
|
2,951,669
|
|
Stock options
|
|
|
19,300,000
|
|
|
|
–
|
|
Convertible promissory notes and accrued interest
|
|
|
17,302,005
|
|
|
|
–
|
|
Total
|
|
|
47,808,686
|
|
|
|
2,951,669
|
|
For the three months ended March 31, 2017,
1,425,836 warrants were included in basic and diluted loss per share as their exercise price was determined to be nominal.
Derivative Liabilities
In connection with the issuance of certain
convertible promissory notes, the terms of the convertible notes included an embedded conversion feature; which provided for the
settlement of certain convertible promissory notes into shares of common stock at a rate which was determined to be variable with
no floor. The Company determined that the conversion feature was an embedded derivative instrument pursuant to ASC 815 “Derivatives
and Hedging”
The accounting treatment of derivative financial
instruments requires that the Company record the conversion option and related warrants, if applicable, at their fair values as
of the inception date of the agreements and at fair value as of each subsequent balance sheet date. As a result of entering into
certain convertible promissory notes, the Company is required to classify all other non-employee warrants as derivative liabilities
and record them at their fair values at each balance sheet date because the Company could not determine it has enough authorized
shares to settle the contracts. Any change in fair value was recorded as a change in the fair value of derivative liabilities for
each reporting period at each balance sheet date. The Company reassesses the classification at each balance sheet date. If the
classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused
the reclassification.
The fair value of conversion options that are
convertible at a variable conversion price are required to be valued using a Binomial Lattice Model. The Company determined the
fair value of the conversion option using either the Black-Scholes Valuation Model or the Binomial Lattice Model to be materially
the same.
The Black-Scholes Valuation Model is used to
estimate the fair value of the warrants and conversion option. The model includes subjective input assumptions that can materially
affect the fair value estimates. The model was developed for use in estimating the fair value of traded options or warrants. The
expected volatility is estimated based on the most recent historical period of time equal to the weighted average life of the instrument
granted.
The principal assumptions used in applying the Black-Scholes model
were as follows:
|
|
For
the Three Months Ended
|
|
|
March
31, 2017
|
Assumptions:
|
|
|
Risk-free interest rate
|
|
0.52-0.84%
|
Expected life
|
|
0.02 – 1.11 years
|
Expected volatility
|
|
250%-301%
|
Dividends
|
|
0.0%
|
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.
Financial assets and liabilities
measured at fair value on a recurring basis are summarized below and disclosed on the balance sheets as follows:
March 31, 2017
|
|
|
|
|
Fair Value Measurement Using
|
|
|
|
Carrying
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative conversion features
|
|
$
|
727,000
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
727,000
|
|
|
$
|
727,000
|
|
The table below provides a summary of the changes
in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2017:
|
|
Fair Value
Measurement Using
Level 3 Inputs
|
|
|
|
Derivative
conversion
features
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
$
|
–
|
|
|
$
|
–
|
|
Purchases, issuances, reassessments and settlements
|
|
|
1,958,100
|
|
|
|
1,958,100
|
|
Reclassification of derivative liability to equity
|
|
|
(11,779
|
)
|
|
|
(11,779
|
)
|
Change in fair value
|
|
|
(1,219,321
|
)
|
|
|
(1,219,321
|
)
|
Balance, March 31, 2017
|
|
$
|
727,000
|
|
|
$
|
727,000
|
|
Changes in the unobservable
input values could potentially cause material changes in the fair value of the Company’s Level 3 financial instruments. The
significant unobservable inputs used in the fair value measurements is the expected volatility assumption. A significant increase
(decrease) in the expected volatility assumption could potentially result in a higher (lower) fair value measurement.
Recently Adopted Accounting Guidance
In March 2016, the FASB issued ASU No. 2016-06,
“Derivatives and Hedging” (topic 815). The FASB issued this update to clarify the requirements for assessing whether
contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related
to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded
call (put) options solely in accordance with the four-step decision sequence. The updated guidance is effective for annual periods
beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is permitted.
We adopted the provisions of ASU 2016-06 on January 1, 2017. The adoption of ASU 2016-06 did not materially impact our condensed
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. We adopted the provisions of ASU 2016-09 on January 1, 2017. The adoption of ASU 2016-09 did not materially
impact our condensed consolidated financial position, results of operations or cash flows.
There were no other new accounting pronouncements
that were issued or became effective since the issuance of our 2016 Annual Report on Form 10-K that had, or are expected to have,
a material impact on our condensed consolidated financial position, results of operations or cash flows.
