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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes
☒
No
☐
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K
☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
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, 2017 was $1,854,320.
The number of shares of the registrant’s
common stock outstanding as of April 30, 2018 was 46,122,368.
The
information contained in this Annual Report on Form 10-K for year ended December 31, 2017 (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 software as a service (SAAS) platform, which enables
the tracking and cataloguing of over-the-top viewership and listenership in order to determine consumer trends and preferences
based upon media consumption. Its platform collects over-the-top data, including Internet Protocol (IP) addresses of the streaming
and downloading parties (location), the name, media type and genre of media watched, listened or downloaded, and utilizes licensed
and publicly available demographic and other databases to further filter the collected data to provide insights into consumer preferences
to digital advertising firms, product and media companies, entertainment studios and others.
The Company was incorporated
on February 14, 2014 in Nevada under the name of Realco International, Inc. The Company previously offered real estate marketing
and sales services to individuals and businesses seeking to purchase international real estate, with a particular focus on the
European and Middle Eastern markets.
On August 14, 2015,
the Company entered into a share exchange transaction whereby all of the shareholders of PeerLogix Technologies, Inc., a privately
held Delaware corporation (“PeerLogix Delaware”), exchanged all of their shares of common stock for newly issued shares
of common stock of the Company (the “Share Exchange”). As a result of the Share Exchange, PeerLogix Delaware has become
a wholly-owned subsidiary of the Company and its business operations are assumed by the Company. On September 3, 2015, the Company
filed a Certificate of Amendment to its Articles of Incorporation changing its name from Realco International, Inc. to PeerLogix,
Inc.
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 Adoption and Activity
Over-the-top media
viewership and listenership represents up to 22% of all worldwide internet traffic, and is used by approximately 140 million people
worldwide to consume TV shows, movies, music, pictures, video games, e-books and software online. All major entertainment and media
content is available to consumers tuning in via over-the-top media channels. Of this population of tech-savvy consumers, approximately
40 million reside in the United States and 100 million are distributed throughout all major and developing countries of the world.
Over-the-Top media
activity represents one of the most significant categories of global Internet usage, comprising up to 22% of all Internet traffic
during peak activity. Although Over-the-Top data available at any one point in time is ephemeral and is then lost, the Company
has been storing and continues to store all such data in a fully scalable database which has been aggregating the results since
approximately January 1, 2014, providing the distinctive ability to provide trend data on the basis of media consumption. The Company’s
proprietary platform operates on an automatic basis with little human interaction and continually acquires and catalogues data
on Over-the-Top media activity in real time, obtaining millions of data points daily.
PeerLogix Platform
The Company’s proprietary platform
enables the tracking and cataloging of over-the-top media in order to determine consumer trends and preferences based upon media
consumption. PeerLogix’s patent pending 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 analyzes its proprietary Media Library of over two billion media downloads and overlays it with select third party demographic
and behavioral datasets to determine the degree of likelihood a client’s target audience is to be interested in a specific
TV show, musical artist, movie, video game and/or commercial software package. By blending Over-the-Top viewership and listenership
data with third party datasets, the Company’s platform enables media pattern identification and tracking and furthermore,
enables clients to test assumptions about who their customers really are and the specific media those customers truly value.
Services Offered
The services offered
by the Company are two-fold:
1) Data licensing
services that provide marketers, publishers and networks custom digital audience segments that match specific advertiser criteria
(e.g., specific sporting interests, luxury retail, media genre, 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) PeerLogix
invites select clients to join the Company's reseller marketplace. These clients are able to establish additional revenue streams
by reselling their own first party audience data via PeerLogix’s reseller relationships. Data sales which take place are
structured as a rev-share between PeerLogix and the respective client.
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 by Digital Element 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 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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Expanding
Value of OVER-THE-TOP Data
Third Party Datasets
The Company has also
collected third party nonproprietary datasets from a multitude of data brokers. These datasets include: Consumer Lifestyles, Sports,
Household Characteristics, Financial, Apparel Preferences, Charitable Causes, Political Leanings, Parenting, Hobbies, Food, Travel,
Pets, Automotive, Income, Home Market Valuations, Net Worth, Credit Worthiness, Languages, Ethnicities, Gender, Education, Occupation,
Children, Marital Status and Religion. All third party data is collected anonymously and aggregated by zip code. By aggregating
in this method, the Company is able to overlay information from one or a combination of these datasets to build a profile of popular
characteristics associated with Over-the-Top audiences.
The Company believes
the following implementations, which further-enhance Over-the-Top analysis, provide significant market opportunities for the Company,
as well as unique value propositions not identically available from alternative data solutions. Implemented applications include:
PeerLogix Analytics; Further Value
for Clients
Audience Analysis -
Clients of the Company are able to select a single musical artist, television show, movie, ebook or video game, and discover generalized
audience characteristics of the population of the respective media’s audience (e.g., the demographics of Jay-Z listeners).
This analysis has many applications, and provides entertainers, content owners and studios an easier ability to understand the
underlying audience characteristics of content they produce. This facilitates simpler and more efficient marketing efforts and
better evaluation of potential merchandising opportunities.
Media Analysis
– Conversely to the aforementioned Audience Analysis, clients of the Company are able to select a single or multitude of
demographics and behaviors from its aggregated third party data, and the PeerLogix Dashboard will calculate highly correlated Over-the-Top
media (e.g., television shows and movies) associated with those demographics and behaviors. This enables the determination of preferred
media preferences of people exhibiting said characteristics (e.g., soccer fans who have a high degree of credit worthiness prefer
watching Breaking Bad and Game of Thrones). This analysis has many applications, including but not limited to determining ideal
placement of advertising in respect to television programming, assisting agencies and others to direct advertising spend across
campaigns and projects.
