Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rue 405 of Regulation S-T during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒
No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b–2 of the Exchange Act.
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 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting
and non-voting common equity held by non-affiliates of the registrant based on the closing sales price, or the average bid and
asked price on such stock, as June 30, 2018 was $1,129,263.
The number of shares of the registrant’s
common stock outstanding as of December 15, 2020 was 67,744,953.
The
information contained in this Annual Report on Form 10-K for year ended December 31, 2018 (the “Report”), including
in documents that may be incorporated by reference into this Report, includes some statements that are not purely historical and
that are “forward-looking statements.” Such forward-looking statements include, but are not limited to, statements
regarding the Company and its management’s expectations, hopes, beliefs, intentions or strategies regarding the future, including
its financial condition and results of operations. In addition, any statements that refer to projections, forecasts or other characterizations
of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,”
“believes,” “continue,” “could,” “estimates,” “expects,” “intends,”
“may,” “might,” “plans,” “possible,” “potential,” “predicts,”
“projects,” “seeks,” “should,” “will,” “would” and similar expressions,
or the negatives of such terms, may identify forward-looking statements, but the absence of these words does not mean that a statement
is not forward-looking.
The
forward-looking statements contained in this Report are based on current expectations and beliefs concerning future developments.
There can be no assurance that future developments actually affecting the Company will be those anticipated. These forward-looking
statements involve a number of risks, uncertainties (some of which are beyond the Company’s control) or other assumptions
that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking
statements, some of which are described in the section of this Report entitled “Risk Factors”.
Should
one or more of these risks or uncertainties materialize, or should any of the Company’s assumptions prove incorrect, actual
results may vary in material respects from those projected in these forward-looking statements. The Company undertakes no obligation
to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except
as may be required under applicable securities laws.
Unless
specifically set forth to the contrary, when used in this Report the terms “PeerLogix,” "we"", "our",
the "Company" and similar terms refer to PeerLogix, Inc., a Nevada corporation and where the context is applicable, to
our business operations, inclusive of those undertaken by our operating subsidiary, PeerLogix Delaware. “PeerLogix Delaware”
refers solely to our wholly-owned subsidiary, PeerLogix Technologies, Inc., a Delaware corporation.
PART I
Item 1. Business.
OVERVIEW
PeerLogix, Inc. is
an advertising technology and data aggregation company. The Company provides a platform which enables the tracking and cataloguing
of over-the-top viewership in order to determine consumer trends and preferences based upon media consumption. Its platform collects
over-the-top data, including Internet Protocol (IP) addresses of the streaming and downloading parties (location), the name, media
type and genre of media watched, listened or downloaded, and utilizes licensed and publicly available demographic and other databases
to further filter the collected data to provide insights into consumer preferences to digital advertising firms, product and media
companies, entertainment studios and others.
The Company was incorporated
on February 14, 2014 in Nevada under the name of Realco International, Inc. The Company previously offered real estate marketing
and sales services to individuals and businesses seeking to purchase international real estate, with a particular focus on the
European and Middle Eastern markets.
Effective May 1, 2018,
the Company executed a services agreement with Oracle America, Inc., whereas, certain portions of the Company’s data assets
and materials will be used for the purpose of testing, analyzing, and evaluating their use with Oracle systems, services and product
offers. The initial term of the agreement is 6-months.
On July 6, 2018, the
Board of Directors of the Company, resolved to offer to the holders of warrants (the “Warrants”) of the Company (the
“Holders”), and approve the execution of, a warrant repricing and exercise agreement (the “Agreement”)
with each of the consenting Holders, whereby the exercise price of the Warrants shall be reduced from $0.10 to $0.06 per share
of common stock of the Company (the “Common Stock”). Furthermore, the Board of Directors resolved to offer to the Holders,
as outlined in the Agreement, an additional Series B Warrant (the “Series B”) for every four (4) Warrants exercised
pursuant to the Agreement. The Series B have an exercise price of $0.25 per share of the Common Stock. A total of 11,274,500 warrants
were exercised for gross proceeds of $676,470 and 2,818,625 Series B warrants were issued.
Effective August 16,
2018, the Company executed an additional services agreement with Oracle America, Inc., whereas, certain services including aggregation,
analysis, segmentation, reporting, marketing, sales and distribution of data segments from the Company are licensed for use via
Oracle’s proprietary electronic platform. Revenue payouts to the company are to occur within sixty (45) days after the end
of each calendar month. The initial term of the agreement is 1-year and automatically renews for successive 1-year terms unless
either party provides written notice of intent to not renew at least ninety days prior to the end of a term. The agreement is active
as of the date of this report.
Industry Background
Brand advertisers and
consumer product companies utilize a broad array of consumer data on which to base advertising decisions. They have traditionally
relied upon information collected from legacy media distribution providers to base their research (e.g., Comcast and other cable
providers). These traditional methods are inherently inefficient by today’s standards and are often cost-prohibitive due
to their fragmented nature, relying upon separate, non-integrated legacy providers for television and music research related to
consumer preferences.
Digital surveying methods
provide a solution to many of the inefficiencies present with traditional methods. Thus, advertisers, agencies, entertainment studios
and others are rapidly adopting digital methodologies to augment their traditional practices. One such digital surveying method
yet to be widely implemented is Over-the-Top (“OTT”) measurement, which the Company believes is a significant market
opportunity.
In today’s digital
world, consumers have access to media, television shows, music, movies, video games and software through a number of growing and
fragmented methods and providers. This change in behavior and habits is an evolution resulting from technological innovation, and
has resulted in greater choice and democratization amongst consumers. The resulting digital empowerment has directly lead to the
birth of platforms providing consumers direct access to media, which often times circumvents legacy providers previously relied
upon for distribution (such as traditional cable providers).
One of the more prominent
digital platforms to arise has been Over-the-Top (e.g., Popcorn Time, Netflix, Hulu, HBOGO). Over-the-Top broadcast is entertainment
content (e.g., audio, video, and other media) transmitted via the Internet without an operator of multiple cable or direct-broadcast
satellite television systems controlling or distributing the content (i.e., cable television service providers). Consumers can
access Over-the-Top content through Internet-connected devices such as phones (including Android, iPhone, and Windows-type mobile
devices), smart TVs (such as Google TV and LG Electronic's Channel Plus), set-top boxes (such as the Fire TV and Roku), gaming
consoles (such as the PlayStation 4, Wii U, and Xbox One), and desktop and laptop computers and tablets.
According to MarketsandMarkets,
the Over-the-Top market is estimated to grow from USD 28.04 Billion in 2015 to USD 62.03 Billion by 2020 with a CAGR of 17.2%.
Thus, because Over-the-Top is so widely used and being rapidly adopted for digital media consumption, demographic data related
to its use can provide digital agencies and consumer product companies with a wide variety of critical and yet untapped information
about consumers enabling them to target their messages and offerings to such consumers.
Marketing and
Advertising Industry Implications
The Company believes
data collected from Over-the-Top viewership and listenership represents a substantial improvement over search and other tracking
data utilized to obtain marketing insights, as Over-the-Top data reflects actual consumption of media with respect to which the
viewing party has taken an affirmative effort to obtain, as opposed to search data, such as Google, which can reflect pure curiosity.
Through rigorous testing
and analysis, the Company has been able to show that on a general basis, the domestic Over-the-Top audiences most commonly reside
in middle to upper-middle class households, possessing greater than average levels of discretionary income. The Company sees this
demographic skew as a significant opportunity in the marketplace, as the Company’s prospective core client base, digital
agencies and consumer product companies, proactively seek new audiences deemed financially worthy of sales and advertising efforts.
PeerLogix
Over-The-top Opportunity
Over-the-Top
(“OTT”) Adoption and Activity
Over-the-top media
viewership represents up to 22% of all worldwide internet traffic and is used by approximately 765 million people worldwide to
consume TV shows, movies, music, pictures, video games, e-books and software online. Representing 10.2% of the global population
and 32.1% of digital video viewers worldwide, the global subscription OTT market will grow by 24.0% this year thanks to increasing
internet penetration, faster speeds and a broader shift toward internet entertainment, according to eMarketer.
All major entertainment
and media content are available to consumers tuning in via OTT media platforms – with the category representing one of the
most significant percentages of global internet bandwidth. The Company measures, tracks and archives OTT viewership data of premium
television shows and movies from approximately 170 million households and stores all such data in a fully scalable database which
has been accumulating since approximately January 1, 2014, providing distinctive ability to provide trend analysis on the basis
of worldwide entertainment viewing habits.
The Company’s
proprietary platform operates on an automatic basis with little human interaction and continually acquires and catalogues data
on OTT media activity in real time, obtaining millions of data points daily.
PeerLogix Platform
The Company’s
proprietary platform enables the tracking and cataloging of OTT media in order to determine consumer trends and preferences based
upon media consumption. PeerLogix’s patented platform collects over-the-top data, including IP addresses of the uploading
and downloading parties (e.g., location), the name, file type, media type (whether movie, television, documentary, music, e-books,
software, etc.), and genre of media downloaded, and utilizes licensed and publicly available demographic and other databases to
further filter the collected data to provide insights into consumer preferences to digital advertising firms, product and media
companies, entertainment studios and others.
PeerLogix
Application
Market
Understanding customer
and target audience information is of the upmost importance for organizations undertaking media planning activities. As marketing
becomes increasingly data-centric, the ability to obtain rich insights about consumers’ media preferences is expected to
represent a significant competitive advantage for the Company’s clients.
According to International
Data Corporation (IDC), the big data technology and services market will grow at a compound annual growth rate (CAGR) of 23.1%
over the 2014-2019 forecast period with annual spending reaching $48.6 billion in 2019. This is the market targeted by the Company.
