Annual Report (10-k)

Date : 04/01/2019 @ 5:33PM
Source : Edgar (US Regulatory)
Stock : Digital Locations, Inc. (PC) (DLOC)
Quote : 0.0008  -0.0001 (-11.11%) @ 6:30PM

Annual Report (10-k)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

(Mark One)

 

 

x

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018

 

 

 

 

¨

TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

FOR THE TRANSITION PERIOD FROM __________ TO __________

 

COMMISSION FILE NUMBER: 000-54817

 

DIGITAL LOCATIONS, INC.

(Name of registrant in its charter)

 

NEVADA

 

20-5451302

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

3700 State Street, Suite 350, Santa Barbara, California 93105

(Address of principal executive offices) (Zip Code)

 

Issuer’s telephone Number: (805) 456-7000

 

Securities registered under Section 12(b) of the Exchange Act: None.

Securities registered under Section 12(g) of the Exchange Act: Common Stock, $0.001 par value per share

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  ¨ No x

 

Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x No ¨ .

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files. Yes  x No ¨ .

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

¨

Accelerated filer

¨

Non-accelerated filer

¨

Smaller reporting company

x

 

Emerging growth company

¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨ No x .

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based upon the price at which the Company’s common stock was sold as reported on the OTC Markets, LLC on June 30, 2018 was $251,020.

 

The number of shares of registrant’s common stock outstanding, as of April 1, 2019 was 42,726,200.

 

 
 
 
 

 

TABLE OF CONTENTS

 

 

Page

PART I

Item 1.

Business

3

Item 1A.

Risk Factors

5

Item 2.

Properties

11

Item 3.

Legal Proceedings

11

Item 4.

Mine Safety Disclosures

11

 

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

12

Item 6.

Selected Financial Data

13

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

Item 8.

Financial Statements and Supplementary Data

20

Item 9.

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

20

Item 9A.

Controls and Procedures

21

Item 9B.

Other Information

22

 

 

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

23

Item 11.

Executive Compensation

27

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

33

Item 13.

Certain Relationship and Related Transactions, and Director Independence

34

Item 14.

Principal Accounting Fees and Services

35

Item 15.

Exhibits, Financial Statement Schedules

36

Item 16.

Form 10-K Summary

37

SIGNATURES

38

 

 
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PART I

 

ITEM 1. BUSINESS.

 

Unless otherwise stated or the context requires otherwise, references in this annual report on Form 10-K to “Digital Locations,” the “Company,” “we,” “us,” or “our” refer to Digital Locations, Inc.

 

Overview

 

We are the developer of an open-source content management system (“CMS”) software, called ExpressionEngine, with an early stage development effort to use artificial intelligence (“AI”) to create highly personalized digital content and online experiences.

 

Today, there are more than 7.6 billion people in the world, of whom more than 4.1 billion are Internet users. No two are exactly alike. By combining AI technologies, such as machine learning and big data analytics, we intend to allow websites, mobile apps, email and other forms of digital communication to dynamically deliver personalized content that is relevant, engaging and motivates the user to action. From the automatic selection of colors and content to a completely personalized look and feel, we intend to allow website owners and marketers to create digital experiences that foster deep and personal connections with their users. This is all part of our bigger vision to ultimately use artificial intelligence to create complete original content that is personalized for everyone. We believe that AI generated content, including literature, music, textbooks, videos and websites, can be more personal, more relatable and more understandable.

 

Previously, our business focused on the development of proximity marketing solutions. In November of 2018, we completed the acquisition of EllisLab, Inc. the creator of ExpressionEngine, and redirected our business to the content management space for revenue and growth. ExpressionEngine is a commercial-grade CMS that has powered presidential campaign websites, such as Barack Obama in 2008 and Donald Trump in 2016, as well other websites from global companies such as Starbucks, Disney and Nike. In the November 2018 acquisition, EllisLab, Inc. was merged into EllisLab Corp, a wholly owned subsidiary of Digital Locations, Inc. with EllisLab Corp as the surviving entity. This acquisition was an important first step to help us achieve our vision of AI-powered content personalization.

 

Recently, we transformed ExpressionEngine into a free and open source software platform (FOSS), following in the footsteps of RedHat, WordPress and other successful open source platforms. Doing so will allow us to quickly increase the user base of ExpressionEngine. From this community we intend to collaborate, distill, and develop our AI-based content personalization products and services.

 

In changing to a FOSS model, we no longer derive our revenue from software sales, but rather from complementary services and premium add-ons to the ExpressionEngine platform and community. We are currently executing a plan to achieve profitability with these new products and services.

 

Market Opportunity

 

In an increasingly online world, competitors are only one click away. Therefore, businesses need better ways to differentiate themselves from their competitors. Building more personal relationships with their existing and prospective customers is crucial for success. Marketers generally agree that personalized content is the best way to achieve that goal.

 

Content personalization is the ability to create a unique online experience based on the needs, preferences and interests of the user. Previous generations of personalization technology are primarily rule-based, such as “if this then show that content” type of rule. However, with 4.1 billion worldwide Internet users expecting to be treated as individuals, the number of rules required for effective personalization is astronomical and nearly impossible to implement. We believe that AI techniques such as machine learning and big data analytics can process large quantities of data and variables to generate highly adaptive and personalized content specific to individual users, all in real-time.

 

 
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According to various market research firms, there is a definite need for personalized content:

 

 

· 91% of consumers are more likely to shop with brands that recognize, remember, and provide relevant offers and recommendations. (Accenture)

 

 

 

 

·

83% of consumers are willing to share their data to enable a personalized experience. (Accenture)

 

 

 

 

·

60% of marketers struggle to personalize content in real time, yet 77% believe real-time personalization is crucial. (Adobe, Inc.)

 

 

 

 

·

59% of shoppers who have experienced personalization believe it has a noticeable influence on purchasing. (Infosys Limited)

 

 

 

 

·

83% lower response rate in marketing campaigns if content is not relevant. (Monetate)

 

There are many ways to provide personalized contents, and AI is one of the more exciting new ways. The Boston Consulting Group, in a 2018 research report, predicts that over the next five years in three sectors alone—retail, health care, and financial services—personalization will push a revenue shift of some $800 billion to the 15% of companies that get it right. We believe that AI-based personalization will help companies “get it right.”

 

TechNavio, in its 2018 research report, predicts that artificial intelligence-based personalization market will witness considerable growth during the period 2018-2022, with a compounded annual growth rate of 13%. The website personalization application segment, a near term market opportunity that we are focused on, will account for the highest growth in the AI-based personalization market. Other growing markets for AI-based personalization are display ads, social media, and e-mail.

 

Competition

 

For 15 years, ExpressionEngine enjoyed success as a popular CMS. The market for commercial web applications, however, has increasingly lost ground to open source, which today commands over 85% of the market. For example the most popular open source CMS is WordPress, which dominates nearly 60% marketshare. Other competitors such as such Drupal and Joomla also have larger marketshare than ExpressionEngine. However, our current goal with the free and open source ExpressionEngine is not to topple any of the existing free and open source platforms. Our plan is to systematically increase the user community of ExpressionEngine into a foundational revenue and profitable business line, and provide us with a platform and community to develop and roll out our AI personalization technology.

 

Our AI personalization platform will be designed as an add-on module for most popular CMS platforms such as WordPress or Drupal, in addition to ExpressionEngine. Therefore we will not compete with the big CMS players, but rather partner and complement them. The market for personalization technology and platforms, however, is wide and very competitive with players of various sizes and market focus. For example, for personalization integrated with web analytics, there are strong offerings such as, Adobe Target, IBM Coremetrics, and Google Optimizer 360. Personalization feature as a part of a CMS has competitors such as Episerver, Sitecore, Kentico and others. For digital marketing automation and website personalization, there is Evergage, BrightInfo, Idio, Sitespect, and others. Companies such as LogicHop, which provides personalization for WordPress websites, can be viewed as our near term competitors.

 

As we make progress in the development of our AI personalization technology, we will take into consideration various competitive solutions and features to create a uniquely compelling product. We will also consider acquisition of smaller players to bolster our presence in the personalization marketplace.

 

Corporate History

 

Digital Locations, Inc. was incorporated in the State of Nevada on August 25, 2006 as Zingerang, Inc. On April 2, 2007, the Company changed its name to Carbon Sciences, Inc. and on September 14, 2017, the Company changed its name to Digital Locations, Inc.

 

 
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On November 30, 2018, the Company entered into an Agreement and Plan of Merger with the EllisLab, Inc., Rick Ellis (“Ellis”), and EllisLab Corp., a newly formed Nevada corporation and wholly owned subsidiary of the Company, pursuant to which EllisLab, Inc. merged with and into EllisLab Corp. (the “Merger”). Pursuant to the terms of the Merger, Ellis received 36,000 shares of the Company’s newly designated Series C Convertible Preferred, with a stated value of $100 per share, in exchange for the cancellation of all common shares of EllisLab, Inc. owned by Ellis, which shares represented 100% of the issued and outstanding capital stock of EllisLab, Inc. The separate legal existence of EllisLab, Inc. ceased, and EllisLab Corp. (“EllisLab”) became the surviving company. EllisLab now operates as a private, wholly-owned subsidiary of the Company.

 

Intellectual Property

 

We have filed numerous patent applications with the United States Patent and Trademark Office (“USPTO”) in the course of our business history. However, patent applications that are not related to the current business focus of CMS and AI personalization have all been abandoned and we currently do not have any outstanding patent applications.

 

Employees

 

As of the date of this report, we have 6 full-time employees, which are comprised of full-time employees at EllisLab Corp. and one part-time employee at Digital Locations, Inc. We have arrangements with various independent contractors and consultants to meet additional needs, including management, accounting, investor relations, research and development and other administrative functions.

 

ITEM 1A. RISK FACTORS

 

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

 

We are in the early stages of development and have limited operating history on which you can base an investment decision.

 

We were formed in August 2006 and have been developing a new technology for commercial use. We have recently changed our business focus. We have generated no revenues, have no real operating history upon which you can evaluate our business strategy or future prospects, and have negative working capital. As a result, our auditor issued an opinion in connection with our December 31, 2017 financial statements, which expressed substantial doubt about our ability to continue as a going concern unless we obtain additional financing. Our ability to generate such revenues will depend on whether we can successfully develop, commercialize and license our technology and make the transition from a development stage company to an operating company. We expect to continue to incur losses. In making your evaluation of our business, you should consider that we are a start-up business focused on a new technology, are designing solutions that have no proven market acceptance, and operate in a rapidly evolving industry. As a result, we may encounter many expenses, delays, problems and difficulties that we have not anticipated and for which we have not planned. There can be no assurance that at this time we will successfully commercialize our technology, operate profitably or that we will have adequate working capital to fund our operations or meet our obligations as they become due.

 

Our proposed operations are subject to all of the risks inherent in the initial expenses, challenges, complications and delays frequently encountered in connection with the formation of any new business. Investors should evaluate an investment in our company in light of the problems and uncertainties frequently encountered by companies attempting to develop markets for new products, services and technologies. Despite best efforts, we may never overcome these obstacles to achieve financial success. Our business is speculative and dependent upon the implementation of our business plan, as well as our ability to successfully enter into licensing agreements with third parties on terms that will be commercially viable for us. There can be no assurance that our efforts will be successful or result in revenue or profit. There is no assurance that we will earn significant revenues or that our investors will not lose their entire investment.

 

 
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There is no assurance that our new growth-by-acquisition strategy will be successful.

 

Our strategy is to grow through the acquisition of other public or private operating companies engaged in the businesses related to artificial intelligence and machine learning. While we will endeavor to acquire companies that are profitable and accretive, there is no assurance that any of our business acquisitions will be economically successful or perform as expected. We may acquire businesses that incur unexpected losses, or may not integrate well with the Company. We may not realize profits on our business acquisitions for a number of reasons, including but not limited to paying higher than fair value, unexpected operating deficits, change in the market, loss of customers, reduced demand, loss of management and other causes.

 

Factors which may affect our ability to grown successfully through acquisitions include:

 

 

· inability to obtain financing;

 

 

 

 

· difficulties and expenses in connection with integrating the entities that we have acquired and achieving the expected benefits;

 

 

 

 

· diversion of management’s attention from current operations;

 

 

 

 

· the possibility that we may be adversely affected by risk factors facing the entities that we have acquired;

 

 

 

 

· acquisitions could be dilutive to earnings, or in the event of acquisitions made through the issuance of our Common Stock to the stockholders of the acquired company, dilutive to the percentage of ownership of our existing stockholders;

 

 

 

 

· potential losses resulting from undiscovered liabilities of the entities that we have acquired not covered by the indemnification we may obtain from the seller and loss of key employees of the entities that we have acquired.

 

If we are unable to effectively manage the transition from a development stage company to an operating company, our financial results will be negatively affected.

 

For the period from our inception, August 25, 2006, through December 31, 2018, we incurred an aggregate net loss, and had an accumulated deficit, of $38,207,267. For the years ended December 31, 2018 and 2017, we incurred net losses of $8,168,814 and $2,388,454, respectively. Our losses are expected to continue to increase for at least the next 48 months as we commence full-scale development of our technology, if feasible. We believe we will require significant funding to make this transition, if full-scale development is commercially justified. If we do make such transition, we expect our business to grow significantly in size and complexity. This growth is expected to place significant additional demands on our management, systems, internal controls and financial and operational resources. As a result, we will need to expend additional funds to hire additional qualified personnel, retain professionals to assist in developing appropriate control systems and expand our operating infrastructures. Our inability to secure additional resources, as and when needed, or manage our growth effectively, if and when it occurs, would significantly hinder our transition to an operating company, as well as diminish our prospects of generating revenues and, ultimately, achieving profitability.

 

Currently, we have not generated significant revenue from this new and unproven segment of our business. While we intend to market our solutions, there is a risk that we will be unable to compete with large, medium and small competitors that are in (or may enter) the industry with substantially larger resources and management experience.

 

Our solutions address an evolving marketplace and must comply with current and evolving customer requirements in order to gain market acceptance. There is a risk that we will not meet anticipated customer requirements or desires.

 

If we fail to respond quickly to technological developments, our solutions may become uncompetitive and obsolete.

 

The mobile data market is expected to experience rapid technology developments, changes in industry standards, changes in customer requirements and frequent new product introductions and improvements. If we are unable to respond quickly to these developments, we may lose competitive position, and our solutions or technologies may become uncompetitive or obsolete, causing revenues and operating results to suffer. In order to compete, we may be required to develop or acquire new technologies and improve our existing technologies and processes on a schedule that keeps pace with technological developments and the requirements for our industry. We must also be able to support a range of changing customer preferences. We cannot guarantee that we will be successful in any manner in these efforts, and our inability to do so could cause our business to suffer.

 

 
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Our business practices with respect to data and consumer protection could give rise to liabilities or reputational harm as a result of governmental regulation, legal requirements or industry standards relating to consumer privacy, data protection and consumer protection.

 

Federal, state and international laws and regulations govern the collection, use, retention, sharing and security of data that we collect. We strive to comply with all applicable laws, regulations, self-regulatory requirements and legal obligations relating to privacy, data protection and consumer protection, including those relating to the use of data for marketing purposes. It is possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. We cannot assure you that our practices have complied, comply, or will comply fully with all such laws, regulations, requirements and obligations. Any failure, or perceived failure, by us to comply with federal, state or international laws or regulations, including laws and regulations regulating privacy, data security, marketing communications or consumer protection, or other policies, self-regulatory requirements or legal obligations could result in harm to our reputation, a loss in business, and proceedings or actions against us by governmental entities, consumers, retailers or others. We may also be contractually liable to indemnify and hold harmless performance marketing networks or other third parties from the costs or consequences of noncompliance with any laws, regulations, self-regulatory requirements or other legal obligations relating to privacy, data protection and consumer protection or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business. Any such proceeding or action, and any related indemnification obligation, could hurt our reputation, force us to incur significant expenses in defense of these proceedings, distract our management, increase our costs of doing business and cause consumers and retailers to decrease their use of our marketplace, and may result in the imposition of monetary liability.

 

As we develop and provide solutions, we may be subject to additional and unexpected regulations, which could increase our costs or otherwise harm our business.

 

As we develop and provide solutions that address new market segments, we may become subject to additional laws and regulations, which could create unexpected liabilities for us, cause us to incur additional costs or restrict our operations. From time to time, we may be notified of or otherwise become aware of additional laws and regulations that governmental organizations or others may claim should be applicable to our business. Our failure to anticipate the application of these laws and regulations accurately, or other failure to comply, could create liability for us, result in adverse publicity or cause us to alter our business practices, which could cause our net revenues to decrease, our costs to increase or our business otherwise to be harmed.

 

Government regulation of the Internet, e-commerce and m-commerce is evolving, and unfavorable changes or failure by us to comply with these laws and regulations could substantially harm our business and results of operations.

 

We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet, e-commerce and m-commerce in a number of jurisdictions around the world. Existing and future regulations and laws could impede the growth of the Internet, e-commerce, m-commerce or other online services. These regulations and laws may involve taxation, tariffs, privacy and data security, anti-spam, data protection, content, copyrights, distribution, electronic contracts, electronic communications and consumer protection. It is not clear how existing laws and regulations governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the Internet as the vast majority of these laws and regulations were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet, e-commerce or m-commerce. It is possible that general business regulations and laws, or those specifically governing the Internet, e-commerce or m-commerce may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. We cannot assure you that our practices have complied, comply or will comply fully with all such laws and regulations. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, a loss in business, and proceedings or actions against us by governmental entities or others. Any such proceeding or action could hurt our reputation, force us to spend significant resources in defense of these proceedings, distract our management, increase our costs of doing business, and cause consumers and retailers to decrease their use of our marketplace, and may result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of noncompliance with any such laws or regulations. In addition, it is possible that governments of one or more countries may seek to censor content available on our websites and mobile applications or may even attempt to completely block access to our marketplace. Adverse legal or regulatory developments could substantially harm our business. In particular, in the event that we are restricted, in whole or in part, from operating in one or more countries, our ability to retain or increase our customer base may be adversely affected and we may not be able to maintain or grow our net revenues as anticipated.

 

 
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The current credit and financial market conditions may exacerbate certain risks affecting our business.

 

Due to the continued disruption in the financial markets arising from the global recession and the slow pace of economic recovery, many of our potential customers are unable to access capital necessary to accommodate the use of our technology. Many are operating under austerity budgets that limit their ability to invest in new technology and that make it significantly more difficult to take risks. As a result, we may experience increased difficulties in convincing customers to adopt our technology as a viable alternative at this time.

 

We do not maintain theft or casualty insurance, and only maintain modest liability and property insurance coverage and therefore we could incur losses as a result of an uninsured loss.

 

We cannot assure that we will not incur uninsured liabilities and losses as a result of the conduct of our business. Any such uninsured or insured loss or liability could have a material adverse effect on our results of operations.

 

If we lose key employees and consultants or are unable to attract or retain qualified personnel, our business could suffer.

 

Our success is highly dependent on our ability to attract and retain qualified management personnel. Competition for these qualified personnel is intense. We are highly dependent on our management and key consultants who have been critical to the development of our business. The loss of the services of key employees and key consultants could have a material adverse effect on our operations. We do have employment or consulting agreements with key individuals. However, there can be no assurance that any employees or consultants will remain associated with us. The efforts of key employees and consultants will be critical to us as we continue to develop our technology and as we attempt to transition from a development stage company to a company with commercialized products and services. If we were to lose key employees or consultants, we may experience difficulties in competing effectively, developing our technology and implementing our business strategies.

 

We may fail to realize any or all of the anticipated benefits of the EllisLab merger, and those benefits may take longer to realize than expected.

 

The benefits of the merger may not be realized as expected and may not be achieved within the anticipated timeframe, or at all. Failure to achieve the anticipated benefits of the merger could adversely impact the Company’s results of operations or cash flows, cause dilution to the earnings per share of the Company, decrease or delay the expected benefits of the merger and negatively affect the price of our common stock.

 

Failure to effectively attract, retain and motivate key employees could diminish the anticipated benefits of the merger.