Development Pipeline
The Company plans to
expand its product and service offerings by including additional products that cater to the marketing and advertising needs of
its core client base. These offerings include:
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Digital Advertising Delivery
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A data pipeline to Digital Advertising Exchanges (an advertising exchange is an automatic platform for selling and buying online advertising inventories where space buyers (advertisers, media agencies, retargeting networks) and suppliers (networks, publisher) meet. An advertising exchange allows automation for buying / selling phases and campaign implementation), enabling direct advertising to Over-the-Top audiences for clients of said Digital Advertising Exchanges. Utilizing this model, the Company expects that it would receive a royalty payment for each advertising impression shown. The primary advantage of this model is immediate scalability to hundreds (and perhaps thousands) of clients who are already customers of said Digital Advertising Exchanges.
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PeerLogix Digital Advertising Server, enabling
website owners who are frequented by Over-the-Top households to receive advertising campaigns facilitated by the Company to their
websites. Music and entertainment marketers are increasingly appropriating advertising budgets to target users using music streaming
services (e.g., Pandora, Spotify), and the Company sees this model as a compliment to such efforts.
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Revenue
Model
Revenue from Clients
The Company anticipates
that after initial client validation, its solution will be sold on a subscription basis, with estimated annualized revenues per
client between $24,000 and $96,000. The Company intends to offer various pricing modules to accommodate Agencies, Entertainment
Studios, Trading Desks, and others. As with most subscription based services, the Company intends to offer different subscription
packages for ongoing support, such as an ongoing support license. Over time, the Company intends to apply optimization techniques
to determine different pricing schemes. Revenues from 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.
The Company will offer
its clients both online and invoice billing. Online billing will enable easy payment from the client’s business checking
account or check card. Invoice billing will require a traditional commercial document being issued by the Company to clients on
a monthly basis, typically providing net 30 payment terms.
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 1
st
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. Furthermore,
these efforts are intended to augment efforts undertaken by the Company’s presales partner, Corporate Rain International
(see below), to prompt quicker market penetration of the PeerLogix Dashboard. Specific efforts will 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.
Churn
SaaS churn is the rate
at which SaaS customers, such as those who become clients of the Company, cancel their recurring revenue subscription. It is a
general indicator of customer dissatisfaction, cheaper and/or better offers from competitors, more successful sales and/or marketing
by competitors, or reasons having to do with the customer life cycle. 5-8% annual churn rates are generally experienced by SaaS
companies offering analytics products, and management anticipates similar results with its own customer retention.
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. The Company has patent pending status currently in the United States (US 13/847,418), Europe, Australia,
Canada, Japan and Israel.
The Company has also
filed a PCT (Patent Cooperation Treaty) application in China, India, Brazil and Mexico to preserve its ability to later file in
these countries.
In addition to the
Company’s patent portfolio, the Company’s proprietary database contains 36 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 two employees located in the United States, and one independent contractor in New Zealand. The independent contractor and one
of the Company’s domestic employees focus on research and 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
Smaller reporting 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 24
th
Street, 4
th
Floor, New
York, NY 10011 and our phone number is
646-825-8549
.
Item 3. Legal Proceedings.
Attia Enterprises,
a creditor, has initiated a claim against the Company for $87,500 relating to a loan due of $46,664 including interest currently
in default. The Company retained counsel for representation in the matter. Subsequent to December 31, 2017, the company accepted
a settlement totaling approximately $90,000 cash and 750,000 shares of stock. The company has accounted for it in accordance with
ASC450.
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 CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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.
On August 14, 2015, the Company entered
into a share exchange transaction whereby all of the shareholders of PeerLogix Technologies, Inc., a privately held Delaware corporation
(“PeerLogix Delaware”), exchanged all of their shares of common stock for newly issued shares of common stock of the
Company (the “Share Exchange”). As a result of the Share Exchange, PeerLogix Delaware has become a wholly-owned subsidiary
of the Company and its business operations are assumed by the Company. On September 3, 2015, the Company filed a Certificate of
Amendment to its Articles of Incorporation changing its name from Realco International, Inc. to PeerLogix, Inc.
NOTE 2 – GOING CONCERN AND MANGAGEMENT’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 $5.0 million and net cash used in operations of approximately $725,000 for the year ended
December 31, 2017. In addition, the Company has notes payable in default (see Note 7). These conditions indicate that there is
substantial doubt about the Company's ability to continue as a going concern within one year from the issuance date of the 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.
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.
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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 four
basic criteria are met before: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price
is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s
judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions
for adjustments are provided for in the same period the related sales are recorded.
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
uncertainly of amount of revenue earned during the process, it is recognized upon payout and receipt of payment. Revenue through
December 31, 2017 had been de minimis to the consolidated financial statements.
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,
2017 and 2016, 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).
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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 ASC 815 “Derivatives
and Hedging”
The accounting treatment of derivative
financial instruments requires that the Company record the conversion option, if applicable, at their fair values as of the inception
date of the agreements and at fair value as of each subsequent balance sheet date. Any change in fair value was recorded as a change
in the fair value of derivative liabilities for each reporting period at each balance sheet date. The Company reassesses the classification
at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified
as of the date of the event that caused the reclassification.
The fair values of conversion options that
are convertible at a variable conversion price are valued using a Black-Scholes Valuation Model. The Company determined the fair
value of the conversion option using either the Black-Scholes Valuation Model or the Binomial Lattice Model to be materially the
same.
The Black-Scholes Valuation Model includes
subjective input assumptions that can materially affect the fair value estimates. The model was developed for use in estimating
the fair value of traded options or warrants. The expected volatility is estimated based on the most recent historical period of
time equal to the weighted average life of the instrument granted.