The Company’s
platform consists of a Media Library with over 3 billion records of streaming activity and media downloads of entertainment programming
(i.e., television shows, movies, etc.). The data is leverageable by clients of the Company to advertise to, and test assumptions
about who their customers really are and the specific media (i.e., television shows, movies, etc.) those customers truly value
through proprietary media pattern identification and tracking.
Services Offered
The services offered
by the Company are two-fold:
1) Advertising
services that provide marketers, publishers and networks custom digital audience segments that match specific advertiser criteria
(e.g., specific sporting interests, television show, media genre, actor/actress, etc.). This enables media planners to buy qualified
audiences directly and execute digital campaigns either through the client's ad server or an existing DSP or SSP relationship.
2) Data licensing
services that provide networks, studios and content creators unfettered analysis of the Company’s OTT data. Macro-level viewership
analysis of millions of households can increase licensing efficiency for both networks and studios by better understanding the
popularity of specific med content (i.e., television shows and movies) in markets around the world.
Product
Architecture
Architecture
The client-server cloud-based
architecture provides several key advantages for the security, scalability and redundancy of the infrastructure.
Client Security
The Company’s
application is a “thin client”, meaning all requests, proprietary data and algorithms reside on the server side. All
communications between servers are through encrypted channels.
Server Scalability and Redundancy
All of the Company’s
web services are hosted on the Amazon EC2 cloud, which is a web service that provides resizable compute capacity in the cloud.
The Company’s current architecture allows it to further scale out (add more servers) and/or scale up (add more capacity to
an existing server) within minutes, and its current architecture has been tested successfully under heavy stress tests. Additionally,
the Company’s load balancers enable updates and maintenance without any downtime and all of its data is backed up and mirrored
between two SQL servers (An SQL server is a Microsoft product used to manage and store information. The aforementioned data stored
inside an SQL server will be housed in an archived database).
Server Security
The Company’s
web services on Amazon EC2 have gone through a hardening process to enhance their security according to known practices, and all
algorithms and data servers are isolated from the internet. Only requests originating from the Company’s Dashboard are delivered
to its data servers, with all other connection requests ignored.
Proprietary Peer-to-Peer Monitoring
System
The peer-to-peer protocol
is a communications protocol that enables computers to share Media Files (e.g., TV shows, movies, music, video games and commercial
software). Rather than making a single TCP connection (TCP enables two hosts to establish a connection and exchange streams of
data), peer-to-peer enables a single user to download Media Files over many small data requests over different IP connections from
a multitude of distributing computers simultaneously, resulting in quicker and more reliable download speeds for the user. A peer-to-peer
client utilized by an individual coordinates Media File distribution by locating other computers in any geography of the world
sharing part or the entirety of the contents of said Media File. To accomplish this series of actions, the peer-to-peer client
running on the distributing/sharing individual’s computer breaks the Media File into a number of smaller but identically
sized pieces. Pieces are typically downloaded non-sequentially by the peer-to-peer client on the downloading individual’s
computer and are rearranged into the correct order by the peer-to-peer client on the downloading individual’s computer (see
below). Typical Media File sharing architecture utilizing a peer-to-peer protocol (the Company’s technology is not depicted):
Search Scraper
The Company’s
Search Scraper scans websites and message forums to find media files of major entertainment interests (e.g., television shows,
movies, music and video games), extracts their web addresses, and subsequently downloads the location of the media files found
into a MySQL database (MySQL is an open source relational database management system. Information in a MySQL database is stored
in the form of related tables). This process mimics the behavior a person would undertake to obtain Over-the-Top media files on
their own. The Company believes its proprietary search technology is capable of finding the vast majority of freely available Over-the-Top
files in existence on the internet.
Accuracy & Geo-location
The Company incorporates
a third-party geo-location service provided to determine authenticity of IP Addresses as well as their physical geographic location
to an accuracy of a few hundred yards. IP Addresses deemed to be virtual private networks (VPNs) or using an alternative masking
service are flagged, giving the Company the ability to filter them out during later analysis steps, if deemed necessary. Information
the Company is able to directly conclude about Over-the-Top households as a result of their IP Address are: Country, Region/State,
City, ZIP/Postal Code, Internet Connection Type & Speed, Mobile Carrier (if applicable), Latitude/Longitude (approximate),
Internet Service Provider, Home/Business, and Company Name (if applicable).
Consumer Privacy
The Company’s
data meets anonymity standards necessary to be classified as non-personally identifiable information (Non-PII), and all contributors
have taken an affirmative effort to download, stream, participate in, or contribute to the respective Over-the-Top network containing
media files of interest. As a result, the Company’s data collection methods meet or exceed the current accountability and
data collection standards of domestic and many international government and regulatory agencies.
Market
Positioning & Product Expansion
Worldwide Solution
The Company sees its
large swath of international data as a significant competitive advantage compared to alternative data offerings. Its data is contributed
to by individuals from the vast majority of countries in the world. As a result, the Company has the ability to offer clients information
giving them a strategic advantage when entering new markets, such as understanding the cultural preferences of local populations,
consequently better positioning products with locally preferred music artists, television or movie content.
Competitive Advantages
The Company, and the
data it collects possess three significant competitive advantages to other data sources.
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Scale – Over-the-Top audience data, and consequently each data point the Company collects, represent individuals from the vast majority of countries around the world. As a result, the Company is able to measure specific media preferences of populations in most countries, and is not limited to predefined major markets. Clients of the Company are able to gain significant competitive advantages understanding media preferences within new markets they choose to enter with their products (e.g., introducing a new consumer packaged good product into a select province of India or Indonesia).
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Granularity – The Company’s tracking mechanisms are location agnostic, and its incorporated geo-location service is able to identify the physical location of viewers within the accuracy of a few hundred yards. As a result, the Company’s technology is able to determine media preferences on a neighborhood-by-neighborhood level (e.g., television preferences in Manhattan vs Brooklyn), providing clients first of its kind abilities previously unattainable with transactional data.
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Transactional Data – Each
user and data record the Company collects in its database represents an affirmative action taken by an individual to obtain and
watch/listen to the content. The Company believes that it is one of only a few organizations able to provide transactional media
information on a worldwide basis, in every major and developing country.
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Revenue
Model
Revenue from Clients
The Company’s
audience data is sold most frequently on a Cost Per Mile basis (“CPM”, i.e., the predetermined price of advertising
sold, typically in units of 1000 ad impressions), with a revenue split between the Company and one or more channel partners. The
Company offers various pricing modules to accommodate Agencies, Entertainment Studios, Trading Desks, and others. As with most
usage-based services, the Company offers different pricing packages for ongoing support, such as custom advertising segments based
on media affinities. Over time, the Company intends to apply optimization techniques to determine different pricing schemes. Revenues
are invoiced on a per-client basis, and the Company is either engaged with, or is negotiating proposals with clients whom are now
deemed recurring.
Foundational Marketing Efforts
Public Relations.
The Company intends to generate both international and local media coverage for its services, through a variety of channels,
including media articles and interviews with management. To date, we have been approached by representatives of several international
media companies expressing interest in covering the Company’s developments through earned media, such as news announcements
and content creation. The Company’s proactive efforts will be supported by local public relations agencies. It will attempt
to focus its efforts on media channels and publications that target advertising and marketing issues, as well as small cap financial
industry publications.
Online Marketing.
The Company intends to utilize online campaigns that are designed to direct additional potential customers to its services.
Rigorous social media profiles on top platforms will assist in bolstering the Company’s value proposition to the market;
top platforms include: Facebook, LinkedIn, Twitter, Wikipedia.
The Company believes
in utilizing Earned Media to bolster its value proposition to both client and investor markets. Core areas of concentration will
include: publishing company news and industry news via distribution channels, including 1st party blogs and investor
relations webpages; social media feeds, including: Facebook, LinkedIn and Twitter; weekly and quarterly newsletters intended to
provide proprietary value to companies in the industry (e.g., ADP Quarterly Jobs Report vs PeerLogix Quarterly Media Report).
Thought Leadership.
Management intends to develop periodic thought leadership pieces on advertising data and the current and future state of
media trends. By participating in industry events and conferences, the Company plans to position itself as a source of imminent
and forthcoming insight for emerging trends in media and consumer data sciences. The Company intends to originate much of this
messaging from events, both hosted by and participated in by the Company, to then continue the topics and conversation through
aforementioned social media channels. These “Community Building” efforts are intended to organically build interest
in the Company both in its industry and in the financial markets.
Acquisition Costs
Because the Company
offers a software solution, its primary variables in respect to expenses are sales efforts, customer acquisition costs and customer
churn.
Customer Acquisition Costs.
The Company continually
evaluates its customer acquisition costs with the intent of optimizing its marketing channels and marketing messages. The Company
anticipates Investor and Public Relations costs to comprise a noteworthy percentage of its overall budget. Management intends to
implement a broadly inclusive plan, with the intention of drawing a significant amount of attention to the Company’s value
proposition for client industries, as well as the Company’s compelling investment thesis to the public markets. Specific
efforts include, but are not limited to: public relations strategy, media relations, news announcements, content creation, thought
leadership development and traditional and digital advertising. As the Company has experienced and continues to have insufficient
working capital to effect its business plan, while it planned on allocating approximately $350,000 to customer acquisition, marketing,
sales, public relations and investor relations efforts over an initial 12 month period, with further budgeting to be determined
thereafter, to date the Company has allocated only approximately $120,000.
Customer
Support
To ensure customer
satisfaction, the Company’s customer support efforts include both proactive and responsive models.
Proactive
The Company has developed
an event-driven automatic system that notifies its support to errors faced by clients. Errors that could potentially be present
in new releases of the Company’s platform are able to be detected by its support staff immediately after a client experiences
them.
Responsive Model
The Company intends
to offer online and telephone support for clients to support its products and services.
Intellectual
Property
The Company has filed
a patent application, including a secondary continuation-in-part (CIP) patent, on its proprietary Over-the-Top tracking technology
and business applications. On May 22, 2018 the Company was granted its first patent application (US20140289860A1). The Company’s
CIP patent application was filed on March 19, 2014 and is currently pending.
