NOTE 2 – GOING CONCERN AND MANAGEMENT’S
LIQUIDITY PLANS
The Company has generated minimal revenues
since inception and continues to incur recurring losses from operations and has an accumulated deficit. Accordingly, the accompanying
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 $5,533,685 and net cash used in operations of $699,974 for the nine months ended September 30,
2018. In addition, the Company has notes payable in default (see Note 4). 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.
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.
PEERLOGIX, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(Unaudited)
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.
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 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.
PEERLOGIX, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(Unaudited)
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).
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 and accrued interest for the nine months
ended September 30, 2018 and 2017 were as follows:
|
|
|
September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Warrants
|
|
|
41,039,175
|
|
|
|
29,417,871
|
|
|
Stock options
|
|
|
24,550,000
|
|
|
|
19,300,000
|
|
|
Convertible promissory notes and accrued interest
|
|
|
51,001,971
|
|
|
|
32,356,837
|
|
|
Total
|
|
|
116,591,146
|
|
|
|
81,074,708
|
|
For the nine months ended September 30,
2018, 4,269,941 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, if applicable, at their fair values as of the inception
date of the agreements and at fair value as of each subsequent balance sheet date. Any change in fair value was recorded as a change
in the fair value of derivative liabilities for each reporting period at each balance sheet date. The Company reassesses the classification
at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified
as of the date of the event that caused the reclassification.
The fair values of conversion options that
are convertible at a variable conversion price are valued using a Black-Scholes Valuation Model. The Company determined the fair
value of the conversion option using either the Black-Scholes Valuation Model or the Binomial Lattice Model to be materially the
same.
The Black-Scholes Valuation Model includes
subjective input assumptions that can materially affect the fair value estimates. The model was developed for use in estimating
the fair value of traded options or warrants. The expected volatility is estimated based on the most recent historical period of
time equal to the weighted average life of the instrument granted.
PEERLOGIX, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(Unaudited)
The principal assumptions used in applying the Black-Scholes
model were as follows:
|
|
|
Three and Nine Months Ended
|
|
|
|
|
September 30, 2018
|
|
|
Risk-free interest rate
|
|
|
1.63% – 2.83%
|
|
|
Contractual term
|
|
|
0.02 - 4.00 years
|
|
|
Expected volatility
|
|
|
229.45%-265.65%
|
|
|
Dividends
|
|
|
0.0%
|
|
At any given time, certain of the Company’s
embedded conversion features on debt and outstanding warrants may be treated as derivative liabilities for accounting purposes
under ASC 815-40 due to insufficient authorized shares to settle these outstanding contracts. Pursuant to SEC staff guidance that
permits a sequencing approach based on the use of ASC 840-15-25 which provides guidance for contracts that permit partial net share
settlement. The sequencing approach may be applied in one of two ways: contracts may be evaluated based on (1) earliest issuance
date or (2) latest maturity date. Pursuant to the sequencing approach, the Company evaluates its contracts based upon the latest
maturity date.
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 Principal Financial Officer determines
its valuation policies and procedures.
The development and determination of the
unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s
Principal Financial Officer.
Changes in fair value measurements categorized
within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as
appropriate.
PEERLOGIX, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(Unaudited)
Financial assets and
liabilities measured at fair value on a recurring basis are summarized below and disclosed on the balance sheets as follows:
|
September 30, 2018
|
|
|
|
|
Fair Value Measurement Using
|
|
|
|
|
Carrying
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Derivative conversion features
|
|
$
|
4,371,141
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
4,371,141
|
|
|
$
|
4,371,141
|
|
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 nine months ended September 30, 2018:
|
|
|
Fair Value
Measurement Using
Level 3 Inputs
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
$
|
935,274
|
|
|
Issuances
|
|
|
322,250
|
|
|
Reclassify to equity upon note payoff
|
|
|
(14,180
|
)
|
|
Change in fair value
|
|
|
3,127,797
|
|
|
Balance, September 30, 2018
|
|
$
|
4,371,141
|
|
Changes in the unobservable
input values could potentially cause material changes in the fair value of the Company’s Level 3 financial instruments. The
significant unobservable inputs used in the fair value measurements are the expected volatility assumption. A significant increase
(decrease) in the expected volatility assumption could potentially result in a higher (lower) fair value measurement.
