PeerLogix, Inc. - Quarter Report: 2018 June (Form 10-Q)
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
Quarterly Report Under the Securities Exchange Act of 1934
For Quarter Ended: June 30, 2018
Commission File Number: 333-191175
PEERLOGIX, INC.
(Exact name of small business issuer as specified in its charter)
| Nevada | 46-4824543 | |
| (State of other jurisdiction of incorporation) | (IRS Employer ID No.) |
119 West 24th Street, 4th Floor
New York, New York 10011
(Address of principal executive offices)
(914) 550-9993
(Issuer’s Telephone Number)
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 þ No o
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | o |
| Non-accelerated filer | o | Smaller reporting company | þ |
| (Do not check if a smaller reporting company) | Emerging growth company | þ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of shares of the registrant’s only class of common stock issued and outstanding as of September 10, 2018, was 46,922,368 shares.
PEERLOGIC, INC.
PART I
FINANCIAL INFORMATION
| 2 |
PEERLOGIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, | December 31, | |||||||
| 2018 | 2017 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 4,280 | $ | 14,086 | ||||
| Prepaid expenses and other current assets | 4,194 | 19,070 | ||||||
| Total current assets | 8,474 | 33,156 | ||||||
| Total assets | $ | 8,474 | $ | 33,156 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 357,467 | $ | 421,518 | ||||
| Accrued payroll and related expenses | 428,457 | 371,069 | ||||||
| Accrued directors' fees | 125,075 | 95,075 | ||||||
Accrued interest and other liabilities | 526,593 | 203,719 | ||||||
| Demand loans payable | 15,000 | 15,000 | ||||||
| Settlement payable | 75,000 | 41,857 | ||||||
| Convertible notes payable-net of debt discount of $200,565 and $277,969, respectively | 1,875,385 | 1,432,081 | ||||||
| Loans payable-officers | – | 9,941 | ||||||
| Derivative liabilities | 3,790,586 | 935,274 | ||||||
| Total current liabilities | 7,193,563 | 3,525,534 | ||||||
| Total liabilities | 7,193,563 | 3,525,534 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' deficit: | ||||||||
| Preferred stock, par value $0.001; 10,000,000 shares authorized, no shares issued and outstanding as of June 30, 2018 and December 31, 2017 | – | – | ||||||
| Common stock, par value $0.001; 100,000,000 shares authorized; 46,922,368 and 46,122,368 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively | 46,922 | 46,122 | ||||||
| Additional paid in capital | 5,448,170 | 4,850,445 | ||||||
| Accumulated deficit | (12,680,181 | ) | (8,388,945 | ) | ||||
| Total stockholders' deficit | (7,185,089 | ) | (3,492,378 | ) | ||||
| Total liabilities and stockholders' deficit | $ | 8,474 | $ | 33,156 | ||||
See the accompanying notes to the condensed consolidated financial statements
| 3 |
PEERLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Revenue | $ | 15,208 | $ | – | $ | 21,301 | $ | – | ||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | 271,811 | 595,671 | 464,616 | 1,097,738 | ||||||||||||
| Total operating expenses | 271,811 | 595,671 | 464,616 | 1,097,738 | ||||||||||||
| Loss from operations | (256,603 | ) | (595,671 | ) | (443,315 | ) | (1,097,738 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (759,564 | ) | (718,366 | ) | (1,162,224 | ) | (2,851,821 | ) | ||||||||
| Change in fair value of derivative liabilities | (2,205,885 | ) | (10,410 | ) | (2,591,419 | ) | 1,208,911 | |||||||||
| Loss on loan receivable | – | – | – | (37,500 | ) | |||||||||||
| Loss on settlement of debt | (3,300 | ) | (260,660 | ) | (94,278 | ) | (312,972 | ) | ||||||||
| Total other income (expense) | (2,968,749 | ) | (989,436 | ) | (3,847,921 | ) | (1,993,382 | ) | ||||||||
| Net loss | $ | (3,225,352 | ) | $ | (1,585,107 | ) | $ | (4,291,236 | ) | $ | (3,091,120 | ) | ||||
| Net loss per common share-basic and diluted | $ | (0.06 | ) | $ | (0.04 | ) | $ | (0.08 | ) | $ | (0.09 | ) | ||||
| Weighted average common shares outstanding-basic and diluted | 50,954,946 | 39,188,186 | 50,675,182 | 35,716,772 | ||||||||||||
See accompanying notes to the condensed consolidated financial statements
| 4 |
PEERLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
SIX MONTHS ENDED JUNE 30, 2018
| Additional | ||||||||||||||||||||
| Common stock | Paid in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance, December 31, 2017 | 46,122,368 | $ | 46,122 | $ | 4,850,445 | $ | (8,388,945 | ) | $ | (3,492,378 | ) | |||||||||
| Common stock issued in connection with settlement agreement | 800,000 | 800 | 52,000 | – | 52,800 | |||||||||||||||