In addition to the
Company’s patent portfolio, the Company’s proprietary database contains 48 months of Over-the-Top media consumption
that cannot be acquired or recreated by new market entrants, as Over-the-Top data is ephemeral and is therefore lost if not captured.
By possessing this historical information, the Company is afforded the unique ability to analyze historical trends that a potential
future competitor would not be capable of upon entrance to the market.
Competition
The Company’s
primary competitors are TruOptik, Muzit, Nielsen, Kantar (a subsidiary of WPP Group) and Rentrak. Secondary competitors include
Google’s Trends products and Facebook’s suite of advertising tools. Most of these companies have significantly greater
resources than the Company. Nielsen’s and Rentrak’s services are largely based on sampling methodologies with a small
sample in each market used to measure television and movie viewing behaviors. These are the standards currently employed for the
measurement of television and movie behavior for advertising purposes, referred to often times as the “sample currency.”
Facebook’s and Google’s services are based on sampling of their users’ posts and search activity which is used
to determine present and emerging curiosity of people who participate on their platforms. TruOptik and Muzit also employ a Over-the-Top
sampling methodology, each respectively stating they track Over-the-Top users. TruOptik’s service is principally a Data Management
Platform, built for advertisers, and Muzit focuses on providing services to music artists. It is unknown as to the extent or depth
of either of their respective technology’s tracking and cataloguing capabilities.
The Company expects
to enjoy a unique competitive position, derived from the scale, granularity and the transactional nature of its data. Its services
and systems differ from a sampling service (e.g., Nielsen) in that the Company possesses a measurement system based on a massive
amount of passively-collected viewing and listening activity. This results in far more granular, reliable and predictable determination
of consumers’ actual preferences as compared to either a small, compensated sample approach (e.g., Nielsen) or search engine
data which is merely an expression of interest and not listening or viewing intent.
Although the Company
believes that it is currently able to compete effectively in the market, it may not be able to do so in the future or be capable
of maintaining or further increasing its market share. A failure to compete successfully in its market could adversely affect its
business and financial condition.
Employees
The Company currently
has one employee and one independent contractor in the United States as of the date of this report. The Company also has three
independent contractors located in New Zealand, Greece, and India, respectively. Domestically, the independent contractor and employee
focus on marketing, research, and development. Internationally, the independent contractors focus on technical development.
None of the Company’s
employees are represented by a labor union, and the Company considers its employee relations to be good. The Company also utilizes
a number of consultants to assist with research and development and commercialization activities, generally on a monthly retainer
basis.
The Company intends
to hire additional personnel to focus on account management, development, marketing, customer support and technological support.
AVAILABLE INFORMATION
The Company is subject
to the reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”). Reports filed with the Securities
and Exchange Commission (the “SEC”) pursuant to the Exchange Act, including annual and quarterly reports, and other
reports it files, can be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington,
D.C. 20549. Investors may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330.
Investors can request copies of these documents upon payment of a duplicating fee by writing to the SEC. The reports we file with
the SEC are also available on the SEC’s website (http://www.sec.gov).
Item 1A. Risk Factors
Emerging growth companies are not required
to provide the information required by this Item 1A.
Item 1B. Unresolved Staff Comments.
Not
applicable.
Item 2. Properties.
Our executive offices
are located in leased premises, under a month-to-month agreement, at 119 West 24th Street, 4th Floor, New
York, NY 10011 and our phone number is 646-825-8549.
Item 3. Legal Proceedings.
From time to time we
may be named in claims arising in the ordinary course of business. Currently, no legal proceedings, government actions, administrative
actions, investigations or claims are pending against us or involve us that, in the opinion of our management, could reasonably
be expected to have a material adverse effect on our business and financial condition.
We anticipate that
we will expend significant financial and managerial resources in the defense of our intellectual property rights in the future
if we believe that our rights have been violated. We also anticipate that we will expend significant financial and managerial resources
to defend against claims that our products and services infringe upon the intellectual property rights of third parties.
Item 4. Mine Safety Disclosures.
Not
applicable.
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND OPERATIONS
Peerlogix, Inc. (“Peerlogix”
or the “Company”) was incorporated in Nevada on February 14, 2014. The Company is an advertising technology and data
aggregation company. The Company provides software as a service (SAAS) platform, which enables the tracking and cataloguing of
over-the-top viewership and listenership in order to determine consumer trends and preferences based upon media consumption. Its
platform collects over-the-top data, including Internet Protocol (IP) addresses of the streaming and downloading parties (location),
the name, media type and genre of media watched, listened or downloaded, and utilizes licensed and publicly available demographic
and other databases to further filter the collected data to provide insights into consumer preferences to digital advertising firms,
product and media companies, entertainment studios and others.
NOTE 2 – GOING CONCERN AND
MANAGEMENT’S LIQUIDITY PLANS
The Company has generated minimal revenues
since inception and continues to incur recurring losses from operations and has an accumulated deficit. Accordingly, the accompanying
consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has
incurred a net loss of approximately $9.5 million and net cash used in operations of approximately $981,000 for the year ended
December 31, 2018. In addition, the Company has notes payable in default (see Note 6). These conditions indicate that there is
substantial doubt about the Company's ability to continue as a going concern within one year from the issuance date of the consolidated
financial statements.
The Company's primary source of operating
funds since inception has been cash proceeds from debt and equity financing. The ability of the Company to continue as a going
concern is dependent upon its ability to further implement its business plan and generate sufficient revenue and its ability to
raise additional funds by way of a public or private offering. (See Note 11)
The Company requires immediate capital
to remain viable. The Company can give no assurance that such financing will be available on terms advantageous to the Company,
or at all. Should the Company not be successful in obtaining the necessary financing to fund its operations, the Company would
need to curtail certain or all of its operational activities. There can be no assurance that such a plan will be successful. The
accompanying consolidated financial statements do not include any adjustments that might be necessary should the Company be unable
to continue as a going concern.
Accordingly, the accompanying consolidated
financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”),
which contemplates continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities
in the normal course of business. The carrying amounts of assets and liabilities presented in the consolidated financial statements
do not necessarily purport to represent realizable or settlement values. The consolidated financial statements do not include any
adjustment that might result from the outcome of this uncertainty.
On November 1, 2019, the Company retained
Bankers Capital International to explore strategic alternatives in order to maximize shareholder value. The Company has not set
a formal timetable for this exploration, nor has it made any decisions related to the form or structure of strategic alternatives
at this time. The Company can not make assurances that the process will result in a transaction.
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries, Peerlogix Technologies, Inc. and IP Squared Technologies
Holdings, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the period. Actual results could differ from these estimates. The Company’s significant estimates
and assumptions include the fair value of the Company’s equity instruments, convertible debt, derivative liabilities, stock-based
compensation, and the valuation allowance relating to the Company’s deferred tax assets.
Reclassifications
Certain prior year amounts in the consolidated
financial statements and the notes thereto have been reclassified where necessary to conform to the current year presentation.
These reclassifications did not affect the prior period total assets, total liabilities, stockholders’ deficit, net loss
or net cash used in operating activities.
Revenue Recognition
The Company recognizes revenue when delivery
of the promised goods or services is transferred to its customers, in an amount that reflects the consideration that the Company
expects to receive in exchange for those goods or services.
Effective January
1, 2018, the Company adopted Accounting Standard Codification(“ASU”) 2014-09 “Revenue from Contracts
with Customers (Topic 606),” which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and
most industry-specific revenue recognition guidance throughout the Industry Topics of the Accounting Standards Codification. The
updated guidance states that an entity should recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The guidance also provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers.
The Company adopted the standard using the modified retrospective approach effective January 1, 2018. There was no significant
impact from adoption of Topic 606.
At the time of each transaction, management
assesses whether the fee associated with the transaction is fixed or determinable and whether or not collection is reasonably assured.
The assessment of whether the fee is fixed or determinable is based upon the payment terms of the transaction. Collectability is
assessed based on a number of factors, including past transaction history with the client and the creditworthiness of the client.
The Company generates revenue primarily
by licensing our Over-the-Top audience dataset to platforms and channel partners. As such, the Company predominantly contracts
with Data Management Platforms (DMPs) and Demand Side Platforms (DSPs) (collectively, “Demand Partners”) who license
the Company’s solution to use in conjunction with other solutions offered to their advertiser clients, including brands and
advertising agencies. When the Company contracts with a Demand Partner, it acts as an agent for a disclosed or undisclosed principal,
which is the advertiser.
The Company contracts with Demand Partners,
including DMPs and DSPs representing advertisers, are generally in the form of a revenue share between the Demand Partner and the
Company. Revenue payouts to the Company typically occur within sixty (60) days after the end of each calendar month, and the contracts
typically have an initial term of a year. Due to the uncertainty of amount of revenue earned during the process, it is recognized
upon payout and receipt of payment. Revenue through December 31, 2018 had been de minimis to the consolidated financial statements.
The Company had
three major customers including their affiliates which generated approximately 91% (60.0%, 16% and 15%) of its revenue in the year
ended December 31, 2018.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with an original maturity of three months or less when purchased to be cash equivalents. As of December 31,
2018 and 2017, the Company does not have any cash equivalents.
Convertible Instruments
The Company bifurcates conversion options
from their host instruments and account for them as free standing derivative financial instruments according to certain criteria.
The criteria includes circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument
are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument
that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable
generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate
instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception
to this rule when the host instrument is deemed to be conventional as that term is described under applicable U.S. GAAP.
When the Company has determined that the
embedded conversion options should not be bifurcated from their host instruments, the Company records, when necessary, discounts
to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between
the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price
embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date
of redemption.
Accounting for Warrants
The Company classifies as equity any contracts
that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement
in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts
that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event
is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical
settlement or net-share settlement).