Recently Issued Accounting Guidance
There are various updates recently issued,
most of which represented technical corrections to the accounting literature or application to specific industries and are not
expected to a have a material impact on the Company’s financial position, results of operations or cash flows.
Subsequent Events
The Company evaluates events that have
occurred after the balance sheet date but before the 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 – SETTLEMENT PAYABLE
On April 8, 2016, the Company entered into
a Securities Purchase Agreement (the “SPA”) with Attia Investments, LLC, a related party (the “Investor”).
A shareholder of the Company who previously owned in-excess of 5% of the Company’s common stock is the managing member of
Attia Investments, LLC. Under the Agreement, we issued and sold to the Investor, and the Investor purchased from us, Debentures
in the principal amount of $87,500 for a purchase price of $70,000, bearing interest at a rate of 0% per annum, with an original
maturity on October 8, 2016, further extended to April 8, 2017.
PEERLOGIX, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(Unaudited)
The Debentures are secured by all assets
of the Company. The Company was in default of the SPA, making the entire unpaid principal and interest due and payable. The Investor
has initiated a claim against the Company for payment of a loan in default. On April 27, 2018, the Company accepted a settlement
offer totaling approximately $115,375 in cash and 800,000 shares of stock. As such, the Company has reclassified the note payable-related
party to settlement payable and accrued the estimated fair value of the settlement of $164,875. In connection with the settlement,
the Company recorded a loss on settlement of debt of $119,653 in current period operations.
During the nine months ended September
30, 2018, the Company issued 800,000 shares of its common stock and paid $115,375 towards the Attia Investments, LLC settlement.
As of September 30, 2018, the outstanding balance was $0.
NOTE 5 – CONVERTIBLE NOTES PAYABLE
Convertible notes payable are comprised
of the following:
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Offering 3
|
|
$
|
825,500
|
|
|
$
|
825,500
|
|
|
Offering 4
|
|
|
439,550
|
|
|
|
439,550
|
|
|
Offering 5
|
|
|
200,000
|
|
|
|
200,000
|
|
|
Offering 6
|
|
|
640,900
|
|
|
|
245,000
|
|
|
Total
|
|
|
2,105,950
|
|
|
|
1,710,050
|
|
|
Less: debt discount
|
|
|
(50,076
|
)
|
|
|
(277,969
|
)
|
|
Net
|
|
$
|
2,055,874
|
|
|
$
|
1,432,081
|
|
Offering 6:
During the nine months ended September
30, 2018, the Company sold $425,900 of Units to investors. Each Unit was sold at a price of $10,000 per Unit and consisted of one
(1) six (6) month, 18% convertible promissory note (36% on an annual basis) with a face value of $10,000 and four year warrants
exercisable for an aggregate number of shares of common stock equal to 50% of the shares of common stock into which the Note is
initially convertible, exercisable at a price of $0.10 per share. The Offerings Notes are due six months after the issuance of
each note, as amended.
Each of the Notes will be convertible at
an initial price equal to $0.06 per share. In addition, during the two month period commencing on each issuance of the Offering
3 Notes, as amended, the Notes will contain a look-back provision pursuant to which the Notes will be convertible at the lower
of $0.06 or the lowest volume weighted average price of the Company’s common stock (the “VWAP”) during any 10
day period during such two (2) month period, provided however, in the event that the VWAP during any such ten (10) day period is
less than $0.06, then the reset conversion price of the Notes shall be no lower than $0.03. The Notes also contain a reset provision
to the same price as any future offering in the next three (3) years in the event that the conversion or offering price of securities
offered in such subsequent offering is less than the Conversion Price of the Notes in this Offering.
The 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.
PEERLOGIX, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(Unaudited)
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 assessment date and the period end. The conversion feature, when assessed, gave rise to a derivative liability
of $322,250. The Company recorded an aggregate debt discount to the Notes of $425,900 comprised of i) $304,697 relating to the
fair value of the conversion option, which was recorded as a derivative liability ii) $63,013 of incurred issuance costs and iii)
$87,788 allocated fair value of the issued warrants. The excess of derivative liability over net proceeds of the notes of $17,552
was charged to interest expense. The debt discounts are amortized ratably to interest expense over the term of the notes.