 

The success of the merger will depend in part on the attraction, retention and motivation of personnel critical to the new business and new operations of the surviving company due to, for example, their technical skills or industry and management expertise. Competition for personnel with expertise in CMS and AI operations in fierce, and if the combined company is unable to attract, retain and motivate personnel that are critical to the successful integration and future operations of the Company, we may face disruption operations, loss of customers, key information, expertise or know-how and unanticipated recruiting and training costs. In addition, loss of key personnel could diminish the anticipated benefits of the merger.

 

 
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The AI Market is new and unproven, and it may decline or experience limited growth, which would adversely affect our ability to fully realize the potential of our new business.

 

The AI market is relatively new and evaluating the size and scope of the market is subject to a number of risks and uncertainties. We believe that our future success will depend in large part on the growth of this market. The utilization of AI solutions is still relatively new, and customers may not recognize the need for, or benefits of, AI platforms and products, which may prompt them to cease use of our proposed AI offerings or decide to adopt alternative products and services to satisfy their cognitive computing search and analytics requirements. Our ability to access and expand the market that our AI offerings is designed to address depends upon a number of factors, including the cost, performance and perceived value of our offerings. Market opportunity estimates are subject to significant uncertainty and are based on assumptions and estimates, including our internal analysis and industry experience. Assessing the market for our solutions in each of the markets we are competing in, or are planning to compete in, is particularly difficult due to a number of factors, including limited available information and rapid evolution of the market. The market for our solutions, or for AI or machine learning in general, may fail to grow significantly or be unable to meet the level of growth we expect. As a result, we may experience lower-than-expected demand for our products and services due to lack of customer acceptance, technological challenges, competing products and services, decreases in spending by current and prospective customers, weakening economic conditions and other causes. If the market for AI-based solutions does not experience significant growth, or if demand for our offerings does not increase in line with our projections, then our business, results of operations and financial condition will be adversely affected.

 

If we are not able to use and protect our intellectual property domestically and internationally, it could have a material adverse effect on our business.

 

Our ability to compete depends, in part, on our ability to use intellectual property internationally. We rely on a combination of patents, copyright, trade secrets and confidentiality, trademarks and licenses to protect our intellectual property. There is limited protection under patent law to protect the source codes we developed or acquired on our platform. The copyright and know-how protection may not be sufficient. Our granted patents and pending patent applications may be challenged. We are also subject to the risks of claims and litigation alleging infringement of the intellectual property rights of others. The telecommunications industry is subject to frequent litigation regarding patent and other intellectual property rights. We rely upon certain technology, including hardware and software, licensed from third parties. The technology licensed by us may not continue to provide competitive features and functionality. Licenses for technology currently used by us or other technology that we may seek to license in the future may not be available to us on commercially reasonable terms or at all.

 

RISKS RELATED TO OUR COMMON STOCK

 

Our common stock is subject to volatility.

 

We cannot assure that the market price for our common stock will remain at its current level and a decrease in the market price could result in substantial losses for investors. The market price of our common stock may be significantly affected by one or more of the following factors:

 

 

·

announcements or press releases relating to the industry or to our own business or prospects;

 

·

regulatory, legislative, or other developments affecting us or the industry generally;

 

·

sales by holders of restricted securities pursuant to effective registration statements or exemptions from registration; and

 

·

market conditions specific to companies in our industry and the stock market generally.

 

 
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If our common stock remains subject to the SEC’s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected.

 

Unless our common stock is listed on a national securities exchange, including the Nasdaq Capital Market, if we have stockholders’ equity of $5,000,000 or less and our common stock has a market price per share of less than $4.00, transactions in our common stock will be subject to the SEC’s “penny stock” rules. If our common stock remains subject to the “penny stock” rules promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected.

 

In accordance with these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure document that describes the risks associated with such stocks, the broker-dealer's duties in selling the stock, the customer's rights and remedies and certain market and other information. Furthermore, the broker-dealer must make a suitability determination approving the customer for low-priced stock transactions based on the customer's financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written consent from the customer, and provide monthly account statements to the customer. The effect of these restrictions will probably decrease the willingness of broker-dealers to make a market in our common stock, decrease liquidity of our common stock and increase transaction costs for sales and purchases of our common stock as compared to other securities. Our management is aware of the abuses that have occurred historically in the penny stock market.

 

As a result, if our common stock becomes subject to the penny stock rules, the market price of our securities may be depressed, and you may find it more difficult to sell our securities.

 

If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.

 

Our internal control over financial reporting may have weaknesses and conditions that could require correction or remediation, the disclosure of which may have an adverse impact on the price of our common stock. We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely affect our public disclosures regarding our business, prospects, financial condition or results of operations.

 

Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of internal controls over financial reporting, and for certain issuers an attestation of this assessment by the issuer’s independent registered public accounting firm. The standards that must be met for management to assess the internal controls over financial reporting as effective are evolving and complex, and require significant documentation, testing, and possible remediation to meet the detailed standards. We expect to incur significant expenses and to devote resources to Section 404 compliance on an ongoing basis. It is difficult for us to predict how long it will take or costly it will be to complete the assessment of the effectiveness of our internal control over financial reporting for each year and to remediate any deficiencies in our internal control over financial reporting. As a result, we may not be able to complete the assessment and remediation process on a timely basis. In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or disclosure of management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.

 

We are authorized to issue shares of preferred stock without stockholder approval, which could adversely impact the rights of holders of our common stock.

 

Our Articles of Incorporation authorize our Company to issue up to 20,000,000 shares of preferred stock, of which 1,000 shares have been designated as Series A Preferred Stock, 30,000 shares have been designated as Series B Preferred Stock and 36,000 shares have been designated as Series C Preferred Stock. As of April 1, 2019, there are no shares of Series A Preferred Stock, 16,155 shares of Series B Preferred Stock and 36,000 shares of Series C Preferred Stock issued and outstanding. We can issue additional shares of our preferred stock in one or more series and can set the terms of the preferred stock without seeking any further approval from our common stockholders. Any preferred stock that we issue may rank ahead of our common stock in terms of dividend priority or liquidation premiums and may have greater voting rights than our common stock. In addition, such preferred stock may contain provisions allowing those shares to be converted into shares of common stock, which could dilute the value of common stock to current stockholders and could adversely affect the market price, if any, of our common stock. In addition, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Although we have no present intention to issue any additional shares of authorized preferred stock, there can be no assurance that we will not do so in the future.

 

 
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Shares eligible for future sale may adversely affect the market.

 

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), subject to certain limitations. In general, pursuant to amended Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public information requirement. Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), current public information and notice requirements. Of the 42,726,200 shares of our common stock outstanding as of April 1, 2019, approximately 42,689,572 shares are freely tradable without restriction. Any substantial sales of our common stock pursuant to Rule 144 may have a material adverse effect on the market price of our common stock.

 

We do not expect to pay dividends in the future and any return on investment may be limited to the value of our common stock.

 

We do not currently anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting it at such time as the Board of Directors may consider relevant. Our current intention is to apply net earnings, if any, in the foreseeable future to increasing our capital base and development and marketing efforts. There can be no assurance that we will ever have sufficient earnings to declare and pay dividends to the holders of our common stock, and in any event, a decision to declare and pay dividends is at the sole discretion of our Board of Directors. If we do not pay dividends, our common stock may be less valuable because a return on investment will only occur if its stock price appreciates.

 

We have certain convertible securities issued and outstanding which were issued in the EllisLab merger.

 

In connection with the merger of EllisLab with and into the Company, we issued an aggregate of 36,000 shares of the Company’s Series C Preferred Stock. Each share of Series C Preferred Stock has a stated face value of One Hundred Dollars ($100.00) and is convertible, at a conversion price per share of $0.005 (the “Conversion Price”), subject to certain customary adjustments, into 20,000 shares of the Company’s common stock. Upon the terms and subject to the conditions of the Agreement and Plan of Merger, together with the ancillary documents entered into together with the Agreement and Plan of Merger, and in accord with the terms of the Certificate of Designation of Series C Convertible Preferred Stock (the “Series C Certificate”) of Digital Locations, Inc., the Company may be required to issue an aggregate of 7,200,000,000 shares of common stock, subject to adjustment as described in the Series C Certificate. Upon conversion, this issuance may have a significant dilutive effect on the value of shares of common stock held by the Company’s existing stockholders.

 

ITEM 2. PROPERTIES.

 

Our principal office is located at 3700 State Street, Suite 350, Santa Barbara, California 93105. On September 5, 2017, we entered into a sublease for office space with base rent of $1,000 per month on a month-to-month basis.

 

ITEM 3. LEGAL PROCEEDINGS.

 

We are not currently a party to, nor is any of our property currently the subject of, any pending legal proceeding that will have a material adverse effect on our business.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 
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PART II

 

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Market Information

 

Commencing November 21, 2017, our common stock traded on the “Pink Sheets” published by OTC Markets Group, Inc. under the symbol “DLOC.” Our common stock has traded on the OTC Bulletin Board and OTCQB Market under the symbol “CABN” since September 28, 2007. The following table provides, for the periods indicated, the range of high and low bid prices for our common stock. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

 

Fiscal Year 2018

 

High

 

 

Low

 

First Quarter

 

$ 0.025

 

 

$ 0.0066

 

Second Quarter

 

 

0.035

 

 

 

0.005

 

Third Quarter

 

 

0.010

 

 

 

0.0037

 

Fourth Quarter

 

 

0.0474

 

 

 

0.003

 

 

Fiscal Year 2017

 

High

 

 

Low

 

First Quarter

 

$ 0.040

 

 

$ 0.024

 

Second Quarter

 

 

0.040

 

 

 

0.020

 

Third Quarter

 

 

0.100

 

 

 

0.028

 

Fourth Quarter

 

 

0.040

 

 

 

0.007

 

 

As of April 1, 2019, there were 88 holders of record of our common stock. This number does not include stockholders for whom shares were held in “nominee” or “street” name.

 

Dividend Policy

 

We have not declared or paid any cash dividends on our common stock and do not anticipate declaring or paying any cash dividends in the foreseeable future. We currently expect to retain future earnings, if any, for the development of our business.

 

Common Stock

 

Our Articles of Incorporation, as amended, authorize the issuance of up to two billion (2,000,000,000) shares of common stock, $0.001 par value per share. Holders of shares of common stock are entitled to one vote for each share on all matters to be voted on by the stockholders. Holders of common stock have cumulative voting rights. Holders of shares of common stock are entitled to share ratably in dividends, if any, as may be declared, from time to time by the Board of Directors in its discretion, from funds legally available therefor. In the event of a liquidation, dissolution, or winding up of our company, the holders of shares of common stock are entitled to share pro rata all assets remaining after payment in full of all liabilities. Holders of common stock have no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions with respect to such shares.

 

As of April 1, 2019, our common stock was held by 88 stockholders of record, and we had 42,726,200 shares of common stock issued and outstanding. We believe that the number of beneficial owners is substantially greater than the number of record holders because a significant portion of our outstanding common stock is held of record in broker street names for the benefit of individual investors. The transfer agent of our common stock is Worldwide Stock Transfer, LLC, One University Plaza, Suite 505, Hackensack, New Jersey 07601.

 

 
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Equity Compensation Plan Information

 

The following table shows information with respect to each equity compensation plan under which our common stock is authorized for issuance from inception (April 24, 2006) through December 31, 2018.

 

EQUITY COMPENSATION PLAN INFORMATION

 

Plan category

 

Number of securities

to be issued upon

exercise of

outstanding options,

warrants and rights

 

 

Weighted average

exercise price of

outstanding options,

warrants and rights

 

 

Number of securities

remaining available for future issuance under equity compensation plans excluding securities reflected in column (a)

 

 

 

(a)

 

 

(b)

 

 

(c)

 

Equity compensation plans approved by security holders

 

 

-0-

 

 

 

-0-

 

 

 

2,000,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity compensation plans not approved by security holders (1)

 

 

141,406,250

 

 

$ 0.006

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

141,406,250

 

 

$ 0.006

 

 

 

0

 

 

(1) Consists of options to purchase a total of 141,406,250 common shares.

 

Recent Sales of Unregistered Securities

 

None.

 

Issuer Purchases of Equity Securities

 

None.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion and analysis should be read together with our financial statements and the related notes appearing elsewhere in this filing. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this annual report.

 

 
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Cautionary Statements

 

This Form 10-K contains financial projections and other “forward-looking statements,” as that term is used in federal securities laws, about our financial condition, results of operations, and business. These statements include, among others:

 

 

· statements concerning the potential for benefits that we may experience from its business activities and certain transactions it contemplates or has completed; and

 

 

 

 

· statements of our expectations, future plans and strategies, anticipated developments, and other matters that are not historical facts. These statements may be made expressly in this Form 10-K. You can find many of these statements by looking for words such as “believes,” “expects,” “anticipates,” “estimates,” or similar expressions used in this Form 10-K. These forward-looking statements are subject to numerous assumptions, risks, and uncertainties that may cause the Company’s actual results to be materially different from any future results expressed or implied by the Company in those statements. The most important facts that could prevent the Company from achieving its stated goals include, but are not limited to, the following:

 

 

(a) volatility or decline of the Company’s stock price;

 

 

 

 

(b) potential fluctuation in quarterly results;

 

 

 

 

(c) failure of the Company to earn revenues or profits;

 

 

 

 

(d) inadequate capital to continue or expand its business, and inability to raise additional capital or financing to implement its business plans;

 

 

 

 

(e) failure to further commercialize its technology or to make sales;

 

 

 

 

(f) rapid and significant changes in markets;

 

 

 

 

(g) litigation with or legal claims and allegations by outside parties;

 

 

 

 

(h) insufficient revenues to cover operating costs;

 

 

 

 

(i) aspects of the Company’s business are not proprietary and in general the Company is subject to inherent competition;

 

 

 

 

(j) further dilution of existing shareholders’ ownership in Company;

 

 

 

 

(k) uncollectible accounts and the need to incur expenses to collect amounts owed to the Company;

 

 

 

 

(l) inability to make business acquisitions in the industries we seek due to a lack of capital or financing, purchase prices that are too high, terms that are too onerous, a lack of attractive candidates for acquisition, and strong competition for business acquisitions from bigger, better capitalized competitors; and

 

 

 

 

(m) failure of newly acquired businesses to operate profitability or perform as expected.

 

There is no assurance that the Company will be profitable. The Company may not be able to successfully develop, manage, or market its products and services. The Company may not be able to attract or retain qualified executives and technology personnel. The Company may not be able to obtain customers for its products or services. The Company’s products and services may become obsolete. Government regulation may hinder the Company’s business. Additional dilution in outstanding stock ownership may be incurred due to the issuance of more shares, warrants and stock options, the exercise of outstanding warrants and stock options.

 

Because the statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. The Company cautions you not to place undue reliance on the statements, which speak only as of the date of this Form 10-K. The cautionary statements contained or referred to in this section should be considered in connection with any subsequent written or oral forward-looking statements that the Company or persons acting on its behalf may issue. The Company does not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events.

 

 
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The following discussion should be read in conjunction with our financial statements and notes to those statements. In addition to historical information, the following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties.

 

Current Overview

 

On November 30, 2018, the Company entered into an Agreement and Plan of Merger with the EllisLab, Inc., Rick Ellis (“Ellis”), and EllisLab Corp., a newly formed Nevada corporation and wholly owned subsidiary of the Company, pursuant to which EllisLab, Inc. merged with and into EllisLab Corp. (the “Merger”). Pursuant to the terms of the Merger, Ellis received 36,000 shares of the Company’s newly designated Series C Convertible Preferred, with a stated value of $100 per share, in exchange for the cancellation of all common shares of EllisLab, Inc. owned by Ellis, which shares represented 100% of the issued and outstanding capital stock of EllisLab, Inc. The separate legal existence of EllisLab, Inc. ceased, and EllisLab Corp. (“EllisLab”) became the surviving company. EllisLab is the developer of an open-source CMS software, called ExpressionEngine, with an early stage development effort to use AI in the creation of highly personalized digital content and online experiences.

 

Recently, we transformed ExpressionEngine into a free and open source software platform (FOSS), following in the footsteps of RedHat, WordPress and other successful open source platforms. Doing so will allow us to quickly increase the user base of ExpressionEngine. From this community we intend to collaborate, distill, and develop our AI-based content personalization products and services.

 

In changing to a FOSS model, we no longer derive our revenue from software sales, but rather from complementary services and premium add-ons to the ExpressionEngine platform and community. We are currently executing a plan to achieve profitability with these new products and services.

 

The acquisition of EllisLab, Inc. in the Merger has been accounted for as a purchase, and the accounts of EllisLab Corp. are consolidated with those of the Company as of December 1, 2018. Therefore, the results of operations for the year ended December 31, 2018 are not comparable to results of operations reported for the year ended December 31, 2017.

 

The accompanying consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. As of December 31, 2018, our current liabilities exceeded our current assets by $12,801,600 and we had a total stockholders’ deficit of $12,673,490. In addition, prior to the Merger in November 2018, the Company did not generate any revenue, and has reported negative cash flows from operations since inception. The Company currently does not have the cash resources to meet its operating commitments for the next twelve months, expects to have ongoing requirements for capital investment to implement its business plan, These factors, among others, raise substantial doubt that the Company will be able to continue as a going concern for a reasonable period of time.

 

The ability of the Company to continue as a going concern is dependent upon, among other things, raising additional capital. The Company has obtained operating funds primarily from the issuance of convertible debt and management believes this funding will continue and will provide the additional cash needed to meet the Company’s obligations as they become due and will allow the development of the recently acquired EllisLab business. There can be no assurance, however, that the Company will be successful in accomplishing its objectives. Without such additional capital we may be required to cease operations. The accompanying consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

 

 
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Results of Operations

 

Year ended December 31, 2018 compared to the year ended December 31, 2017

 

Revenues

 

Revenues for the year ended December 31, 2018 totaled $23,776, comprised of services income of $21,451 and software sales of $2,325. As discussed above, the revenues of EllisLab for December 2018 are included in the consolidated operations of the Company for the year ended December 31, 2018. We had no revenues prior to the Merger.

 

General and Administrative Expenses

 

General and administrative expenses increased by $68,034 to $867,623 in the year ended December 31, 2018 from $799,589 in the year ended December 31, 2017. The increase in general and administrative expenses is due primarily to inclusion of EllisLab operating expenses for the month of December 2018, particularly payroll and payroll related expenses.

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense was $3,625 and $675 for the years ended December 31, 2018 and 2017, respectively. Our investment in property and equipment currently is not material to our operations. The increase in depreciation and amortization expense in the year ended December 31, 2018 resulted from the amortization of intangible assets acquired in the Merger.

 

Impairment Expense

 

The excess of the cost over the fair value of net assets of acquired in the Merger was recorded as goodwill. Goodwill is not subject to amortization, but is reviewed for impairment annually, or more frequently whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. At December 31, 2018, the Company reviewed the goodwill recorded in the Merger and determined that an impairment expense of $4,934,429 was required for the year ended December 31, 2018. We had no impairment expense in the year ended December 31, 2017.

 

Research and Development Expenses

 

Research and development expenses totaled $65,009 in the year ended December 31, 2017 and related to our third sponsored research agreement with University of California – Santa Barbara (“UCSB”). We have completed our development and research efforts around graphene through our sponsored research agreements with UCSB. As a result, we reported no research and development expenses in the year ended December 31, 2018.

 

Other Income (Expense)

 

Total other expense was $2,386,913 and $1,523,181 for the years ended December 31, 2018 and 2017, respectively. The change in total other income (expense) is primarily due to the fluctuation in gain (loss) on change in derivative liabilities.

 

Our interest expense increased by $66,382 to $969,130 for the year ended December 31, 2018 from $902,748 for the year ended December 31, 2017. The increase in interest expense is the result of additional convertible notes payable in the current fiscal year and the amortization of debt discount for the new convertible debt.