The Company assessed the classification
of its common stock purchase warrants as of the date of each equity offering and determined that such instruments met the criteria
for equity classification, as the settlement terms indicate that the instruments are indexed to the entity’s underlying stock.
Concentrations of Credit Risk
Financial instruments and related items,
which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. The Company
places its cash and temporary cash investments with credit quality institutions. At times, such amounts may be in excess of the
FDIC insurance limit.
Derivative Liabilities
In connection with the issuance of certain
convertible promissory notes, the terms of the convertible notes included an embedded conversion feature which provided for the
settlement of certain convertible promissory notes into shares of common stock at a rate which was determined to be variable with
no floor. The Company determined that the conversion feature was an embedded derivative instrument pursuant to Accounting Standards
Codification (“ASC”) 815 “Derivatives and Hedging”
The accounting treatment of derivative
financial instruments requires that the Company record the conversion option, if applicable, at their fair values as of the inception
date of the agreements and at fair value as of each subsequent balance sheet date. Any change in fair value was recorded as a change
in the fair value of derivative liabilities for each reporting period at each balance sheet date. The Company reassesses the classification
at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified
as of the date of the event that caused the reclassification.
The fair values of conversion options that
are convertible at a variable conversion price are valued using a Black-Scholes Valuation Model and the assumptions used in the
calculation would produce substantially the same results if valued through a lattice model.
The Black-Scholes Valuation Model includes
subjective input assumptions that can materially affect the fair value estimates. The model was developed for use in estimating
the fair value of traded options or warrants. The expected volatility is estimated based on the most recent historical period of
time equal to the weighted average life of the instrument granted.
The principal assumptions used in applying the Black-Scholes
model were as follows:
|
|
Year Ended
|
|
|
|
December 31, 2018
|
|
Risk-free interest rate
|
|
|
1.63% – 2.83%
|
|
Contractual term
|
|
|
0.02 - 4.00 years
|
|
Expected volatility
|
|
|
228.055%-265.65%
|
|
Dividends
|
|
|
0.0%
|
|
|
|
Year Ended
|
|
|
|
December 31, 2017
|
|
Risk-free interest rate
|
|
|
0.52 – 2.20%
|
|
Contractual term
|
|
|
0.02 - 4.00 years
|
|
Expected volatility
|
|
|
200% - 353%
|
|
Dividends
|
|
|
0.0%
|
|
At any given time, certain of the Company’s
embedded conversion features on debt and outstanding warrants may be treated as derivative liabilities for accounting purposes
under ASC 815-40 due to insufficient authorized shares to settle these outstanding contracts. Pursuant to SEC staff guidance that
permits a sequencing approach based on the use of ASC 815-15-25 which provides guidance for contracts that permit partial net share
settlement. The sequencing approach may be applied in one of two ways: contracts may be evaluated based on (1) earliest issuance
date or (2) latest maturity date. Pursuant to the sequencing approach, the Company evaluates its contracts based upon the latest
maturity date.
Net Loss Per Share
Basic loss per share was computed using
the weighted average number of outstanding common shares. Diluted earnings per share, when presented, includes the effect of dilutive
common stock equivalents from the assumed exercise of options, warrants, convertible preferred stock and convertible notes. Common
stock equivalents are excluded in the computation of diluted earnings per share since their inclusion would be anti-dilutive.
Total shares issuable upon the exercise
of warrants, exercise of stock options and conversion of convertible promissory notes for the year ended December 31, 2018 and
2017 were as follows:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Warrants
|
|
|
59,028,170
|
|
|
|
36,305,369
|
|
Stock options
|
|
|
52,400,000
|
|
|
|
24,550,000
|
|
Convertible promissory notes and accrued interest
|
|
|
53,662,991
|
|
|
|
35,227,200
|
|
Total
|
|
|
165,091,161
|
|
|
|
96,082,569
|
|
For the year ended December 31, 2018 and
2017, 14,124,453 and 4,269,941 warrants were included in basic and diluted loss per share as their exercise price was determined
to be nominal.
Income Taxes
Deferred tax assets and liabilities are
computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted
marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses
or benefits are based on the changes in the asset or liability during each period. If available evidence suggests that it is more
likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to
reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance
are included in the provision for deferred income taxes in the period of change. Deferred income taxes may arise from temporary
differences resulting from income and expense items reported for financial accounting and tax purposes in different periods.
The Company follows a recognition threshold
and measurement process for consolidated financial statement recognition and measurement of a tax position taken or expected to
be taken in a tax return. The guidance also prescribes direction on the recognition, classification, interest and penalties in
interim periods, disclosure and transition.
The Company classifies interest expense
and any related penalties, if any, related to income tax uncertainties as a component of income tax expense. No interest or penalties
have been recognized as of December 31, 2018 and 2017.
Management has evaluated and concluded
that there was no material uncertain tax positions requiring recognition in the Company’s financial statements for the years
ended December 31, 2018 and 2017. The Company does not expect any significant changes in the unrecognized tax benefits within twelve
months of the reporting date.
Research and development costs
All research and development costs are
charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research
and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored
research and development costs related to both present and future products are expensed in the period incurred. The Company incurred
minimal research and development expenses for the years ended December 31, 2018 and 2017.
Advertising
The Company follows the policy of charging
the costs of advertising to expense as incurred. The Company charged to operations $26,625 and $6,453 as advertising costs for
the years ended December 31, 2018 and 2017, respectively.
Stock based compensation
The Company measures the cost of services
received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the
fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured
on vesting dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized
over the period during which services are required to be provided in exchange for the award, usually the vesting period. Stock-based
compensation expense is recorded by the Company in the same expense classifications in the statements of operations, as if such
amounts were paid in cash.
Fair Value of Financial Instruments
The carrying amounts of cash and accounts
payable approximate fair value due to the short-term nature of these instruments.
The Company measures the fair value of
financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements and Disclosures” which defines
fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 defines
fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.
ASC 820 describes three levels of inputs
that may be used to measure fair value:
Level 1
|
|
Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
|
|
Level 2
|
|
Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
|
|
|
|
Level 3
|
|
Pricing inputs that are generally unobservable inputs and not corroborated by market data.
|
Level 3 liabilities are valued using unobservable
inputs to the valuation methodology that are significant to the measurement of the fair value of the warrant liabilities. For fair
value measurements categorized within Level 3 of the fair value hierarchy, the Company’s Principal Financial Officer determines
its valuation policies and procedures.
The development and determination of the
unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s
Principal Financial Officer.
Changes in fair value measurements categorized
within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as
appropriate.
Financial assets and
liabilities measured at fair value on a recurring basis are summarized below and disclosed on the balance sheets as follows:
December 31, 2018
|
|
|
|
|
Fair Value Measurement Using
|
|
|
|
Carrying
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative conversion features
|
|
$
|
2,773,654
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
2,773,654
|
|
|
$
|
2,773,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
Fair Value Measurement Using
|
|
|
|
Carrying
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative conversion features
|
|
$
|
935,274
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
935,274
|
|
|
$
|
935,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below provides a summary of the
changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on
a recurring basis using significant unobservable inputs (Level 3) during the year ended December 31, 2018:
|
|
Fair Value
Measurement Using
Level 3 Inputs
|
|
|
|
Total
|
|
Balance, January 1, 2017
|
|
$
|
–
|
|
Reclassification of derivative liability from equity
|
|
|
172,036
|
|
Issuances, reassessments and settlements
|
|
|
2,552,772
|
|
Reclassify to equity upon note payoff
|
|
|
(48,093
|
)
|
Change in fair value
|
|
|
(1,741,441
|
)
|
Balance, December 31, 2017
|
|
|
935,274
|
|
Fair value of derivative at issuance date
|
|
|
322,251
|
|
Reclassify to equity upon note payoff
|
|
|
(31,271
|
)
|
Change in fair value
|
|
|
1,547,402
|
|
Balance, December 31, 2018
|
|
$
|
2,773,654
|
|
Changes in the unobservable
input values could potentially cause material changes in the fair value of the Company’s Level 3 financial instruments. The
significant unobservable inputs used in the fair value measurements are the expected volatility assumption. A significant increase
(decrease) in the expected volatility assumption could potentially result in a higher (lower) fair value measurement.
Recently Issued Accounting Guidance
We have reviewed the FASB issued Accounting
Standards Update (“ASU”) accounting pronouncements and interpretations thereof that have effectiveness dates during
the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally
accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation’s
reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of
our financial management and certain standards are under consideration.
Subsequent Events
The Company evaluates events that have
occurred after the balance sheet date but before the consolidated financial statements are issued. Based upon the evaluation,
the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure
in the consolidated financial statements, except as disclosed (see note 11).
NOTE 4 – LOAN RECEIVABLE
During February 2017, the Company loaned
$37,500 to a potential merger candidate, for working capital purposes. In March 2017, the Company withdrew its plan of merger and
recorded an allowance for loan losses of $37,500 due to the loan deemed uncollectible.
NOTE 5 – SETTLEMENT PAYABLE
On April 8, 2016, the Company entered into
a Securities Purchase Agreement (the “SPA”) with Attia Investments, LLC, a related party (the “Investor”).
A shareholder of the Company who previously owned in-excess of 5% of the Company’s common stock is the managing member of
Attia Investments, LLC. Under the Agreement, we issued and sold to the Investor, and the Investor purchased from us, Debentures
in the principal amount of $87,500 for a purchase price of $70,000, bearing interest at a rate of 0% per annum, with an original
maturity on October 8, 2016, further extended to April 8, 2017.
Amendment
On March 16, 2017, the Company entered
into an amendment to the SPA. The SPA was modified as follows:
|
☐
|
The maturity date of the Debentures was extended to April 8, 2017;
|
|
☐
|
The default interest rate was set at 18%.
|
As consideration for the amendment, the
Company increased the principal amount on the Debentures from $65,000 to $86,875 and issued the Investor 218,750 shares of common
stock with a fair value of $13,125. All remaining terms of the Debentures remained the same.