Subsequent Events
The Company evaluates events that have occurred
after the balance sheet date but before the condensed consolidated financial statements are issued. Based upon the evaluation,
the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure
in the condensed consolidated financial statements, except as disclosed.
Note 4 – Loan Receivable
During February 2017, the Company loaned $37,500
to a potential merger candidate, for working capital purposes. In March 2017, the Company withdrew its plan of merger and recorded
an allowance for loan losses of $37,500 due to the loan deemed uncollectible.
Note 5 – Notes Payable
The Company is currently in default of a promissory
note with an outstanding principal balance at March 31, 2017 in the amount of $106,000.
The
note is secured by all assets of the Company.
The noteholder may take possession of the collateral without notice or hearing,
and sell or dispose of it. As of the date of this report no defaults under the note have been called.
Note 6 – Convertible Notes Payable
a)
|
Unsecured Convertible Notes
|
During the three months ended March 31, 2017,
the Company sold $225,000 of Units to investors (“Offering 3”). 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 conversion feature of the Offering 3 Notes
issued during 2016 was accounted for in the previous year initially as equity. The Company concluded the conversion feature of
the Notes did not qualify as a derivative because there was no market mechanism for net settlement and they were not readily convertible
to cash.
The Company reassessed the conversion feature
of the Offering 3 Notes issued during 2016 for derivative treatment during January of 2017 and concluded its shares were readily
convertible to cash based on the current trading volume of the Company’s stock. Due to the fact that these convertible notes
have an option to convert at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC
815, due to the potential for settlement in a variable quantity of shares. The conversion feature has been measured at fair value
using a Black Scholes and Binomial model at the reassessment date and the period end. The conversion feature, when reassessed,
gave rise to a derivative liability of $1,526,300. In accordance with ASC 815, $129,434 was charged to paid in-capital due to the
fact a beneficial conversion feature was recorded on the original issue date. In-addition the Company recorded a debt discount
to the Notes of $90,153 relating to the fair value of the conversion option. The fair value of the conversion option on the date
of issuance in excess of the face amount of the note was recorded to interest expense on the date of issuance.
The conversion feature of new Notes issued
during the three months ended March 31, 2017, gave rise to a derivative liability of $431,800. The gross proceeds from the sale
of the Notes were recorded net of a discount of $219,200. The debt discount relates to fair value of the conversion option. The
debt discount is charged to interest expense ratably over the term of the convertible note. The fair value of the conversion option
on the date of issuance in excess of the face amount of the note was recorded to interest expense on the date of issuance. Gains
and losses in future reporting periods from the change in fair value of the derivative liability will be recognized on the statements
of operations.
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.
During the three months ended March 31, 2017,
the Company issued investors who invested in prior offerings 4,478,334 shares of common stock and reduced the exercise price of
520,750 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 $34,586 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 $5,450 debt discount
relating to 4,478,334 shares of common stock and 1,875,004 warrants issued to investors based on the relative fair value of each
equity instrument after reducing Note proceeds by the fair value of the derivative liability on the dates of issuance. 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.
As part of the transaction, the Company incurred
placement agent fees based on the aggregate gross proceeds raised during the three months ended March 31, 2017, or $41,139, which
were recorded as debt issuance costs. During the three months ended March 31, 2017, the Company issued the placement agent 819,750
common shares with a fair value of $126,287 and 375,001 warrants (See Note 11) with a fair value of $64,760 which were recorded
as debt issuance costs. 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.
The outstanding principal balance on the Notes
at March 31, 2017 and December 31, 2016 was $825,500 and $600,500.
Note 7 – Convertible Notes Payable
– Related Party
On April 8, 2016 (the “Initial Closing
Date”), we entered into a Securities Purchase Agreement (the “
SPA
”)
with Attia Investments, LLC, a related party (the “Investor”). A shareholder of the Company who owns in-excess of 5%
of the Company’s common stock is the managing member of Attia Investments, LLC. Under the Agreement, we issued and sold to
the Investor, and the Investor purchased from us, Debentures in the principal amount of $87,500 for a purchase price of $70,000
(together the “Debentures”), bearing interest at a rate of 0% per annum, with an original maturity on October 8, 2016,
further extended to April 8, 2017. The Debentures are secured by all assets of the Company. The Company is currently in default
of the SPA, making the entire unpaid principal and interest due and payable. As of the date of this report no defaults under the
note have been called by the Investor.
The principal amount of the Debentures can
be converted at the option of the Investor into shares of 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.
The Company assessed the conversion feature
of the Debentures on the date of issuance and at the end of each subsequent reporting period through December 31, 2016 and concluded
the conversion feature of the Debentures did not qualify as a derivative because there was no market mechanism for net settlement
and they were not readily convertible to cash.