The principal assumptions used in applying the Black-Scholes
model were as follows:
|
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 840-15-25 which provides guidance for contracts that permit partial net share
settlement. The sequencing approach may be applied in one of two ways: contracts may be evaluated based on (1) earliest issuance
date or (2) latest maturity date. Pursuant to the sequencing approach, the Company evaluates its contracts based upon the latest
maturity date.
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.
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Total shares issuable upon the exercise
of warrants, exercise of stock options and conversion of convertible promissory notes for the year ended December 31, 2017 and
2016 were as follows:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Warrants
|
|
|
36,305,369
|
|
|
|
8,956,677
|
|
Stock options
|
|
|
24,550,000
|
|
|
|
12,300,000
|
|
Convertible promissory notes and accrued interest
|
|
|
35,227,200
|
|
|
|
11,408,333
|
|
Total
|
|
|
96,082,569
|
|
|
|
32,665,010
|
|
For the year ended December 31, 2017, 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, 2017 and 2016.
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, 2017 and 2016. 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, 2017 and 2016.
Advertising
The Company follows the policy of charging
the costs of advertising to expense as incurred. The Company charged to operations $6,453 and $4,333 as advertising costs for the
years ended December 31, 2017 and 2016, 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.
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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, 2017
|
|
|
|
|
Fair Value Measurement Using
|
|
|
|
Carrying
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative conversion features
|
|
$
|
935,274
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
935,274
|
|
|
$
|
935,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
Fair Value Measurement Using
|
|
|
|
Carrying
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative conversion features
|
|
$
|
-
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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 two years ended December 31, 2017:
|
|
Fair Value
Measurement Using
Level 3 Inputs
|
|
|
|
Total
|
|
|
|
|
|
Balance, December 31, 2016 (and prior)
|
|
$
|
–
|
|
Reclassification of derivative liability from equity
|
|
|
172,036
|
|
Issuances, reassessments and settlements
|
|
|
2,552,772
|
|
Reclassification of derivative liability to equity
|
|
|
(48,093
|
)
|
Change in fair value
|
|
|
(1,741,441
|
)
|
Balance, December 31, 2017
|
|
$
|
935,274
|
|
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 Adopted Accounting Guidance
In March 2016, the FASB
issued ASU No. 2016-06, “Derivatives and Hedging” (Topic 815). The FASB issued this update to clarify the requirements
for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly
and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to
assess the embedded call (put) options solely in accordance with the four-step decision sequence. The updated guidance is effective
for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the
update is permitted. The Company adopted the provisions of ASU 2016-06 on January 1, 2017. The adoption of ASU 2016-06 did not
materially impact its consolidated financial position, results of operations or cash flows.
In April 2016, the FASB issued ASU No.
2016-09, “Compensation – Stock Compensation” (Topic 718). The FASB issued this update to improve the accounting
for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several
aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b)
classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated guidance
is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption
of the update is permitted. The Company adopted the provisions of ASU 2016-09 on January 1, 2017. The adoption of ASU 2016-09 did
not materially impact the Company’s consolidated financial position, results of operations or cash flows.
Recently Issued Accounting Guidance
In May 2014, the Financial
Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09 “Revenue
from Contracts with Customers” to supersede previous revenue recognition guidance under current U.S. GAAP. The guidance
presents a single five-step model for comprehensive revenue recognition that requires an entity to 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. Two options are available for implementation of the standard which is
either the retrospective approach or cumulative effect adjustment approach. The guidance becomes effective for annual reporting
periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted.
The Company anticipates using the modified retrospective transition method beginning with the first quarter of fiscal 2019. The
adoption of ASU 2014-09 using the modified retrospective transition method in the first quarter of fiscal 2019 is not anticipated
to have a material impact on the Company’s financial statements.
In May 2017, the FASB issued ASU 2017-09,
“Compensation-Stock Compensation” (Topic 718): Scope of Modification Accounting. The amendments provide guidance on
determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting
under Topic 718 Compensation-Stock Compensation. An entity should account for the effects of a modification unless all the following
are met: (1.) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the
modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method
is used) of the original award immediately before the original award is modified. If the modification does not affect any of the
inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately
before and after the modification. (2.) The vesting conditions of the modified award are the same as the vesting conditions of
the original award immediately before the original award is modified. (3.) The classification of the modified award as an equity
instrument or a liability instrument is the same as the classification of the original award immediately before the original award
is modified.
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The ASU is effective for all entities for
annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted,
including adoption in any interim period. The Company is currently assessing the impact that this standard will have on its consolidated
financial statements.
In July 2017, the FASB issued ASU 2017-11,
“Earnings Per Share” (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic
815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral
for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling
Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments
with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result
in the strike price being reduced on the basis of the pricing of future equity offerings. When determining whether certain financial
instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification
when assessing whether the instrument is indexed to an entity's own stock. Part II of this update addresses the difficulty of navigating
Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting
Standards Codification. For public business entities, the amendments in Part I of this update are effective for fiscal years, and
years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period.
The Company is currently assessing the impact that this standard will have on its condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02—Leases
(Topic 842), requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with
the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in
the income statement. The effective date of the new standard for public companies is for fiscal years beginning after December
15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified
retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented.
The Company is evaluating the effect that the updated standard will have on its financial statements and related disclosures.
In August 2016, the FASB issued ASU
2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15
provides guidance for eight specific cash flow issues with respect to how cash receipts and cash payments are classified in
the statements of cash flows, with the objective of reducing diversity in practice. The effective date for ASU 2016-15 is for
annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted.
The Company is currently assessing the impact of this new standard on its financial statements.
There were various updates recently issued,
most of which represented technical corrections to the accounting literature or application to specific industries and are not
expected to a have a material impact on the Company’s financial position, results of operations or cash flows.