In accordance with ASC 470, since the present
value of the cash flows under the new debt instrument was at least ten percent different from the present value of the remaining
cash flows under the terms of the original debt instrument, the Company accounted for the amendment to SPA as a debt extinguishment.
Accordingly, the Company wrote off the remaining debt discount on the original Debentures of $17,312. The Company recorded a loss
on extinguishment of debt of $52,312 on the amendment date.
During the year ended December 31, 2017,
the Company repaid $50,018 in principal and $2,982 in accrued interest on certain convertible notes to related parties. Upon repayment,
derivative liabilities in the amount of $48,093 were reclassified to equity. The outstanding principal balance on the Debentures
at December 31, 2017 was $41,857.
The Debentures are secured by all assets
of the Company. The Company was in default of the SPA, making the entire unpaid principal and interest due and payable. The Investor
has initiated a claim against the Company for payment of a loan in default with a principal sum of $109,375. On April 27, 2018,
the Company accepted a settlement offer totaling approximately $115,375 in cash and 800,000 shares of stock. As such, the Company
has reclassified the note payable-related party to settlement payable and accrued the estimated fair value of the settlement of
$164,875. In connection with the settlement, the Company recorded a loss on settlement of debt of $119,653 in current period operations.
During year ended December 31, 2018, the
Company issued 800,000 shares of its common stock and paid $115,375 towards the Attia Investments, LLC settlement. As of December
31, 2018, the outstanding balance was $0.
NOTE 6 – CONVERTIBLE NOTES PAYABLE
Convertible notes payable are comprised
of the following:
|
|
2018
|
|
|
2017
|
|
Offering 3
|
|
$
|
825,500
|
|
|
$
|
825,500
|
|
Offering 4
|
|
|
439,550
|
|
|
|
439,550
|
|
Offering 5
|
|
|
200,000
|
|
|
|
200,000
|
|
Offering 6
|
|
|
640,900
|
|
|
|
245,000
|
|
Total
|
|
|
2,105,950
|
|
|
|
1,710,050
|
|
Less: debt discount
|
|
|
(325
|
)
|
|
|
(277,969
|
)
|
Net
|
|
$
|
2,105,625
|
|
|
$
|
1,432,081
|
|
Offering 3, 4,5,6 (collectively referred
to as “Offerings”):
During the years ended December 31, 2018,
2017 and 2016, the Company sold $425,450, $1,110,000 and $600,500, respectively, of Units to investors. Each Unit was sold at a
price of $10,000 per Unit and consisted of one (1) six (6) month, 18% convertible promissory note (36% on an annual basis) with
a face value of $10,000 and four year warrants exercisable for an aggregate number of shares of common stock equal to 50% of the
shares of common stock into which the Note is initially convertible, exercisable at a price of $0.10 per share. The Offerings Notes
are due six months after the issuance of each note, as amended.
Each of the Notes is convertible at an
initial price equal to $0.06 per share. In addition, during the two month period commencing on each issuance of the Offering 3
Notes, as amended, the Notes will contain a look-back provision pursuant to which the Notes will be convertible at the lower of
$0.06 or the lowest volume weighted average price of the Company’s common stock (the “VWAP”) during any 10 day
period during such two (2) month period, provided however, in the event that the VWAP during any such ten (10) day period is less
than $0.06, then the reset conversion price of the Notes shall be no lower than $0.03. The Notes also contain a reset provision
to the same price as any future offering over the lifetime of the Notes in the event that the conversion or offering price of securities
offered in such subsequent offering is less the Conversion Price of the Notes in this Offering. Notwithstanding the foregoing,
in no event shall the Conversion Price be lower than $0.03 per share.
The conversion feature of the Offerings
Notes issued during 2016 was accounted for in the previous year initially as equity. The Company concluded the conversion feature
of the Notes did not qualify as a derivative because there was no market mechanism for net settlement and they were not readily
convertible to cash.
The Company reassessed the conversion feature
of the Offerings Notes issued during 2016 for derivative treatment during January 2017 and concluded its shares were readily convertible
to cash based on the current trading volume of the Company’s stock. Due to the fact that these convertible notes have an
option to convert at a variable amount, they are subject to derivative liability treatment. The conversion feature was measured
at fair value using a Black Scholes and Binomial model at the reassessment date and the period end. The conversion feature, when
reassessed, gave rise to a derivative liability of $1,526,300. In accordance with ASC 815, $129,434 was charged to paid in-capital
due to the fact a beneficial conversion feature was recorded on the original issue date. In addition the Company recorded a debt
discount to the Notes of $90,153 relating to the fair value of the conversion option. The fair value of the conversion option on
the date of issuance in excess of the face amount of the note was recorded to interest expense on the date of issuance.
The conversion feature has been measured
at fair value using a Black Scholes model at the assessment date and the period end. The conversion feature, when assessed, gave
rise to a derivative liability of $322,250. In 2018, the Company recorded an aggregate debt discount to the Notes of $425,900 comprised
of i) $322,250 relating to the fair value of the conversion option, which was recorded as a derivative liability ii) $63,013 of
incurred issuance costs and iii) $152,243 allocated fair value of the issued warrants. The excess of derivative liability over
net proceeds of the notes of $111,606 was charged to interest expense. The debt discounts are amortized ratably to interest expense
over the term of the notes.
The Company will have the ability to extend
the Notes for an additional six (6) months (the “Extended Term”) and if so extended shall be referred to herein as
the “Extended Notes”. The Extended Notes, upon maturity, will pay interest at a six (6) month rate of 18% (36% annualized)
at the termination of the Extended Term. The Extended Notes, to the extent extended pursuant to their terms for the Extended Term,
will carry an additional 50% warrant coverage (e.g. such warrant to be exercisable for an additional 50% of the number of shares
into which the Extended Note is initially convertible (the “Extended Warrants”). The Extended Warrants shall be exercisable
at a price equal to $0.10. The Extended Warrants will expire four (4) years from the Extended Term and shall contain customary
anti-dilution rights (for stock splits, stock dividends and sales of substantially all the Company’s assets) and the shares
underlying the Extended Warrants will contain registration rights.
At December 31, 2018, the Company remeasured
the fair value of the conversion feature of the issued and outstanding notes and accrued interest and determined the estimated
fair value of the derivative liability of $2,773,654. The Company recorded a loss on change in fair value of derivative liabilities
of $1,547,402 for the year ended December 31, 2018.
During the year ended December 31, 2018,
the Company issued an aggregate of 13,020,414 warrants to existing note holders at $0.10 per share for four years to extend the
terms of maturing notes for six months. The fair value of the issued warrants, determined by the Black-Scholes model, of $1,109,829
was charged as a debt discount and amortized over the extended term up to the note’s initial net proceeds of $1,089,460 and
the excess of $20,369 was charged as a loss on extinguishment of debt.
During the year ended December 31, 2017,
the Company issued warrants to acquire an aggregate of 11,883,331 shares of the Company’s common stock at $0.10 per share
for four years in connection with the extension of the above described notes. The determined fair value at the date of issuance
of $890,372 was charged as loss on extinguishment of debt.
In addition, to the extent that any investor
that acquires Units in these Offerings had previously acquired securities issued by the Company or its subsidiary in one of the
two prior private offerings placed by the Placement Agent in 2015 (each a “Prior Offering”), which collectively raised
gross proceeds of $1,510,000 (each an “Existing Investor”), the Company has agreed to provide additional consideration
to each such Existing Investor as follows: (i) if the Existing Investor acquires Units in this Offering in an amount equal to fifty
percent (50%) or greater than the amount the Existing Investor invested in a Prior Offering, such Existing Investor will receive
(a) an additional 7.33 shares, as amended, (if the investor invested in the first Prior offering) or 9 shares, as amended, of the
Company’s common stock (if the investor invested in the second Prior Offering) (each “Incentive Shares”); and
(b) the exercise price of each of the warrants purchased by the Existing Investor will be reduced from $0.60 per share (if the
investor invested in the first Prior Offering) or $0.72 per share (if the investor invested in the second Prior Offering) to $0.10
per share (the “Incentive Warrant Price Reduction”); and (ii) if the Existing Investor acquires Units in this Offering
in an amount equal to less than fifty percent (50%) of the amount the Existing Investor invested in a Prior Offering, such Existing
Investor will receive a pro-rata number of Incentive Shares and Incentive Warrant Price Reduction on only a pro-rata portion of
the warrants acquired by the Existing Investor in the Prior Offering.
During the year ended December 31, 2017,
the Company issued investors who invested in prior offerings 8,211,333 shares of common stock and reduced the exercise price of
954,083 warrants as per the terms above. The incentive shares were recorded as a debt discount of $5,972 on the date of issuance
based on the relative fair value of the shares.
Upon modification, it is required to analyze
the fair value of the instruments, before and after the modification, recognizing the increase as a charge to the statement of
operations. The Company computed the fair value of the warrants directly preceding the modification and compared the fair value
to that of the modified warrants with new terms. The Company recorded the increased value of the warrants of $37,329 to interest
expense with an offsetting entry to additional paid in capital on the date of the modification.
As part of the transactions, the Company
incurred placement agent fees based on the aggregate gross proceeds raised during the year ended December 31, 2017, or $208,862,
which were recorded as debt discount for debt issuance costs. In addition, during the year ended December 31, 2017, the Company
issued the placement agent warrants an aggregate of 3,219,106 common shares and was obligated to issue an additional 1,333,467
warrants (See Note 11). The placement agent warrants have an exercise price of $0.001 per share, have a seven (7) year term and
vest immediately. In 2018, the Company issued placement agents warrants in aggregate of 9,854,512 with the same terms as 2017 for
past advisory services. The fair value of $1,280,507 was charged to 2017 operations.