The Company reassessed the conversion feature
of the Notes for derivative treatment during January of 2017 and concluded its shares were readily convertible to cash based on
the current trading volume of the Company’s stock. Due to the fact that these convertible notes have an option to convert
at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC 815, due to the potential
for settlement in a variable quantity of shares. The conversion feature has been measured at fair value using a black scholes model
at the reassessment date and the period end. The conversion feature, when reassessed, gave rise to a derivative liability of $154,100.
In accordance with ASC 815, $42,602 was charged to paid in-capital due to the fact a beneficial conversion feature was recorded
on the original issue date. In-addition the Company recorded a debt discount to the Notes of $70,000 relating to the fair value
of the conversion option. The fair value of the conversion option on the date of issuance in excess of the face amount of the note
was recorded to interest expense on the date of issuance.
Amendment
On March 16, 2017, the Company entered
into an amendment to the SPA. The SPA was modified as follows:
·
|
The maturity date of the Debentures was extended to April 8, 2017;
|
·
|
The default interest rate was set at 18%.
|
As consideration for the amendment, the Company increased the principal
amount on the Debentures from $65,000 to $86,875 and issued the Investor 218,750 shares of common stock with a fair value of $13,125.
All remaining terms of the Debentures remained the same.
In accordance with ASC 470, since the present
value of the cash flows under the new debt instrument was at least ten percent different from the present value of the remaining
cash flows under the terms of the original debt instrument, the Company accounted for the amendment to SPA as a debt extinguishment.
Accordingly, the Company wrote off the remaining debt discount on the original Debentures of $17,312. The Company recorded a loss
on extinguishment of debt of $52,312 in the March 31, 2017 consolidated statement of operations.
During the three months ended March 31, 2017,
the Company repaid $5,000 in principal on certain convertible notes to related parties. The outstanding principal balance on the
Debentures at March 31, 2017 and December 31, 2016 was $86,875 and $70,000, respectively.
Note 8 – Loans Payable – Officers
During
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 March 31, 2017 and December 31, 2016, the
Company is reflecting a liability of $32,421, and $34,254, respectively. The Company did not impute interest on the loan as it
was deemed to be de minimis to the condensed consolidated financial statements.
Note 9 – Stockholders’ Deficit
Common stock issued
for services
During the three months ended March 31, 2017,
the Company issued an aggregate of 1,150,000
restricted
common shares to a consultant
with a fair value of $90,000. These shares vested immediately on the date of issuance. The Company has recorded $86,516 in stock-based
compensation expense for the three months ended March 31, 2017, which is a component of professional fees in the condensed consolidated
statements of operations. The shares were valued based on the quoted closing trading price on the date of issuance.
During the three months ended March 31, 2017,
the Company granted an aggregate of 819,750
restricted
common shares to a placement
agent with a fair value of $126,287. (See Note 7). The shares were granted as compensation to the placement agent for Units sold
in Offering 3 during the three months ended March 31, 2017. The shares were valued based on the quoted closing trading price on
the date of issuance.
Common stock issued
with convertible notes
During the three months ended March 31, 2017,
the Company granted an aggregate of 4,478,333
restricted
common shares to investors
as part of a private placement of the Company’s debt and equity securities. (See Note 7).
Common stock issued
in connection with extinguishment of related party convertible notes
During the three months ended March 31, 2017,
the Company granted an aggregate of 218,750
restricted
common shares to an investor
related to the modification of the terms of an existing convertible note. (See Note 8).
Common stock issued
in connection with settlement of vendor liabilities
During the three months ended March 31, 2017,
the Company granted an aggregate of 500,000
restricted
common shares to a placement
agent to settle a liability in the amount of $57,500. The shares were valued based on the quoted closing trading price on the vesting
date.
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 March 31, 2017, no
shares remain available for future issuance under the 2016 Plan.
Stock options issued for services
During the three months ended March 31, 2017,
the Company granted its interim Chief Executive Officer an aggregate of 7,000,000 stock options with an exercise price of $0.11
for services rendered, having a total grant date fair value of approximately $409,000. 1,000,000 options vest immediately and expire
in 2027. 1,500,000 options vest in the event that the average volume weighted average price of the Company’s common stock
over any 10 day period is greater than or equal to $0.25 and expire between in 2027. 1,500,000 options vest in the event that the
average volume weighted average price of the Company’s common stock over any 10 day period is greater than or equal to $0.50
and expire in 2027. 1,500,000 options vest in the event that the average volume weighted average price of the Company’s common
stock over any 10 day period is greater than or equal to $0.75 and expire in 2027. 1,500,000 options vest in the event that the
average volume weighted average price of the Company’s common stock over any 10 day period is greater than or equal to $1.00
and expire in 2027. 1,000,000 of the options contain only service conditions and will be expensed on a straight-line basis over
the service period of the agreement. The remaining options contain market conditions and are being expensed over the derived service
period as computed by a Monte Carlo pricing model.