At September 30, 2018, the Company reassessed
the fair value of the conversion feature of the issued and outstanding notes and accrued interest and determined the estimated
fair value of the derivative liability of $4,371,141. The Company recorded a loss on change in fair value of derivative liabilities
of $536,378 and $3,127,797 for the three and nine months ended September 30, 2018.
During the nine months ended September
30, 2018, the Company issued an aggregate of 5,454,581 warrants to existing note holders to extend the terms of maturing notes
for six months as described above. The fair value of the issued warrants, determined by the Black-Scholes model, of $345,485 was
charged to interest expense.
NOTE 6 – STOCKHOLDERS’ DEFICIT
Warrants
The Company used the Black-Scholes model
to determine the fair value of warrants granted during the nine months ended September 30, 2018. In applying the Black-Scholes
option pricing model to warrants granted, the Company used the following assumptions:
The principal assumptions used in applying the Black-Scholes
model were as follows:
|
|
|
September Months Ended
September 30, 2018
|
|
|
Risk free interest rate
|
|
|
2.25% – 2.85%
|
|
|
Dividend yield
|
|
|
0.00%
|
|
|
Expected volatility
|
|
|
170.30%-279.23%
|
|
|
Contractual term (years)
|
|
|
4
|
|
The following is a summary of the Company’s
warrant activity during the nine months ended September 30, 2018:
|
|
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
|
Outstanding – December 31, 2017
|
|
|
|
36,305,369
|
|
|
$
|
0.11
|
|
|
|
3.74
|
|
|
|
Granted
|
|
|
|
9,003,747
|
|
|
|
0.10
|
|
|
|
4.00
|
|
|
|
Exercised
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
Forfeited/Cancelled
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
Outstanding and Exercisable – September 30, 2018
|
|
|
|
45,309,116
|
|
|
$
|
0.11
|
|
|
|
3.10
|
|
PEERLOGIX, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(Unaudited)
At September 30, 2018, the aggregate intrinsic
value of warrants outstanding and exercisable was $1,735,748.
The following is additional information with respect to the
Company's warrants as of September 30, 2018:
Number of
Warrants
|
|
|
Exercise
Price
|
|
|
Weighted Average
Remaining
Contractual Life
(In Years)
|
|
|
Currently
Exercisable
|
|
|
|
4,219,941
|
|
|
$
|
0.001
|
|
|
|
5.62
|
|
|
|
4,219,941
|
|
|
|
50,000
|
|
|
$
|
0.01
|
|
|
|
1.43
|
|
|
|
50,000
|
|
|
|
1,000,000
|
|
|
$
|
0.06
|
|
|
|
3.53
|
|
|
|
1,000,000
|
|
|
|
36,845,840
|
|
|
$
|
0.10
|
|
|
|
2.82
|
|
|
|
36,845,840
|
|
|
|
1,000,000
|
|
|
$
|
0.12
|
|
|
|
3.53
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
$
|
0.18
|
|
|
|
3.53
|
|
|
|
1,000,000
|
|
|
|
418,333
|
|
|
$
|
0.60
|
|
|
|
1.61
|
|
|
|
418,333
|
|
|
|
775,002
|
|
|
$
|
0.72
|
|
|
|
1.87
|
|
|
|
775,002
|
|
|
|
45,309,116
|
|
|
|
|
|
|
|
|
|
|
|
45,309,116
|
|
During the nine months ended September
30, 2018, the Company issued an aggregate of 3,549,166 warrants to purchase the Company’s common stock at $0.10 per share,
expiring four years from issuance, in connection with the issuance of convertible notes payable.
NOTE 7 – 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 other than described above that are deemed material to the condensed
consolidated financial statements as of September 30, 2018.
Payroll Tax Liabilities
As of September 30, 2018, 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 $10,722 and $10,118 as of September 30, 2018 and December 31, 2017, respectively which have been
included in other accrued liabilities at September 30, 2018 and December 31, 2017 in the accompanying condensed consolidated Balance
Sheets.
Placement Agent and Finders Agreements
In 2018, the Company entered into a Financial
Advisory and Investment Banking Agreements with WestPark Capital, Inc. (“WestPark”) (the “WestPark Advisory Agreements”).
Pursuant to the WestPark Advisory Agreement, WestPark shall act as the Company’s financial advisor and placement agent in
connection with a best efforts private placement (the “Financing”) of the Company’s debt and/or equity securities
(the “Securities”).