The Company was in default on convertible
notes in the principle sum of $2,105,950 as of the date of this report. The convertible notes are secured by all assets of the
Company. No defaults under the convertible notes have been called by any note holders.
NOTE 7 – LOANS PAYABLE - OFFICERS
During
the current and prior periods, one of the Company’s officers made non-interest bearing loans to the Company in the form of
cash and payments to vendors on behalf of the Company. The loans are due on demand and unsecured. As of December 31, 2018 and 2017,
the Company is reflecting a liability of $0 and $9,941 respectively. The Company did not impute interest on the loan as it was
deemed to be de minimis to the consolidated financial statements.
NOTE 8 – STOCKHOLDERS’ DEFICIT
Common stock issued for services
In August 2017, the Company entered into
an agreement with a consulting firm to provide investor and public relations services. As compensation for the services, the Company
was to pay the consultant $30,000 and issue 750,000 restricted common shares. The term of the agreement was for three months. During
the three months ended September 30, 2017, the Company canceled the agreement without any payment or obligation.
During the year ended December 31, 2017,
the Company issued an aggregate of 4,300,000 restricted common shares to consultants
with a fair value of $304,830. These shares vested immediately on the date of issuance. The Company has recorded $304,830 in stock-based
compensation expense for the year ended December 31, 2017, which is a component of professional fees in the consolidated statements
of operations. The shares were valued based on the quoted closing trading price on the date of issuance.
During the year ended December 31, 2017,
the Company issued an aggregate of 819,750 restricted common shares to a placement
agent with a fair value of $126,287 (See Note 6). The shares were granted as compensation to the placement agent for Units sold
in Offering 3 during the year ended December 31, 2017. The shares were valued based on the quoted closing trading price on the
date of issuance.
Common
stock issued with convertible notes
During the year ended December 31, 2017,
the Company issued an aggregate of 8,211,333 restricted common shares to investors
as part of a private placement of the Company’s debt and equity securities (See Note 6).
Common
stock issued with convertible notes - related party
During the year ended December 31, 2017,
the Company issued an aggregate of 218,750 restricted common shares to an investor
related to the modification of the terms of an existing convertible note (See Note 5).
During year ended December 31, 2018, the
Company issued 800,000 shares of its common stock and paid $115,375 towards the Attia Investments, LLC debt settlement. As of December
31, 2018, the outstanding debt obligation to Attia was $0.
Common stock issued in connection
with settlement of vendor liabilities
During the year ended December 31, 2017,
the Company issued an aggregate of 878,710 restricted common shares to vendors to
settle liabilities in the amount of $83,479. The shares were valued based on the quoted closing trading price on the grant date.
In connection with the settlement, the Company recorded a gain on settlement of vendor debt of $29,122.
Common stock issued in payment of
interest on convertible notes payable
During the year ended December 31, 2017,
the Company issued an aggregate of 4,833,000 restricted common shares in settlement
of accrued interest on convertible notes payable in the amount of $289,980. The shares were valued based on the quoted closing
trading price on the vesting date of $419,180. In connection with the settlement, the Company recorded the excess of fair value
of common stock and settled interest as a reduction in the derivative liability.
During the year ended December 31, 2018,
the Company issued an aggregate of 666,000 restricted common shares in settlement
of accrued interest on convertible notes payable in the amount of $39,294. The shares were valued based on the quoted closing trading
price on the vesting date of $58,189. In connection with the settlement, the Company recorded the excess of fair value of common
stock and settled interest as a reduction in the derivative liability.
Common stock issued upon exercise
of warrants
During the year ended December 31, 2018,
the Company issued an aggregate of 6,429,917 restricted common shares upon exercise of warrants with net proceeds of $382,695.
Preferred Stock
The Company is authorized to issue up to
10,000,000 shares of preferred stock, par value $0.001 per share. No shares of its preferred stock are issued or outstanding.
2018 Amended and Restated Equity
Incentive Plan
The Board of Directors and stockholders
of the Company adopted the 2018 Amended and Restated Equity Incentive Plan in December 2018, which was amended and restated from
2016, which reserves a total of 70,000,000 shares of Common Stock for issuance under the 2018 Plan. If an incentive award granted
under the 2018 Plan expires, terminates, is unexercised or is forfeited, or if any shares are surrendered in connection with an
incentive award, the shares subject to such award and the surrendered shares will become available for further awards under the
2018 Plan.
Shares issued under the 2018 Plan through
the settlement, assumption or substitution of outstanding awards or obligations to grant future awards as a condition of acquiring
another entity are not expected to reduce the maximum number of shares available under the 2018 Plan. In addition, the number of
shares of common stock subject to the 2018 Plan, any number of shares subject to any numerical limit in the 2018 Plan, and the
number of shares and terms of any incentive award are expected to be adjusted in the event of any change in outstanding common
stock by reason of any stock dividend, spin-off, split-up, stock split, reverse stock split, recapitalization, reclassification,
merger, consolidation, liquidation, business combination or exchange of shares or similar transaction. As of December 31, 2018,
50,000,000 shares remain available for future issuance under the 2018 Plan.
Stock options issued for services
During the year ended December 31, 2017,
the Company granted its Chief Executive Officer an aggregate of 7,000,000 stock options with an exercise price of $0.11 for services
rendered, having a total grant date fair value of approximately $409,000. See below cancellation on December 1, 2018. 1,000,000
options vested immediately and expire in 2027; 1,500,000 options vest in the event that the average volume weighted average price
of the Company’s common stock over any 10 day period is greater than or equal to $0.25 and expire in 2027; 1,500,000 options
vest in the event that the average volume weighted average price of the Company’s common stock over any 10 day period is
greater than or equal to $0.50 and expire in 2027; 1,500,000 options vest in the event that the average volume weighted average
price of the Company’s common stock over any 10 day period is greater than or equal to $0.75 and expire in 2027; and 1,500,000
options vest in the event that the average volume weighted average price of the Company’s common stock over any 10 day period
is greater than or equal to $1.00 and expire in 2027. 1,000,000 of the options contain only service conditions and will be expensed
on a straight-line basis over the service period of the agreement. The remaining options contain market conditions and are being
expensed over the derived service period as computed by a Geometric Brownian pricing model. Stock compensation expense of $70,779
and $63,574 in 2018 and 2017, respectively, was recorded prior to cancellation.
During the year ended December 31, 2017,
the Company granted its Chairman of the Board an aggregate of 5,250,000 stock options with an exercise price of $0.07 for services
rendered, having a total grant date fair value of approximately $128,525. See below cancellation on December 1, 2018. 1,750,000
options vested immediately and expire in 2027; 1,750,000 options vest in the event that the average volume weighted average price
of the Company’s common stock over any 10 day period is greater than or equal to $0.20 and expire in 2027; 1,750,000 options
vest in the event that the average volume weighted average price of the Company’s common stock over any 10 day period is
greater than or equal to $0.40 and expire in 2027; 1,750,000 of the options contain only service conditions and will be expensed
on a straight-line basis over the service period of the agreement. The remaining options contain market conditions and are being
expensed over the derived service period as computed by a Geometric Brownian pricing model. Stock compensation expense of $118,330
and $163,784 in 2018 and 2017, respectively, was recorded prior to cancellation.
On December 1, 2018, the Company cancelled
an aggregate of 22,150,000 previously granted options to members of the Company’s Board of Directors, including options previously
granted to the CEO and Chairman. Concurrently, the Company granted its Chairman of the Board, Chief Executive Officer and Board
member 10,000,000, 20,000,000 and 20,000,000 (an aggregate of 50,000,000) stock options with an exercise price of $0.09 for services
rendered.
The Company considered the concurrent cancellation
and issuance of the 2018 options as a modification under the guidance of ASC 718, Compensation – Stock Compensation.
In accordance with the guidance, the Company calculated the incremental increase of the fair value of the new 2018 options over
the canceled options at the time of the modification, December 1, 2018. This incremental increase in fair value of the concurrent
cancellation and issuance of the stock options amounted to $3,933,550 , which in accordance with the guidance is added to the original
grant date fair value of the modified options in the amount of $273,457 (excluding previously recorded stock compensation expense).
The aggregate fair value of the original grant date fair value and the incremental increase in fair value amounted to $4,207,007,
which will be vested over the new terms of the 2018 options, with no adjustment to the stock compensation recorded just prior to
the modification date.
The Company uses the Black-Scholes model
to determine the fair value of awards granted that contain typical service conditions that affect vesting. The Company uses the
Monte Carlo or Geometric Brownian model to determine the fair value of awards granted that contain complex features such as market
conditions because the Company believes the method accounts for multiple embedded features and contingencies in a superior manner
than a simple Black Scholes model. In other words, simple models such as Black-Scholes may not be appropriate in many situations
given complex features and differing terms. In applying the Black-Scholes, Monte Carlo or Geometric Brownian option pricing models
to options granted, the Company used the following assumptions:
|
|
For the
Year Ended
December 31,
2018
|
|
For the
Year Ended
December 31,
2017
|
|
Risk free interest rate
|
|
2.842%
|
|
|
1.83-1.92%
|
|
Dividend yield
|
|
0.00%
|
|
|
0.00%
|
|
Expected volatility
|
|
237.76%
|
|
|
70.00-298.88%
|
|
Expected life in years
|
|
5.5
|
|
|
10
|
|
Forfeiture rate
|
|
0.00
|
|
|
0.00%
|
|
Since the Company had limited trading history
in 2017, volatility was determined by averaging volatilities of comparable companies in addition to its historical trading history.
The Company determined in 2018 that it did have sufficient data to estimate the volatility
using only the Company’s own historical stock prices as compared to comparable companies.