Subsequent Events
The Company evaluates events that have
occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company
did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated
financial statements, except as disclosed.
NOTE 4 – 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.
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
NOTE 5 – NOTES PAYABLE
On
January 28, 2016, the Company entered into a Securities Purchase Agreement (“SPA”), Promissory Note (the “January
Note”) and Registration Rights Agreement (“RRA”) (collectively, the “Transaction Documents”) with
Pinewood Trading Fund, L.P. (“Pinewood”). Pursuant to the SPA, the Company issued 100,000 shares (the “Shares”)
of its common stock (the “Common Stock”), in exchange for Pinewood lending $105,000 (“Funding Amount”)
to the Company pursuant to the January Note with a principal amount of $131,250 (“Principal Amount”).
The January
Note was due on July 28, 2016 or earlier in the event that the gross proceeds of any Company offering equals or exceeds $300,000.
The January Note is secured by all assets of the Company.
As part of the transaction, the Company
recorded an $18,000 debt discount relating to the relative fair value of the 100,000 shares of common stock issued and $26,250
was recorded as an original issue discount and is being accreted over the life of the note to interest expense. The shares were
valued based on the quoted closing trading price on the date of issuance. In addition the Company incurred legal fees of $7,418
which will be amortized over the life of the note to interest expense.
The outstanding principal balance
on the January Note at December 31, 2016 was $106,000.
During the year ended December 31, 2017,
the Company repaid the remaining $106,000 in principal along with outstanding accrued interest of $12,687 on a promissory note
which was previously in default. The outstanding principal balance on the note at December 31, 2017 was $0.
Under
the terms of the RRA with Pinewood, the Company committed to file a registration statement on or prior to March 31, 2016 or any
additional registration statements which may be required pursuant to the terms of the RRA on or prior to the earliest practical
date (“Filing Date”), covering, among other things, the resale of all or such portion (as permitted by SEC Guidance
and Rule 415) of all of the Shares and any shares of Common Stock issued or issuable upon any stock split, dividend or other distribution,
recapitalization or similar event with respect to the Shares (the “Registrable Securities”) on such Filing Date that
are not then registered on an effective registration statement.
The
Company has agreed to use its commercially reasonable best efforts to cause the registration statement to be declared effective
under the Securities Act as promptly as practicable after the filing thereof, and use its commercially reasonable best efforts
to keep such registration statement continuously effective under the Securities Act until all Registrable Securities covered by
such registration statement have been sold, or may be sold without volume restrictions pursuant to Rule 144, as determined by the
counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company’s transfer
agent and the Holder (the “Effectiveness Period”).
If
the Company fails to file the registration statement on or prior to the Filing Date, or fails to maintain the effectiveness of
the registration statement pursuant to the terms of the RRA, the Company may be subject to partial cash liquidated damages, and
not as a penalty, equal to $2,500 per month (not to exceed an aggregate of $20,000), pro-rated for periods of less than 30 days.
If the Company fails to pay any partial liquidated damages in full within seven (7) days after the date payable, the Company will
pay interest, as an addition to the stated original issue discount, thereon at a rate of 18% per annum (or such lesser maximum
amount that is permitted to be paid by applicable law) to Pinewood, accruing daily from the date such partial liquidated damages
are due until such amounts, plus all such interest thereon, are paid in full. As of the date of this report the registration statement
has not been filed. For the year ended December 31, 2017 and 2016, the Company has accrued liquidated damages of $0 and $20,000
along with accrued interest of $4,051 and $1,359, respectively, and has recorded such amounts in interest expense in the consolidated
statement of operations.
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
On August 22, 2016, the Company issued
an unsecured convertible promissory note in principal amount of $25,000 to an accredited investor through a private placement.
The note bears interest at a rate of 12% per annum, with maturity on the earlier of i) September 22, 2016 or ii) an offering of
securities of the Company through WestPark. On September 22, 2016, the promissory note was converted into a convertible note per
the contractual terms of the WestPark Offering (See Note 6 and Note 9).
As part of the transaction, the
Company incurred placement agent fees of $3,250 which were recorded as debt issuance costs. The debt issuance costs were
accreted over the life of the notes to interest expense.
NOTE 6 – CONVERTIBLE NOTES PAYABLE
Convertible notes payable are comprised
of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Offering 3
|
|
$
|
825,500
|
|
|
$
|
600,500
|
|
Offering 4
|
|
|
439,550
|
|
|
|
–
|
|
Offering 5
|
|
|
200,000
|
|
|
|
–
|
|
Offering 6
|
|
|
245,000
|
|
|
|
–
|
|
Total
|
|
|
1,710,500
|
|
|
|
600,500
|
|
Less: debt discount
|
|
|
277,969
|
|
|
|
512,014
|
|
Net
|
|
$
|
1,432,081
|
|
|
$
|
88,486
|
|
Offering 3, 4,5,6 (collectively referred
to as “Offerings”):
During the years ended December 31, 2017
and 2016, the Company sold $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 will be convertible at
an initial price equal to $0.06 per share. In addition, during the two month period commencing on each issuance of the Offering
3 Notes, as amended, the Notes will contain a look-back provision pursuant to which the Notes will be convertible at the lower
of $0.06 or the lowest volume weighted average price of the Company’s common stock (the “VWAP”) during any 10
day period during such two (2) month period, provided however, in the event that the VWAP during any such ten (10) day period is
less than $0.06, then the reset conversion price of the Notes shall be no lower than $0.03. The Notes also contain a reset provision
to the same price as any future offering in the next three (3) years in the event that the conversion or offering price of securities
offered in such subsequent offering is less than the Conversion Price of the Notes in this Offering.