The Company uses the Black-Scholes model to
determine the fair value of awards granted that contain typical service conditions that affect vesting. The Company uses the Monte
Carlo model to determine the fair value of awards granted that contain complex features such as market conditions because the Company
believes the method accounts for multiple embedded features and contingencies in a superior manner than a simple Black Scholes
model. In other words, simple models such as Black-Scholes may not be appropriate in many situations given complex features and
differing terms. In applying the Black-Scholes and Monte Carlo option pricing models to options granted, the Company used the following
assumptions:
|
|
For the
Three Months Ended
March 31,
2017
|
|
Risk free interest rate
|
|
|
1.83%
|
|
Dividend yield
|
|
|
0.00%
|
|
Expected volatility
|
|
|
70.00%
|
|
Expected life in years
|
|
|
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 and for options valued using the Monte Carlo model.
The following is a summary of the Company’s
stock option activity during the three months ended March 31, 2017:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Outstanding - January 1, 2017
|
|
|
12,300,000
|
|
|
$
|
0.11
|
|
|
|
5.64
|
|
Granted
|
|
|
7,000,000
|
|
|
|
0.11
|
|
|
|
10.00
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited/Cancelled
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding – March 31, 2017
|
|
|
19,300,000
|
|
|
$
|
0.11
|
|
|
|
7.04
|
|
Exercisable - March 31, 2017
|
|
|
2,350,000
|
|
|
$
|
0.10
|
|
|
|
7.16
|
|
At March 31, 2017, the aggregate intrinsic
value of options outstanding and exercisable was $0 and $0, respectively.
Stock-based compensation for stock options
has been recorded in the consolidated statements of operations and totaled $136,628 and $0, for the three months ended March 31,
2017 and 2016, respectively.
The Company used the Black-Scholes model to
determine the fair value of warrants granted during the three months ended March 31, 2017. In applying the Black-Scholes option
pricing model to warrants granted, the Company used the following assumptions:
|
|
For the
Three Months Ended
March 31,
2017
|
Risk free interest rate
|
|
|
1.46 - 1.90%
|
Dividend yield
|
|
|
0.00%
|
Expected volatility
|
|
|
65.32 - 77.40%
|
Contractual term
|
|
|
3.1 - 4
|
Forfeiture rate
|
|
|
0.00%
|
The following is a summary of the Company’s
warrant activity during the three months ended March 31, 2017:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Outstanding - December 31, 2016
|
|
|
8,956,677
|
|
|
$
|
0.20
|
|
|
|
3.65
|
|
Granted
|
|
|
2,250,004
|
|
|
|
0.08
|
|
|
|
4.00
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited/Cancelled
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding and Exercisable at – March 31, 2017
|
|
|
11,206,681
|
|
|
$
|
0.18
|
|
|
|
3.45
|
|
At March 31, 2017, the aggregate intrinsic
value of warrants outstanding and exercisable was $83,674.
At December 31, 2016, the aggregate intrinsic
value of warrants outstanding and exercisable was $782,214.
The following is additional information with respect to the Company's
warrants as of March 31, 2017:
Number of
Warrants
|
|
Exercise
Price
|
|
Weighted Average
Remaining
Contractual Life
(In Years)
|
|
Currently
Exercisable
|
1,375,836
|
|
$0.001
|
|
3.66
|
|
1,375,836
|
50,000
|
|
$0.01
|
|
2.97
|
|
50,000
|
8,587,510
|
|
$0.10
|
|
3.60
|
|
8,587,510
|
418,333
|
|
$0.60
|
|
3.15
|
|
418,333
|
775,002
|
|
$0.72
|
|
3.42
|
|
775,002
|
11,206,681
|
|
|
|
|
|
11,206,681
|
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 condensed consolidated financial
statements as of March 31, 2017 and December 31, 2016.
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 condensed
consolidated Balance Sheet. On February 2, 2017 the Company paid the settlement in full.