The Company uses the simplified method
to calculate expected term of share options and similar instruments issued to employees as the Company does not have sufficient
historical exercise data to provide a reasonable basis upon which to estimate expected term. The contractual term is used as the
expected term for share options and similar instruments issued to non-employees and for options valued using the Monte Carlo or
Geometric Brownian model.
The following is a summary of the Company’s
stock option activity during the two years ended December 31, 2018:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Outstanding-January 1, 2017
|
|
|
12,300,000
|
|
|
$
|
0.11
|
|
|
|
5.94
|
|
Granted
|
|
|
12,250,000
|
|
|
|
0.09
|
|
|
|
10.00
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited/Cancelled
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding – December 31, 2017
|
|
|
24,550,000
|
|
|
$
|
0.10
|
|
|
|
7.03
|
|
Granted
|
|
|
50,000,000
|
|
|
|
0.09
|
|
|
|
10.00
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited/Cancelled
|
|
|
(22,150,000
|
)
|
|
|
0.10
|
|
|
|
8.39
|
|
Outstanding – December 31, 2018
|
|
|
52,400,000
|
|
|
$
|
0.09
|
|
|
|
9.72
|
|
Exercisable – December 31, 2018
|
|
|
2,100,000
|
|
|
$
|
0.09
|
|
|
|
5.11
|
|
At December 31, 2018, the aggregate intrinsic
value of options outstanding and exercisable was $3,000.
Stock-based compensation for stock options
has been recorded in the consolidated statements of operations and totaled $2,606,982 and $450,413, for the years ended December
31, 2018 and 2017, respectively.
As of December
31, 2018, stock-based compensation of $1,814,263 remains unamortized and is expected to be amortized over the weighted average
remaining period of 4 months.
Warrants
The Company used the Black-Scholes model
to determine the fair value of warrants granted during the years ended December 31, 2018 and 2017. In applying the Black-Scholes
option pricing model to warrants granted, the Company used the following assumptions:
|
|
Year Ended
December 31,
2018
|
|
|
Year Ended
December 31,
2017
|
|
Risk free interest rate
|
|
|
1.93 – 2.96%
|
|
|
|
1.10 – 2.14%
|
|
Dividend yield
|
|
|
0.00%
|
|
|
|
0.00%
|
|
Expected volatility
|
|
|
170.30-279.23%
|
|
|
|
65.32 –316.98%
|
|
Contractual term (years)
|
|
|
4-7
|
|
|
|
3.1 - 5
|
|
The following is a summary of the Company’s
warrant activity during the two years ended December 31, 2018:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Outstanding - January 1, 2017
|
|
|
8,956,677
|
|
|
$
|
0.20
|
|
|
|
3.65
|
|
Granted
|
|
|
27,348,692
|
|
|
|
0.09
|
|
|
|
4.11
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited/Cancelled
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding – December 31, 2017
|
|
|
36,305,369
|
|
|
$
|
0.11
|
|
|
|
3.74
|
|
Granted
|
|
|
29,242,717
|
|
|
|
0.08
|
|
|
|
4.01
|
|
Exercised
|
|
|
(6,429,917
|
)
|
|
|
0.10
|
|
|
|
–
|
|
Forfeited/Cancelled
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding and Exercisable – December 31, 2018
|
|
|
59,118,169
|
|
|
$
|
0.10
|
|
|
|
3.76
|
|
At December 31, 2018, the aggregate intrinsic
value of warrants outstanding and exercisable was $1,286,626.
The following is additional information with respect to the
Company's warrants as of December 31, 2018:
Number of
Warrants
|
|
|
Exercise
Price
|
|
|
Weighted Average
Remaining
Contractual Life
(In Years)
|
|
|
Currently
Exercisable
|
|
|
14,074,453
|
|
|
$
|
0.001
|
|
|
|
6.34
|
|
|
|
14,074,453
|
|
|
50,000
|
|
|
$
|
0.01
|
|
|
|
1.18
|
|
|
|
50,000
|
|
|
1,000,000
|
|
|
$
|
0.06
|
|
|
|
3.28
|
|
|
|
1,000,000
|
|
|
37,981,756
|
|
|
$
|
0.10
|
|
|
|
2.92
|
|
|
|
37,981,756
|
|
|
1,000,000
|
|
|
$
|
0.12
|
|
|
|
3.28
|
|
|
|
1,000,000
|
|
|
1,000,000
|
|
|
$
|
0.18
|
|
|
|
3.28
|
|
|
|
1,000,000
|
|
|
2,818,625
|
|
|
$
|
0.25
|
|
|
|
3.75
|
|
|
|
2,818,625
|
|
|
418,333
|
|
|
$
|
0.60
|
|
|
|
1.35
|
|
|
|
418,333
|
|
|
775,002
|
|
|
$
|
0.72
|
|
|
|
1.62
|
|
|
|
775,002
|
|
|
59,118,169
|
|
|
|
|
|
|
|
|
|
|
|
59,118,169
|
|
In April 2017, in exchange for services
rendered by a third party, the Company issued 1,000,000, 1,000,000 and 1,000,000 warrants to purchase shares of the Company’s
common stock with exercise prices of $0.06 per share, $0.12 and $0.18 per share, respectively that vested immediately. The fair
value on the grant date of the warrants was $112,717 was charged to operations as services.
During the year ended December 31, 2017,
the Company issued an aggregate of 9,246,257 warrants to purchase the Company’s common stock at $0.10 per share, expiring
four years from issuance, in connection with the issuance of convertible notes payable. In addition, the Company issued 3,219,106
warrants to purchase the Company’s common stock at $0.001 per share, expiring seven years from issuance for placement agent
services.
During the year ended December 31, 2017,
the Company issued an aggregate of 11,883,329 warrants to purchase the Company’s common stock at $0.10 per share, expiring
four years from issuance, in connection with the six month extension of previously issued convertible notes payable. The fair value
on the grant date of the warrants was $767,936 was charged to operations as loss on extinguishment of debt.
During the year ended December 31, 2018,
the Company issued an aggregate of 3,549,166 warrants to purchase the Company’s common stock at $0.10 per share, expiring
four years from issuance, in connection with the issuance of convertible notes payable. In addition, the Company issued 9,854,512
warrants to purchase the Company’s common stock at $0.001 per share, expiring seven years from issuance for placement agent
services valued at $1,280,507.
During the year ended December 31, 2018,
the Company issued an aggregate of 2,818,625 warrants to purchase the Company’s common stock at $0.25 per share, expiring
four years from issuance, in connection with the exercise of warrants (see below).
During the year ended December 31, 2018,
the Company issued an aggregate of 13,020,414 warrants to purchase the Company’s common stock at $0.10 per share, expiring
four years from issuance, in connection with the six month extension of previously issued convertible notes payable. The fair value
on the grant date of the warrants was $1,109,829 was charged as a debt discount up to the initial proceeds of the related notes
and excess to operations as loss on extinguishment of debt.
During the year ended December 31, 2018,
the Company reduced previously issued warrants exercisable at $0.10 per share to $0.06 per share as an inducement to exercise.
In addition, as part of the exercise of the warrant, the holder would receive one Series B warrant (exercisable at $0.25 per share,
expiring four years from issuance -see above) for every four warrants exercised. As of December 31, 2018, the Company issued 6,429,917
shares of common stock for warrant exercises with net proceeds of $382,695. The Company accounted for the transaction under inducement
accounting and accounted for the price reduction of $0.04 per share and the fair value of the Series B warrants as inducement expense
in the amount of $734,273. In addition, the Company has received net proceeds of $287,575 for the exercise of 4,844,583 additional
warrants of which the shares were not issued until after December 31, 2018.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Litigations, Claims and Assessments
The Company may be involved in legal proceedings,
claims and assessments arising in the ordinary course of business. Such matters are subject to many uncertainties, and outcomes
are not predictable with assurance. There are no such matters other than described above that are deemed material to the consolidated
financial statements as of December 31, 2018 and 2017.
Employment Agreements
On February 21, 2017, the Company entered
into an employment agreement with an individual, pursuant to which, commencing March 6, 2017, the individual will serve as the
Interim Chief Executive Officer of the Company and, commencing 90 days thereafter, shall serve as Chief Executive Officer of the
Company through March 5, 2019, subject to extension as provided in the employment agreement, and be appointed to the Board of Directors.
The agreement calls for an annual salary of $250,000 per annum and a bonus in the amount of 10% of all incremental gross revenue
generated by the Company, which bonus shall be determined and be payable quarterly. In addition, pursuant to the employment agreement,
the Company granted to the individual certain stock options (See Note 9).
On March 6, 2017, William Gorfein resigned
as the Company’s Chief Executive Officer and was named the Company’s Chief Strategy Officer and Principal Financial
Officer. No changes were made to Mr. Gorfein’s existing employment agreement.
On November 26, 2019, Walter Ray Colwell
resigned as Chief Executive Officer (“CEO”) of PeerLogix, Inc. (the “Company”). No changes were made to
the Company’s management after Mr. Colwell’s resignation.
Payroll Tax Liabilities
As of December 31, 2018, and through the
date of this report, the Company has not filed certain federal and state income and payroll tax returns nor has it paid the payroll
tax amounts and related interest and penalties relating to such returns. Payroll tax amounts due as of December 31, 2018, were
$19,127 and penalties and interest are estimated to be $10,924 and $10,118 as of December 31, 2018 and 2017, respectively which
have been included in other accrued liabilities at December 31, 2018 and 2017 in the accompanying consolidated Balance Sheets.
Placement Agent and Finders Agreements
In 2016 and 2017, the Company entered into
a Financial Advisory and Investment Banking Agreements with WestPark Capital, Inc. (“WestPark”) (the “WestPark
Advisory Agreements”). Pursuant to the WestPark Advisory Agreement, WestPark shall act as the Company’s financial advisor
and placement agent in connection with a best efforts private placement (the “Financing”) of the Company’s debt
and/or equity securities (the “Securities”).