PEERLOGIX, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(Unaudited)
The Company, upon each closing of the Financing
will pay consideration to WestPark, in cash, a fee in an amount equal to 10% of the aggregate gross proceeds raised in the Financing
from the sale of Securities placed by WestPark and warrants in the amount of 10% of the aggregate gross proceeds. The Company will
also pay all WestPark legal fees and expenses as well as a 3% non-accountable expense allowance of the aggregate gross proceeds
raised in the Financing. The Placement Agent Warrants will have: (a) a nominal exercise price of $0.001 per share, (b) a seven
year term, and (c) a cashless exercise provision. The shares underlying the Placement Agent Warrants will have standard piggyback
registration rights.
NOTE 8 – SUBSEQUENT EVENTS
On July 6, 2018, the Company offered to
the holders of the Company’s common stock warrants, a warrant repricing and exercise agreement with each of the consenting
holders whereby the exercise price of the warrants was reduced from $0.10 to $0.06 per share of common stock. Furthermore, the
Company offered to the holders, an additional Series B warrant for every four warrants exercised pursuant to the agreement. The
Series B warrant shall have an exercise price of $0.25 per share of the common stock. Through the months of July through September
2018, the Company received proceeds of $365,895 and $304,375 in the month of October 2018 from warrant exercises of 11,274,500
warrants exercised at $0.06 share.
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. was
incorporated in Nevada on February 14, 2014. The Company is an advertising technology and data aggregation company. The Company
provides software as a service (SAAS) platform, which enables the tracking and cataloguing of over-the-top viewership and listenership
in order to determine consumer trends and preferences based upon media consumption. Its platform collects over-the-top data, including
Internet Protocol (IP) addresses of the streaming and downloading parties (location), the name, media type and genre of media watched,
listened or downloaded, and utilizes licensed and publicly available demographic and other databases to further filter the collected
data to provide insights into consumer preferences to digital advertising firms, product and media companies, entertainment studios
and others.
Operations
We will generate revenue
primarily by licensing our Over-the-Top audience dataset to platforms and channel partners. We predominantly contract with
Data Management Platforms (DMPs) and Demand Side Platforms (DSPs) (collectively, “Demand Partners”) who license our
solution to use in conjunction with other solutions offered to their advertiser clients, including brands and advertising agencies.
When we contract with
a Demand Partner, it acts as an agent for a disclosed or undisclosed principal, which is the advertiser. Our contracts with Demand
Partners, including DMPs and DSPs representing advertisers, are generally in the form of a revenue share between the Demand Partner
and Peerlogix. Revenue payouts to PeerLogix typically occur within sixty (60) days after the end of each calendar month, and the
contracts typically have an initial term of a year.
In September 2017,
we renewed an agreement with Lotame, Inc, whereas, our Over-the-Top audience segments are licensed for use in Lotame’s LDX
platform. In August 2017, we entered into an agreement with eXelate, Inc., a subsidiary of Nielsen Holdings plc, whereas, our Over-the-Top
audience segments are licensed for use via eXelate’s proprietary electronic platform. In October 2017, we entered into a
partnership with AdSquare to integrate our Over-the-Top audience segments with their Audience Management Platform.
We also work with Channel
Partners who provide us with ad hoc integrations to the majority of marketing platforms in the digital marketing ecosystem, including
the DMPs and DSPs licensing our Over-the-Top audience data. Channel Partner relationships are a critical aspect of our supply chain
and represent the distribution component of our business by facilitating our audience data for Demand Partners. We see healthy
relationships with Channel Partners as a sign of validation in an otherwise noisy industry of data providers who we compete against
for advertising spend from DMPs and DSPs. Together, Channel Partners form the “power grid” for data distribution, the
foundation that Demand Partners commonly rely upon for access to our audience data.
In May 2017, we entered
into a partnership with Narrative I/O to integrate our Over-the-Top audience data with their marketplace, enabling buyers on their
platform access to our OTT engagement data. In June 2017, we entered into a partnership with Neustar, Inc. to warehouse our household
level Over-the-Top audience data with Neustar’s Data Onboarding offering, therefore expanding our potential distribution
capabilities to include companies integrated with Neustar’s partner ecosystem. In September 2017, we entered into a partnership
with Liveramp, a subsidiary of Acxiom, Inc., to include our Over-the-Top audience data in Liveramp’s Data Store, enabling
access to our data for advertising in partners of Liveramp.