The 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 Company has applied ASC 815, due to
the potential for settlement in a variable quantity of shares. The conversion feature has been measured at fair value using a Black
Scholes and Binomial model at the reassessment date and the period end. The conversion feature, when reassessed, gave rise to a
derivative liability of $1,526,300. In accordance with ASC 815, $129,434 was charged to paid in-capital due to the fact a beneficial
conversion feature was recorded on the original issue date. In addition the Company recorded a debt discount to the Notes of $90,153
relating to the fair value of the conversion option. The fair value of the conversion option on the date of issuance in excess
of the face amount of the note was recorded to interest expense on the date of issuance.
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The conversion feature of new Notes issued
during the year ended December 31, 2017, gave rise to a derivative liability of $1,544,007. The gross proceeds from the
sale of the Notes were recorded net of a discount of $1,167,289. The debt discount relates to fair value of the conversion
option, issuance costs, any allocated fair value of issued warrants and placement agent warrants. The debt discount is charged
to interest expense ratably over the term of the convertible note. The fair value of the conversion option on the date of issuance
in excess of the net proceeds of the note was recorded to interest expense on the date of issuance.
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 (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.
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.
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.
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 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.
NOTE 7 – CONVERTIBLE NOTES PAYABLE
– RELATED PARTY
On April 8, 2016 (the “Initial Closing
Date”), we entered into a Securities Purchase Agreement (the “SPA”) with Attia Investments, LLC, a related party
(the “Investor”). A shareholder of the Company who 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 (together the “Debentures”),
bearing interest at a rate of 0% per annum, with an original maturity on October 8, 2016, further extended to April 8, 2017. The
Debentures are secured by all assets of the Company. The Company is currently in default of the SPA, making the entire unpaid
principal and interest due and payable. The investor has initiated a claim against the Company for payment of a loan in default.
Subsequent to December 31, 2017, the company accepted a settlement totaling approximately $90,000 cash and 750,000 shares of stock.
The company has accounted for it in accordance with ASC450.
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The principal amount of the Debentures
can be converted at the option of the Investor into shares of the Company’s common stock at a conversion price per share
of the lower of (i) $0.05 or (ii) the price per share in an offering of securities prior to the maturity date.
The Company assessed the conversion feature
of the Debentures on the date of issuance and at the end of each subsequent reporting period through December 31, 2016 and concluded
the conversion feature of the Debentures did not qualify as a derivative because there was no market mechanism for net settlement
and they were not readily convertible to cash.
The Company reassessed the conversion feature
of the Notes for derivative treatment during January 2017 and concluded its shares were readily convertible to cash based on the
current trading volume of the Company’s stock. Due to the fact that these convertible notes have an option to convert at
a variable amount, they are subject to derivative liability treatment. The Company has applied ASC 815, due to the potential for
settlement in a variable quantity of shares.
The conversion feature has been measured
at fair value using a Black Scholes model at the reassessment date and the period end. The conversion feature, when reassessed,
gave rise to a derivative liability of $154,100. In accordance with ASC 815, $42,602 was charged to paid-in-capital since a beneficial
conversion feature was recorded on the original issue date. In addition, the Company recorded a debt discount to the Notes of
$70,000 relating to the fair value of the conversion option. The fair value of the conversion option on the date of issuance in
excess of the face amount of the note was recorded to interest expense on the date of issuance.
Amendment
On March 16, 2017, the Company entered
into an amendment to the SPA. The SPA was modified as follows:
|
·
|
The maturity date of the Debentures was extended to April 8, 2017;
|
|
·
|
The default interest rate was set at 18%.
|
As consideration for the amendment, the
Company increased the principal amount on the Debentures from $65,000 to $86,875 and issued the Investor 218,750 shares of common
stock with a fair value of $13,125. All remaining terms of the Debentures remained the same.
In accordance with ASC 470, since the present
value of the cash flows under the new debt instrument was at least ten percent different from the present value of the remaining
cash flows under the terms of the original debt instrument, the Company accounted for the amendment to SPA as a debt extinguishment.
Accordingly, the Company wrote off the remaining debt discount on the original Debentures of $17,312. The Company recorded a loss
on extinguishment of debt of $52,312 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 and 2016 was $41,857 and $70,000, respectively.
NOTE 8 – 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, 2017 and 2016,
the Company is reflecting a liability of $9,941 and $34,254, respectively. The Company did not impute interest on the loan as it
was deemed to be de minimis to the consolidated financial statements.
NOTE 9 – STOCKHOLDERS’ DEFICIT
Common stock issued for cash
On September 9, 2016, the Company sold
57,000 shares of common stock to an investor for proceeds of $2,000.
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Common stock issued for services
During
the year ended December 31, 2016, the Company issued an aggregate of 40,000 restricted common shares to a consultant with a fair
value of $8,000. The shares represented a bonus on a previous investor and public relations agreement. These shares vested immediately
on the date of issuance. The Company has recorded $8,000 in stock-based compensation expense for the year ended December 31, 2016,
which is a component of professional fees in the consolidated statements of operations. The shares were valued based on the quoted
closing trading price on the date of issuance.
During the year ended December 31, 2016,
the Company issued an aggregate of 500,000
restricted
common shares to a consultant
with a fair value of $56,667. The shares were issued as per the terms of an investor and public relations agreement. These shares
vested immediately on the date of issuance. The Company has recorded $56,667 in stock-based compensation expense for the year ended
December 31, 2016, which is a component of professional fees in the consolidated statements of operations. The shares were valued
based on the quoted closing trading price on the date of issuance.
During the year ended December 31, 2016,
the Company issued an aggregate of 166,667
restricted
common shares to a consultant
with a fair value of $50,000. The shares were issued as per the terms of an investor and public relations agreement. These shares
vested immediately on the date of issuance. The Company has recorded $50,000 in stock-based compensation expense for the year ended
December 31, 2016, which is a component of professional fees in the consolidated statements of operations. The shares were valued
based on the most recent sales of its common stock to independent qualified investors on the grant date.