| Fair value of warrants issued in connection with convertible notes payable | – | – | 58,189 | – | 58,189 | |||||||||||||||
| Fair value of warrants issued in connection with extension of convertible notes payable | – | – | 345,485 | – | 345,485 | |||||||||||||||
| Reclassify derivative liability to equity upon payoff of convertible notes payable | – | – | 14,180 | – | 14,180 | |||||||||||||||
| Stock based compensation | – | – | 127,871 | – | 127,871 | |||||||||||||||
| Net loss | – | – | – | (4,291,236 | ) | (4,291,236 | ) | |||||||||||||
| Balance, June 30, 2018 (unaudited) | 46,922,368 | $ | 46,922 | $ | 5,448,170 | $ | (12,680,181 | ) | $ | (7,185,089 | ) | |||||||||
See accompanying notes to the condensed consolidated financial statements
| 5 |
PEERLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Six months ended June 30, | ||||||||
| 2018 | 2017 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (4,291,236 | ) | $ | (3,091,120 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock based compensation | 127,871 | 538,100 | ||||||
| Amortization of debt discounts | 473,304 | 1,209,480 | ||||||
Initial fair value of derivative in excess of note proceeds | 3,376 | 1,425,511 | ||||||
| Change in fair value of derivative liabilities | 2,591,419 | (1,208,911 | ) | |||||
| Loss on loan receivable | – | 37,500 | ||||||
| Loss on settlement of debt | 94,278 | 312,972 | ||||||
| Fair value of warrants issued in connection with note payable extensions | 345,485 | – | ||||||
| Modification of investor warrants | – | 37,329 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses and other current assets | 14,876 | 30,199 | ||||||
| Accounts payable | (64,052 | ) | 77,933 | |||||
| Accrued payroll and related expenses | 57,388 | 85,771 | ||||||
| Accrued director fees | 30,000 | 25,000 | ||||||
Accrued interest and other liabilities | 329,539 | 138,426 | ||||||
| Settlement payable | (15,000 | ) | – | |||||
| Net cash used in operating activities | (302,752 | ) | (381,810 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Loan to abandoned acquisition target | – | (37,500 | ) | |||||
| Net cash used in investing activities | – | (37,500 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from convertible notes | 332,887 | 516,523 | ||||||
| Proceeds from officer loans | – | 11,156 | ||||||
| Repayments of notes payable-related party | – | (32,018 | ) | |||||
| Repayments of convertible notes payable | (30,000 | ) | (106,000 | ) | ||||
| Repayments of officer loans | (9,941 | ) | (6,280 | ) | ||||
| Net cash provided by financing activities | 292,946 | 383,381 | ||||||
| Net change in cash | (9,806 | ) | (35,929 | ) | ||||
| Cash-beginning of period | 14,086 | 56,022 | ||||||
| Cash-end of period | $ | 4,280 | $ | 20,093 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Interest paid | $ | – | $ | 15,670 | ||||
| Income taxes paid | $ | – | $ | – | ||||
| Supplemental disclosure on non-cash investing and financing activities: | ||||||||
| Debt discount paid in form of common shares and warrants | $ | 58,189 | $ | 24,139 | ||||
| Debt discount recorded on convertible debt accounted for as derivative liabilities | $ | 336,263 | $ | 756,953 | ||||
| Repurchase of beneficial conversion feature due to reassessment of derivative liability | $ | – | $ | 172,036 | ||||
| Reclassification of derivative liability to equity | $ | 14,180 | $ | 31,789 | ||||
| Debt issuance cost paid in form of common stock and warrants | $ | – | $ | 298,510 | ||||
| Debt issuance cost accrued | $ | – | $ | 7,500 | ||||
| Common stock issued in connection with settlement of liabilities | $ | 52,800 | $ | 57,500 | ||||
See accompanying notes to the condensed consolidated financial statements
| 6 |
PEERLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
(Unaudited)
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.
Basis of Presentation - Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the condensed consolidated financial position of the Company as of June 30, 2018, the results of operations for the three and six months ended June 30, 2018 and 2017, the statement of stockholders’ deficiency for the six months ended June 30, 2018 and the statement of cash flows for the six months ended June 30, 2018 and 2017. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the operating results for the full year ending December 31, 2018 or any other period.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related disclosures of the Company as of December 31, 2017 and for the year then ended, which were filed with the Securities and Exchange Commission (“SEC”) on Form 10-K on April 30, 2018.