 

We reported a loss on change in derivative liabilities of $1,417,783 in the year ended December 31, 2018 compared to a loss on change in derivative liabilities of $638,432 in the year ended December 31, 2017. Our convertible debt continued to increase during the current year resulting in additional derivative liabilities. We estimate the fair value of the derivatives associated with our convertible notes, certain stock options and our Series B Preferred Stock using a multinomial lattice model based on projections of various potential future outcomes. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price volatility, variable conversion prices based on market prices as defined in the respective agreements and probabilities of certain outcomes based on management projections. These inputs are subject to significant changes from period to period and to management’s judgment; therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material.

 

 
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We reported other income from the sublease of our office space of $6,356 in the year ended December 31, 2017. We had no other income or expense in the year ended December 31, 2018.

 

The gain on settlement of debt of $11,643 in the year ended December 31, 2017 resulted from the conversion of convertible debt into equity. We had no gain or loss on settlement of debt in the year ended December 31, 2018.

 

Net Loss

 

As a result, our net loss for the year ended December 31, 2018 was $8,168,814 compared to a net loss of $2,388,454 for the year ended December 31, 2017.

 

Liquidity and Capital Resources

 

As of December 31, 2018, we had total current assets of $65,483, including cash of $56,414, and total current liabilities of $12,867,083, resulting in a working capital deficit of $12,801,600. Included in our current liabilities at December 31, 2018 are derivative liabilities totaling $10,363,105, which we do not anticipate will require cash payments to settle.

 

We have funded our operations primarily from the proceeds of convertible notes payable. During the year ended December 31, 2018, we received proceeds of $692,500.

 

During the year ended December 31, 2018, we used net cash of $635,369 in operating activities as a result of our net loss of $8,168,814, increase in prepaid expenses of $3,637 and decrease in deferred revenue of $1,319, partially offset by non-cash expenses totaling $7,324,478, decrease in accounts receivable of $18,801 and increases in accounts payable of $3,864 and accrued expenses of $191,258.

 

During the year ended December 31, 2017, we used net cash of $859,111 in operating activities as a result of our net loss of $2,388,454, non-cash gain on settlement of debt of $11,643 and increase in prepaid expenses of $93, partially offset by non-cash expenses totaling $1,429,869 and increases in accounts payable of $4,387 and accrued expenses of $106,823.

 

During the year ended December 31, 2018 we used net cash in investing activities of $24,178 comprised of cash advanced prior to the merger. We used net cash in investing activities of $1,945 during the year ended December 31, 2017 for the purchase of property and equipment.

 

Net cash provided by financing activities during the year ended December 31, 2018 was $692,500, comprised of proceeds from convertible notes payable of $692,500. Net cash provided by financing activities during the year ended December 31, 2017 was $844,583, comprised of proceeds from convertible notes payable of $855,000, partially offset by repayment of convertible notes payable of $10,417.

 

Although most recently, proceeds received from the issuance of debt are sufficient to fund our current operating expenses, we will need to raise additional funds in the future to grow the EllisLab operations and provide the necessary capital to meet our other general and administrative expenses. Therefore, our future operations are dependent on our ability to secure additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences, or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we may have to curtail our marketing and development plans and possibly cease our operations.

 

 
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We believe that EllisLab has the potential to attain a profitable level of operations and we believe we have assets to ensure that we can continue to operate without liquidation over the next twelve months, due to our current cash, and our experience in the past in being able to raise money from our investor base. Therefore, we believe we have the ability to continue our operations for the foreseeable future and will be able to realize assets and discharge liabilities in the normal course of our operations. However, we cannot assure that we will be successful in these endeavors.

 

Critical Accounting Policies

 

Our significant accounting policies are disclosed in Note 2 to our consolidated financial statements. The following is a summary of those accounting policies that involve significant estimates and judgment of management.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include the estimate of useful lives of property and equipment and intangible assets, impairment of assets, the deferred tax valuation allowance, the fair value of stock options and derivative liabilities. Actual results could differ from those estimates.

 

Intangible Assets

 

Intangible assets consist primarily of intellectual property, customer base, trade-names/marks and non-compete agreements acquired in the Merger, which are amortized on a straight-line basis over their estimated useful lives of 5 years. Intangible assets are reviewed for impairment annually, or more frequently whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable.

 

The excess of the cost over the fair value of net assets of acquired in the Merger is recorded as goodwill. Goodwill is not subject to amortization, but is reviewed for impairment annually, or more frequently whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. An impairment charge would be recorded to the extent the carrying value of goodwill exceeds its estimated fair value. The testing of goodwill under established guidelines for impairment requires significant use of judgment and assumptions. Changes in forecasted operations and other assumptions could materially affect the estimated fair values. Changes in business conditions could potentially require adjustments to these asset valuations. At December 31, 2018, the Company reviewed the goodwill recorded in the Merger and determined that an impairment expense of $4,934,429 was required.

 

Derivative Liabilities

 

We have identified the conversion features of our convertible notes payable and Series B preferred stock and certain stock options as derivatives. Where the number of warrants or common shares to be issued under these agreements is indeterminate, the Company has concluded that the equity environment is tainted, and all additional warrants and convertible debt and equity are included in the value of the derivatives. We estimate the fair value of the derivatives using the Black-Scholes pricing model and a multinomial lattice model based on projections of various potential future outcomes. We estimate the fair value of the derivative liabilities at the inception of the financial instruments, at the date of conversions to equity and at each reporting date, recording a derivative liability, debt discount, additional paid-in capital and a gain or loss on change in derivative liabilities as applicable. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price volatility, variable conversion prices based on market prices as defined in the respective agreements and probabilities of certain outcomes based on management projections. These inputs are subject to significant changes from period to period and to management's judgment; therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material.

 

 
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Fair Value of Financial Instruments

 

Disclosures about fair value of financial instruments require disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of December 31, 2018 and 2017, we believe the amounts reported for cash, accounts receivable, prepaid expenses, accounts payable, accrued interest, accrued expenses and other current liabilities, and convertible note payable approximate fair value because of their short maturities.

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

 

 

· Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;

 

 

 

 

· Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and

 

 

 

 

· Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

We measure certain financial instruments at fair value on a recurring basis. Liabilities measured at fair value on a recurring basis are as follows at December 31, 2018 and 2017:

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$ 10,363,105

 

 

$ -

 

 

$ -

 

 

$ 10,363,105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities measured at fair value

 

$ 10,363,105

 

 

$ -

 

 

$ -

 

 

$ 10,363,105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$ 8,072,904

 

 

$ -

 

 

$ -

 

 

$ 8,072,904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities measured at fair value

 

$ 8,072,904

 

 

$ -

 

 

$ -

 

 

$ 8,072,904

 

 

Revenue Recognition

 

On January 1, 2018, we adopted Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) Topic 605, “Revenue Recognition” (Topic 605). The Company had no operating revenues prior to the Merger. Effective December 1, 2018, the Company’s revenues are derived primarily from the sale of monthly and annual tech support subscriptions and partnership fees, and from software applications that customers purchase via the Company’s online store. Sales are processed using a real-time payment processing company. Revenue from product sales is recorded net of processing costs. Effective December 31, 2018, revenues are presented under Topic 606. The impact of adopting the new revenue standard was not material to our financial statements and there was no adjustment to beginning retained earnings on January 1, 2018.

 

Under Topic 606, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

 

 
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We determine revenue recognition through the following steps:

 

 

·

identification of the contract, or contracts, with a customer;

 

·

identification of the performance obligations in the contract;

 

·

determination of the transaction price;

 

·

allocation of the transaction price to the performance obligations in the contract; and

 

·

recognition of revenue when, or as, we satisfy a performance obligation.

   

Amounts collected from customers for support subscriptions and partnership fees with a contract life of one month or greater are recorded as deferred revenue and recognized over the life of the contract.

 

Income Taxes

 

We account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

Stock-Based Compensation

 

Stock-based compensation is measured at the grant date based on the value of the award granted using either the Black-Scholes option pricing model or a multinomial lattice model based on projections of various potential future outcomes and recognized over the period in which the award vests. For stock awards no longer expected to vest, any previously recognized stock compensation expense is reversed in the period of termination. The stock-based compensation expense is included in general and administrative expenses.

 

Recently Issued Accounting Pronouncements

 

Although there are several new accounting pronouncements issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting pronouncements has had or will have a material impact on its financial position or results of operations.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

All financial information required by this Item is attached hereto at the end of this report beginning on page F-1 and is hereby incorporated by reference.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

On December 17, 2018, Digital Locations, Inc. (the “Company”) dismissed Liggett & Webb, P.A. (“L&W”) as the independent registered public accounting firm of the Company. The decision to change auditors was approved by the Company’s Board of Directors.

 

During the fiscal years ended December 31, 2017 and December 31, 2016, L&W’s reports on the Company’s financial statements did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles, except that the report was modified as to the Company’s ability to continue as a going concern.

 

 

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During the fiscal years ended December 31, 2017 and December 31, 2016 and the subsequent interim period through December 17, 2018, (i) there were no disagreements between the Company and L&W on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of L&W, would have caused L&W to make reference to the subject matter of the disagreement in connection with its report on the Company’s financial statements; and (ii) there were no reportable events as described in paragraph (a)(1)(v) of Item 304 of Regulation S-K.

 

On December 18, 2018, the Company provided L&W with a copy of the disclosures it is making in response to Item 4.01 on this Form 8-K, and has requested that L&W furnish it with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the above statements. A copy of the letter, dated December 20, 2018, was filed as Exhibit 16.1 to the Current Report on Form 8-K files with the Securities and Exchange Commission on December 20, 2018.

 

On December 18, 2018, the Company’s Board of Directors approved the engagement of M&K CPAS, PLLC (“M&K”) as its independent registered public accounting firm for the Company’s fiscal year ending December 31, 2018.

 

During the fiscal years ended December 31, 2017 and December 31, 2016 and the subsequent interim period through December 18, 2018, the date of engagement of M&K, the Company did not consult with M&K regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements; or (ii) any matter that was either the subject of a disagreement (as defined in paragraph (a)(1)(iv) of Item 304 of Regulation S-K and the related instructions thereto) or a reportable event (as described in paragraph (a)(1)(v) of Item 304 of Regulation S-K).

 

ITEM 9A. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

Based on an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, as of December 31, 2018, our Interim Chief Executive Officer and Acting Chief Financial Officer has concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Our Interim Chief Executive Officer and Acting Chief Financial Officer also concluded that, as of December 31, 2018, our disclosure controls and procedures were not effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Acting Chief Financial Officer, to allow timely decisions regarding required disclosure.

  

 
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Management’s Report on Internal Control over Financial Reporting

 

We are responsible for establishing and maintaining adequate internal control over financial reporting in accordance with Exchange Act Rule 13a-15. With the participation of our Interim Chief Executive Officer and Acting Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2018 based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2018, based on those criteria. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. We have identified the following material weaknesses:

 

1.

As of December 31, 2018, we did not maintain effective controls over the control environment. Specifically, the Board of Directors does not currently have any independent members. Since this entity level control has a pervasive effect across the organization, management has determined that this circumstance constitutes a material weakness.

 

2.

As of December 31, 2018, due to the inherent issue of segregation of duties in a small company, we have relied heavily on entity or management review controls and engaged an outside financial consultant to lessen the issue of segregation of duties over accounting, financial close procedures and controls over financial statement disclosure. Accordingly, management has determined that this control deficiency constitutes a material weakness.

 

 

 

 

3.

As of December 31, 2018, we did not establish a formal written policy for the approval, identification and authorization of related party transactions.

 

Because of these material weaknesses, management has concluded that the Company did not maintain effective internal control over financial reporting as of June 30, 2018, based on the criteria established in "Internal Control-Integrated Framework" issued by the COSO.

 

Changes in Internal Controls

 

During the three months ended December 31, 2018, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

No Attestation Report by Independent Registered Accountant

 

The annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission.

 

ITEM 9B. OTHER INFORMATION.

 

None.

 

 
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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.

 

The following table sets forth information about our executive officers and directors:

 

Name

 

Age

 

Position

 

 

 

 

 

William E. Beifuss, Jr.

 

73

 

Chairman of the Board of Directors, President, Acting Chief Executive Officer, Acting Chief Financial Officer and Secretary

 

 

 

 

 

Byron Elton

 

65

 

Director

 

 

 

 

 

Rick Ellis

 

54

 

Director, Chief Executive Officer of EllisLab Corp.

 

Directors serve until the next annual meeting and until their successors are elected and qualified. The directors of our company are elected by the vote of a majority in interest of the holders of the voting stock of our company and hold office until the expiration of the term for which he or she was elected and until a successor has been elected and qualified.

 

A majority of the authorized number of directors constitutes a quorum of the Board for the transaction of business. The directors must be present at the meeting to constitute a quorum. However, any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board individually or collectively consent in writing to the action.

 

Directors may receive compensation for their services and reimbursement for their expenses as shall be determined from time to time by resolution of the Board. Our directors currently do not receive monetary compensation for their service on the Board of Directors.

 

Officers are appointed to serve for one year until the meeting of the Board of Directors following the annual meeting of stockholders and until their successors have been elected and qualified.

 

On June 8, 2018, Gerard F. Hug, chief executive officer and a director of Digital Locations, Inc. (the “Company”), notified the Company of his resignation from his positions as the Company’s chief executive officer and member of the board of directors, effective immediately. Mr. Hug’s resignation was not due to any disagreement related to the Company’s operations, policies or practices, financial status or financial statements. Mr. Hug was appointed chief executive officer and director effective July 1, 2017.

 

Effective June 9, 2018, William E. Beifuss, Jr., the Company’s President and Acting Chief Financial Officer was appointed to serve as Interim Chief Executive Officer of the Company.

 

Pursuant to the Merger, effective November 30, 2018, Rick Ellis, the owner and founder of EllisLab, Inc. and current Chief Executive Officer of EllisLab Corp., was appointed as a director of the Company.

 

The principal occupations for the past five years (and, in some instances, for prior years) of each of our executive officers and directors are as follows:

 

William E. Beifuss, Jr. — Chairman of the Board of Directors, President, Secretary and Acting Chief Executive Officer and Acting Chief Financial Officer. Effective June 9, 2018, Mr. Beifuss was appointed to serve as Interim Chief Executive Officer of the Company. Mr. Beifuss has been the President, acting Chief Financial Officer, Secretary, and a director of the Company since May 10, 2013. Mr. Beifuss also served as interim Chief Executive Officer of the Company from May 1, 2017 to July 1, 2017 and as Chief Executive Officer of the Company from May 10, 2013 to March 7, 2016. Mr. Beifuss is a business executive and has served since February 2006 as the Chief Executive Officer of Cumorah Capital, Inc., a private investment company. Mr. Beifuss served as Chairman of the Board of Warp 9, Inc. from December 2008 to January 2013. From June 2010 to April 2012, Mr. Beifuss was the President of Warp 9. He served as the interim Chief Financial Officer of Warp 9, Inc. from June 2011 to April 2012. From April 1992 to January 2006, Mr. Beifuss was Chief Executive Officer of Coeur D'Alene French Baking Company. He served as a unit committee chairman of Boy Scouts of America.

 

 
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Byron Elton — Director. Mr. Elton has been a director of the Company since March 16, 2009. He served as the President, Chief Operating Officer, acting Chief Financial Officer, and Secretary of the Company from January 5, 2009 to May 10, 2013. Mr. Elton is an experienced media and marketing professional with experience in crafting new business development strategies and building top-flight marketing organizations. From January 2014 to the present, he has served on the Board of Directors of OriginClear, Inc. From January 2014 to the present, he has served as Executive Vice President of 451 Marketing, a fully integrated marketing and communications agency with offices in Boston, New York and Los Angeles. From June 2013 to the present, he has served as a principal at PointClear Search, an executive search firm. He previously served as Senior Vice President of Sales for Univision Online from 2007 to 2008. Mr. Elton also served for eight years as an executive at AOL Media Networks from 2000 to 2007, where his assignments included Regional Vice President of Sales for AOL and Senior Vice President of E-Commerce for AOL Canada. His broadcast media experience includes leading the ABC affiliate in Santa Barbara, California from 1995 to 2000 and the CBS affiliate in Monterrey, California, from 1998 to 1999, in addition to serving as President of the Alaskan Television Network from 1995 to 1999.

 

Mr. Elton’s extensive senior level management experience specifically in new business development and partnership strategies made him qualified to serve on the Board of Directors.

 

Rick Ellis — Director. Mr. Ellis was the founder of EllisLab, Inc. and served as Chief Executive Officer from September 2001 through June 2011, Lead Product Developer from September 2001 through June of 2007, and Chief Financial Officer from June 2011 through October 2018. Mr. Ellis has a deep background in web and media technology, both as designer and developer. He was the primary architect and lead developer of EllisLab's first three products, a Content Management System called pMachine, its current flagship CMS ExpressionEngine, and an Open Source web application framework called CodeIgniter (which was transferred to the British Columbia Institute of Technology). Prior to founding EllisLab, Mr. Ellis was a Recording Engineer and Sound Designer in Los Angeles. In that capacity he worked on hundreds of projects for film and television, from feature films for Disney such as Toy Story and Lion King, to hit TV shows such as The Highlander and Family Guy. Mr. Ellis won an Emmy for his work on the Oliver Stone film, “The Final Days of Kennedy and King”. He holds an Audio Engineering degree from Full Sail University, where he graduated Valedictorian.

 

Family Relationships

 

There are no family relationships among our executive officers and directors.

 

Board Leadership Structure and Role in Risk Oversight

 

Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have recently determined that it is in the best interests of the Company and its shareholders to separate these roles.

 

Our Board of Directors focuses on the most significant risks facing our company and our company’s general risk management strategy, and also ensure that risks undertaken by our Company are consistent with the Board’s appetite for risk. While the Board oversees our company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our Board leadership structure supports this approach.

 

Limitation of Liability and Indemnification of Officers and Directors

 

Under the Nevada Revised Statutes and our Articles of Incorporation, our directors will have no personal liability to us or our stockholders for monetary damages incurred as the result of the breach or alleged breach by a director of his “duty of care.” This provision does not apply to the directors’ (i) acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) acts or omissions that a director believes to be contrary to the best interests of the corporation or our shareholders or that involve the absence of good faith on the part of the director, (iii) approval of any transaction from which a director derives an improper personal benefit, (iv) acts or omissions that show a reckless disregard for the director’s duty to the corporation or our shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director’s duties, of a risk of serious injury to the corporation or our shareholders, (v) acts or omissions that constituted an unexcused pattern of inattention that amounts to an abdication of the director’s duty to the corporation or our shareholders, or (vi) approval of an unlawful dividend, distribution, stock repurchase or redemption. This provision would generally absolve directors of personal liability for negligence in the performance of duties, including gross negligence.

 

 
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The effect of this provision in our Articles of Incorporation is to eliminate the rights of Digital Locations and our stockholders (through stockholder’s derivative suits on behalf of Digital Locations) to recover monetary damages against a director for breach of his fiduciary duty of care as a director (including breaches resulting from negligent or grossly negligent behavior) except in the situations described in clauses (i) through (vi) above. This provision does not limit nor eliminate the rights of Digital Locations or any stockholder to seek non-monetary relief such as an injunction or rescission in the event of a breach of a director’s duty of care. In addition, our Articles of Incorporation provide that if Nevada law is amended to authorize the future elimination or limitation of the liability of a director, then the liability of the directors will be eliminated or limited to the fullest extent permitted by the law, as amended. The Nevada Revised Statutes grants corporations the right to indemnify their directors, officers, employees and agents in accordance with applicable law. Our bylaws provide for indemnification of such persons to the full extent allowable under applicable law. These provisions will not alter the liability of the directors under federal securities laws.