During the year ended December 31, 2016,
the Company issued an aggregate of 10,000
restricted
common shares to a consultant
with a fair value of $6,000. The shares were issued as per the terms of an investor and public relations agreement. These shares
vested immediately on the date of issuance. The Company has recorded $6,000 in stock-based compensation expense for the year ended
December 31, 2016, which is a component of professional fees in the consolidated statements of operations. The shares were valued
based on the most recent sales of its common stock to independent qualified investors on the grant date.
During the year ended December 31, 2016,
the Company issued an aggregate of 100,000
restricted
common shares to a consultant
with a fair value of $14,200. The shares were issued as per the terms of a board advisory agreement. These shares vested immediately
on the date of issuance. The value of the shares will be expensed on a straight-line basis over the term of the agreement. The
Company has recorded $1,754 in stock-based compensation expense for the year ended December 31, 2016, which is a component of professional
fees in the consolidated statements of operations. The shares were valued based on the quoted closing trading price on the date
of issuance.
During the year ended December 31, 2016,
the Company issued an aggregate of 675,000
restricted
common shares to a placement
agent with a fair value of $67,500. The shares were issued upon entering into a Financial Advisory and Investment Banking Agreement.
These shares vested immediately on the date of issuance. The Company has recorded $67,500 in stock-based compensation expense for
the year ended December 31, 2016, which is a component of professional fees in the consolidated statements of operations. The shares
were valued based on the quoted closing trading price on the date of issuance.
During the year ended December 31, 2016,
the Company issued an aggregate of 450,375
restricted
common shares to a placement
agent with a fair value of $65,385. The shares were granted as compensation to the placement agent for Units sold in the Offering
during the year ended December 31, 2016. The shares were valued based on the quoted closing trading price on the date of issuance.
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.
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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, 2016,
the Company issued an aggregate of 6,229,999
restricted
common shares to investors
as part of a private placement of the Company’s debt and equity securities (See Note 6).
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, 2016,
the Company issued an aggregate of 175,000
restricted
common shares to a related party
investor as part of a private placement of the Company’s debt and equity securities (See Note 7).
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 7).
Common
stock issued with promissory notes
During the year ended December 31, 2016,
the Company issued an aggregate of 100,000
restricted
common shares to an investor
as part of a private placement of the Company’s debt and equity securities (See Note 5).
Common stock issued in connection
with 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 vesting 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.
Preferred Stock
The Company is authorized to issue up to
10,000,000 shares of preferred stock, par value $0.001 per share. No shares of its preferred stock are issued or outstanding.
2016 Amended and Restated Equity
Incentive Plan
The Board of Directors and stockholders
of the Company adopted the 2015 Equity Incentive Plan prior to the closing of the Share Exchange, which was amended and restated
in 2016, which reserves a total of 15,000,000 shares of Common Stock for issuance under the 2016 Plan. If an incentive award granted
under the 2016 Plan expires, terminates, is unexercised or is forfeited, or if any shares are surrendered in connection with an
incentive award, the shares subject to such award and the surrendered shares will become available for further awards under the
2016 Plan.
Shares issued under the 2016 Plan through
the settlement, assumption or substitution of outstanding awards or obligations to grant future awards as a condition of acquiring
another entity are not expected to reduce the maximum number of shares available under the 2016 Plan. In addition, the number
of shares of common stock subject to the 2016 Plan, any number of shares subject to any numerical limit in the 2016 Plan, and
the number of shares and terms of any incentive award are expected to be adjusted in the event of any change in 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, 2017,
no shares remain available for future issuance under the 2016 Plan.
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Stock options issued for services
During the year ended December 31, 2016,
the Company granted three board members an aggregate of 12,100,000 stock options for services rendered, having a total grant date
fair value of approximately $546,000. 2,200,000 options vest immediately and expire between 2021 and 2026. 2,700,000 options vest
in the event that the average volume weighted average price of the Company’s common stock over any 10 day period is greater
than or equal to $0.25 and expire between 2021 and 2026. 2,700,000 options vest in the event that the average volume weighted average
price of the Company’s common stock over any 10 day period is greater than or equal to $0.50 and expire between 2021 and
2026. 2,250,000 options vest in the event that the average volume weighted average price of the Company’s common stock over
any 10 day period is greater than or equal to $0.75 and expire in 2021. 2,250,000 options vest in the event that the average volume
weighted average price of the Company’s common stock over any 10 day period is greater than or equal to $1.00 and expire
in 2021. 1,750,000 of the options contain only service conditions and will be expensed on a straight-line basis over the service
period of the agreement. The remaining options contain market conditions and are being expensed over the derived service period
as computed by a Monte Carlo pricing model.
During the year ended December 31, 2016,
the Company granted of an aggregate of 200,000 stock options to two advisory board members, having a total grant date fair value
of approximately $9,600. The options have an exercise price ranging from $0.06 to $0.10 per share; have a ten (10) year term and
a vesting period of 1 year. These options will be revalued at the end of each reporting period until they vest and will be expensed
on a straight-line basis over the term of the agreements.