Employment Agreements
On February 21, 2017, the Company entered into
an employment agreement with an individual, pursuant to which, commencing March 6, 2017, the individual will serve as the Interim
Chief Executive Officer of the Company and, commencing 90 days thereafter, shall serve as Chief Executive Officer of the Company
through March 5, 2019, subject to extension as provided in the employment agreement, and be appointed to the Board of Directors.
The agreement calls for an annual salary of $250,000 per annum and a bonus in the amount of 10% of all incremental gross revenue
generated by the Company, which bonus shall be determined and be payable quarterly. In addition, pursuant to the employment agreement,
the Company granted to the individual certain stock options (See Note 9).
On March 6, 2017, William Gorfein 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.
Payroll Tax Liabilities
As of March 31, 2017 and through the date of
this report, the Company has not filed certain federal and state income and payroll tax returns nor has it paid the payroll tax
amounts and related interest and penalties relating to such returns. Amounts due under these returns with respect to penalties
and interest are estimated to be $9,341 and $10,493 as of March 31, 2017 and December 31, 2016, respectively which have been included
in other accrued liabilities at March 31, 2017 and December 31, 2016 in the accompanying condensed consolidated Balance Sheets.
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”). 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.
During the first quarter of 2017, 1,319,750
shares were issued to the placement agent as per the terms of the WestPark Advisory Agreement.
Note 11 - Subsequent Events
In March 2017, the Company entered into a second
Financial Advisory and Investment Banking Agreement with WestPark under which WestPark will provide financial advisory services
and will act as the Company’s exclusive placement agent and assist in a private offering of the Company’s securities
of up to $300,000 (“Offering 4”). Subsequent to March 31, 2017, the Company sold 19.3 Units under Offering 4 for gross
proceeds of $193,000. As additional consideration for entering in the private placement offering, the investors were granted a
total of 2,833,000 shares of common stock and 1,608,334 warrants to purchase common stock. As part of the transaction, the Company
incurred placement agent fees of $29,900. In addition, the placement agent was granted a total of 144,750 shares of common stock
and 321,667 warrants to purchase common stock at an exercise price of $0.001. As of the date of this filing the shares have not
been issued.
Subsequent to March 31, 2017, the Company issued
1,000,000 restricted common shares to a marketing consultant as per the terms of digital marketing advisory services agreement.
In April 2017, the Company entered into an
agreement with a consulting firm to provide investor and public relations services. As compensation for the services, the Company
shall pay the consultant $10,000 per month and issue: i) 1,000,000 5 year common stock purchase warrant with an exercise price
of $0.06; ii) 1,000,000 5 year common stock purchase warrant with an exercise price of $0.12; and 1,000,000 5 year common stock
purchase warrant with an exercise price of $0.18. The term of the agreement is for three months.
In April 2017, the Company granted an aggregate
of 100,000
restricted
common shares to a consultant as per the terms of a board advisory
agreement. As of the date of the filing the shares have not been issued.
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion
should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein. In connection
with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation
Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in
this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange
Commission. Forward looking statements are statements not based on historical information and which relate to future operations,
strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are
beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward
looking statements made by, or on our behalf. We disclaim any obligation to update forward looking statements.
Overview
PeerLogix, Inc. is an advertising
technology and data aggregation company. The Company provides a software as a service (SAAS) platform, which enables the tracking
and cataloguing of over-the-top viewership and listenership in order to determine consumer trends and preferences based upon media
consumption. Its platform collects over-the-top data, including Internet Protocol (IP) addresses of the streaming and downloading
parties (location), the name, media type and genre of media watched, listened or downloaded, and utilizes licensed and publicly
available demographic and other databases to further filter the collected data to provide insights into consumer preferences to
digital advertising firms, product and media companies, entertainment studios and others.
The Company was incorporated
on February 14, 2014 in Nevada under the name of Realco International, Inc. The Company previously offered real estate marketing
and sales services to individuals and businesses seeking to purchase international real estate, with a particular focus on the
European and Middle Eastern markets.
On August 14, 2015, the
Company entered into a share exchange transaction whereby all of the shareholders of PeerLogix Technologies, Inc., a privately
held Delaware corporation (“PeerLogix Delaware”), exchanged all of their shares of common stock for newly issued shares
of common stock of the Company (the “Share Exchange”). As a result of the Share Exchange, PeerLogix Delaware has become
a wholly-owned subsidiary of the Company and its business operations are assumed by the Company. On September 3, 2015, the Company
filed a Certificate of Amendment to its Articles of Incorporation changing its name from Realco International, Inc. to PeerLogix,
Inc.