NOTE 2 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS
The Company has generated minimal revenues since inception and continues to incur recurring losses from operations and has an accumulated deficit. Accordingly, the accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred a net loss of $4,291,236 and net cash used in operations of $302,752 for the six months ended June 30, 2018. In addition, the Company has notes payable in default (see Note 4). These conditions indicate that there is substantial doubt about the Company's ability to continue as a going concern within one year from the issuance date of the condensed consolidated financial statements.
The Company's primary source of operating funds since inception has been cash proceeds from the sale of Class A units, common stock and common stock warrants, convertible debentures and notes payable. The ability of the Company to continue as a going concern is dependent upon its ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of a public or private offering.
The Company requires immediate capital to remain viable. The Company can give no assurance that such financing will be available on terms advantageous to the Company, or at all. Should the Company not be successful in obtaining the necessary financing to fund its operations, the Company would need to curtail certain or all of its operational activities. There can be no assurance that such a plan will be successful. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
| 7 |
PEERLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
(Unaudited)
Accordingly, the accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplates continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the consolidated financial statements do not necessarily purport to represent realizable or settlement values. The condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Peerlogix Technologies, Inc. and IP Squared Technologies Holdings, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain items in the prior year financial statements have been reclassified to conform to the current year presentation. These reclassifications did not have an impact on previously reported results of operations.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from these estimates. The Company’s significant estimates and assumptions include the fair value of the Company’s equity instruments, convertible debt, derivative liabilities, stock-based compensation, and the valuation allowance relating to the Company’s deferred tax assets.
Convertible Instruments
The Company bifurcates conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule when the host instrument is deemed to be conventional as that term is described under applicable U.S. GAAP.
When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.
| 8 |
PEERLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
(Unaudited)
Accounting for Warrants
The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
Net Loss Per Share
Basic loss per share was computed using the weighted average number of outstanding common shares. Diluted earnings per share, when presented, includes the effect of dilutive common stock equivalents from the assumed exercise of options, warrants, convertible preferred stock and convertible notes. Common stock equivalents are excluded in the computation of diluted earnings per share since their inclusion would be anti-dilutive.
Total shares issuable upon the exercise of warrants, exercise of stock options and conversion of convertible promissory notes and accrued interest for the six months ended June 30, 2018 and 2017 were as follows:
| June 30, | ||||||||
| 2018 | 2017 | |||||||
| Warrants | 40,789,175 | 24,276,872 | ||||||
| Stock options | 24,550,000 | 19,300,000 | ||||||
| Convertible promissory notes and accrued interest | 47,038,835 | 27,162,332 | ||||||
| Total | 112,378,010 | 70,739,204 | ||||||
For the six months ended June 30, 2018, 4,269,941 warrants were included in basic and diluted loss per share as their exercise price was determined to be nominal.
Derivative Liabilities
In connection with the issuance of certain convertible promissory notes, the terms of the convertible notes included an embedded conversion feature which provided for the settlement of certain convertible promissory notes into shares of common stock at a rate which was determined to be variable with no floor. The Company determined that the conversion feature was an embedded derivative instrument pursuant to ASC 815 “Derivatives and Hedging”
The accounting treatment of derivative financial instruments requires that the Company record the conversion option, if applicable, at their fair values as of the inception date of the agreements and at fair value as of each subsequent balance sheet date. Any change in fair value was recorded as a change in the fair value of derivative liabilities for each reporting period at each balance sheet date. The Company reassesses the classification at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.
The fair values of conversion options that are convertible at a variable conversion price are valued using a Black-Scholes Valuation Model. The Company determined the fair value of the conversion option using either the Black-Scholes Valuation Model or the Binomial Lattice Model to be materially the same.
| 9 |
PEERLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
(Unaudited)
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:
| Three and Six Months Ended | ||||
| June 30, 2018 | ||||
| Risk-free interest rate | 1.63% – 2.83% | |||
| Contractual term | 0.02 - 4.00 years | |||
| Expected volatility | 229.45%-265.65% | |||
| Dividends | 0.0% | |||
At any given time, certain of the Company’s embedded conversion features on debt and outstanding warrants may be treated as derivative liabilities for accounting purposes under ASC 815-40 due to insufficient authorized shares to settle these outstanding contracts. Pursuant to SEC staff guidance that permits a sequencing approach based on the use of ASC 840-15-25 which provides guidance for contracts that permit partial net share settlement. The sequencing approach may be applied in one of two ways: contracts may be evaluated based on (1) earliest issuance date or (2) latest maturity date. Pursuant to the sequencing approach, the Company evaluates its contracts based upon the latest maturity date.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts payable, and accrued liabilities approximate fair value due to the short-term nature of these instruments.
The Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements and Disclosures” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
ASC 820 describes three levels of inputs that may be used to measure fair value:
| Level 1 | Quoted market prices available in active markets for identical assets or liabilities as of the reporting date. | |
| Level 2 | Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. | |
| Level 3 | Pricing inputs that are generally unobservable inputs and not corroborated by market data. |
Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the warrant liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s Principal Financial Officer determines its valuation policies and procedures.
| 10 |
PEERLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
(Unaudited)
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:
| June 30, 2018 | Fair Value Measurement Using | |||||||||||||||||||
| Carrying Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Derivative conversion features | $ | 3,790,586 | $ | – | $ | – | $ | 3,790,586 | $ | 3,790,586 | ||||||||||
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 six months ended June 30, 2018:
| Fair Value Measurement Using Level 3 Inputs | ||||
| Total | ||||
| Balance, December 31, 2017 | $ | 935,274 | ||
| Issuances | 278,073 | |||
| Reclassify to equity upon note payoff | (14,180 | ) | ||
| Change in fair value | 2,591,419 | |||
| Balance, June 30, 2018 | $ | 3,790,586 | ||
Changes in the unobservable input values could potentially cause material changes in the fair value of the Company’s Level 3 financial instruments. The significant unobservable inputs used in the fair value measurements are the expected volatility assumption. A significant increase (decrease) in the expected volatility assumption could potentially result in a higher (lower) fair value measurement.
Recently Issued Accounting Guidance
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 adoption of ASU 2016-09 is not expected to have a material impact on the Company’s condensed consolidated financial position, results of operations or cash flows.
In June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-07, Compensation – Stock Compensation (Topic718): Improvements to Nonemployee Share-Based Payment Accounting. Under the new standard, companies will no longer be required to value nonemployee awards differently from employee awards. Companies will value all equity classified awards at their grant-date under ASC718 and forgo revaluing the award after the grant date. ASU 2018-07 is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within that reporting period. Early adoption is permitted, but no earlier than the Company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company does not believe it will have a significant impact on its condensed consolidated financial statements.
| 11 |
PEERLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
(Unaudited)
On August 28, 2018, the FASB issued Accounting Standards Update (ASU) 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU 2018-13 apply to all entities that are required GAAP, to make disclosures about recurring or nonrecurring fair value measurements. ASU 2018-13 removes, modifies, and adds certain disclosure requirements in ASC 820, Fair Value Measurement. Certain of the disclosures that are required by ASU 2018-13 are not required for nonpublic entities.
ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (calendar 2020). The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption.
All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of ASU 2018-13. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. The Company does not believe it will have a significant impact on its condensed consolidated financial statements.
There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s financial position, results of operations or cash flows.
Subsequent Events
The Company evaluates events that have occurred after the balance sheet date but before the condensed consolidated financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements, except as disclosed.
NOTE 4 – SETTLEMENT PAYABLE
On April 8, 2016, the Company entered into a Securities Purchase Agreement (the “SPA”) with Attia Investments, LLC, a related party (the “Investor”). A shareholder of the Company who previously owned in-excess of 5% of the Company’s common stock is the managing member of Attia Investments, LLC. Under the Agreement, we issued and sold to the Investor, and the Investor purchased from us, Debentures in the principal amount of $87,500 for a purchase price of $70,000, bearing interest at a rate of 0% per annum, with an original maturity on October 8, 2016, further extended to April 8, 2017.
The Debentures are secured by all assets of the Company. The Company was in default of the SPA, making the entire unpaid principal and interest due and payable. The Investor has initiated a claim against the Company for payment of a loan in default. On April 27, 2018, the Company accepted a settlement offer totaling approximately $90,000 in cash and 800,000 shares of stock. As such, the Company has reclassified the note payable-related party to settlement payable and accrued the estimated fair value of the settlement of $139,500. In connection with the settlement, the Company recorded a loss on settlement of debt of $94,278 in current period operations.
During the six months ended June 30, 2018, the Company issued 800,000 shares of its common stock and paid $15,000 towards the Attia Investments, LLC settlement. As of June 30, 2018, the outstanding balance was $75,000.
| 12 |
PEERLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
(Unaudited)
NOTE 5 – CONVERTIBLE NOTES PAYABLE
Convertible notes payable are comprised of the following:
| June 30, | December 31, | |||||||
| 2018 | 2017 | |||||||
| Offering 3 | $ | 825,500 | $ | 825,500 | ||||
| Offering 4 | 439,550 | 439,550 | ||||||
| Offering 5 | 200,000 | 200,000 | ||||||
| Offering 6 | 610,900 | 245,000 | ||||||
| Total | 2,075,950 | 1,710,500 | ||||||
| Less: debt discount | (200,565 | ) | (277,969 | ) | ||||
| Net | $ | 1,875,385 | $ | 1,432,081 | ||||
Offering 6:
During the six months ended June 30, 2018, the Company sold $395,900 of Units to investors. Each Unit was sold at a price of $10,000 per Unit and consisted of one (1) six (6) month, 18% convertible promissory note (36% on an annual basis) with a face value of $10,000 and four year warrants exercisable for an aggregate number of shares of common stock equal to 50% of the shares of common stock into which the Note is initially convertible, exercisable at a price of $0.10 per share. The Offerings Notes are due six months after the issuance of each note, as amended.