Results of Operations for the Three
Months Ended September 30, 2018 and 2017
The following table
sets forth the summary statement of operations for the three months ended September 30, 2018 and 2017:
|
|
|
For the Three Months Ended
|
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
Revenue
|
|
$
|
12,542
|
|
|
$
|
–
|
|
|
Operating expenses
|
|
|
(306,429
|
)
|
|
|
(313,439
|
)
|
|
Interest expense
|
|
|
(386,809
|
)
|
|
|
(443,991
|
)
|
|
Change in fair value of derivative liabilities
|
|
|
(536,378
|
)
|
|
|
(1,016,550
|
)
|
|
Loss on extinguishment of debt and loan receivable
|
|
|
(25,375
|
)
|
|
|
(300,634
|
)
|
|
Net Loss
|
|
$
|
(1,242,448
|
)
|
|
$
|
(2,074,614
|
)
|
Revenues:
From
inception through September 30, 2018 the Company has generated minimal revenues.
Operating Expenses:
Operating expenses consist primarily of compensation and related costs for personnel and facilities, and include costs related
to our facilities, finance, human resources, information technology and fees for professional services. Professional services are
principally comprised of outside legal, audit, information technology consulting, marketing, investor relations and outsourcing
services.
Operating expenses
decreased by 2.2% during the three months ended September 30, 2018, as compared to the three months ended September 30, 2017. The
overall $7,010 decrease in operating expenses is primarily attributable to the following approximate net increases (decreases)
in operating expenses:
|
|
·
|
An decrease of payroll and related expenses of $50,953 due to a reduction in number of employees.
|
|
|
·
|
A decrease in equity-based compensation expense of $63,807. During the three months ended September 30, 2018, the Company recognized $47,879 of equity-based compensation as a result of equity-based awards granted to board members and advisory board members. During the three months ended September 30, 2017, the Company recognized $111,686 of equity- based compensation.
|
|
|
·
|
An increase in professional fees of $97,775 (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 and an increase in auditing fees related to public filing requirements.
|
|
|
·
|
An increase in general operating costs of $9,976 primarily due to the higher costs incurred in the current period as compared to same period, last year. Monthly server costs fluctuate based on usage and data collection.
|
Other expenses:
Other expense consists primarily of interest expense primarily related to the Company’s notes payable.
Interest expense -
decreased by $57,182 to $386,809 during the three months ended September 30, 2018 as compared to $443,991 during the three months
ended September 30, 2017 primarily from a non- cash interest charge of $53,648 in 2017 due to issuance of new notes, net with a
decrease in non-cash debt discount amortization of $88,951.
Change in fair
value of derivative liabilities - We issued convertible notes with an embedded derivative, all requiring us to fair value the
derivatives each reporting period and mark to market as a non-cash adjustment to our current period operations. This resulted
in a loss of $(536,378) and $(1,016,550) on change in fair value of derivative liabilities for the three months ended
September 30, 2018 and 2017, respectively.
Loss
on extinguishment of debt - During the three months ended September 30, 2018; we recorded a settlement relating to an
outstanding convertible note and accrued interest, incurring a loss on settlement of debt of $25,375 compared to $300,634 for
the same period last year.
Results of Operations for the Nine Months
Ended September 30, 2018 and 2017
The following table
sets forth the summary statement of operations for the nine months ended September 30, 2018 and 2017:
|
|
|
For the Nine Months Ended
|
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
Revenue
|
|
$
|
33,843
|
|
|
$
|
–
|
|
|
Operating expenses
|
|
$
|
(771,045
|
)
|
|
$
|
(1,411,177
|
)
|
|
Interest expense
|
|
$
|
(1,549,033
|
)
|
|
$
|
(3,295,812
|
)
|
|
Change in fair value of derivative liabilities
|
|
$
|
(3,127,797
|
)
|
|
$
|
192,361
|
|
|
Loss on extinguishment of debt and loan receivable
|
|
$
|
(119,653
|
)
|
|
$
|
(651,106
|
)
|
|
Net Loss
|
|
$
|
(5,533,685
|
)
|
|
$
|
(5,165,734
|
)
|
Revenues:
From
inception through September 30, 2018 the Company has generated minimal revenues.