 

We intend to enter into agreements to indemnify our directors and officers, in addition to the indemnification provided for in our bylaws. These agreements, among other things, indemnify our directors and officers for certain expenses (including attorneys’ fees), judgments, fines, and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of Digital Locations, arising out of such person’s services as a director or officer of Digital Locations, any subsidiary of Digital Locations or any other company or enterprise to which the person provides services at the request of Digital Locations. We believe that these provisions and agreements are necessary to attract and retain qualified directors and officers.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling Digital Locations pursuant to the foregoing provisions, Digital Locations has been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

Involvement in Certain Legal Proceedings

 

During the past ten years, none of our directors, executive officers, promoters, control persons, or nominees has been:

 

 

·

the subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

 

 

 

 

·

convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

 

 

 

 

·

subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or any Federal or State authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities;

 

 

 

 

·

found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law;

 

 

 

 

·

the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (a) any Federal or State securities or commodities law or regulation; (b) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (c) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

 

 

 

 

·

the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

 
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Board Committees

 

Audit Committee. Our Board of Directors has appointed an audit committee. During our fiscal year ended December 31, 2018, our audit committee is comprised of Byron Elton. Mr. Elton does not qualify as independent as defined in Rule 4200 of the listing standards of The Nasdaq Capital Market. Our audit committee is authorized to:

 

 

·  

appoint, compensate, and oversee the work of any registered public accounting firm employed by us;

 

 

 

 

·  

resolve any disagreements between management and the auditor regarding financial reporting;

 

 

 

 

·

pre-approve all auditing and non-audit services;

 

 

 

 

·  

retain independent counsel, accountants, or others to advise the audit committee or assist in the conduct of an investigation;

 

 

 

 

·  

meet with our officers, external auditors, or outside counsel, as necessary; and

 

 

 

 

·  

oversee that management has established and maintained processes to assure our compliance with all applicable laws, regulations and corporate policy.

 

The audit committee held four meetings during fiscal year ended December 31, 2018.

 

Compensation Committee. Our compensation committee is comprised of Byron Elton. Our compensation committee is authorized to:

 

 

·

discharge the responsibilities of the Board of Directors relating to compensation of the our directors, executive officers and key employees;

 

 

 

 

·

assist the Board of Directors in establishing appropriate incentive compensation and equity-based plans and to administer such plans;

 

 

 

 

·

oversee the annual process of evaluation of the performance of our management; and

 

 

 

 

·

perform such other duties and responsibilities as enumerated in and consistent with compensation committee’s charter.

 

Nominating Committee. Our nominating committee is comprised of Byron Elton. Our nominating committee is authorized to:

 

 

·

assist the Board of Directors by identifying qualified candidates for director nominees, and to recommend to the Board of Directors the director nominees for the next annual meeting of shareholders;

 

 

 

 

·

lead the Board of Directors in its annual review of its performance;

 

 

 

 

·

recommend to the Board director nominees for each committee of the Board of Directors; and

 

 

 

 

·

develop and recommend to the Board of Directors corporate governance guidelines applicable to us.

 

 
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Indebtedness of Executive Officers

 

No executive officer, director or any member of these individuals' immediate families or any corporation or organization with whom any of these individuals is an affiliate is or has been indebted to us since the beginning of our last fiscal year.

 

Code of Ethics

 

We have adopted a Code of Ethics that applies to all of our directors, officers and employees. The text of the Code of Ethics can be accessed on Digital Location’s Internet website at www.digitallocations.com. A copy of the Code of Ethics has also been filed as an exhibit to our Annual Report for the year ending December 31, 2007, filed with the SEC on March 26, 2008, and incorporated herein by reference. Any waiver of the provisions of the Code of Ethics for executive officers and directors may be made only by the Audit Committee and, in the case of a waiver for members of the Audit Committee, by the Board of Directors. Any such waivers will be promptly disclosed to our shareholders.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires the Company's directors, executive officers and persons who own more than 10% of the Company's stock (collectively, "Reporting Persons") to file with the SEC initial reports of ownership and changes in ownership of the Company's common stock. Reporting Persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file. To the Company's knowledge, based solely on its review of the copies of such reports received or written representations from certain Reporting Persons that no other reports were required, the Company believes that during its fiscal year ended December 31, 2017 all Reporting Persons timely complied with all applicable filing requirements.

 

ITEM 11. EXECUTIVE COMPENSATION.

 

Compensation Discussion and Analysis

 

The following Compensation Discussion and Analysis describes the material elements of compensation for our executive officers identified in the Summary Compensation Table (“Named Executive Officers”), and executive officers that we may hire in the future. As more fully described below, our Board of Directors makes all decisions for the total direct compensation of our executive officers, including the Named Executive Officers. We do not have a compensation committee, so all decisions with respect to management compensation are made by the whole Board.

 

Compensation Program Objectives and Rewards

 

Our compensation philosophy is based on the premise of attracting, retaining, and motivating exceptional leaders, setting high goals, working toward the common objectives of meeting the expectations of customers and stockholders, and rewarding outstanding performance. Following this philosophy, in determining executive compensation, we consider all relevant factors, such as the competition for talent, our desire to link pay with performance in the future, the use of equity to align executive interests with those of our stockholders, individual contributions, teamwork and performance, and each executive’s total compensation package. We strive to accomplish these objectives by compensating all executives with total compensation packages consisting of a combination of competitive base salary and incentive compensation.

 

While we have only hired three executives since inception because our business has not grown sufficiently to justify additional hires, we expect to grow and hire in the future. To date, we have not applied a formal compensation program to determine the compensation of the Named Executives Officers. In the future, as we and our management team expand, our Board of Directors expects to add independent members, form a compensation committee comprised of independent directors, and apply the compensation philosophy and policies described in this section of the Form 10-K.

 

 
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The primary purpose of the compensation and benefits described below is to attract, retain, and motivate highly talented individuals when we do hire, who will engage in the behaviors necessary to enable us to succeed in our mission while upholding our values in a highly competitive marketplace. Different elements are designed to engender different behaviors, and the actual incentive amounts which may be awarded to each Named Executive Officer are subject to the annual review of the Board of Directors. The following is a brief description of the key elements of our planned executive compensation structure.

 

 

· Base salary and benefits are designed to attract and retain employees over time.

 

 

 

 

· Incentive compensation awards are designed to focus employees on the business objectives for a particular year.

 

 

 

 

· Equity incentive awards, such as stock options and non-vested stock, focus executives’ efforts on the behaviors within the recipients’ control that they believe are designed to ensure our long-term success as reflected in increases to our stock prices over a period of several years, growth in our profitability and other elements.

 

 

 

 

· Severance and change in control plans are designed to facilitate a company’s ability to attract and retain executives as we compete for talented employees in a marketplace where such protections are commonly offered. We currently have not given separation benefits to any of our Name Executive Officers.

 

Benchmarking

 

We have not yet adopted benchmarking but may do so in the future. When making compensation decisions, our Board of Directors may compare each element of compensation paid to our Named Executive Officers against a report showing comparable compensation metrics from a group that includes both publicly-traded and privately-held companies. Our Board believes that while such peer group benchmarks are a point of reference for measurement, they are not necessarily a determining factor in setting executive compensation as each executive officer’s compensation relative to the benchmark varies based on scope of responsibility and time in the position. We have not yet formally established our peer group for this purpose.

 

The Elements of Digital Location’s Compensation Program

 

Base Salary

 

Executive officer base salaries are based on job responsibilities and individual contribution. The Board reviews the base salaries of our executive officers, including our Named Executive Officers, considering factors such as corporate progress toward achieving objectives (without reference to any specific performance-related targets) and individual performance experience and expertise. None of our Named Executive Officers have employment agreements with us. Additional factors reviewed by the Board of Directors in determining appropriate base salary levels and raises include subjective factors related to corporate and individual performance. For the year ended December 31, 2018, all executive officer base salary decisions were approved by the Board of Directors.

 

Our Board of Directors determines base salaries for the Named Executive Officers at the beginning of each fiscal year, and the Board proposes new base salary amounts, if appropriate, based on its evaluation of individual performance and expected future contributions. We do not have a 401(k) Plan, but if we adopt one in the future, base salary would be the only element of compensation that would be used in determining the amount of contributions permitted under the 401(k) Plan.

 

Incentive Compensation Awards

 

The Named Executives have not been paid bonuses and our Board of Directors has not yet established a formal compensation policy for the determination of bonuses. If our revenue grows and bonuses become affordable and justifiable, we expect to use the following parameters in justifying and quantifying bonuses for our Named Executive Officers and other officers of Digital Locations: (1) the growth in our revenue, (2) the growth in our earnings before interest, taxes, depreciation and amortization, as adjusted (“EBITDA”), and (3) our stock price. The Board has not adopted specific performance goals and target bonus amounts for any of our fiscal years, but may do so in the future.

 

 
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Equity Incentive Awards

 

In November 2011, our Board adopted a stock option plan (the “2011 Plan”) under which 2,000,000 shares of common stock have been reserved for issuance. No stock option awards have yet been made to any of our Named Executives or other officers or employees of Digital Locations under the 2011 Plan. Our Board has granted a total of 1,400,000 stock options to our current President and a former Chief Executive Officer outside of our 2011 Plan. These equity incentive awards, we believe, motivate our employees to work to improve our business and stock price performance, thereby further linking the interests of our senior management and our stockholders. The Board considers several factors in determining whether awards are granted to an executive officer, including those previously described, as well as the executive’s position, his or her performance and responsibilities, and the amount of options or other awards, if any, currently held by the officer and their vesting schedule. Our policy prohibits backdating options or granting them retroactively.

 

Benefits and Prerequisites

 

At this stage of our business we have limited benefits and no prerequisites for our employees other than health insurance and vacation benefits that are generally comparable to those offered by other small private and public companies or as may be required by applicable state employment laws. We do not have a 401(k) Plan or any other retirement plan for our Named Executive Officers. We may adopt these plans and confer other fringe benefits for our executive officers in the future if our business grows sufficiently to enable us to afford them.

 

Separation and Change in Control Arrangements

 

We have employment agreements with our Named Executive Officers as more fully described below. None of our Named Executive Officers are eligible for specific benefits or payments if their employment or engagement terminates in a separation or if there is a change of control.

 

 
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Executive Officer Compensation

 

The following table sets forth the annual compensation for years ended December 31, 2018 and 2017 to our Chief Executive Officer, our President and our most highly compensated officers other than the Chief Executive Officer at December 31, 2018 whose total compensation exceeded $100,000, which we refer to as our “Named Executive Officers.”

 

Name and

Principal Position

 

Year

 

Salary ($)

 

 

Bonus

 ($)

 

 

Stock Awards ($)

 

 

Option Awards ($)

 

 

Non-Equity Incentive Plan Compensation ($)

 

 

Change in 

Pension Value

and Non-

Qualified 

Deferred

Compensation

Earnings ($)

 

 

All Other

Compensation

($) (1)

 

 

Total ($)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

William E. Beifuss, Jr. - President, Acting Chief Executive Officer and Chief Financial Officer,

 

2018

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

120,000

 

 

 

120,000

 

Secretary (2)

 

2017

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

120,000

 

 

 

120,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gerard F. Hug –

Former Chief

Executive

 

2018

 

 

110,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

110,000

 

Officer (3)

 

2017

 

 

120,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

120,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rick Ellis –Chief Executive Officer of EllisLab Corp. (4)

 

2018

 

 

10,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,841

 

 

 

11,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Christopher S. Kelly Jr. - Former Chief Executive Officer (5)

 

2017

 

 

73,333

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,894

 

 

 

79,227

 

___________

(1)

Other compensation for Mr. Beifuss consists of consulting fees paid. Other compensation for Mr. Ellis consists of medical, dental and vision insurance premiums paid by EllisLab Corp. Other compensation for Mr. Kelly consists of medical insurance premiums paid by the Company.

(2)

Effective June 9, 2018, Mr. Beifuss was appointed to serve as Interim Chief Executive Officer of the Company. Mr. Beifuss has been the President, acting Chief Financial Officer, Secretary, and a director of the Company since May 10, 2013.

(3)

Mr. Hug was appointed Chief Executive Officer effective July 1, 2017 and resigned from that position on June 8, 2018.

 

(4)

Mr. Ellis was appointed Chief Executive Officer of EllisLab Corp. effective with the Merger on November 30, 2018.

 

(5)

Mr. Kelly resigned as Chief Executive Officer and a director of the Company on April 30, 2017.

 

Employment Arrangements

 

We have a consulting agreement dated May 31, 2013 with William E. Beifuss, Jr., our former Chief Executive Officer, and current President and Acting Chief Financial Officer, for the payment of monthly compensation of $5,000 per month beginning in June 2013. The agreement was amended, effective November 1, 2016, to increase the monthly compensation to $10,000. The agreement may be cancelled by either party with 30 days’ notice.

 

Commencing on July 1, 2017, Mr. Hug served as the Chief Executive Officer of the Company on an "at-will," full-time basis. Mr. Hug's base salary was $20,000 per month, equivalent to an annual salary of $240,000. He was entitled to participate in all benefits that the Company offered, including covering all of Mr. Kelly's health insurance premiums. Mr. Hug executed the Company's standard Employment Confidentiality and Inventions Agreement. Mr. Hug resigned on June 8, 2018.

 

Mr. Ellis serves as Chief Executive Officer of EllisLab Corp. and receives a monthly salary from EllisLab Corp. of $10,000. Mr. Ellis participates in the benefits offered to the employees of EllisLab Corp., including health, dental and vision insurance paid by EllisLab Corp.

 

 
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Commencing on March 7, 2016 and terminating April 30, 2017, Mr. Kelly served as the Chief Executive Officer of the Company on an "at-will," full-time basis. Mr. Kelly's base salary was $18,333.33 per month, equivalent to an annual salary of $220,000. He was entitled to participate in all benefits that the Company has or will implement, including covering all of Mr. Kelly's health insurance premiums. Mr. Kelly executed the Company's standard Employment Confidentiality and Inventions Agreement.

 

Grants of Equity Awards – Fiscal Year 2018

 

We did not grant any equity awards to our Named Executive Officers in fiscal year 2018.

 

Outstanding Equity Awards

 

The following table sets forth information with respect to grants of options to purchase our common stock to our Named Executive Officers at December 31, 2018.

 

Outstanding Equity Awards at Fiscal Year-End

 

Name

 

Number of

Securities

Underlying

Unexercised

Options Exercisable

 

 

Number of Securities

Underlying Unexercised

Options Unexercisable

 

 

Equity Incentive Plan

Awards: Number of

Securities Underlying

Unexercised Unearned Options

 

 

Option Exercise

Price

 

 

Option

Expiration

Date

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

William E. Beifuss, Jr., President, Acting Chief Executive Officer, Acting Chief Financial Officer, Secretary(1)

 

 

1,200,000

 

 

 

-

 

 

 

-

 

 

$ 0.06

 

 

9/23/2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Byron Elton, Former Chief Executive Officer, Former President, Former Acting Chief Financial Officer and Former Secretary(2)

 

 

200,000

 

 

 

-

 

 

 

-

 

 

$ 0.06

 

 

9/23/2020

 

___________

(1) On September 23, 2013, Mr. Beifuss was granted nonqualified stock options to purchase 1,200,000 shares of our common stock at an exercise price of $0.06 per share exercisable until September 23, 2020 in consideration for his services to us. These stock options vest 1/25th per month, commencing on October 23, 2013, on a monthly basis for as long as Mr. Beifuss is an employee or consultant of Digital Locations.

 

 

(2) On September 23, 2013, Mr. Elton was granted nonqualified stock options to purchase 200,000 shares of our common stock at an exercise price of $0.06 per share exercisable until September 23, 2020 in consideration for his services to us. These stock options vest 1/25th per month, commencing on October 23, 2013, on a monthly basis for as long as Mr. Elton is an employee or consultant of Digital Locations.

 

Option Exercises and Stock Vested

 

None of our executive officers exercised any stock options or acquired stock through vesting of an equity award during the fiscal year ended December 31, 2018.

 

Director Compensation

 

Non-employee directors may receive compensation for their services and reimbursement for their expenses as shall be determined from time to time by resolution of the Board.

 

No director compensation was paid to our non-employee directors during the fiscal year ended December 31, 2018. Our employee directors currently do not receive cash compensation for their service on the Board of Directors.

 

 
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Stock Option and Other Long-Term Incentive Plan

 

On November 2, 2011, our Board of Directors adopted the 2011 Equity Incentive Plan, or the 2011 Plan. Under the 2011 Plan, options may be granted which are intended to qualify as Incentive Stock Options under Section 422 of the Internal Revenue Code of 1986, as amended, or the Code, or which are not intended to qualify as Incentive Stock Options thereunder. In addition, direct grants of stock or restricted stock may be awarded. There are 2,000,000 shares of common stock reserved for issuance under the 2011 Plan. A summary of the terms and provisions of the 2011 Plan are described below.

 

The primary purpose of the 2011 Plan is to attract and retain the best available personnel in order to promote the success of our business and to facilitate the ownership of our stock by employees and others who provide services to us. Under the 2011 Plan, options may be granted to employees, officers, directors or consultants of ours. The term of each option granted under the 2011 Plan will be contained in a stock option agreement between the optionee and us and such terms shall be determined by a committee of the Board of Directors consistent with the provisions of the 2011 Plan, including the following:

 

 

· The purchase price of the common stock subject to each incentive stock option will not be less than the fair market value (as set forth in the 2011 Plan), or in the case of the grant of an incentive stock option to a principal stockholder, not less than 110% of fair market value of such common stock at the time such option is granted.

 

 

 

 

· The dates on which each option (or portion thereof) will be exercisable and the conditions precedent to such exercise, if any, shall be fixed by the committee delegated by the Board of Directors, in its discretion, at the time such option is granted. Unless otherwise provided in the grant agreement, in the event of a change of control (as set forth in the Incentive Stock Plan), the committee delegated by the Board may accelerate the vesting and exercisability of outstanding options all unvested shares shall immediately become vested;

 

 

 

 

· Any option granted to an employee of ours will become exercisable over a period of no longer than five years. No option will in any event be exercisable after ten years from, and no Incentive Stock Option granted to a ten percent stockholder will become exercisable after the expiration of five years from, the date of the option;

 

 

 

 

· No option will be transferable, except by will or the laws of descent and distribution, and any option may be exercised during the lifetime of the optionee only by such optionee. No option granted under the 2011 Plan will be subject to execution, attachment or other process;

 

 

 

 

· In the event of any change in our outstanding common stock by reason of a stock split, stock dividend, combination or reclassification of shares, recapitalization, merger, or similar event, the Board of Directors or the committee delegated by the Board may adjust proportionally (a) the number of shares of common stock (i) reserved under the 2011 Plan, (ii) available for Incentive Stock Options and Non-statutory Options and (iii) covered by outstanding stock awards or restricted stock purchase offers; (b) the exercise prices related to outstanding grants so that each optionee’s proportionate interest is maintained as immediately before such event; and (c) the appropriate fair market value and other price determinations for such grants. In the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the Board of Directors or the committee delegated by the Board of Directors will be authorized to issue or assume stock options, whether or not in a transaction to which Section 424(a) of the Code, applies, and other grants by means of substitution of new grant agreements for previously issued grants or an assumption of previously issued grants.

  

 
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The Board of Directors may, insofar as permitted by law, from time to time, suspend or terminate the 2011 Plan or revise or amend it in any respect whatsoever, except that without the approval of our stockholders, no such revision or amendment will (i) increase the number of shares subject to the 2011 Plan, (ii) reduce the exercise price of outstanding options or effect repricing through cancellations and re-grants of new options, (iii) materially increase the benefits to participants, (iv) materially change the class of persons eligible to receive grants under the 2011 Plan; (v) decrease the exercise price of any grant to below 100% of the fair market value on the date of grant; or (vi) extend the term of any options beyond that provided in the 2011 Plan; provided, however, no such action will alter or impair the rights and obligations under any option, or stock award, or restricted stock purchase offer outstanding as of the date thereof without the written consent of the participant thereunder. As of the date of this report, 8,750 stock options are currently outstanding under our 2011 Plan.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth, as of March 25, 2019, the number of and percent of our common stock beneficially owned by:

 

 

· each of our directors;

 

 

 

 

· each of our named executive officers;

 

Unless otherwise specified, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them. The address for our executive officers and directors is the same as our address.