Each of the Notes will be convertible at an initial price equal to $0.06 per share. In addition, during the two month period commencing on each issuance of the Offering 3 Notes, as amended, the Notes will contain a look-back provision pursuant to which the Notes will be convertible at the lower of $0.06 or the lowest volume weighted average price of the Company’s common stock (the “VWAP”) during any 10 day period during such two (2) month period, provided however, in the event that the VWAP during any such ten (10) day period is less than $0.06, then the reset conversion price of the Notes shall be no lower than $0.03. The Notes also contain a reset provision to the same price as any future offering in the next three (3) years in the event that the conversion or offering price of securities offered in such subsequent offering is less than the Conversion Price of the Notes in this Offering.
The Company will have the ability to extend the Notes for an additional six (6) months (the “Extended Term”) and if so extended shall be referred to herein as the “Extended Notes”. The Extended Notes, upon maturity, will pay interest at a six (6) month rate of 18% (36% annualized) at the termination of the Extended Term. The Extended Notes, to the extent extended pursuant to their terms for the Extended Term, will carry an additional 50% warrant coverage (e.g. such warrant to be exercisable for an additional 50% of the number of shares into which the Extended Note is initially convertible (the “Extended Warrants”). The Extended Warrants shall be exercisable at a price equal to $0.10. The Extended Warrants will expire four (4) years from the Extended Term and shall contain customary anti-dilution rights (for stock splits, stock dividends and sales of substantially all the Company’s assets) and the shares underlying the Extended Warrants will contain registration rights.
The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion feature has been measured at fair value using a Black Scholes model at the assessment date and the period end. The conversion feature, when assessed, gave rise to a derivative liability of $278,073. The Company recorded an aggregate debt discount to the Notes of $395,900 comprised of i) $274,698 relating to the fair value of the conversion option, which was recorded as a derivative liability ii) $63,013 of incurred issuance costs and iii) $58,190 allocated fair value of the issued warrants. The excess of derivative liability over net proceeds of the notes of $3,376 was charged to interest expense. The debt discounts are amortized ratably to interest expense over the term of the notes.
| 13 |
PEERLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
(Unaudited)
At June 30, 2018, the Company reassessed the fair value of the conversion feature of the issued and outstanding notes and accrued interest and determined the estimated fair value of the derivative liability of $3,790,586. The Company recorded a loss on change in fair value of derivative liabilities of $2,205,885 and $2,591,419 for the three and six months ended June 30, 2018.
During the six months ended June 30, 2018, the Company issued an aggregate of 5,454,581 warrants to existing note holders to extend the terms of maturing notes for six months as described above. The fair value of the issued warrants, determined by the Black-Scholes model, of $345,485 was charged to interest expense.
NOTE 6 – STOCKHOLDERS’ DEFICIT
Warrants
The Company used the Black-Scholes model to determine the fair value of warrants granted during the six months ended June 30, 2018. In applying the Black-Scholes option pricing model to warrants granted, the Company used the following assumptions:
The principal assumptions used in applying the Black-Scholes model were as follows:
| Six Months Ended June 30, 2018 | ||||
| Risk free interest rate | 2.25% – 2.85% | |||
| Dividend yield | 0.00% | |||
| Expected volatility | 170.30%-279.23% | |||
| Contractual term (years) | 4 | |||
The following is a summary of the Company’s warrant activity during the six months ended June 30, 2018:
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | ||||||||||||
| Outstanding – December 31, 2017 | 36,305,369 | $ | 0.11 | 3.74 | ||||||||||
| Granted | 8,753,747 | 0.10 | 4.00 | |||||||||||
| Exercised | – | – | – | |||||||||||
| Forfeited/Cancelled | – | – | – | |||||||||||
| Outstanding and Exercisable – June 30, 2018 | 45,059,116 | $ | 0.11 | 3.34 | ||||||||||
At June 30, 2018, the aggregate intrinsic value of warrants outstanding and exercisable was $1,299,590.