Operating Expenses:
Operating expenses consist primarily of compensation and related costs for personnel and facilities, and include costs related
to our facilities, finance, human resources, information technology and fees for professional services. Professional services are
principally comprised of outside legal, audit, information technology consulting, marketing, investor relations and outsourcing
services.
Operating expenses
decreased by 45.4% during the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017. The
overall $640,132 decrease in operating expenses is primarily attributable to the following approximate net increases (decreases)
in operating expenses:
|
|
·
|
A decrease of payroll and related expenses of $25,685 due to a reduction in the number of employees.
|
|
|
·
|
A decrease in equity-based compensation expense of $474,036. During the nine months ended September 30, 2018, the Company recognized $175,750 of equity-based compensation as a result of awards granted to board members and advisory board members. During the nine months ended September 30, 2017, the Company recognized $649,786 of equity- based compensation.
|
|
|
·
|
A decrease in professional fees of $111,140 (excluding equity-based compensation - see above). In the current period the Company incurred a decrease in consulting fees related to business development, financial advisory services and investor relations and an increase in auditing fees and legal fees related to public filing requirements. These decreases were partially offset by an increase in accounting fees related to public filing requirements.
|
|
|
·
|
A decrease in general operating costs of $29,270 primarily due to the less costs incurred in the current period as compared to same period, last year. Monthly server costs fluctuate based on usage and data collection.
|
Other expenses:
Other expense consists primarily of interest expense primarily related to the Company’s notes payable.
Interest expense -
decreased by $1,746,779 to $1,549,033 during the nine months ended September 30, 2018 as compared to $3,295,812 during the nine
months ended September 30, 2017 primarily from a decrease in non-cash interest charges of $1,479,159 from 2017 to 2018 and a decrease
of $825,127 in non-cash debt discount amortization, net of a non-cash charge in 2018 of $345,485 for the fair value of warrants
issued with note extensions.
Change in fair value
of derivative liabilities- We issued convertible notes with an embedded derivative, all requiring us to fair value the derivatives
each reporting period and mark to market as a non-cash adjustment to our current period operations. This resulted in a (loss) gain
of $(3,127,797) and $192,361 on change in fair value of derivative liabilities for the nine months ended September 30, 2018 and
2017, respectively.
Loss on extinguishment
of debt-During the nine months ended September 30, 2018; we recorded a settlement relating to an outstanding convertible note and
accrued interest, incurring a loss on settlement of debt of $119,653 compared to $613,606 for the same period last year.
Liquidity and Capital Resources
The following table
summarizes total current assets, liabilities and working capital at September 30, 2018 compared to December 31, 2017:
|
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
Increase/
(Decrease)
|
|
|
Current Assets
|
|
$
|
29,585
|
|
|
$
|
33,156
|
|
|
$
|
(3,571
|
)
|
|
Current Liabilities
|
|
$
|
8,043,349
|
|
|
$
|
3,525,534
|
|
|
$
|
4,517,815
|
|
|
Working Capital Deficit
|
|
$
|
(8,013,764
|
)
|
|
$
|
(3,492,378
|
)
|
|
$
|
4,521,386
|
|
As of September 30,
2018, we had working capital deficit of $8,013,764 as compared to a working capital deficit of $3,492,378 as of December 31, 2017,
an increase of $4,521,386. The change in working capital deficit is primarily attributable our increase in accounts payable and
accrued expenses of $509,953, increase in our short term debt of $623,793 and our derivative liability of $3,435,867.
We
have incurred net operating losses and operating cash flow deficits since inception, continuing through the third quarter of 2018.
We have been funded primarily by a combination of equity issuances and debt, to execute on our business plan and for working capital.
Our principal source of liquidity is our cash.
At September 30, 2018, we had cash
totaling approximately $3,000.
We believe our existing available cash is insufficient to enable the Company to meet the
working capital requirements for the near future. Consequently, we will be required to raise additional capital to complete the
development and commercialization of our current product. However, there can be no assurance that we will be able to raise additional
capital on terms acceptable to us, or at all. In order to boost sales, we continue to explore potential expansion opportunities
in the industry through mergers and acquisitions, enhancement of our existing products, development of new products and expansion
into other international markets. We will incur increased costs as a result of being a public company, which could affect our profitability
and operating results.