 

A person is deemed to be the beneficial owner of securities that can be acquired by him within 60 days of March 25, 2019 upon the exercise of options, warrants or convertible securities. Each beneficial owner's percentage ownership is determined by assuming that options, warrants or convertible securities that are held by him, but not those held by any other person, and which are exercisable within 60 days of March 25, 2019 have been exercised and converted. The address for each of the below is c/o Digital Locations, Inc., 3700 State Street, Suite 350, Santa Barbara, California 93105.

 

 

 

Common Stock

 

Name of Beneficial Owner

 

Number of

Shares Owned

 

 

Percent Owned (1)

 

 

 

 

 

 

 

 

William E. Beifuss, Jr., President, Acting Chief Executive Officer, Acting Chief Financial Officer, Secretary and Chairman of the Board of Directors (2)

 

 

1,295,538

 

 

 

2.95 %

 

 

 

 

 

 

 

 

 

Byron Elton, Director (3)

 

 

262,500

 

 

*

 

 

 

 

 

 

 

 

 

 

Rick Ellis, Chief Executive Officer of EllisLab Corp. and Director

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

All Executive Officers and Directors as a Group (3 persons)

 

 

1,558,038

 

 

 

3.88 %

______________

*

Indicates beneficial ownership of less than 1%.

 

(1)

Based upon 42,726,200 common shares issued and outstanding as of March 25, 2019.

 

 

(2)

Includes 1,200,000 shares subject to stock options that are currently exercisable or exercisable within 60 days of March 25, 2019.

 

 

(3)

Includes 200,000 shares subject to stock options that are currently exercisable or exercisable within 60 days of March 25, 2019.

 

 
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

Certain Relationships and Related Transactions

 

Pursuant to a written consulting agreement, dated May 31, 2013 and amended effective November 1, 2016, William E. Beifuss, Jr., our current President, Acting Chief Executive Officer and Acting Chief Financial Officer, received $120,000 in fees for each of the years ended December 31, 2018 and 2017.

 

Effective December 1, 2018, Rick Ellis, Chief Executive Officer of EllisLab Corp., receives a monthly salary of $10,000.

 

On June 4, 2013, we entered into a convertible note with a former member of our Board of Directors in exchange for services valued at $25,000. The note was to mature on June 4, 2016. We entered into an agreement to repay this note in 12 equal monthly payments of principal and interest of $2,352, beginning in June 2016. The note was paid in full as of December 31, 2017.

 

On June 4, 2013, Daniel Nethercott, a former director who resigned effective January 3, 2015, was issued a convertible promissory note in the amount of $25,000 in exchange for services. The original maturity date of the note was June 4, 2016 and the note bore interest at a rate of 5% per annum. Mr. Nethercott had the right, at his election, to convert all or part of the outstanding and unpaid principal and accrued interest into shares of our common stock. The conversion price was the lesser of $0.035 per share or the closing price per share of our common stock on the trading day immediately preceding the date of conversion. We extended the maturity date of the note by entering into an agreement to repay the note with 12 equal monthly payments of principal and interest of $2,352 beginning in June 2016. The note was paid in full as of December 31, 2017.

 

On September 4, 2017, the Board of Directors of the Company authorized (a) the execution and recording with the Nevada Secretary of State of a Certificate of Designation (the “Series A Certificate”) for its newly designated Series A Preferred Stock, authorizing up to 1,000 shares of it, and (b) the issuance of 1,000 shares of Series A Preferred Stock to the Company’s President and Director, William E. Beifuss, Jr., which shares were issued and outstanding at December 31, 2017. The shares of Series A Preferred Stock have a par value of $0.001 per share. The shares of Series A Preferred Stock do not have a dividend right or rate, or liquidation preference, and are not convertible into shares of common stock.

 

For so long as any shares of the Series A Preferred Stock remain issued and outstanding, the holders thereof, voting separately as a class, shall have the right, on or after September 7, 2017, to vote in an amount equal to 51% of the total vote (representing a super majority voting power) with respect to any proposal relating to (a) any amendment to the Company’s Articles of Incorporation changing the name of the Company, (b) increasing the authorized share capital of the Company, and (c) effecting any reverse stock split of the Company’s issued and outstanding shares of capital stock. Such vote shall be determined by the holder(s) of a majority of the then issued and outstanding shares of Series A Preferred Stock.

 

The 1,000 shares of the Series A Preferred Stock issued to Mr. Beifuss were automatically redeemed by the Company at their par value in January 2018, 120 days after the effective date of the Series A Certificate.

 

On November 30, 2018, the Company consummated the Merger, whereby EllisLab, Inc. merged with and into EllisLab Corp. and continued as a wholly-owned subsidiary of the Company. Pursuant to the terms of the Merger, Rick Ellis received 36,000 shares of the Company’s newly designated Series C Convertible Preferred, with a stated value of $100 per share, and each share convertible into 20,000 shares of the Company’s common stock. Rick Elllis is a Director of the Company and the President and Chief Executive Officer of EllisLab Corp, the Company’s wholly-owned subsidiary following the consummation of the Merger.

 

During the past three fiscal years, there have been no transactions other than those described above, and there are no currently proposed transactions in which the Company is a participant in which any related person has or will have a direct or indirect material interest which exceeds the lesser of $120,000 or one percent of the Company’s total assets at year-end for the last two completed fiscal years.

 

 
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Director Independence

 

We currently have no independent directors as that term is defined by the listing standards of The Nasdaq Capital Market.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

 

Audit Fees

 

The aggregate fees billable to us by M&K CPAS, PLLC in the year ended December 31, 2018 for the audit and reviews of our 2018 financial statements total approximately $20,000.

 

The aggregate fees billable to us by Liggett & Webb P.A. in the years ended December 31, 2018 and 2017 for the audit and reviews of our 2018 and 2017 financial statements total approximately $43,500 and $42,000, respectively.

 

Audit-Related Fees

 

We incurred no audit-related fees during the years ended December 31, 2018 and 2017 to M&K CPAS, PLLC or to Liggett & Webb, P.A.

 

Tax Fees

 

We incurred fees of $1,750 to Liggett & Webb, P. A. for tax compliance services for the year ended December 31, 2017.

 

All Other Fees

 

There were no fees billed to us by to M&K CPAS, PLLC for services other than the services described above under “Audit Fees,” “Audit-Related Fees” during the year ended December 31, 2018.

 

There were no fees billed to us by Liggett & Webb, P.A. for services other than the services described above under “Audit Fees,” “Audit-Related Fees” and “Tax Fees” during the years ended December 31, 2018 and 2017.

 

Pre-Approval Policies and Procedures of Audit and Non-Audit Services of Independent Registered Public Accounting Firm

 

The audit committee’s policy is to pre-approve, typically at the beginning of our fiscal year, all audit and non-audit services, other than de minimis non-audit services, to be provided by an independent registered public accounting firm. These services may include, among others, audit services, audit-related services, tax services and other services and such services are generally subject to a specific budget. The independent registered public accounting firm and management are required to periodically report to the full Board of Directors regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval, and the fees for the services performed to date. As part of the Board’s review, the Board will evaluate other known potential engagements of the independent auditor, including the scope of work proposed to be performed and the proposed fees, and approve or reject each service, taking into account whether the services are permissible under applicable law and the possible impact of each non-audit service on the independent auditor’s independence from management. At audit committee meetings throughout the year, the auditor and management may present subsequent services for approval. Typically, these would be services such as due diligence for an acquisition, that would not have been known at the beginning of the year.

 

The audit committee has considered the provision of non-audit services provided by our independent registered public accounting firm to be compatible with maintaining their independence. The audit committee will continue to approve all audit and permissible non-audit services provided by our independent registered public accounting firm.

 

As of the date of this filing, our current policy is to not engage M&K CPAS, PLLC to provide, among other things, bookkeeping services, appraisal or valuation services, or international audit services. The policy provides that we engage M&K CPAS, PLLC to provide audit and other assurance services, such as review of SEC reports or filings.

 

 
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ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES.

 

EXHIBIT INDEX

 

2.1

 

Agreement and Plan of Merger, dated as of November 30, 2018, by and among Digital Locations, Inc., EllisLab, Inc., Rick Ellis and EllisLab Corp. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on December 3, 2018

 

 

3.1

 

Articles of Incorporation of Carbon Sciences, Inc. filed with the Nevada Secretary of State on August 25, 2007 (Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on July 27, 2007).

 

 

 

3.2

 

Articles of Amendment of Articles of Incorporation of Carbon Sciences, Inc. filed with the Nevada Secretary of State on April 9, 2007 (Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on July 27, 2007).

 

 

 

3.3

 

Certificate of Amendment to Articles of Incorporation, filed with the Nevada Secretary of State on May 9, 2011 (Incorporated by reference to the Company’s Current Report on Form 8-K filed on May 16, 2011).

 

 

 

3.4

 

Certificate of Amendment to Articles of Incorporation, filed with the Nevada Secretary of State on August 1, 2011 (Incorporated by reference to the Company’s Current Report on Form 8-K filed on August 4, 2011).

 

 

3.5

 

Certificate of Amendment to Articles of Incorporation, filed with the Nevada Secretary of State on August 26, 2013 (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on November 13, 2017).

 

 

3.6

 

Series A Preferred Stock Certificate of Designation of Carbon Sciences, Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 17, 2016).

 

 

 

3.7

 

Series B Preferred Stock Certificate of Designation of Carbon Sciences, Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on March 4, 2016).

 

 

3.8

 

Certificate of Correction, filed with the Nevada Secretary of State on April 1, 2016 (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on May 16, 2016)

 

 

 

3.9

 

Certificate of Change, filed with the Nevada Secretary of State on April 14, 2016 (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on May 16, 2016).

 

 

 

3.10

 

Certificate of Amendment to Articles of Incorporation, filed with the Nevada Secretary of State on June 15, 2016 (Incorporated by reference to the Company’s Annual Report on Form 10-K filed on March 21, 2017)

 

 

3.11

 

Withdrawal of Series A Certificate of Designation of Carbon Sciences, Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on September 7, 2017).

 

 

3.12

 

Series A Certificate of Designation of Carbon Sciences, Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on September 7, 2017).

 

 

3.13

 

Certificate of Amendment to Articles of Incorporation, filed with the Nevada Secretary of State on November 16, 2017 (Incorporated by reference to the Company’s Current Report on Form 8-K filed on November 24, 2017)

 

 

 

3.14

 

Bylaws of Carbon Sciences, Inc. (Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on July 27, 2007).

 

 

 

3.15

 

Certificate of Designation of Series C Convertible Preferred Stock of Digital Locations, Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on December 3, 2018)

 

 

4.1

 

Form of Warrant issued in connection with Stock Purchase Agreement entered into between the Company and the Purchasers, signatory thereto. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)

 

 

 

10.1***

 

Stock Option Agreement between Carbon Sciences, Inc. and Byron Elton. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)

 

 

 

10.2**

 

Carbon Sciences, Inc. 2011 Equity Incentive Plan. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)

 

 

 

10.3

 

Consulting Agreement between Carbon Sciences, Inc. and William E. Beifuss, Jr., dated May 31, 2013. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed on March 31, 2014)

 

 

10.4

 

Shareholders’ Agreement for Transhpene, Inc., dated January 5, 2015. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on January 8, 2015)

 

 

10.5

 

Consulting Agreement between Carbon Sciences, Inc. and Big Star Capital 1, dated April 1, 2017. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on May 12, 2017)

 

 

10.6

 

Term Sheet with Glanz, Inc. dba Corner Media, a Delaware corporation. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on September 8, 2017)

 

 

10.7***

 

Stock Option Agreement between Carbon Sciences, Inc. and Byron Elton, dated September 23, 2013. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on November 13, 2017)

 

 
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10.8***

 

Stock Option Agreement between Carbon Sciences, Inc. and William Beifuss, Jr., dated September 23, 2013. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on November 13, 2017)

 

 

10.9

 

Form of Promissory Note. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on December 19, 2017)

 

 

10.10

 

Nonstatutory Stock Option Agreement, dated as of November 30, 2018, between Digital Locations, Inc. and Derek Jones (Incorporated by reference to the Company’s Current Report on Form 8-K filed on December 3, 2018)

 

 

10.11*

 

Convertible Promissory Note, dated November 23, 2018, between Digital Locations, Inc. and Power Up Lending Group Ltd.

 

 

10.12*

 

Convertible Promissory Note, dated December 5, 2018, between Digital Locations, Inc. and Power Up Lending Group Ltd.

 

 

14.1

 

Code of Ethics (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on March 26, 2008).

 

 

 

16.1

 

Letter from Liggett & Webb, P.A. dated December 20, 2018 (Incorporated by reference to the Company’s Report on Form 8-K filed on December 20, 2018)

 

 

 

21.1*

 

Subsidiaries

 

 

31.1*

 

Certification by Acting Chief Executive Officer and Acting Chief Financial Officer pursuant to Sarbanes-Oxley Section 302

 

 

32.1*

 

Certification by Acting Chief Executive Officer and Acting Chief Financial Officer pursuant to 18 U.S.C. Section 1350

 

 

EX-101.INS

 

XBRL INSTANCE DOCUMENT

 

 

 

EX-101.SCH

 

XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT

 

 

 

EX-101.CAL

 

XBRL TAXONOMY EXTENSION CALCULATION LINKBASE

 

 

 

EX-101.DEF

 

XBRL TAXONOMY EXTENSION DEFINITION LINKBASE

 

 

 

EX-101.LAB

 

XBRL TAXONOMY EXTENSION LABELS LINKBASE

 

 

 

EX-101.PRE

 

XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

*Filed herewith

**Management incentive plan

***Management contract

 

ITEM 16. FORM 10-K SUMMARY

 

None.

 

 
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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

Digital Locations, Inc.

 

 

 

 

 

 

 

 

Date: April 1, 2019

 

 

By:

/s/ William E. Beifuss, Jr.

 

 

William E. Beifuss, Jr.

 

 

 

 

ACTING CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER)

 

 

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

 

SIGNATURE

 

TITLE

 

DATE

 

/s/ William E. Beifuss, Jr.

 

CHAIRMAN OF THE BOARD OF DIRECTORS, PRESIDENT, AND ACTING CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER)

 

April 1, 2019

William E. Beifuss, Jr. 

 

 

 

 

 

 

 

 

 

/s/ Byron Elton

 

DIRECTOR

 

April 1, 2019

Byron Elton

 

 

 

 

 

/s/ Rick Ellis

 

DIRECTOR

 

April 1, 2019

Rick Ellis

 

 

 

 

 

 
38
 
Table of Contents

 

DIGITAL LOCATIONS, INC. AND SUBSIDIARY

  

Index to Consolidated Financial Statements

 

Report of Independent Registered Public Accounting Firm - M&K CPAS, PLLC

 

F-2

 

 

 

 

Report of Independent Registered Public Accounting Firm - Liggett & Webb, P.A.

 

F-3

 

 

 

 

Consolidated Balance Sheets

 

F-4

 

 

 

 

 

Consolidated Statements of Operations

 

F-5

 

 

 

 

 

Consolidated Statements of Stockholders’ Deficit

 

F-6

 

 

 

 

 

Consolidated Statements of Cash Flows

 

F-8

 

 

 

 

 

Notes to Consolidated Financial Statements

 

F-9

 

 

 
F-1
 
Table of Contents

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Digital Locations, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Digital Locations, Inc. (the Company) as of December 31, 2018, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the period ended December 31, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. The financial statements of Digital Locations, Inc., as of December 31, 2017 were audited by other auditors, whose report dated March 30, 2018 expressed an unqualified opinion on those statements.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company currently has ongoing operating losses, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ M&K CPAS, PLLC

 

We have served as the Company’s auditor since 2018.

 

Houston, TX

 

April 1, 2019

 

 
F-2
 
Table of Contents

 

  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

   

To the Board of Directors and Shareholders of

Digital Locations, Inc. (formerly Carbon Sciences, Inc.)

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheet of Digital Locations, Inc.  (the "Company") as of December 31, 2017, the related statements of operations, shareholders’ deficit, and cash flows for the year then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The Company’s Ability to Continue as a Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the financial statements, the Company does not generate revenue and has negative cash flows from operations.  This raises substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 1.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion in accordance with the standards of the PCAOB.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. 

 

       
/s/ Liggett & Webb, P.A.

 

We have served as the Company’s auditor since 2015.

 

New York, NY

March 30, 2018

  

 
F-3
 
 

   

DIGITAL LOCATIONS, INC. AND SUBSIDIARY

Consolidated Balance Sheets

 

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$ 56,414

 

 

$ 23,461

 

Accounts receivable

 

 

3,434

 

 

 

-

 

Prepaid expenses

 

 

5,635

 

 

 

1,998

 

Total current assets

 

 

65,483

 

 

 

25,459

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

5,193

 

 

 

2,464

 

Intangible assets, net

 

 

122,917

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Total assets

 

$ 193,593

 

 

$ 27,923

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$ 191,312

 

 

$ 112,768

 

Accrued expenses and other current liabilities

 

 

19,132

 

 

 

2,011

 

Accrued interest, notes payable

 

 

342,752

 

 

 

155,070

 

Deferred revenue

 

 

25,718

 

 

 

-

 

Derivative liabilities

 

 

10,363,105

 

 

 

8,072,904

 

Convertible note payable

 

 

29,500

 

 

 

29,500

 

Convertible notes payable - related parties

 

 

 58,600

 

 

 

 58,600

 

Convertible notes payable, net of discount of $341,206 and $423,219, respectively

 

 

1,836,964

 

 

 

1,058,780

 

Total current liabilities

 

 

12,867,083

 

 

 

9,489,633

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 20,000,000 shares authorized:

 

 

 

 

 

 

 

 

Series A, 0 and 1,000 shares issued and outstanding at December 31, 2018 and 2017, respectively

 

 

-

 

 

 

1

 

Series B, 16,155 shares issued and outstanding at December 31, 2018 and 2017, respectively

 

 

16

 

 

 

16

 

Series C, 36,000 and 0 shares issued and outstanding at December 31, 2018 and 2017, respectively

 

 

36

 

 

 

-

 

Common stock, $0.001 par value; 2,000,000,000 shares authorized,

40,750,040 and 38,776,436 shares issued and outstanding, respectively

 

 

40,750

 

 

 

38,776

 

Additional paid-in capital

 

 

25,492,975

 

 

 

20,537,950

 

Accumulated deficit

 

 

(38,207,267 )

 

 

(30,038,453 )

Total stockholders’ deficit

 

 

(12,673,490 )

 

 

(9,461,710 )

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ deficit

 

$ 193,593

 

 

$ 27,923

 

 

See notes to consolidated financial statements

 

 
F-4
 
Table of Contents

 

DIGITAL LOCATIONS, INC. AND SUBSIDIARY

Consolidated Statements of Operations

 

 

 

Years Ended December 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

Services income

 

$ 21,451

 

 

$ -

 

Software sales

 

 

2,325

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

23,776

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

General and administrative

 

 

867,623

 

 

 

799,589

 

Depreciation and amortization

 

 

3,625

 

 

 

675

 

Impairment expense

 

 

4,934,429

 

 

 

-

 

Research and development

 

 

-

 

 

 

65,009

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

5,805,677

 

 

 

865,273

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(5,781,901 )

 

 

(865,273 )

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense

 

 

(969,130 )

 

 

(902,748 )

Loss on change in derivative liabilities

 

 

(1,417,783 )

 

 

(638,432 )

Other income

 

 

-

 

 

 

6,356

 

Gain on settlement of debt

 

 

-

 

 

 

11,643

 

 

 

 

 

 

 

 

 

 

Total other income (expense)

 

 

(2,386,913 )

 

 

(1,523,181 )

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(8,168,814 )

 

 

(2,388,454 )

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Net loss

 

$ (8,168,814 )

 

$ (2,388,454 )

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$ (0.21 )

 

$ (0.06 )

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding, basic and diluted

 

 

38,962,364

 

 

 

36,822,968

 

 

See notes to consolidated financial statements

 

 
F-5
 
Table of Contents

  

DIGITAL LOCATIONS, INC. AND SUBSIDIARY

Consolidated Statements of Stockholders’ Deficit

For the Years Ended December 31, 2018 and 2017

 