| 14 |
PEERLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
(Unaudited)
The following is additional information with respect to the Company's warrants as of June 30, 2018:
| Number of Warrants | Exercise Price | Weighted Average Remaining Contractual Life (In Years) | Currently Exercisable | |||||||||||
| 4,219,941 | $ | 0.001 | 5.88 | 4,219,941 | ||||||||||
| 50,000 | $ | 0.01 | 1.68 | 50,000 | ||||||||||
| 1,000,000 | $ | 0.06 | 3.78 | 1,000,000 | ||||||||||
| 36,595,840 | $ | 0.10 | 3.06 | 36,595,840 | ||||||||||
| 1,000,000 | $ | 0.12 | 3.78 | 1,000,000 | ||||||||||
| 1,000,000 | $ | 0.18 | 3.78 | 1,000,000 | ||||||||||
| 418,333 | $ | 0.60 | 1.86 | 418,333 | ||||||||||
| 775,002 | $ | 0.72 | 2.12 | 775,002 | ||||||||||
| 45,059,116 | 45,059,116 | |||||||||||||
During the six months ended June 30, 2018, the Company issued an aggregate of 3,299,166 warrants to purchase the Company’s common stock at $0.10 per share, expiring four years from issuance, in connection with the issuance of convertible notes payable.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
Litigations, Claims and Assessments
The Company may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. There are no such matters other than described above that are deemed material to the condensed consolidated financial statements as of June 30, 2018.
Payroll Tax Liabilities
As of June 30, 2018, and through the date of this report, the Company has not filed certain federal and state income and payroll tax returns nor has it paid the payroll tax amounts and related interest and penalties relating to such returns. Amounts due under these returns with respect to penalties and interest are estimated to be $10,521 and $10,118 as of June 30, 2018 and December 31, 2017, respectively which have been included in other accrued liabilities at June 30, 2018 and December 31, 2017 in the accompanying condensed consolidated Balance Sheets.
| 15 |
PEERLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
(Unaudited)
Placement Agent and Finders Agreements
In 2018, the Company entered into a Financial Advisory and Investment Banking Agreements with WestPark Capital, Inc. (“WestPark”) (the “WestPark Advisory Agreements”). Pursuant to the WestPark Advisory Agreement, WestPark shall act as the Company’s financial advisor and placement agent in connection with a best efforts private placement (the “Financing”) of the Company’s debt and/or equity securities (the “Securities”).
The Company, upon each closing of the Financing will pay consideration to WestPark, in cash, a fee in an amount equal to 10% of the aggregate gross proceeds raised in the Financing from the sale of Securities placed by WestPark and warrants in the amount of 10% of the aggregate gross proceeds. The Company will also pay all WestPark legal fees and expenses as well as a 3% non-accountable expense allowance of the aggregate gross proceeds raised in the Financing. The Placement Agent Warrants will have: (a) a nominal exercise price of $0.001 per share, (b) a seven year term, and (c) a cashless exercise provision. The shares underlying the Placement Agent Warrants will have standard piggyback registration rights.
NOTE 8 – SUBSEQUENT EVENTS
On July 6, 2018, the Company offered to the holders of the Company’s common stock warrants, a warrant repricing and exercise agreement with each of the consenting holders whereby the exercise price of the warrants were reduced from $0.10 to $0.06 per share of common stock.. Furthermore, the Company offered to the holders, an additional series B warrant for every four warrants exercised pursuant to the agreement. The Series B warrant shall have an exercise price of $0.25 per share of the common stock. Through the months of July through September 2018, the Company received proceeds of $346,195 from warrant exercises of 5,769,916 warrants exercised at $0.06 share. The common stock has not been issued as of September 14, 2018.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein. In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or on our behalf. We disclaim any obligation to update forward looking statements.
Overview
Peerlogix, Inc. was incorporated in Nevada on February 14, 2014. The Company is an advertising technology and data aggregation company. The Company provides software as a service (SAAS) platform, which enables the tracking and cataloguing of over-the-top viewership and listenership in order to determine consumer trends and preferences based upon media consumption. Its platform collects over-the-top data, including Internet Protocol (IP) addresses of the streaming and downloading parties (location), the name, media type and genre of media watched, listened or downloaded, and utilizes licensed and publicly available demographic and other databases to further filter the collected data to provide insights into consumer preferences to digital advertising firms, product and media companies, entertainment studios and others.
Operations
We will generate revenue primarily by licensing our Over-the-Top audience dataset to platforms and channel partners. We predominantly contract with Data Management Platforms (DMPs) and Demand Side Platforms (DSPs) (collectively, “Demand Partners”) who license our solution to use in conjunction with other solutions offered to their advertiser clients, including brands and advertising agencies.
When we contract with a Demand Partner, it acts as an agent for a disclosed or undisclosed principal, which is the advertiser. Our contracts with Demand Partners, including DMPs and DSPs representing advertisers, are generally in the form of a revenue share between the Demand Partner and Peerlogix. Revenue payouts to PeerLogix typically occur within sixty (60) days after the end of each calendar month, and the contracts typically have an initial term of a year.