The
discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial
statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial
statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during
the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail
below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We
qualify as an “emerging growth company” under the JOBS Act. As a result, we are permitted to, and intend to, rely on
exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:
|
·
|
have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
|
|
·
|
comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);
|
|
·
|
submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay” and “say-on-frequency;” and
|
|
·
|
disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation.
|
In
addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition
period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words,
an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to
private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements
may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
We
will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first
fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated
filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our ordinary
shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal
quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year
period.
We
also qualify as a smaller reporting company under Rule 12b-2 of the Securities Exchange Act of 1934, as amended. As a smaller reporting
company and so long as we remain a smaller reporting company, we benefit from similar exemptions and exclusions as an emerging
growth company. In the event that we cease to be an emerging growth company as a result of a lapse of the five year period, but
continue to be a smaller reporting company, we would continue to be subject to similar exemptions available to emerging growth
company until such time as we were no longer a smaller reporting company.
There is very little historical
financial information about us upon which to base an evaluation of our performance. We are an early stage corporation and have
generated minimal revenues from operations. We cannot guarantee we will be successful in our business operations. Our business
is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources and possible
cost overruns due to price and cost increases in products.
We have not been subject
to any bankruptcy, receivership or similar proceeding.
Results of Operations for the Three Months
Ended March 31, 2017 and 2016
The following table sets
forth the summary income statement for the three months ended March 31, 2017 and 2015:
|
|
For the Three Months Ended
|
|
|
|
March 31,
2017
|
|
|
March 31,
2016
|
|
Revenues
|
|
$
|
–
|
|
|
$
|
–
|
|
Operating Expenses
|
|
$
|
(502,067
|
)
|
|
$
|
(357,781
|
)
|
Other Expense
|
|
$
|
(1,003,946
|
)
|
|
$
|
(18,171
|
)
|
Net Loss
|
|
$
|
(1,506,013
|
)
|
|
$
|
(375,952
|
)
|
Revenues:
From inception
through March 31, 2017 the Company has generated minimal revenues.
Operating Expenses:
Operating expenses consist primarily of compensation and related costs for personnel and facilities, and include costs related
to our facilities, finance, human resources, information technology and fees for professional services. Professional services are
principally comprised of outside legal, audit, information technology consulting, marketing, investor relations and outsourcing
services.
Operating expenses increased
by 40% during the three months ended March 31, 2017, as compared to the three months ended March 31, 2016. The overall $144,286
increase in operating expenses is primarily attributable to the following approximate net increases (decreases) in operating expenses:
|
·
|
A decrease of payroll and related expenses of $92,000 (excluding equity-based compensation - see below). due to the following: During the 4th quarter of 2015 the Company hired a Chief Accounting Officer (“CAO”), a project manager and a project manager assistant. In February 2016, the employment of the CAO was terminated and in April 2016, the Company’s Chief Operating Officer resigned. In addition, the project manager and project manager’s assistant were terminated in March 2016. The decrease was partially offset by the hiring of a new Chief Executive Officer (“CEO”) in March 2017.
|
|
·
|
An increase in director fees of $15,000 (excluding equity-based compensation - see below). In June 2016, the Company’s board approved the payment of quarterly fees to board members retroactive to the quarter ending December 31, 2015. In prior periods, board members were not compensated for board services.
|
|
|
|
|
·
|
A decrease of software maintenance expenses of $10,700. Software maintenance expenses consist of costs incurred to maintain our software, improve functionality and customer support.
|
|
·
|
An increase in equity-based compensation expense of $214,500. During the three months ended March 31, 2017, the Company recognized $88,000 of equity-based compensation as a result of equity-based award granted to consultants and $45,300 equity-based compensation issued to board members and $89,200 equity-based compensation issued to employees. During the three months ended March 31, 2016, the Company recognized $8,000 of equity-based compensation as a result of an equity-based award granted to a consultant.
|
|
·
|
An increase in professional fees of $34,300 (excluding equity-based compensation - see above). In the current period the Company incurred an increase in consulting fees related to business development, financial advisory services and investor relations partially offset by a decrease in legal fees related to public filing requirements and litigation matters.
|
|
·
|
An increase in computer and internet expenses of $14,400 primarily due to an increase in usage and data collection. The Company leases servers on a monthly basis from a third party. Monthly server costs fluctuate based on usage and data collection.
|
|
·
|
A decrease in rent expense and overhead expenses of $22,000. The Company entered into a new lease agreement for its office facility during October 2015 and subsequently cancelled the lease in March 2016. The Company is not currently a party to any operating lease agreements.
|
Other income (expenses)
- net:
Other income (expenses) consist primarily of gains and losses on the change in fair value of derivative liabilities,
derivative expense, gains and losses on extinguishment of debt and interest expense all primarily related to the Company’s
convertible promissory note and warrant issuances.