The Company, upon each closing of the Financing
will pay consideration to WestPark, in cash, a fee in an amount equal to 10% of the aggregate gross proceeds raised in the Financing
from the sale of Securities placed by WestPark and warrants in the amount of 10% of the aggregate gross proceeds. The Company will
also pay all WestPark legal fees and expenses as well as a 3% non-accountable expense allowance of the aggregate gross proceeds
raised in the Financing. The Placement Agent Warrants will have: (a) a nominal exercise price of $0.001 per share, (b) a seven
year term, and (c) a cashless exercise provision. The shares underlying the Placement Agent Warrants will have standard piggyback
registration rights.
During the year ended December 31, 2017,
in addition to the cash fees, the Company issued 1,319,750 shares and 3,219,106 warrants to acquire the Company’s common
stock at $0.001 per share for seven years as placement agent fees as per the terms of the WestPark Advisory Agreements. In addition,
as of December 31, 2017, the Company is obligated to issue an additional 1,333,467 warrants for placement agent fees with an exercise
price of $0.001, expiring seven years from issuance date. In 2018, the Company issued placement agents warrants in aggregate of
9,854,512 with the same terms as 2017 for past advisory services. The fair value of $1,280,507 was charged to current year operations.
NOTE 10 – INCOME TAXES
The
tax effects of temporary differences that give rise to deferred tax assets as of December 31, 2018 and 2017 are presented below:
The income tax provision (benefit) consists
of the following:
|
|
2018
|
|
|
2017
|
|
Federal
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
–
|
|
|
$
|
–
|
|
Deferred
|
|
|
(691,673
|
)
|
|
|
(94,974
|
)
|
State and local
|
|
|
|
|
|
|
|
|
Current
|
|
|
–
|
|
|
|
–
|
|
Deferred
|
|
|
(310,405
|
)
|
|
|
(42,630
|
)
|
Change in valuation allowance
|
|
|
(1,002,078
|
)
|
|
|
137,604
|
|
Income tax provision (benefit)
|
|
$
|
–
|
|
|
$
|
–
|
|
The reconciliation between the statutory
federal income tax rate and the Company’s effective rate for the years ended December 31, 2018 and 2017 is as follows:
|
|
2018
|
|
|
2017
|
|
U.S. Federal statutory rate
|
|
|
(21.0%
|
)
|
|
|
(34.0%
|
)
|
State tax, net of federal tax benefit
|
|
|
(9.4
|
)
|
|
|
(9.4
|
)
|
Federal tax rate change
|
|
|
0.0
|
|
|
|
10.9
|
|
Stock based compensation
|
|
|
13.5
|
|
|
|
8.9
|
|
Non-deductible interest expense
|
|
|
16.3
|
|
|
|
27.9
|
|
Other permanent differences
|
|
|
5.8
|
|
|
|
(7.0
|
)
|
Change in valuation allowance
|
|
|
(5.2
|
)
|
|
|
2.7
|
|
Income tax provision (Benefit)
|
|
|
0.0%
|
|
|
|
0.0%
|
|
As of December 31, 2018 and 2017 the deferred
tax assets consisted of the following:
|
|
2018
|
|
|
2017
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryovers
|
|
$
|
809,873
|
|
|
$
|
1,269,504
|
|
Total deferred tax asset
|
|
|
809,873
|
|
|
|
1,269,504
|
|
Valuation allowance
|
|
|
(809,873
|
)
|
|
|
(1,269,504
|
)
|
Net Deferred Tax Asset, net of valuation allowance
|
|
$
|
–
|
|
|
$
|
–
|
|
The
Company is required to file its income tax returns in the U.S. federal jurisdiction and the state of New York and such returns
are subject to examination by tax authorities. Tax returns for the years ended December 31, 2016, 2017 and 2018 remain open to
Internal Revenue Service and State audits.
The
Company has not filed its federal and state tax returns for the years ended December 31, 2018, 2017, 2016, 2015, 2014, 2013 and
2012. The Net operating losses (“NOLs”) for these years will not be available to reduce future taxable income until
the returns are filed. Assuming these returns are filed, as of December 31, 2018, the Company had approximately $3.8 million of
federal and state net operating losses that may be available to offset future taxable income. The net operating loss carryforwards
will begin to expire in 2035 unless utilized. In accordance with Section 382 of the Internal Revenue Code, deductibility of the
Company’s U.S. net operating carryovers may be subject to an annual limitation in the event of a change of control as defined
the regulations. A Section 382 analysis has not been prepared and the Company’s NOLs could be subject to limitation.
The
Company assesses the likelihood that deferred tax assets will be realized. To the extent that realization is not likely, a valuation
allowance is established. Based upon the Company’s losses since inception, management believes that it is more likely
than not that the future benefits of its deferred tax assets will not be realized and has therefore established a full valuation
allowance.
Management will be taking on a project
to file delinquent federal and state tax returns in the upcoming reporting periods and updated values will be disclosed in the
following reporting periods.
On December 22, 2017, new legislation was
signed into law, informally titled the Tax Cuts and Jobs Act, which included, among other things, a provision to reduce the federal
corporate income tax rate to 21%. Under ASC 740, Accounting for Income Taxes, the enactment of the Tax Act also requires
companies, to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive
effects of changes in tax laws in the period in which the new legislation is enacted. There is no further change to its assertion
on maintaining a full valuation allowance against its U.S. deferred tax assets. The Company’s gross deferred tax assets have
been revalued from 34% to 21% with a corresponding offset to the valuation allowance and any potential other taxes arising due
to the Tax Act will result in reductions to its net operating loss carryforward and valuation allowance. Deferred tax assets of
approximately $1,800,000 have been revalued to approximately $1,200,000 with a corresponding decrease to the Company’s valuation
allowance. Therefore, there was no net impact on the Company’s financial statements for the year ended December 31, 2018.
NOTE 11 – SUBSEQUENT EVENTS
Increase in Authorized Shares
On April 16, 2019, our board of directors approved, and the
company effectuated an amendment to Article THIRD of our Certificate of Incorporation to increase the number of authorized shares
of our common stock from 100,000,000 shares to 350,000,000 shares. The number of shares of authorized preferred stock remains unchanged
at 10,000,000.
Financing
Subsequent to year end, the Company entered
into convertible notes worth an aggregate of $331,668 with eleven investors. The note maturities range from six months to one year
and carry interest rates ranging from 12.5% to 18%. The conversion feature embedded in the convertible note is accounted for as
a derivative liability with adjustments to the fair value of the liability charged to the income statement. In connection with
the convertible notes, the Company issued an aggregate of 7,625,000 warrants exercisable at $0.10 per share.
Interest Conversion
In first quarter 2019, the Company issued
an aggregate of 1,419,900 shares of common stock to 10 investors for partial conversion of interest on outstanding convertible
notes of $85,194 at the conversion price of $0.06 per share stated in the note agreement.
Settlement Agreement with Investor
The Company and Attia entered into a settlement
agreement on April 16, 2018 that required the Company to pay cash, issue 800,000 unregistered shares of common stock and to timely
file a registration statement to register the 800,000 shares. On July 7, 2020 the Company issued 2,250,000 unregistered shares
of common stock, with a value of $0.03 per share based on the price per share on the date of issuance, in lieu of filing a registration
statement as stated in the settlement agreement, thus satisfying the original requirement to register the shares. . As of July
7, 2020, the company has fully satisfied the 2018 settlement agreement and has no further obligation to Attia.
Departure of Chief Executive Officer
On November 26, 2019, Walter Ray Colwell
tendered his resignation as Chief Executive Officer (“CEO”) of PeerLogix, Inc. (the “Company”). Mr. Colwell’s
employment agreement was terminated, however Mr. Colwell retained his options. The Company’s Principal Financial Officer,
William Gorfein, assumed the role of CEO upon Mr. Colwell’s departure.
Salary Conversion
In first quarter 2019, the Company issued
4,012,185 shares of common stock in exchange for the forgiveness and dismissal of $361,097 of accrued and unpaid salary and board
fees owed to one of the Company’s directors. The shares had a fair value of $0.09 per share on the date of grant.
Stock option Cancellation and Issuance
On July 9, 2020, the Company cancelled
30,000,000 stock options with an original grant date of December 1, 2018 and an exercise price of $0.09 per share issued to two
directors of the Company. On the same day, the Company granted to the same two directors 50,000,000 stock options with exercise
price of $0.05 per share with a ten-year term. Fifty percent of the options vest immediately, twenty five percent in six months
from grant date and twenty five percent in one year from grant date. The cancellation and issuance of the stock options will be
treated as an option modification. The old options will be valued on the day before the cancellation and will be compared to the
value of the new options with the corresponding difference recorded in the income statement.
Warrant repricing and exercise agreement
In 2019, the Company entered into a warrant
repricing and exercise agreement with certain warrant holders of the Company. Pursuant to the agreement the Company offered existing
warrant holders the opportunity to exercise all or a portion of their existing warrants into amended warrants with a revised exercise
price of $0.06 per share. Simultaneously with execution of the warrant and repricing and exercise agreement the holders of the
amended warrants agreed to exercise a portion of those warrants. As added consideration the Company issued an aggregate of 1,211,146
Series B warrants to the above warrant holders.
Paycheck Protection Program
The COVID-19 Aid, Relief and Economic Security
Act (CARES Act) was signed into law on March 27, 2020 and provided for, among other things, the Payroll Protection Program (PPP).
The CARES Act temporarily added the PPP Loan program to the U.S. Small Business Administration’s (SBA) 7(a) Loan Program
and provides for the forgiveness of up to the full amount of qualifying loan plus accrued interest guaranteed under the program.
The Company applied for and received on April 23, 2020, through a bank, $35,800 under this program. The loan provides for an annual
interest rate of 1% and a term of two years from the date the proceeds were received. Payments of principal and interest are deferred
for the first six months of the loan period.