 

 

Series A  Preferred Stock

 

 

Series B  Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-in

 

 

 

Accumulated

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

Capital

 

 

 

Deficit

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

 

-

 

 

$ -

 

 

 

16,155

 

 

$ 16

 

 

 

35,178,624

 

 

$ 35,179

 

 

$ 20,400,413

 

 

$ (27,649,999 )

 

$ (7,214,391 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for conversion of notes payable and accrued interest payable

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,597,812

 

 

 

3,597

 

 

 

137,537

 

 

 

-

 

 

 

141,134

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Series A preferred shares for services

 

 

1,000

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,388,454 )

 

 

(2,388,454 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

1,000

 

 

$ 1

 

 

 

16,155

 

 

$ 16

 

 

 

38,776,436

 

 

$ 38,776

 

 

$ 20,537,950

 

 

$ (30,038,453 )

 

$ (9,461,710 )

 

See notes to consolidated financial statements

 

 
F-6
 
Table of Contents

  

DIGITAL LOCATIONS, INC. AND SUBSIDIARY

Consolidated Statements of Stockholders’ Deficit (continued)

For the Years Ended December 31, 2018 and 2017

  

 

 

Series A  Preferred Stock

 

 

Series B  Preferred Stock

 

 

Series C

 Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

 Deficit

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

1,000

 

 

$ 1

 

 

 

16,155

 

 

$ 16

 

 

 

-

 

 

$ -

 

 

 

38,776,436

 

 

$ 38,776

 

 

$ 20,537,950

 

 

$ (30,038,453 )

 

$ (9,461,710 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeem Series A preferred shares

 

 

(1,000 )

 

 

(1 )

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for conversion of notes payable and accrued interest payable

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,973,604

 

 

 

1,974

 

 

 

9,196

 

 

 

-

 

 

 

11,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Series C preferred shares in Merger

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

36,000

 

 

 

36

 

 

 

-

 

 

 

-

 

 

 

4,345,830

 

 

 

-

 

 

 

4,345,866

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock options in  Merger

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

599,998

 

 

 

-

 

 

 

599,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(8,168,814 )

 

 

(8,168,814 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

-

 

 

$ -

 

 

 

16,155

 

 

$ 16

 

 

 

36,000

 

 

$ 36

 

 

 

40,750,040

 

 

$ 40,750

 

 

$ 25,492,975

 

 

$ (38,207,267 )

 

$ (12,673,490 )

 

See notes to consolidated financial statements

 

 
F-7
 
Table of Contents

  

DIGITAL LOCATIONS, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

 

 

 

Years Ended December 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$ (8,168,814 )

 

$ (2,388,454 )

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,625

 

 

 

675

 

Impairment expense

 

 

4,934,429

 

 

 

-

 

Stock-based compensation expense

 

 

188,127

 

 

 

-

 

Amortization of debt discount recorded to interest expense

 

 

780,514

 

 

 

790,761

 

Loss on change in derivative liabilities

 

 

1,417,783

 

 

 

638,432

 

(Gain) loss on settlement of debt

 

 

-

 

 

 

(11,643 )

Stock compensation cost

 

 

-

 

 

 

1

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

18,801

 

 

 

-

 

Prepaid expenses

 

 

(3,637 )

 

 

(93 )

Accounts payable

 

 

3,864

 

 

 

4,387

 

Accrued expenses

 

 

191,258

 

 

 

106,823

 

Deferred revenue

 

 

(1,319 )

 

 

-

 

Net cash used in operating activities

 

 

(635,369 )

 

 

(859,111 )

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Cash advanced in advance of Merger

 

 

(24,178 )

 

 

-

 

Purchase of property and equipment

 

 

-

 

 

 

(1,945 )

Net cash used in investing activities

 

 

(24,178 )

 

 

(1,945 )

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from convertible notes payable

 

 

692,500

 

 

 

855,000

 

Repayment of convertible notes payable

 

 

-

 

 

 

(10,417 )

Net cash provided by financing activities

 

 

692,500

 

 

 

844,583

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

32,953

 

 

 

(16,473 )

Cash, beginning of the year

 

 

23,461

 

 

 

39,934

 

 

 

 

 

 

 

 

 

 

Cash, end of the year

 

$ 56,414

 

 

$ 23,461

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$ -

 

 

$ -

 

Cash paid for interest

 

 

304

 

 

 

1,328

 

 

 

 

 

 

 

 

 

 

Non-cash financing and investing activities:

 

 

 

 

 

 

 

 

Redemption of Series A preferred stock

 

$ 1

 

 

$ -

 

Debt discount for derivative liabilities

 

 

692,500

 

 

 

855,000

 

Common shares issued in conversion of debt

 

 

11,170

 

 

 

141,134

 

Series C preferred shares and options issued in merger

 

 

4,345,866

 

 

 

-

 

 

See notes to consolidated financial statements

 

 
F-8
 
Table of Contents

 

DIGITAL LOCATIONS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Years Ended December 31, 2018 and 2017

 

1. ORGANIZATION AND LINE OF BUSINESS

 

Organizational History

 

Digital Locations, Inc. (the “Company”) was incorporated in the State of Nevada on August 25, 2006 as Zingerang, Inc. On April 2, 2007, the Company changed its name to Carbon Sciences, Inc. and on September 14, 2017, the Company changed its name to Digital Locations, Inc.

 

As further discussed in Note 3, on November 30, 2018, the Company entered into an Agreement and Plan of Merger ( the “Merger”) pursuant to which EllisLab, Inc., an S Corporation owned 100% by Rick Ellis that builds software for web professionals and provides related support services, merged with and into EllisLab Corp., a newly-formed subsidiary of the Company.

 

Going Concern

 

The accompanying financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. As of December 31, 2018, our current liabilities exceeded our current assets by $12,801,600 and we had a total stockholders’ deficit of $12,673,490. In addition, prior to the Merger in November 2018, the Company did not generate any revenue, and has reported negative cash flows from operations since inception. The Company currently does not have the cash resources to meet its operating commitments for the next twelve months, expects to have ongoing requirements for capital investment to implement its business plan, These factors, among others, raise substantial doubt that the Company will be able to continue as a going concern for a reasonable period of time.

 

The ability of the Company to continue as a going concern is dependent upon, among other things, raising additional capital. The Company has obtained operating funds primarily from the issuance of convertible debt and management believes this funding will continue and will provide the additional cash needed to meet the Company’s obligations as they become due and will allow the development of the recently acquired EllisLab business. There can be no assurance, however, that the Company will be successful in accomplishing its objectives. Without such additional capital we may be required to cease operations. The accompanying financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

This summary of significant accounting policies is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include the estimate of useful lives of property and equipment and intangible assets, impairment of assets, the deferred tax valuation allowance, the fair value of stock options and derivative liabilities. Actual results could differ from those estimates.

 

Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and, effective December 1, 2018, the accounts of EllisLab Corp., its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

 
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Cash and Cash Equivalents

 

For purposes of the Statement of Cash Flows, the Company considers liquid investments with an original maturity of three months or less to be cash equivalents. The Company places its cash and cash equivalents with large commercial banks. The Federal Deposit Insurance Corporation (“FDIC”) insures these balances, up to $250,000. All of the Company’s cash balances at December 31, 2018 and December 31, 2017 were insured. At December 31, 2018 and 2017, there were no cash equivalents.

 

Prepaid Expenses

 

Insurance premiums paid in advance of the policy coverage period are recorded as prepaid expenses and expensed over the policy coverage period. Domain name registration costs are also recorded as prepaid expenses and amortized over their contract lives.

 

Property and Equipment

 

The Company’s property and equipment is stated at cost, and is depreciated using the straight-line method over the estimated useful life of the related asset as follows:

 

Computer equipment

3-5 years

Office furniture and equipment

7 years

 

Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments will be capitalized. At the time of retirement or other disposition of equipment, the cost and accumulated depreciation will be removed from the accounts and the resulting gain or loss, if any, will be reflected in operations.

 

The Company assesses the recoverability of property and equipment by determining whether the depreciation and amortization of these assets over their remaining life can be recovered through projected undiscounted future cash flows. The amount of equipment impairment, if any, will be measured based on fair value and is charged to operations in the period in which such impairment is determined by management.

 

Intangible Assets

 

Intangible assets consist primarily of intellectual property, customer base, trade-names/marks and non-compete agreements acquired in the Merger, which are amortized on a straight-line basis over their estimated useful lives of 5 years. Intangible assets are reviewed for impairment annually, or more frequently whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable.

 

The excess of the cost over the fair value of net assets of acquired in the Merger is recorded as goodwill. Goodwill is not subject to amortization, but is reviewed for impairment annually, or more frequently whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. An impairment charge would be recorded to the extent the carrying value of goodwill exceeds its estimated fair value. The testing of goodwill under established guidelines for impairment requires significant use of judgment and assumptions. Changes in forecasted operations and other assumptions could materially affect the estimated fair values. Changes in business conditions could potentially require adjustments to these asset valuations. At December 31, 2018, the Company reviewed the goodwill recorded in the Merger and determined that an impairment expense of $4,934,429 was required.

 

Derivative Liabilities

 

We have identified the conversion features of our convertible notes payable and Series B preferred stock and certain stock options as derivatives. Where the number of warrants or common shares to be issued under these agreements is indeterminate, the Company has concluded that the equity environment is tainted, and all additional warrants and convertible debt and equity are included in the value of the derivatives. We estimate the fair value of the derivatives using the Black-Scholes pricing model and a multinomial lattice model based on projections of various potential future outcomes. We estimate the fair value of the derivative liabilities at the inception of the financial instruments, at the date of conversions to equity and at each reporting date, recording a derivative liability, debt discount, additional paid-in capital and a gain or loss on change in derivative liabilities as applicable. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price volatility, variable conversion prices based on market prices as defined in the respective agreements and probabilities of certain outcomes based on management projections. These inputs are subject to significant changes from period to period and to management's judgment; therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material.

 

 
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Fair Value of Financial Instruments

 

Disclosures about fair value of financial instruments require disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of December 31, 2018 and 2017, we believe the amounts reported for cash, accounts receivable, prepaid expenses, accounts payable, accrued interest, accrued expenses and other current liabilities, and convertible note payable approximate fair value because of their short maturities.

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

 

 

· Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;

 

 

 

 

· Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and

 

 

 

 

· Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

We measure certain financial instruments at fair value on a recurring basis. Liabilities measured at fair value on a recurring basis are as follows at December 31, 2018 and 2017:

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$ 10,363,105

 

 

$ -

 

 

$ -

 

 

$ 10,363,105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities measured at fair value

 

$ 10,363,105

 

 

$ -

 

 

$ -

 

 

$ 10,363,105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$ 8,072,904

 

 

$ -

 

 

$ -

 

 

$ 8,072,904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities measured at fair value

 

$ 8,072,904

 

 

$ -

 

 

$ -

 

 

$ 8,072,904

 

 

During the years ended December 31, 2018 and 2017, the Company had the following activity in its derivative liabilities account:

 

 

 

Convertible

 

 

Series B

 

 

Stock

 

 

 

 

 

 

Notes Payable

 

 

Preferred Stock

 

 

Options

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities at December 31, 2016

 

$ 3,335,906

 

 

$ 3,354,791

 

 

$ -

 

 

$ 6,690,697

 

Addition to liability for new issuances

 

 

855,000

 

 

 

-

 

 

 

-

 

 

 

855,000

 

Elimination of liability on conversion to common shares

 

 

(111,225 )

 

 

-

 

 

 

-

 

 

 

(111,225 )

Change in fair value

 

 

1,162,081

 

 

 

(523,649 )

 

 

-

 

 

 

638,432

 

Derivative liabilities at December 31, 2017

 

 

5,241,762

 

 

 

2,831,142

 

 

 

-

 

 

 

8,072,904

 

Addition to liability for new issuances

 

 

692,500

 

 

 

-

 

 

 

188,127

 

 

 

880,627

 

Elimination of liability on conversion to common shares

 

 

(8,209 )

 

 

-

 

 

 

-

 

 

 

(8,209 )

Change in fair value

 

 

1,883,001

 

 

 

(491,244 )

 

 

26,026

 

 

1,417,783

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities at December 31, 2018

 

$ 7,809,054

 

 

$ 2,339,898

 

 

$ 214,153

 

 

$ 10,363,105

 

 

 
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Revenue Recognition

 

On January 1, 2018, we adopted Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) Topic 605, “Revenue Recognition” (Topic 605). The Company had no operating revenues prior to the Merger. Effective December 1, 2018, the Company’s revenues are derived primarily from the sale of monthly and annual tech support subscriptions and partnership fees, and from software applications that customers purchase via the Company’s online store. Sales are processed using a real-time payment processing company. Revenue from product sales is recorded net of processing costs. Effective December 31, 2018, revenues are presented under Topic 606. The impact of adopting the new revenue standard was not material to our financial statements and there was no adjustment to beginning retained earnings on January 1, 2018.

 

Under Topic 606, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

 

We determine revenue recognition through the following steps:

 

 

·

identification of the contract, or contracts, with a customer;

 

·  

identification of the performance obligations in the contract;

 

·  

determination of the transaction price;

 

·

allocation of the transaction price to the performance obligations in the contract; and

 

·

recognition of revenue when, or as, we satisfy a performance obligation.

 

Amounts collected from customers for support subscriptions and partnership fees with a contract life of one month or greater are recorded as deferred revenue and recognized over the life of the contract.

 

Concentrations of Credit Risk and Major Customers

 

The Company’s customers are the end-consumers that purchase its products from the Company’s online store. Therefore, the Company does not have any individual customers that represent any more than a fraction of its revenue.

 

Income (Loss) per Share Calculations

 

Basic net income or loss per common share is computed by dividing net income or loss by the weighted average number of common shares outstanding. Diluted net income or loss per common share is computed by dividing net income or loss by the sum of the weighted average number of common shares outstanding and the dilutive potential common share equivalents then outstanding. Potential dilutive common share equivalents consist of shares issuable upon the exercise of outstanding stock options and warrants to acquire common stock using the treasury stock method and the average market price per share during the period and shares issuable upon exercise of convertible notes payable and convertible preferred stock.

 

Since we had no dilutive effect of stock options, warrants, convertible notes payable and convertible preferred stock for the years ended December 31, 2018 and 2017, our basic weighted average number of common shares outstanding is the same as our diluted weighted average number of common shares outstanding. For the year ended December 31, 2018, the Company has excluded 1,451,561,693 common shares for exercisable options, approximately 1,451,562,000 shares issuable upon conversion of convertible notes payable, approximately 367,000,000 common shares upon conversion of convertible Series B preferred stock and approximately 720,000,000 common shares upon conversion of convertible Series C preferred stock. For the year ended December 31, 2017, the Company has excluded 1,408,750 common shares for exercisable options, 6,000 common shares for exercisable warrants, approximately 502,772,000 shares issuable upon conversion of convertible notes payable and approximately 367,000,000 common shares upon conversion of convertible Series B preferred stock.

 

Income Taxes

 

We account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

 
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Research and Development

 

Research and development costs are expensed as incurred. Total research and development costs were $0 and $65,009 for the years ended December 31, 2018 and 2017, respectively.

 

Advertising Costs

 

We expense the cost of advertising and promotional materials when incurred. We incurred no material advertising costs for the years ended December 31, 2018 and 2017.

 

Stock-Based Compensation

 

Stock-based compensation is measured at the grant date based on the value of the award granted using either the Black-Scholes option pricing model or a multinomial lattice model based on projections of various potential future outcomes and recognized over the period in which the award vests. For stock awards no longer expected to vest, any previously recognized stock compensation expense is reversed in the period of termination. The stock-based compensation expense is included in general and administrative expenses.

 

Comprehensive Loss

 

Comprehensive loss is the same as net loss for all years presented.

 

Reclassifications

 

Certain amounts in the prior years have been reclassified to conform to the current year presentation.

 

Recently Issued Accounting Pronouncements

 

Although there are several new accounting pronouncements issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting pronouncements has had or will have a material impact on its financial position or results of operations.

 

NOTE 3 – MERGER

 

On November 30, 2018, the Company entered into an Agreement and Plan of Merger with the EllisLab, Inc., Rick Ellis (“Ellis”), and EllisLab Corp., a newly formed Nevada corporation and wholly owned subsidiary of the Company, pursuant to which EllisLab, Inc. merged with and into EllisLab Corp. (the “Merger”). Pursuant to the terms of the Merger, Ellis received 36,000 shares of the Company’s newly designated Series C Convertible Preferred, with a stated value of $100 per share, in exchange for the cancellation of all common shares of EllisLab, Inc. owned by Ellis, which shares represented 100% of the issued and outstanding capital stock of EllisLab, Inc. The separate legal existence of EllisLab, Inc. ceased, and EllisLab Corp. became the surviving company.

 

Pursuant to the Merger, Ellis has agreed to a covenant not to compete for a period of 2 years following the effective date of the Merger (the “Non-Competition Period”). Ellis further agreed that during the Non-Competition Period, he will not directly or indirectly solicit or agree to service for his benefit or the benefit of any third-party, any of the Company’s, Digital Locations, or EllisLab Corp. customers.

 

Pursuant to the Merger, during the period beginning on the effective date and ending on the 24 month anniversary thereof, Ellis will not directly or indirectly, (i) offer, sell, offer to sell, contract to sell, hedge, pledge, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or sell, or otherwise transfer or dispose of, any portion of the Series C preferred shares, or any shares of the Company’s common stock underlying the preferred, beneficially owned, within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934.

 

Each of the parties to the Plan of Merger has made customary representations and warranties in the Plan of Merger.

 

 
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On November 30, 2018, in connection with and pursuant to the Merger, the Company entered into a Nonstatutory Stock Option Agreement (the “Option Agreement”) with Derek Jones (“Jones”), whereby the Company issued to Jones an option to purchase 100,000,000 shares of the Common stock of the Company, at an exercise price of $0.005, in exchange for his surrender of an option to purchase 10% of the shares of outstanding common stock of EllisLab, Inc. The option is vested but may not be exercised for 2 years from the date of the Merger. The option contains a blocker that prevents Jones from exercising the Option if such exercise would result in beneficial ownership of more than 4.99% of the outstanding shares of the Company’s stock, without at least 61 days of prior notice. Under the Option, Jones is also subject to the Rule 144 restrictions of an affiliate.

 

The acquisition of EllisLab, Inc. in the Merger has been accounted for as a purchase, and the accounts of EllisLab Corp. are consolidated with those of the Company as of December 1, 2018. The Company engaged an independent valuation firm to estimate the value of the consideration paid by the Company in the Merger, consisting of the issuance of 36,000 shares of the Company’s $0.001 par value Series C Preferred Stock to Ellis, valued at $4,345,866, and 100,000,000 stock options to purchase common shares of the Company to Jones, valued at $599,998. Based on the report of the independent valuation firm, the total value of the consideration paid of $4,945,864 has been allocated as follows:

 

Cash

 

$ 35,822

 

Accounts receivable

 

 

22,235

 

Property and equipment, net

 

 

4,271

 

Accounts payable

 

 

(74,680 )

Accrued expenses

 

 

(14,176 )

Deferred revenue

 

 

(27,037 )

Loans payable

 

 

(60,000 )

Net liabilities

 

 

(113,565 )

Intangible assets:

 

 

 

 

Intellectual property

 

 

37,000

 

Customer base

 

 

79,000

 

Trade-name/marks

 

 

8,000

 

Non-compete agreements

 

 

1,000

 

Goodwill

 

 

4,934,429

 

 

 

 

 

 

Total

 

$ 4,945,864

 

 

At December 31, 2018, the Company reviewed the goodwill recorded in the Merger and determined that an impairment expense of $4,934,429 was required.