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 of $13,922,630 at September 30, 2018, a net
loss and net cash used in operating activities for the period then ended and 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.
We may also require
additional funding to finance the growth of our anticipated future operations as well as to achieve our 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.
Our plan regarding
these matters is to raise additional debt and/or equity financing to allow us the ability to cover our current cash flow requirements
and meet our 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 we are unable to generate adequate revenues to cover
expenses and cannot obtain additional financing in the near future, we may seek protection under bankruptcy laws. The accompanying
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery
of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue
as a going concern.
Financing Transactions
During the nine months
ended September 30, 2018, the Company sold $425,900 of Units to investors, net of certain costs. Each Unit was sold at a price
of $10,000 per Unit and consisted of one (1) six (6) month, 18% convertible promissory note (36% on an annual basis) with a face
value of $10,000 and four year warrants exercisable for an aggregate number of shares of common stock equal to 50% of the shares
of common stock into which the Note is initially convertible, exercisable at a price of $0.10 per share. The Offerings Notes are
due six months after the issuance of each note, as amended.
Each of the Notes will
be convertible at an initial price equal to $0.06 per share. In addition, during the two month period commencing on each issuance
of the Offering 3 Notes, as amended, the Notes will contain a look-back provision pursuant to which the Notes will be convertible
at the lower of $0.06 or the lowest volume weighted average price of the Company’s common stock (the “VWAP”)
during any 10 day period during such two (2) month period, provided however, in the event that the VWAP during any such ten (10)
day period is less than $0.06, then the reset conversion price of the Notes shall be no lower than $0.03.
The Notes also contain
a reset provision to the same price as any future offering in the next three (3) years in the event that the conversion or offering
price of securities offered in such subsequent offering is less than the Conversion Price of the Notes in this Offering.
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
$100,000 and $150,000 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.
Summary Cash flows for the Nine Months Ended September 30,
2018 and 2017:
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
Net cash used in operating activities
|
|
$
|
(699,974
|
)
|
|
$
|
(504,135
|
)
|
|
Net cash used in investing activities
|
|
$
|
–
|
|
|
$
|
(37,500
|
)
|
|
Net cash provided by financing activities
|
|
$
|
688,841
|
|
|
$
|
492,100
|
|
Cash Used in Operating Activities
Our primary uses of
cash from operating activities include payments to consultants for research and development, compensation and related costs, legal
and professional fees, computer and internet expenses and other general corporate expenditures.
Cash used in operating
activities consist of net loss adjusted for certain non-cash items, primarily equity-based compensation expense, amortization of
debt discount, and amortization of debt issuance costs during the nine months ended September 30, 2018, as well as the effect of
changes in working capital and other activities.
The adjustments for
the non-cash items increased from the nine months ended September 30, 2017 to the nine months ended September 30, 2018 due primarily
to a decrease in equity based compensation, amortization of the debt discount and debt issuance costs recorded on the notes payable
and changes in derivative liabilities during the current period. In addition, the net increase in cash from changes in working
capital activities from the nine months ended September 30, 2017 to the nine months ended September 30, 2018 primarily consisted
of an increase in accrued expenses primarily due to an increase in accrued payroll and payroll related expenses, accrued interest,
accrued director’s fees and accrued consulting fees, business development, financial advisory services and investor relations.
Cash Provided by Financing Activities
Cash provided by financing
activities consists primarily of net proceeds from issuance or repayments of notes payable, convertible promissory notes, related
party loans and proceeds from exercise of warrants.
Cash provided by financing
activities decreased from the nine months ended September 30, 2017 to the nine months ended September 30, 2018, primarily driven
by a decrease in proceeds from the convertible notes, net with proceeds from warrant exercises in 2018.
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 consolidated financial statements:
Use of Estimates
The preparation of
consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the period. Actual results could differ from these estimates. The Company’s
significant estimates and assumptions include the fair value of the Company’s equity instruments, convertible debt, derivative
liabilities, stock-based compensation, and the valuation allowance relating to the Company’s deferred tax assets.
Recently Issued Accounting Pronouncements
See Note 3 to our condensed
consolidated financial statements for the nine months ended September 30, 2018, included elsewhere in this document.
Off Balance Sheet Arrangements:
We do not have any
off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as
“special purpose entities” (SPEs).