Other income (expenses)
- net increased by $(985,775) to $(1,003,946) during the three months ended March 31, 2017 as compared to other income (expenses)
- net of $18,171 during the three months ended March 31, 2016. For the three months ended March 31, 2017 other income (expenses)
consisted of $(2,133,455) in interest expense, a gain on change in fair value of derivative liabilities of $1,219,321, a loss on
extinguishment of debt of $(52,312) and a loss on a loan receivable of $(37,500). For the three months ended March 31, 2016 other
income (expenses) consisted of $(18,171) in interest expense.
Liquidity and Capital Resources
The following table summarizes
total current assets, liabilities and working capital at March 31, 2017 compared to December 31, 2016:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
Increase/
(Decrease)
|
|
Current Assets
|
|
$
|
39,207
|
|
|
$
|
102,891
|
|
|
$
|
(63,684
|
)
|
Current Liabilities
|
|
$
|
2.112,852
|
|
|
$
|
1,038,602
|
|
|
$
|
1,074,250
|
|
Working Capital Deficit
|
|
$
|
(2,073,645
|
)
|
|
$
|
(935,711
|
)
|
|
$
|
(1,137,934
|
)
|
As of March 31, 2017, we
had working capital deficit of $2,073,645 as compared to a working capital deficit of $935,711 as of December 31, 2016, an increase
of $1,137,934. During the three months ended March 31, 2017 we received proceeds of $225,000 from the issuance of notes payable.
The Company used the proceeds to fund operations during the current period. The increase in our working capital deficit is primarily
attributable to our historic negative cash flow from operations resulting in our growing accounts payable, accrued liabilities
and short-term debt.
We
have incurred net operating losses and operating cash flow deficits since inception, continuing through the first quarter of 2017.
We have been funded primarily by a combination of equity issuances and debt, to execute on our business plan and for working capital.
Our principal source of liquidity is our cash.
At March 31, 2017, we had cash of approximately
$12,000.
Consequently, we will be required to raise additional capital to complete the development and commercialization
of our current product and to fund operations. However, there can be no assurance that we will be able to raise additional capital
on terms acceptable to us, or at all. In order to boost sales, we continue to explore potential expansion opportunities in the
industry through mergers and acquisitions, enhancement of our existing products, development of new products and expansion into
other international markets. We will incur increased costs as a result of being a public company, which could affect our profitability
and operating results.
We
are obligated to file annual, quarterly and current reports with the SEC pursuant to the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). In addition, the Sarbanes-Oxley Act of 2002
(“Sarbanes-Oxley”) and the rules
subsequently implemented by the SEC and the Public Company Accounting Oversight Board have imposed various requirements on public
companies, including requiring changes in corporate governance practices. We expect these rules and regulations to increase our
legal and financial compliance costs and to make some activities of ours more time-consuming and costly. We expect to spend between
$200,000 and $250,000 in legal and accounting expenses annually to comply with our reporting obligations and Sarbanes-Oxley. These
costs could affect profitability and our results of operations.
Management has determined
that additional capital will be required in the form of equity or debt securities. In addition, if we cannot raise additional short
term capital we will be forced to continue to further accrue liabilities due to our limited cash reserves. There are no assurances
that management will be able to raise capital on terms acceptable to the Company. If we are unable to obtain sufficient amounts
of additional capital, we may be required to reduce the scope of our planned development, which could harm our business, financial
condition and operating results. If we obtain additional funds by selling any of our equity securities or by issuing common stock
to pay current or future obligations, the percentage ownership of our stockholders will be reduced, stockholders may experience
additional dilution, or the equity securities may have rights preferences or privileges senior to the common stock. If adequate
funds are not available to us when needed on satisfactory terms, we may be required to cease operating or otherwise modify our
business strategy.
Going Concern and Management’s Liquidity
Plans
As reflected in the condensed
consolidated financial statements, the Company had an accumulated deficit at March 31, 2017, a net loss and net cash used in operating
activities for the three months ended and has generated only minimal revenues since inception. These factors raise substantial
doubt about the Company’s ability to continue as a going concern.
The ability of the Company
to continue its operations is dependent on management’s plans, which include the raising of capital through debt and/or equity
markets, with some additional funding from other traditional financing sources, including term notes, until such time that funds
provided by operations are sufficient to fund working capital requirements. The Company may need to incur additional liabilities
with certain related parties to sustain the Company’s existence. There can be no assurance that the Company will be able
to raise any additional capital.