During the year ended December 31, 2017,
the Company granted its interim Chief Executive Officer an aggregate of 7,000,000 stock options with an exercise price of $0.11
for services rendered, having a total grant date fair value of approximately $409,000. 1,000,000 options vest immediately and expire
in 2027. 1,500,000 options vest in the event that the average volume weighted average price of the Company’s common stock
over any 10 day period is greater than or equal to $0.25 and expire between in 2027. 1,500,000 options vest in the event that the
average volume weighted average price of the Company’s common stock over any 10 day period is greater than or equal to $0.50
and expire in 2027. 1,500,000 options vest in the event that the average volume weighted average price of the Company’s common
stock over any 10 day period is greater than or equal to $0.75 and expire in 2027. 1,500,000 options vest in the event that the
average volume weighted average price of the Company’s common stock over any 10 day period is greater than or equal to $1.00
and expire in 2027. 1,000,000 of the options contain only service conditions and will be expensed on a straight-line basis over
the service period of the agreement. The remaining options contain market conditions and are being expensed over the derived service
period as computed by a Monte Carlo pricing model.
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. 1,750,000 options vest 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 between 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.
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,
2017
|
|
For the
Year Ended
December 31,
2016
|
|
Risk free interest rate
|
|
1.83-1.92%
|
|
|
0.087-2.45%
|
|
Dividend yield
|
|
0.00%
|
|
|
0.00%
|
|
Expected volatility
|
|
70.00-298.88%
|
|
|
59.00-83.71%
|
|
Expected life in years
|
|
10
|
|
|
5-10
|
|
Forfeiture rate
|
|
0.00
|
|
|
0.00%
|
|
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Since the Company has limited trading
history in 2016 and 2017, volatility was determined by averaging volatilities of comparable companies in addition to its historical
trading history. The Company determined it did not have
sufficient data to estimate the
volatility using the only 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, 2017:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Outstanding-January 1, 2016
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
Granted
|
|
|
12,300,000
|
|
|
|
0.11
|
|
|
|
5.94
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited/Canceled
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding – December 31, 2016
|
|
|
12,300,000
|
|
|
$
|
0.11
|
|
|
|
5.64
|
|
Granted
|
|
|
12,250,000
|
|
|
|
0.09
|
|
|
|
10.00
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited/Cancelled
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding – December 31, 2017
|
|
|
24,550,000
|
|
|
$
|
0.10
|
|
|
|
7.03
|
|
Exercisable – December 31, 2017
|
|
|
5,150,000
|
|
|
$
|
0.09
|
|
|
|
8.10
|
|
At December 31, 2017, the aggregate intrinsic
value of options outstanding and exercisable was $0.
Stock-based compensation for stock options
has been recorded in the consolidated statements of operations and totaled $450,413 and $166,565, for the years ended December
31, 2017 and 2016, respectively.
As of December
31, 2017, stock-based compensation of $487,684 remains unamortized and is expected to be amortized over the weighted average remaining
period of 2.75 years.
Warrants
The Company used the Black-Scholes model
to determine the fair value of warrants granted during the years ended December 31, 2017 and 2016. In applying the Black-Scholes
option pricing model to warrants granted, the Company used the following assumptions:
|
Year Ended
December 31,
2017
|
|
|
Year Ended
December 31,
2016
|
Risk free interest rate
|
1.10 – 2.14%
|
|
|
|
1.13 – 1.92%
|
Dividend yield
|
0.00%
|
|
|
|
0.00%
|
Expected volatility
|
65.32-316.98%
|
|
|
|
68.46 – 84.00%
|
Contractual term (years)
|
3.1-5
|
|
|
|
3.3 - 4
|
The following is a summary of the Company’s
warrant activity during the two years ended December 31, 2017:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Outstanding-January 1, 2016
|
|
|
2,951,669
|
|
|
$
|
0.66
|
|
|
|
4.54
|
|
Granted
|
|
|
6,005,008
|
|
|
|
0.10
|
|
|
|
4.00
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited/Canceled
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding – December 31, 2016
|
|
|
8,956,677
|
|
|
$
|
0.20
|
|
|
|
3.65
|
|
Granted
|
|
|
27,348,692
|
|
|
|
0.09
|
|
|
|
4.11
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited/Canceled
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding and Exercisable – December 31, 2017
|
|
|
36,305,369
|
|
|
$
|
0.11
|
|
|
|
3.74
|
|
At December 31, 2017, the aggregate intrinsic
value of warrants outstanding and exercisable was $217,317.
The following is additional information with respect to the
Company's warrants as of December 31, 2017:
Number of
Warrants
|
|
Exercise
Price
|
|
Weighted Average
Remaining
Contractual Life
(In Years)
|
|
Currently
Exercisable
|
4,219,941
|
|
$0.001
|
|
6.37
|
|
4,219,941
|
50,000
|
|
$0.01
|
|
2.18
|
|
50,000
|
1,000,000
|
|
$0.06
|
|
4.28
|
|
1,000,000
|
27,842,093
|
|
$0.10
|
|
3.34
|
|
27,842,093
|
1,000,000
|
|
$0.12
|
|
4.28
|
|
1,000,000
|
1,000,000
|
|
$0.18
|
|
4.28
|
|
1,000,000
|
418,333
|
|
$0.60
|
|
2.35
|
|
418,333
|
775,002
|
|
$0.72
|
|
2.62
|
|
775,002
|
36,305,369
|
|
|
|
|
|
36,305,369
|
In April 2017, in exchange for services
rendered, 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, $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.
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Litigations, Claims and Assessments
Attia Enterprises, a creditor, has initiated
a claim against the Company for $87,500 relating to a loan due of $46,664 including interest currently in default. The Company
retained counsel for representation in the matter. Subsequent to December 31, 2017, the company accepted a settlement totaling
approximately $90,000 cash and 750,000 shares of stock. The company has accounted for it in accordance with ASC450.