In September 2017, we renewed an agreement with Lotame, Inc, whereas, our Over-the-Top audience segments are licensed for use in Lotame’s LDX platform. In August 2017, we entered into an agreement with eXelate, Inc., a subsidiary of Nielsen Holdings plc, whereas, our Over-the-Top audience segments are licensed for use via eXelate’s proprietary electronic platform. In October 2017, we entered into a partnership with AdSquare to integrate our Over-the-Top audience segments with their Audience Management Platform.
We also work with Channel Partners who provide us with ad hoc integrations to the majority of marketing platforms in the digital marketing ecosystem, including the DMPs and DSPs licensing our Over-the-Top audience data. Channel Partner relationships are a critical aspect of our supply chain and represent the distribution component of our business by facilitating our audience data for Demand Partners. We see healthy relationships with Channel Partners as a sign of validation in an otherwise noisy industry of data providers who we compete against for advertising spend from DMPs and DSPs. Together, Channel Partners form the “power grid” for data distribution, the foundation that Demand Partners commonly rely upon for access to our audience data.
In May 2017, we entered into a partnership with Narrative I/O to integrate our Over-the-Top audience data with their marketplace, enabling buyers on their platform access to our OTT engagement data. In June 2017, we entered into a partnership with Neustar, Inc. to warehouse our household level Over-the-Top audience data with Neustar’s Data Onboarding offering, therefore expanding our potential distribution capabilities to include companies integrated with Neustar’s partner ecosystem. In September 2017, we entered into a partnership with Liveramp, a subsidiary of Acxiom, Inc., to include our Over-the-Top audience data in Liveramp’s Data Store, enabling access to our data for advertising in partners of Liveramp.
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Results of Operations for the Three Months Ended June 30, 2018 and 2017
The following table sets forth the summary statement of operations for the three months ended June 30, 2018 and 2017:
| For the Three Months Ended | ||||||||
| June 30, 2018 | June 30, 2017 | |||||||
| Revenue | $ | 15,208 | $ | – | ||||
| Operating expenses | $ | (271,811 | ) | $ | (595,671 | ) | ||
| Interest expense | $ | (759,564 | ) | $ | (718,366 | ) | ||
| Change in fair value of derivative liabilities | $ | (2,205,885 | ) | $ | (10,410 | ) | ||
| Loss on extinguishment of debt and loan receivable | $ | (3,300 | ) | $ | (260,660 | ) | ||
| Net Loss | $ | (3,225,352 | ) | $ | (1,585,107 | ) | ||
Revenues: From inception through June 30, 2018 the Company has generated minimal revenues.
Operating Expenses: Operating expenses consist primarily of compensation and related costs for personnel and facilities, and include costs related to our facilities, finance, human resources, information technology and fees for professional services. Professional services are principally comprised of outside legal, audit, information technology consulting, marketing, investor relations and outsourcing services.
Operating expenses decreased by 54.4% during the three months ended June 30, 2018, as compared to the three months ended June 30, 2017. The overall $323,860 decrease in operating expenses is primarily attributable to the following approximate net increases (decreases) in operating expenses:
| · | An increase of payroll and related expenses of $56,101 due to an increase in officers’ salaries and a new employee. |
| · | A decrease in equity-based compensation expense of $163,169. During the three months ended June 30, 2018, the Company recognized $63,459 of equity-based compensation as a result of equity-based awards granted to board members and advisory board members. During the three months ended June 30, 2017, the Company recognized $226,628 of equity- based compensation. |
| · | A decrease in professional fees of $213,610 (excluding equity-based compensation - see above). In the current period the Company incurred a decrease in consulting fees related to business development, financial advisory services and investor relations and an increase in auditing fees and legal fees related to public filing requirements. These decreases were partially offset by an increase in accounting fees related to public filing requirements. |
| · | A decrease in general operating costs of $2,679 primarily due to the less costs incurred in the current period as compared to same period, last year. Monthly server costs fluctuate based on usage and data collection. |
Other expenses: Other expense consists primarily of interest expense primarily related to the Company’s notes payable.
Interest expense - increased by $41,198 to $759,564 during the three months ended June 30, 2018 as compared to $718,366 during the three months ended June 30, 2017 primarily from a non cash interest charge of $345,485 in 2018 based on fair value of warrants issued with note extensions, and due to issuance of new notes, net with a decrease in non-cash debt discount amortization of $364,860.