 

Unaudited pro forma summary results of operations for the years ended December 31, 2018 and 2017 as though the Merger had taken place on January 1, 2017 are as follows:

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

Revenues

 

$ 624,381

 

 

$ 701,981

 

Net loss

 

 

(3,308,857 )

 

 

(7,231,785 )

Net loss per share

 

 

(0.08 )

 

 

(0.20 )

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following at December 31:

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

Computer equipment

 

$ 49,605

 

 

$ 12,303

 

Office furniture and equipment

 

 

8,751

 

 

 

1,459

 

Total

 

 

58,356

 

 

 

13,762

 

Less accumulated depreciation

 

 

(53,163 )

 

 

(11,298 )

 

 

 

 

 

 

 

 

 

Net

 

$ 5,193

 

 

$ 2,464

 

 

Depreciation expense was $1,542 and $675 for the years ended December 31, 2018 and 2017, respectively.

 

 
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NOTE 5 – INTANGIBLE ASSETS

 

Intangible assets were acquired in the Merger and consisted of the following at December 31, 2018:

 

Intellectual property

 

$ 37,000

 

Customer base

 

 

79,000

 

Trade-name/marks

 

 

8,000

 

Non-compete agreements

 

 

1,000

 

Total

 

 

125,000

 

Less accumulated amortization

 

 

(2,083 )

 

 

 

 

 

Net

 

$ 122,917

 

 

Amortization expense was $2,083 and $0 for the years ended December 31, 2018 and 2017, respectively.

 

Future amortization of intangible assets as of December 31, 2018 is as follows:

 

Years ending December 31:

 

 

 

2019

 

$ 25,000

 

2020

 

 

25,000

 

2021

 

 

25,000

 

2022

 

 

25,000

 

2023

 

 

22,917

 

 

 

 

 

 

Total

 

$ 122,917

 

 

6. CONVERTIBLE NOTES PAYABLE

 

Convertible Promissory Notes - Related Parties of $58,600

 

On December 31, 2012, we entered into 5% convertible promissory notes with two employees in exchange for services rendered in the aggregate amount of $58,600. The notes are convertible into shares of our common stock at a conversion price equal to the lesser of $2.00 per share or the closing price per share of common stock recorded on the trading day immediately preceding the date of conversion. We recorded a total debt discount of $57,050 related to the conversion feature of the notes, which has been fully amortized to interest expense, along with a derivative liability at inception. One of the notes with a principal balance of $25,980 at December 31, 2018 matured on December 31, 2014 and is currently in default. The maturity date of a second note with a principal balance of $32,620 at December 31, 2018 has been extended to December 31, 2019.

 

Convertible Promissory Note – Accounts Payable of $29,500

 

On March 14, 2013, we entered into a 5% convertible promissory note in the principal amount of $29,500, which is convertible into shares of our common stock at a conversion price equal to the lesser of $1.50 per share or the closing price per share of common stock recorded on the trading day immediately preceding the date of conversion. The note, with a principal balance of $29,500 at December 31, 2018, matured two years from its effective date, or March 14, 2015, and is currently in default.

 

Convertible Promissory Note – Services of $25,000

 

On June 4, 2013, we entered into a 5% convertible promissory note with a former member of our Board of Directors in exchange for services rendered in the amount of $25,000. The note was convertible into shares of common stock of the Company at a conversion price equal to the lesser of $0.35 per share or the closing price per share of common stock recorded on the trading day immediately preceding the date of conversion. We entered into an agreement to repay this note with 12 equal monthly payments of principal and interest of $2,352 beginning in June 2016. The note was paid in full as of December 31, 2017.

 

Convertible Promissory Note – $5,000 Exchanged Note

 

On September 6, 2013, we exchanged a $5,000 promissory note for a 10% convertible promissory note in the aggregate principal amount of $5,000. The note was convertible into shares of our common stock at a price equal to a conversion price of the lesser of $0.042 per share or fifty percent (50%) of the lowest trade price recorded after the effective date. We recorded a debt discount of $2,536, which has been fully amortized to interest expense, along with a derivative liability at inception. In February 2017, we issued the lender 1,496,499 shares of our common stock in consideration for the conversion of principal of $5,000 and accrued interest of $1,734.

 

 
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March 2016 Convertible Promissory Note – $1,000,000

 

On March 4, 2016, we entered into a 10% convertible promissory note in the aggregate principal amount of up to $1,000,000 (the "March 2016 $1,000,000 CPN"). The lender may advance the Company consideration for the note in such amounts as the lender may choose in its sole discretion. The note is convertible into shares of our common stock at a price per share equal to the lesser of: $0.03; 50% of the lowest trade price of our common stock subsequent to the effective date of the note; or the lowest effective price per share granted to any person or entity (exclusive of our officers and directors) to acquire common stock subsequent to the effective date of the note. The note initially matured, with respect to each advance, one year from the effective date of each advance. Subsequently, the lender extended the maturity date, with the note payable upon demand, but in no event later than 60 months from March 4, 2016.

 

On March 4, 2016, we received proceeds of $25,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2017 and 2016, amortization of debt discount was recorded to interest expense in the amount of $4,315 and $20,685, respectively, and the debt discount was fully amortized to interest expense. In September and December 2017, we issued the lender a total of 1,632,272 shares of our common stock in consideration for the conversion of principal of $25,000 and accrued interest of $3,956, extinguishing the note in full.

 

On March 14, 2016, we received proceeds of $27,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $27,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2017 and 2016, amortization of debt discount was recorded to interest expense in the amount of $5,400 and $21,600, respectively, and the debt discount was fully amortized to interest expense. In December 2017, we issued the lender 469,041 shares of our common stock in consideration for the conversion of principal of $5,000 and accrued interest of $863, resulting in a principal balance of $22,000 at December 31, 2017. In November and December 2018, we issued the lender a total of 1,973,604 shares of our common stock in consideration for the conversion of principal of $2,330 and accrued interest of $630, resulting in a principal balance of $19,670 at December 31, 2018.

 

On March 17, 2016, we received proceeds of $33,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $33,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $11,392 and the debt discount was fully amortized to interest expense.

 

On April 11, 2016, we received proceeds of $90,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $90,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $24,904 and the debt discount was fully amortized to interest expense.

 

On May 20, 2016, we received proceeds of $60,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $23,014 and the debt discount was fully amortized to interest expense.

 

On June 22, 2016, we received proceeds of $50,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $50,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $23,699 and the debt discount was fully amortized to interest expense.

 

On July 6, 2016, we received proceeds of $87,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $87,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $44,573 and the debt discount was fully amortized to interest expense.

 

On August 8, 2016, we received proceeds of $60,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $36,164 and the debt discount was fully amortized to interest expense.

 

On September 13, 2016, we received proceeds of $55,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $55,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $38,575 and the debt discount was fully amortized to interest expense.

 

On October 17, 2016, we received proceeds of $55,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $55,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $43,699 and the debt discount was fully amortized to interest expense.

 

On November 8, 2016, we received proceeds of $55,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $55,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $47,014 and the debt discount was fully amortized to interest expense.

 

 
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On December 6, 2016, we received proceeds of $60,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $56,233 and the debt discount was fully amortized to interest expense.

 

On January 10, 2017, we received proceeds of $60,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $1,644 and $58,356, respectively, and the debt discount was fully amortized to interest expense.

 

On February 13, 2017, we received proceeds of $60,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $7.233 and $52,767, respectively, and the debt discount was fully amortized to interest expense.

 

On March 9, 2017, we received proceeds of $60,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $11,178 and $48,822, respectively, and the debt discount was fully amortized to interest expense.

 

On April 12, 2017, we received proceeds of $95,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $95,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $26,548 and $68,452, respectively, and the debt discount was fully amortized to interest expense.

 

On May 8, 2017, we received proceeds of $60,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $21,041 and $38,959, respectively, and the debt discount was fully amortized to interest expense.

 

June 2017 Convertible Promissory Note – $500,000

 

On June 2, 2017, we entered into a 10% convertible promissory note in the aggregate principal amount of up to $500,000 (the "June 2017 $500,000 CPN"). The lender may advance the Company consideration for the note in such amounts as the lender may choose in its sole discretion. The note is convertible into shares of our common stock at a price per share equal to the lesser of: $0.03; 50% of the lowest trade price of our common stock subsequent to the effective date of the note; or the lowest effective price per share granted to any person or entity (exclusive of our officers and directors) to acquire common stock subsequent to the effective date of the note. The note initially matured, with respect to each advance, one year from the effective date of each advance. Subsequently, the lender extended the maturity date, with the note payable upon demand, but in no event later than 60 months from June 2, 2017.

 

On June 2, 2017, we received proceeds of $60,000 pursuant to the June 2017 $500,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $25,151 and $34,849, respectively, and the debt discount was fully amortized to interest expense.

 

On July 10, 2017, we received proceeds of $80,000 pursuant to the June 2017 $500,000 CPN. We recorded a debt discount of $80,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $41,863 and $38,137, respectively, and the debt discount was fully amortized to interest expense.

 

 
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On August 11, 2017, we received proceeds of $80,000 pursuant to the June 2017 $500,000 CPN. We recorded a debt discount of $80,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $48,877 and $31,123, respectively, and the debt discount was fully amortized to interest expense.

 

On September 12, 2017, we received proceeds of $85,000 pursuant to the June 2017 $500,000 CPN. We recorded a debt discount of $85,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $59,384 and $25,616, respectively, and the debt discount was fully amortized to interest expense.

 

On October 13, 2017, we received proceeds of $80,000 pursuant to the June 2017 $500,000 CPN. We recorded a debt discount of $80,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $61,603 and $18,397, respectively, and the debt discount was fully amortized to interest expense.

 

On November 8, 2017, we received proceeds of $75,000 pursuant to the June 2017 $500,000 CPN. We recorded a debt discount of $75,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $62,658 and $12,342, respectively, and the debt discount was fully amortized to interest expense.

 

December 2017 Convertible Promissory Note – $500,000

 

On December 14, 2017, we entered into a 10% convertible promissory note in the aggregate principal amount of up to $500,000 (the "December 2017 $500,000 CPN"). The lender may advance the Company consideration for the note in such amounts as the lender may choose in its sole discretion. The note is convertible into shares of our common stock at a price per share equal to the lesser of: $0.03; 50% of the lowest trade price of our common stock subsequent to the effective date of the note; or the lowest effective price per share granted to any person or entity (exclusive of our officers and directors) to acquire common stock subsequent to the effective date of the note. The note initially matured, with respect to each advance, one year from the effective date of each advance. Subsequently, the lender extended the maturity date, with the note payable upon demand, but in no event later than 60 months from December 14, 2017.

 

On December 14, 2017, we received proceeds of $60,000 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $56,041 and $3,959, respectively, resulting in a remaining discount of $56,041 at December 31, 2017.

 

On January 11, 2018, we received proceeds of $70,000 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $70,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $67,890, resulting in a remaining debt discount of $2,110 as of December 31, 2018.

 

On February 7, 2018, we received proceeds of $60,000 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $53,753, resulting in a remaining debt discount of $6,247 as of December 31, 2018.

 

On March 8, 2018, we received proceeds of $55,000 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $55,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $44,904, resulting in a remaining debt discount of $10,096 as of December 31, 2018.

 

On March 14, 2018, we received proceeds of $6,500 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $6,500 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $5,200, resulting in a remaining debt discount of $1,300 as of December 31, 2018.

 

 
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On April 9, 2018, we received proceeds of $77,000 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $77,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $56,115, resulting in a remaining debt discount of $20,885 as of December 31, 2018.

 

On May 7, 2018, we received proceeds of $60,000 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $39,123, resulting in a remaining debt discount of $20,877 as of December 31, 2018.

 

On June 7, 2018, we received proceeds of $52,000 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $52,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $29,490, resulting in a remaining debt discount of $22,510 as of December 31, 2018.

 

On July 10, 2018, we received proceeds of $35,000 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $35,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $16,685, resulting in a remaining debt discount of $18,315 as of December 31, 2018.

 

On August 16, 2018, we received proceeds of $24,500 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $24,500 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $9,196, resulting in a remaining debt discount of $15,304 as of December 31, 2018.

 

August 2018 Convertible Promissory Note – $500,000

 

On August 17, 2018, we issued a 10% convertible promissory note in the aggregate principal amount of up to $500,000 (the "August 2018 $500,000 CPN"). The lender may advance the Company consideration for the note in such amounts as the lender may choose in its sole discretion. The note is convertible into shares of our common stock at a price per share equal to the lesser of: $0.01; 50% of the lowest trade price of our common stock subsequent to the effective date of the note; or the lowest effective price per share granted to any person or entity (exclusive of our officers and directors) to acquire common stock subsequent to the effective date of the note. The note matures, with respect to each advance, one year from the effective date of each advance.

 

On August 17, 2018, we received proceeds of $10,500 pursuant to the August 2018 $500,000 CPN. We recorded a debt discount of $10,500 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $3,912, resulting in a remaining debt discount of $6,588 as of December 31, 2018.

 

On September 13, 2018, we received proceeds of $30,000 pursuant to the August 2018 $500,000 CPN. We recorded a debt discount of $30,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $8,959, resulting in a remaining debt discount of $21,041 as of December 31, 2018.

 

On October 8, 2018, we received proceeds of $25,000 pursuant to the August 2018 $500,000 CPN. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $5,753, resulting in a remaining debt discount of $19,247 as of December 31, 2018.

 

On October 26, 2018, we received proceeds of $12,000 pursuant to the August 2018 $500,000 CPN. We recorded a debt discount of $12,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $2,170, resulting in a remaining debt discount of $9,830 as of December 31, 2018.

 

On November 5, 2018, we received proceeds of $25,000 pursuant to the August 2018 $500,000 CPN. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $3,836, resulting in a remaining debt discount of $21,164 as of December 31, 2018.

 

 
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On November 28, 2018, we received proceeds of $30,000 pursuant to the August 2018 $500,000 CPN. We recorded a debt discount of $30,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $2,712, resulting in a remaining debt discount of $27,288 as of December 31, 2018.

 

On November 30, 2018, we received proceeds of $10,000 pursuant to the August 2018 $500,000 CPN. We recorded a debt discount of $10,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $849, resulting in a remaining debt discount of $9,151 as of December 31, 2018.

 

On December 24, 2018, we received proceeds of $50,000 pursuant to the August 2018 $500,000 CPN. We recorded a debt discount of $50,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $959, resulting in a remaining debt discount of $49,041 as of December 31, 2018.

 

November 2018 Convertible Promissory Note – $33,000

 

Effective November 23, 2018, the Company entered into a 10% convertible note with an institutional investor in the principal amount of $33,000. The note matures November 23, 2019. The Company received proceeds of $30,000 after payment of $3,000 of the fees and expenses of the lender and its counsel. The lender, at its option after 180 days from the issuance of the note, may convert the unpaid principal balance of, and accrued interest on, the note into shares of the Company’s common stock at a 39% discount from the lowest trading price during the 15 days prior to conversion. The Company may prepay the note during the 180 days from the issuance of the note at redemption premiums ranging from 20% to 45%. After the expiration of 180 days after issuance, the Company has no right of prepayment. We recorded a debt discount of $33,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $3,436, resulting in a remaining debt discount of $29,564 as of December 31, 2018.

 

December 2018 Convertible Promissory Note – $33,000

 

Effective December 5, 2018, the Company entered into a 10% convertible note with an institutional investor in the principal amount of $33,000. The note matures December 5, 2019. The Company received proceeds of $30,000 after payment of $3,000 of the fees and expenses of the lender and its counsel. The lender, at its option after 180 days from the issuance of the note, may convert the unpaid principal balance of, and accrued interest on, the note into shares of the Company’s common stock at a 39% discount from the lowest trading price during the 15 days prior to conversion. The Company may prepay the note during the 180 days from the issuance of the note at redemption premiums ranging from 20% to 45%. After the expiration of 180 days after issuance, the Company has no right of prepayment. We recorded a debt discount of $33,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $2,351, resulting in a remaining debt discount of $30,649 as of December 31, 2018.

 

Total accrued interest payable on notes payable was $342,752 and 155,070 as of December 31, 2018 and 2017, respectively.

 

For the year ended December 31, 2018, there was no gain or loss on settlement of debt. The total gain on settlement of debt, including conversions to common stock, was $11,643 for the year ended December 31, 2017.

 

7. CAPITAL STOCK

 

At December 31, 2018, the Company’s authorized stock consisted of 2,000,000,000 shares of common stock, with a par value of $0.001 per share. The Company is also authorized to issue 20,000,000 shares of preferred stock, with a par value of $0.001 per share. The rights, preferences and privileges of the holders of the preferred stock will be determined by the Board of Directors prior to issuance of such shares.

 

 
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Series A Preferred Stock

 

On August 31, 2017, the Company filed a Withdrawal of Certificate of Designation for its original Series A Preferred Stock with the Secretary of State of Nevada. On September 4, 2017, the Board of Directors of the Company authorized (a) the execution and recording with the Nevada Secretary of State of a new Certificate of Designation (the “Series A Certificate”) for its new Series A Preferred Stock, authorizing up to 1,000 shares, and (b) the issuance of 1,000 shares of Series A Preferred Stock to the Company’s President and Director, William E. Beifuss, Jr., which shares were issued and outstanding at December 31, 2017.

 

The shares of Series A Preferred Stock have a par value of $0.001 per share. The shares of Series A Preferred Stock do not have a dividend right or rate, or liquidation preference, and are not convertible into shares of common stock.

 

The shares of the Series A Preferred Stock were automatically redeemed by the Company at their par value in January 2018, 120 days after the effective date of the Series A Certificate

 

Series B Preferred Stock

 

On March 2, 2016, the Company filed a Certificate of Designation for its Series B Preferred Stock (the “Series B Certificate”) with the Secretary of State of Nevada designating 30,000 shares of its authorized preferred stock as Series B Preferred Stock. The shares of Series B Preferred Stock have a par value of $0.001 per share.

 

The total face value of this entire series is three million dollars ($3,000,000). Each share of Series B Preferred Stock has a stated face value of One Hundred Dollars ($100) (“Share Value”) and is convertible into shares of fully paid and non-assessable shares of common stock (“Common Stock”) of the Company.

 

As of December 31, 2018 and 2017, the Company had 16,155 shares of Series B Preferred Stock outstanding, with a face value of $1,615,500. These shares were issued in March 2016 for the redemption and cancellation of $1,615,362 of convertible promissory notes and $264,530 of accrued interest payable.

 

The holders of outstanding shares of the Series B Preferred Stock (the "Holders") are entitled to receive dividends pari passu with the holders of Common Stock, except upon a liquidation, dissolution and winding up of the Company, in which case the Series B Preferred Stock has a preference. Such dividends will be paid equally to all outstanding shares of Series B Preferred Stock and Common Stock, on an as-if-converted basis with respect to the Series B Preferred Stock. The Holders may elect to use the most favorable conversion price for the purpose of determining the as-if-converted number of shares.

 

In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the Holder of each outstanding share of the Series B Preferred Stock shall be entitled to receive, out of the assets of the Company available for distribution to its shareholders upon such liquidation, whether such assets are capital or surplus of any nature, an amount equal to one hundred dollars ($100) for each such share of the Series B Preferred Stock (as adjusted for any combinations, consolidations, stock distributions, stock splits or stock dividends with respect to such shares), plus all dividends, if any, declared and unpaid thereon as of the date of such distribution, before any payment is made or any assets distributed to the holders of the Common Stock. After such payment, the remaining assets of the Company will be distributed to the holders of Common Stock.

 

If the assets to be distributed to the Holders of the Series B Preferred Stock are insufficient to permit the receipt by such Holders of the full preferential amounts, then all of such assets will be distributed among such Holders ratably in accordance with the number of such shares then held by each such Holder.

 

The sale of all or substantially all of the Company's assets, any consolidation or merger of the Company with or into any other entity or person, or any other corporate reorganization, in which the stockholders of the Company immediately prior to such consolidation, merger or reorganization, own less than fifty percent (50%) of the Company's voting power immediately after such consolidation, merger or reorganization, or any transaction or series of related transactions to which the Company is a party in which in excess of fifty percent (50%) of the Company's voting power is transferred, excluding any consolidation or merger effected exclusively to change the domicile of the Company, is deemed to be a liquidation, dissolution or winding up.

 

The Series B Preferred Stock is convertible into Common Stock.