On January 31, 2017, the Company entered
into a mutual general release and settlement agreement (the "Settlement Agreement") with Microcap Headlines, Inc. (“Microcap”)
to settle a judgment against the Company in the sum of $17,042 entered pursuant to a lawsuit filed by Microcap against the Company
(the "Action") in the New York County, New York, Superior Court (Index No. 653105/2016). In the Action, the plaintiff
alleged that the Company owed the plaintiff past due amounts for investor relations services provided to the Company. Pursuant
to the Settlement Agreement, the Company agreed to pay Microcap $14,700 upon execution of the Settlement Agreement. The Settlement
Agreement also contains a general release by Microcap of the Company relating to the Action, such release however is predicated
on the Company making payments pursuant to the Settlement Agreement. Pursuant to the Settlement Agreement, after receipt of the
full $14,700 by Microcap, the Company and Microcap shall execute a written stipulation to set aside the default and judgment against
the Company and dismiss the Action with prejudice. As of December 31, 2016, the Company had accrued a liability of $17,042 related
to the Settlement Agreement which has been included in other accrued liabilities at December 31, 2016 in the accompanying consolidated
Balance Sheet. On February 2, 2017, the Company paid the settlement in full.
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, 2017 and 2016.
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.
Payroll Tax Liabilities
As of December 31, 2017, and through the
date of this report, the Company has not filed certain federal and state income and payroll tax returns nor has it paid the payroll
tax amounts and related interest and penalties relating to such returns. Amounts due under these returns with respect to penalties
and interest are estimated to be $10,118 and $10,493 as of December 31, 2017 and 2016, respectively which have been included in
other accrued liabilities at December 31, 2017 and 2016 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.
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Operating Lease
The Company had an operating lease for
its New York office facility under a month-to-month agreement which ended on March 31, 2016. The Company is not currently a party
to any operating lease agreements. Rent expense for the year ended December 31, 2017 and 2016 totaled $0 and $20,231, respectively.
NOTE 11 – RELATED PARTY TRANSACTIONS
On
March 9, 2015, the Company engaged with a lead generation and presales outsourcing firm, Corporate Rain International (“CRI”).
Tim Askew, a member of the Company’s Board of Directors, is the founder and CEO of CRI. CRI will be compensated $6,000 per
month along with a flat commission of $500 for each customer referred by CRI to the Company per the terms of the engagement.
The
Company recorded compensation expense to CRI of $30,000 during the year ended December 31, 2015. As of December 31, 2015, the Company
had an outstanding balance due to CRI of $6,000. During the year ended December 31, 2016 $6,000 was forgiven.
See Notes 7 and 8.
NOTE 12 – INCOME TAXES
The
tax effects of temporary differences that give rise to deferred tax assets as of December 31, 2017 and 2016 are presented below:
The income tax provision (benefit) consists
of the following:
|
|
2017
|
|
|
2016
|
|
Federal
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
–
|
|
|
$
|
–
|
|
Deferred
|
|
|
(94,974
|
)
|
|
|
(377,200
|
)
|
State and local
|
|
|
|
|
|
|
|
|
Current
|
|
|
–
|
|
|
|
–
|
|
Deferred
|
|
|
(42,630
|
)
|
|
|
(104,600
|
)
|
Change in valuation allowance
|
|
|
137,604
|
|
|
|
481,800
|
|
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, 2017 and 2016 is as follows:
|
|
2017
|
|
|
2016
|
|
U.S. Federal statutory rate
|
|
|
(34.0%
|
)
|
|
|
(34.0%
|
)
|
State tax, net of federal tax benefit
|
|
|
(9.4
|
)
|
|
|
(9.42
|
)
|
Federal tax rate change
|
|
|
10.9
|
|
|
|
–
|
|
Stock based compensation
|
|
|
8.9
|
|
|
|
10.33
|
|
Non-deductible interest expense
|
|
|
27.9
|
|
|
|
6.46
|
|
Other permanent differences
|
|
|
(7.0
|
)
|
|
|
0.56
|
|
Change in valuation allowance
|
|
|
2.7
|
|
|
|
26.07
|
|
Income tax provision (Benefit)
|
|
|
0.0%
|
|
|
|
0.0%
|
|
As of December 31, 2017 and 2016 the deferred
tax assets consisted of the following:
|
|
2017
|
|
|
2016
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryovers
|
|
$
|
1,269,504
|
|
|
$
|
1,131,900
|
|
Total deferred tax asset
|
|
|
1,269,504
|
|
|
|
1,131,900
|
|
Valuation allowance
|
|
|
(1,269,504
|
)
|
|
|
(1,131,900
|
)
|
Net Deferred Tax Asset, net of valuation allowance
|
|
$
|
–
|
|
|
$
|
–
|
|
PEERLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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, 2015, 2016 and 2017 remain open to Internal
Revenue Service and State audits.
The
Company is in the process of filing its federal and state tax returns for the years ended December 31, 2017, 2016, 2015 and 2014.
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, 2017, the Company had approximately $4.2 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.
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 $1,300,000 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, 2017.
On December 22, 2017, the SEC Staff issued
Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of ASC Topic 740 in situations when a registrant
does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain
income tax effects of the Act. The Company is complete with its accounting for the effects of the Tax Act, however, as additional
guidance and interpretation may be issued by the U.S. Treasury Department, the IRS and other standard setting bodies, the Company
may be required to make adjustment and/or additional disclosure relating to its gross deferred tax assets in 2018.
NOTE 13 – SUBSEQUENT EVENTS
Financing
In 2018, the Company sold an aggregate
of $111,900 of Units to five investors under Offering 6. Each Unit was sold at a price of $10,000 per Unit and consisted of one
(1) six (6) month, 18% convertible promissory note (36% on an annual basis) with a face value of $10,000 (the “Offering
6 Notes”) 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 Offering 6 Note is initially convertible, exercisable at a price of $0.06 per share. The Offering
6 Notes are due six months after the issuance of each note. In connection with the sale of $91,500 of Units, the Company issued
an aggregate of 932,500 four year warrants.