The Company may also require
additional funding to finance the growth of our anticipated future operations as well as to achieve its strategic objectives. There
can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. In that event, the
Company would be required to change its growth strategy and seek funding on that basis, if at all.
The Company’s plan
regarding these matters is to raise additional debt and/or equity financing to allow the Company the ability to cover its current
cash flow requirements and meet its obligations as they become due. There can be no assurances that financing will be available
or if available, that such financing will be available under favorable terms. In the event that the Company is unable to generate
adequate revenues to cover expenses and cannot obtain additional financing in the near future, the Company may seek protection
under bankruptcy laws. The accompanying financial statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include
any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary
should the Company be unable to continue as a going concern.
Financing Transactions
In March 2017, the Company
entered into a second Financial Advisory and Investment Banking Agreement with WestPark under which WestPark will provide financial
advisory services and will act as the Company’s exclusive placement agent and assist in a private offering of the Company’s
securities of up to $300,000 (“Offering 4”). Subsequent to March 31, 2017, the Company sold 19.3 Units under Offering
4 for gross proceeds of $193,000. As additional consideration for entering in the private placement offering, the investors were
granted a total of 2,833,000 shares of common stock and 1,608,334 warrants to purchase common stock. As part of the transaction,
the Company incurred placement agent fees of $29,900. In addition, the placement agent was granted a total of 144,750 shares of
common stock and 321,667 warrants to purchase common stock at an exercise price of $0.001. As of the date of this filing the shares
have not been issued.
Summary Cash flows for the three months
ended March 31, 2017 and 2016:
|
|
Three Months Ended
|
|
|
|
March 31,
2017
|
|
|
March 31,
2016
|
|
Net cash used in operating activities
|
|
$
|
(183,123
|
)
|
|
$
|
(98,880
|
)
|
Net cash used in investing activities
|
|
|
(37,500
|
)
|
|
|
–
|
|
Net cash provided by financing activities
|
|
$
|
177,029
|
|
|
$
|
97,582
|
|
Cash Used in Operating Activities
Our primary uses of cash
from operating activities include payments to consultants for research and development, compensation and related costs, legal and
professional fees, computer and internet expenses and other general corporate expenditures.
Cash used in operating
activities consist of net loss adjusted for certain non-cash items, primarily equity-based compensation expense, changes in fair
value of derivative liabilities, derivative expense, loss on extinguishment of debt, amortization of debt discount, and amortization
of debt issuance costs during the three months ended March 31, 2017, as well as the effect of changes in working capital and other
activities.
The adjustments for the
non-cash items increased from the three months ended March 31, 2016 to the three months ended March 31, 2017 due primarily to an
increase in equity based compensation, loss on extinguishment of debt and changes in fair value of derivative liabilities, derivative
expense, amortization of the debt discount and debt issuance costs recorded on the notes payable entered into during the current
and previous two quarters. In addition, the net decrease in cash from changes in working capital activities from the three months
ended March 31, 2016 to the three months ended March 31, 2017 primarily consisted of a decrease in the overall growth of accounts
payable and accrued liabilities for the comparable periods.
Cash Provided by Financing Activities
Cash provided by financing
activities consists primarily of net proceeds from issuance or repayments of notes payable, convertible promissory notes, related
party loans and proceeds from the issuance of common stock and warrants of the Company.
Cash provided by financing
activities increased from the three months ended March 31, 2016 to the three months ended March 31, 2017, primarily driven by an
increase in proceeds from the issuance of promissory notes.
Critical Accounting Policies
Our financial statements
and related public financial information are based on the application of accounting principles generally accepted in the United
States (“U.S. GAAP”). U.S. GAAP requires the use of estimates; assumptions, judgments and subjective interpretations
of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates
can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk
and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to U.S. GAAP and are consistently
and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to
be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or
conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Our significant accounting
policies are summarized in Note 3 of our condensed consolidated financial statements. While all these significant accounting policies
impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to
be critical are those policies that have the most significant impact on our financial statements and require management to use
a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given
current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause
effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
We believe the following
critical accounting policies and procedures, among others, affect our more significant judgments and estimates used in the preparation
of our condensed consolidated financial statements:
Use of Estimates
The preparation of condensed
consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the period. Actual results could differ from these estimates. The Company’s
significant estimates and assumptions include the fair value of the Company’s equity instruments, convertible debt, derivative
liabilities, stock-based compensation, and the valuation allowance relating to the Company’s deferred tax assets.
Off Balance Sheet Arrangements:
We do not have any off-balance
sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special
purpose entities” (SPEs).