 

 
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The Holder has the right, at any time, at its election, to convert all or part of the Share Value into shares of Common Stock. The conversion price is the lesser of (1) Fifty Percent (50%) of the lowest trade price of Common Stock recorded on any trade day after December 12, 2012 or (2) the lowest effective price per share granted to any person or entity, including the Holder but excluding officers and directors of the Company, to acquire Common Stock, or adjusted, whether by operation of purchase price adjustment, settlement agreements, exchange agreements, reset provision, floating conversion or otherwise, any outstanding warrant, option or other right to acquire Common Stock or outstanding Common Stock equivalents (the "Conversion Price").

 

The conversion formula is as follows: The number of shares receivable upon conversion equals the Share Value divided by the Conversion Price. A conversion notice (the "Conversion Notice") may be delivered to Company by any method of Holder's choice (including but not limited to email, facsimile, mail, overnight courier, or personal delivery), and all conversions will be cashless and not require further payment from the Holder. If no objection is delivered from the Company to the Holder, with respect to any variable or calculation reflected in the Conversion Notice, within 24 hours of delivery of the Conversion Notice, the Company will thereafter be deemed to have irrevocably confirmed and ratified such notice of conversion and waived any objection. The Company will deliver the shares of Common Stock from any conversion to the Holder (in any name directed by the Holder) within three (3) business days of Conversion Notice delivery. If the Company is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, then upon request of the Holder and provided that the shares to be issued are eligible for transfer under Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"), or are effectively registered under the Securities Act, the Company will cause its transfer agent to electronically issue the Common Stock issuable upon conversion to the Holder through the DTC Direct Registration System ("DRS"). If the Company is not participating in the DTC FAST program, then the Company agrees in good faith to apply and cause the approval for participation in the DTC FAST program.

 

The Conversion Price is subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Company relating to the Company's securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events. No fractional shares of the Common Stock shall be issuable upon the conversion of shares of the Series B Preferred Stock and the Company shall pay the cash equivalent of any fractional share upon such conversion.

 

If the Company fails to deliver shares in accordance with the required time frame, then for each conversion, a penalty of $1,500 per day will be assessed for each day after the third business day (inclusive of the day of the conversion) until share delivery is made. Such penalty may be converted into Common Stock at the Conversion Price or payable in cash, at the sole option of the Holder (under the Holder's and the Company's expectations that any penalty amounts shall tack back to the original date of the issuance of Series B Preferred Stock, consistent with applicable securities laws).

 

In no event will the Holder be entitled to convert any Series B Preferred Stock, such that upon conversion the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of this Series B Preferred Stock or the unexercised or unconverted portion of any other security of the Company subject to a limitation on conversion or exercise analogous to these limitations), and (2) the number of shares of Common Stock issuable upon the conversion of Series B Preferred Stock, would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock. The limitations on conversion may be waived by the Holder upon, at the election of the Holder, not less than 61 days prior notice to the Company, and the provisions of the conversion limitation shall continue to apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver).

 

Except as required by law, the Holders of Series B Preferred Stock are not entitled to vote, as a separate class or otherwise, on any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting). Each Holder of outstanding shares of Series B Preferred Stock will be entitled, on the same basis as holders of Common Stock, to receive notice of such action or meeting.

 

So long as any shares of the Series B Preferred Stock remain outstanding, the Company will not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series B Preferred Stock voting together as one class: (a) alter or change the rights, preferences or privileges of the shares of the Series B Preferred Stock so as to affect materially and adversely such shares; or (b) create any new class of shares having preference over the Series B Preferred Stock.

 

 
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The Holder has the right, at its sole discretion, to elect a fixed conversion price for the Series B Preferred Stock. The Fixed Conversion Price may not be lower than the Conversion Price. The Company will not, by amendment of its Certificate of Incorporation, bylaws or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Series B Certificate, and will at all times carry out all the provisions of the Series B Certificate.

 

On March 2, 2016, the Company filed a Certificate of Designation for its Series B Preferred Stock (the “Series B Certificate”) with the Secretary of State of Nevada designating 30,000 shares of its authorized preferred stock as Series B Preferred Stock. The shares of Series B Preferred Stock have a par value of $0.001 per share.

 

Series C Preferred Stock

 

In November 2018, the Company filed a Certificate of Designation for its Series B Preferred Stock (the “Series B Certificate”) with the Secretary of State of Nevada designating 36,000 shares of its authorized preferred stock as Series C Preferred Stock. The shares of Series B Preferred Stock have a par value of $0.001 per share. The total face value of this entire series is three million dollars ($3,600,000). Each share of Series C Preferred Stock has a stated face value of One Hundred Dollars ($100) (“Share Value”) and is convertible into shares of fully paid and non-assessable shares of common stock (“Common Stock”) of the Company.

 

As discussed in Note 3, the Company issued 36,000 shares of Series C Preferred Stock to the owner of the common stock of EllisLab, Inc. in the Merger, which shares were outstanding at December 31, 2018.

 

The holders of outstanding shares of the Series C Preferred Stock (the “Holders”) shall be entitled to receive dividends pari passu (on a pro rata basis) with the holders of Series B Preferred Stock and Common Stock, except upon a liquidation, dissolution and winding up of the Company. Such dividends shall be paid equally to all outstanding shares of Series C Preferred Stock, Series B Preferred Stock and Common Stock, on an as-if-converted basis with respect to the Series C Preferred Stock and Series B Preferred Stock.

 

In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the Holder of each outstanding share of the Series C Preferred Stock shall be entitled to receive, on a pro rata basis with the outstanding Series B Preferred Stock, out of the assets of the Company available for distribution to its shareholders upon such liquidation, whether such assets are capital or surplus of any nature, an amount equal to one hundred dollars ($100.00) for each such share of the Series C Preferred Stock (as adjusted for any combinations. consolidations, stock distributions, stock splits or stock dividends with respect to such shares), plus all dividends, if any, declared and unpaid thereon as of the date of such distribution, before any payment shall be made or any assets distributed to the holders of the Common Stock, and, after such payment, the remaining assets of the Company shall be distributed to the holders of Common Stock.

 

Each share of Series C Preferred Stock is convertible into twenty thousand (20,000) shares of the Company’s fully paid and nonassessable shares of Common Stock, as adjusted. The Series C Preferred Stock shall contain the respective rights, privileges and designations as are set forth in the Certificate of Designations, Preferences, Rights and Limitations of Series C Preferred Stock appended hereto as Exhibit 4.1. The Series C contains a blocker that prevents the Holder from converting the Series C Preferred if such exercise would result in beneficial ownership of re than 4.99% of the outstanding shares of the Company’s stock, without at least 61 days of prior notice. Under the Series C Preferred Stock, the Holder is also subject to the Rule 144 restrictions of an affiliate.

 

Except as required by law or as specifically provided in the Certificate of Designation, the Holders of Series C Preferred Stock shall not be entitled to vote, as a separate class or otherwise, on any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting); provided, however, that each Holder of outstanding shares of Series C Preferred Stock shall be entitled, on the same basis as holders of Common Stock, to receive notice of such action or meeting.

 

The foregoing description of the Certificate of Designation of Series C Preferred Stock does not purport to be complete and is qualified in its entirety by reference to the full text of the Certificate of Designation of Series C Preferred Stock, which is attached as Exhibit 4.1 to this Current Report on Form 8-K and is incorporated herein by reference.

 

 
F-23
 
Table of Contents

 

Common Stock

 

On April 20, 2016, the Company amended its articles of incorporation to reduce the number of authorized shares of common stock from 1,000,000,000 to 100,000,000 and to affect a one-for-ten reverse stock split of its authorized, issued and outstanding shares of common stock. The Company has given retroactive affect for the reverse stock split in all periods presented in the accompanying financial statements.

 

On April 29, 2016, our Board of Directors and the holder of a majority of the total issued and outstanding voting stock of the Company authorized and approved an amendment to the Company's articles of incorporation to increase the number of authorized shares of common stock from 100,000,000 to 2,000,000,000.

 

As of December 31, 2018 and 2017, the Company had 40,750,040 and 38,776,436 shares of common stock issued and outstanding, respectively.

 

During the year ended December 31, 2018, the Company the Company issued a total of 1,973,604 shares of common stock at fair value in consideration for the conversion of $2,330 of convertible promissory notes and accrued interest payable of $631. In connection with the debt conversion, the Company reduced derivative liabilities by $8,209. There was no gain or loss on settlement of debt due to the conversions occurring within the terms of the convertible note.

 

During the year ended December 31, 2017, The Company issued a total of 3,597,812 shares of common stock for the conversion of $35,000 of convertible notes payable and accrued interest payable of $6,552. In connection with the debt conversion, the Company reduced derivative liabilities by $111,225 and recorded a gain on settlement of debt of $11,643.

 

8. STOCK OPTIONS AND WARRANTS

 

As of December 31, 2018, the Board of Directors of the Company had granted non-qualified stock options and warrants exercisable for a total of 141,406,250 shares of common stock to its employees, officers, and consultants.

 

As further discussed in Note 3, on November 30, 2018 in connection with the Merger, the Company issued a ten-year option to purchase 100,000,000 shares of common stock of the Company, at an exercise price of $0.005. The option vested upon grant but may not be exercised for 2 years from the date of the Merger. Stock-based compensation of $599,998, measured at the grant date using a multinomial lattice model, was included in the purchase price recorded in the Merger and recorded to additional paid-in capital.

 

On November 30, 2018, the Company also issued ten-year warrants to two consultants to purchase a total of 40,000,000 shares of common stock of the Company, at an exercise price of $0.005. The warrants vested upon grant but may not be exercised for 2 years from the date of issuance. Stock-based compensation of $188,127, measured at the grant date using a multinomial lattice model, was included in general and administrative expenses and recorded to derivative liabilities due to the existence of a tainted equity environment.

 

We recognized stock-based compensation expense of $188,124 and $0 for the years ended December 31, 2018 and 2017, respectively. As of December 31, 2018, we had no unrecognized stock-based compensation expense.

 

The significant assumptions used in the valuation of the stock options and warrants are as follows:

 

Stock price on the valuation date

 

$0.006 - $0.013

 

Risk free interest rates

 

2.59 - 2.84

%

Expected volatility

 

228.9 – 236.6

%

 

 
F-24
 
Table of Contents

 

A summary of the Company’s stock options and warrants as of December 31, 2018, and changes during the two years then ended is as follows:

 

 

 

Shares

 

 

Weighted

Average

Exercise Price

 

 

Weighted Average

Remaining

Contract Term

(Years)

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2016

 

 

1,416,000

 

 

$ 0.19

 

 

 

 

 

 

 

Granted

 

 

-

 

 

$ -

 

 

 

 

 

 

 

Exercised

 

 

-

 

 

$ -

 

 

 

 

 

 

 

Forfeited or expired

 

 

(1,250 )

 

$ 29.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2017

 

 

1,414,750

 

 

$ 0.19

 

 

 

 

 

 

 

Granted

 

 

140,000,000

 

 

$ 0.005

 

 

 

 

 

 

 

Exercised

 

 

-

 

 

$ -

 

 

 

 

 

 

 

Forfeited or expired

 

 

(8,500 )

 

$ 13.53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2018

 

 

141,406,250

 

 

$ 0.006

 

 

 

9.84

 

 

$ 1,120,000

 

 

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the closing price of our common stock of $0.013 as of December 31, 2018, which would have been received by the holders of in-the-money options and warrants had the holders exercised their options and warrants as of that date.

 

As of December 31, 2017, the Company had 6,000 common stock purchase warrants outstanding with an exercise price of $5.00 per share. The warrants expired during 2018.

 

9. DERIVATIVE LIABILITIES

 

The fair value of the Company’s derivative liabilities is estimated at the issuance date and is revalued at each subsequent reporting date. We estimate the fair value of derivative liabilities associated with our convertible notes payable, Series B preferred stock and warrants using a multinomial lattice model based on projections of various potential future outcomes. Where the number of warrants or common shares to be issued under these agreements is indeterminate, the Company has concluded that the equity environment is tainted, and all additional warrants and convertible debt and equity are included in the value of the derivatives.

 

The significant assumptions used in the valuation of the derivative liabilities at December 31, 2018 are as follows:

 

Conversion to stock

 

Monthly

 

Stock price on the valuation date

 

$ 0.0230

 

Conversion price

 

$ 0.0045

 

Risk free interest rates

 

2.58% - 2.49

 %

Years to maturity

 

 

15.0

 

Expected volatility

 

123%–358

 %

 

The value of our derivative liabilities was estimated as follows at December 31:

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

Convertible notes payable

 

$ 7,809,054

 

 

$ 5,241,762

 

Series B preferred stock

 

 

2,339,898

 

 

 

2,831,142

 

Warrants

 

 

214,153

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Total

 

$ 10,363,105

 

 

$ 8,072,904

 

 

The calculation input assumptions are subject to significant changes from period to period and to management’s judgment; therefore, the estimated fair value of the derivative liability will fluctuate from period to period, and the fluctuation may be material.

 

 
F-25
 
Table of Contents

  

10. RESEARCH AGREEMENTS

 

Research and development expenses totaled $65,009 in the year ended December 31, 2017 and related to our third sponsored research agreement with University of California – Santa Barbara (“UCSB”). We have completed our development and research efforts around graphene through our sponsored research agreements with UCSB. As a result, we reported no research and development expenses in the year ended December 31, 2018.

 

11. INCOME TAXES

 

A reconciliation of the income tax provision (benefit) that would result from applying a 2018 combined U.S. federal and state rate of 29% to loss before income taxes with the provision (benefit) for income taxes presented in the financial statements is as follows:

 

 

 

Years Ended December 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

Income tax benefit at statutory rate

 

$ (2,369,000 )

 

$ (1,027,000 )

State income taxes, net of federal benefit

 

 

(200 )

 

 

(300 )

Nondeductible expenses

 

 

2,123,100

 

 

 

2,004,820

 

Other

 

 

5,000

 

 

 

(600 )

Valuation allowance

 

 

241,100

 

 

 

(976,920 )

 

 

 

 

 

 

 

 

 

 

 

$ -

 

 

$ -

 

 

Deferred tax assets (liabilities) are comprised of the following:

 

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

Deferred tax assets:

 

 

 

 

 

 

Net operating loss carryforward

 

$ 3,104,700

 

 

$ 2,863,700

 

Research and development credit carryforward

 

 

125,300

 

 

 

125,200

 

Accrued compensated absences

 

 

700

 

 

 

600

 

 

 

 

 

 

 

 

 

 

Valuation allowance

 

 

(3,230,700 )

 

 

(2,989,500 )

 

 

 

 

 

 

 

 

 

 

 

$ -

 

 

$ -

 

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”). The Tax Act establishes new tax laws that affect 2018 and future years, including a reduction in the U.S. federal corporate income tax rate to 21%, effective January 1, 2018. For certain deferred tax assets and deferred tax liabilities, we have recorded a provisional decrease of $1,382,720, with a corresponding net adjustment to valuation allowance of $1,382,720 as of December 31, 2017.

 

The ultimate realization of our deferred tax assets is dependent, in part, upon the tax laws in effect, our future earnings, and other events. As of December 31, 2018, we recorded a valuation allowance of $3,230,700 against net current deferred tax. In recording the valuation allowance, we were unable to conclude that it is more likely than not that our deferred tax assets will be realized.

 

As of December 31, 2018, we had a net operating loss carryforward available to offset future taxable income of approximately $10,706,000, which begins to expire at dates that have not been determined. If substantial changes in the Company’s ownership should occur, there would be an annual limitation of the amount of the net operating loss carryforward that could be utilized.

 

 
F-26
 
Table of Contents

 

We perform a review of our material tax positions in accordance with recognition and measurement standards established by authoritative accounting literature, which requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. Based upon our review and evaluation, during the years ended December 31, 2018 and 2017, we concluded the Company had no unrecognized tax benefit that would affect its effective tax rate if recognized.

 

We file income tax returns in the U.S. federal jurisdiction and in the state of California. With few exceptions, we are no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years before 2011.

 

We classify any interest and penalties arising from the underpayment of income taxes in our statements of operations and comprehensive loss in other income (expense). As of December 31, 2018 and 2017, we had no accrued interest or penalties related to uncertain tax positions.

 

12. RELATED PARTY TRANSACTIONS

 

Pursuant to a written consulting agreement, dated May 31, 2013 and amended effective November 1, 2016, William E. Beifuss, Jr., our current President, Acting Chief Executive Officer and Acting Chief Financial Officer, received $120,000 in fees for each of the years ended December 31, 2018 and 2017.

 

Effective December 1, 2018, Rick Ellis, Chief Executive Officer of EllisLab Corp., receives a monthly salary of $10,000.

 

As discussed in Note 3, the Company issued 36,000 shares of Series C Preferred Stock to Rick Ellis, which shares were outstanding at December 31, 2018.

 

See Note 7 for a discussion regarding the issuance in August 2017 of 1,000 shares of Series A Preferred Stock to the Company's interim chief executive officer and director, William E. Beifuss, Jr., for services rendered. The shares were automatically redeemed 120 days after the effective date of the related Series A Certificate.

 

See Note 5 for discussion of convertible notes payable with related parties.

 

On June 4, 2013, we entered into a convertible note with a former member of our Board of Directors in exchange for services valued at $25,000. The note was to mature on June 4, 2016. We entered into an agreement to repay this note in 12 equal monthly payments of principal and interest of $2,352, beginning in June 2016. The note was paid in full as of December 31, 2017.

 

13. COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

On September 5, 2017, we entered into an operating sublease for office space. The base rent for the new sublease is $1,000 per month for a period of one year and month-to-month thereafter. Rent expense for all operating leases for the years ended December 31, 2018 and 2017 was $12,000 and $47,068, respectively.

 

Consulting Agreement

 

We have a written consulting agreement, dated May 31, 2013 and amended effective November 1, 2016, with William E. Beifuss, Jr., our former Chief Executive Officer, and current President and Acting Chief Financial Officer, for the payment of monthly compensation of $10,000 per month. The agreement may be cancelled by either party with 30 days’ notice.

  

 
F-27
 
Table of Contents

 

14. SUBSEQUENT EVENTS

 

Management has evaluated subsequent events according to the requirements of ASC TOPIC 855, and has reported the following:

 

Convertible Note Conversion

 

On March 4, 2019, a lender converted $2,285 principal and $679 accrued interest payable into 1,976,160 common shares of the Company.

 

Subsequent Borrowings

 

We received advances under the August 2018 $500,000 CPN of $25,000 in each of January, February and March 2019 and $15,000 in March 2019.

 

Effective January 25, 2019, the Company entered into a 10% convertible note with an institutional investor in the principal amount of $38,000. The note matures January 25, 2020. The Company received proceeds of $35,000 after payment of $3,000 of the fees and expenses of the lender and its counsel. The lender, at its option after 180 days from the issuance of the note, may convert the unpaid principal balance of, and accrued interest on, the note into shares of the Company’s common stock at a 39% discount from the lowest trading price during the 15 days prior to conversion. The Company may prepay the note during the 180 days from the issuance of the note at redemption premiums ranging from 20% to 45%. After the expiration of 180 days after issuance, the Company has no right of prepayment.

 

Effective March 25, 2019, the Company entered into a 10% convertible note with an institutional investor in the principal amount of $35,000. The note matures March 25, 2020. The Company received proceeds of $32,000 after payment of $3,000 of the fees and expenses of the lender and its counsel. The lender, at its option after 180 days from the issuance of the note, may convert the unpaid principal balance of, and accrued interest on, the note into shares of the Company’s common stock at a 39% discount from the lowest trading price during the 15 days prior to conversion. The Company may prepay the note during the 180 days from the issuance of the note at redemption premiums ranging from 20% to 45%. After the expiration of 180 days after issuance, the Company has no right of prepayment.

 

Extension of Maturity Dates of Convertible Promissory Note

 

Subsequent to December 31, 2018, the maturity date of a note payable issued for services with a principal balance of $32,620 at December 31, 2018 was extended from December 31, 2018 to December 31, 2019.

 

 

F-28

 

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