Change in fair value of derivative liabilities- We issued convertible notes with an embedded derivative, all requiring us to fair value the derivatives each reporting period and mark to market as a non-cash adjustment to our current period operations. This resulted in a loss of $(2,205,885) and $(10,410) on change in fair value of derivative liabilities for the three months ended June 30, 2018 and 2017, respectively.
| 18 |
Loss on extinguishment of debt-During the three months ended June 30, 2018; we recorded a settlement relating to an outstanding convertible note and accrued interest, incurring a loss on settlement of debt of $3,300 compared to $260,660 for the same period last year.
Results of Operations for the Six Months Ended June 30, 2018 and 2017
The following table sets forth the summary statement of operations for the six months ended June 30, 2018 and 2017:
| For the Six Months Ended | ||||||||
| June 30, 2018 | June 30, 2017 | |||||||
| Revenue | $ | 21,301 | $ | – | ||||
| Operating expenses | $ | (464,616 | ) | $ | (1,097,738 | ) | ||
| Interest expense | $ | (1,162,224 | ) | $ | (2,851,821 | ) | ||
| Change in fair value of derivative liabilities | $ | (2,591,419 | ) | $ | 1,208,911 | |||
| Loss on extinguishment of debt and loan receivable | $ | (94,278 | ) | $ | (350,472 | ) | ||
| Net Loss | $ | (4,291,236 | ) | $ | (3,091,120 | ) | ||
Revenues: From inception through June 30, 2018 the Company has generated minimal revenues.
Operating Expenses: Operating expenses consist primarily of compensation and related costs for personnel and facilities, and include costs related to our facilities, finance, human resources, information technology and fees for professional services. Professional services are principally comprised of outside legal, audit, information technology consulting, marketing, investor relations and outsourcing services.
Operating expenses decreased by57.7% during the six months ended June 30, 2018, as compared to the six months ended June 30, 2017. The overall $633,122 decrease in operating expenses is primarily attributable to the following approximate net increases (decreases) in operating expenses:
| · | An increase of payroll and related expenses of $25,268 due to an increase in officers’ salaries and a new employee. |
| · | A decrease in equity-based compensation expense of $410,229. During the six months ended June 30, 2018, the Company recognized $127,871 of equity-based compensation as a result of awards granted to board members and advisory board members. During the six months ended June 30, 2017, the Company recognized $538,100 of equity- based compensation. |
| · | A decrease in professional fees of $208,915 (excluding equity-based compensation - see above). In the current period the Company incurred a decrease in consulting fees related to business development, financial advisory services and investor relations and an increase in auditing fees and legal fees related to public filing requirements. These decreases were partially offset by an increase in accounting fees related to public filing requirements. |
| · | A decrease in general operating costs of $39,246 primarily due to the less costs incurred in the current period as compared to same period, last year. Monthly server costs fluctuate based on usage and data collection. |
Other expenses: Other expense consists primarily of interest expense primarily related to the Company’s notes payable.
Interest expense - decreased by $1,689,597 to $1,162,224 during the six months ended June 30, 2018 as compared to $2,851,821 during the six months ended June 30, 2017 primarily from a decrease in non-cash interest charges of $1,422,135 from 2017 to 2018 and a decrease of $736,176 in non-cash debt discount amortization, net of a non-cash charge in 2018 of $345,485 for the fair value of warrants issued with note extensions.
| 19 |
Change in fair value of derivative liabilities- We issued convertible notes with an embedded derivative, all requiring us to fair value the derivatives each reporting period and mark to market as a non-cash adjustment to our current period operations. This resulted in a (loss) gain of $(2,205,885) and $1,208,911 on change in fair value of derivative liabilities for the six months ended June 30, 2018 and 2017, respectively.
Loss on extinguishment of debt-During the six months ended June 30, 2018; we recorded a settlement relating to an outstanding convertible note and accrued interest, incurring a loss on settlement of debt of $94,278 compared to $312,972 for the same period last year.
Liquidity and Capital Resources
The following table summarizes total current assets, liabilities and working capital at June 30, 2018 compared to December 31, 2017:
| June 30, 2018 | December 31, 2017 | Increase/ (Decrease) | ||||||||||
| Current Assets | $ | 8,474 | $ | 33,156 | $ | (24,682 | ) | |||||
| Current Liabilities | $ | 7,193,563 | $ | 3,525,534 | $ | 3,668,029 | ||||||
| Working Capital Deficit | $ | (7,185,089 | ) | $ | (3,492,378 | ) | $ | 3,692,711 | ||||
As of June 30, 2018, we had working capital deficit of $7,185,089 as compared to a working capital deficit of $3,492,378 as of December 31, 2017, an increase of $3,692,711. The change in working capital deficit is primarily attributable our increase in accounts payable and accrued expenses of $346,211, increase in our short term debt of $433,363 and our derivative liability of $2,855,312.
We have incurred net operating losses and operating cash flow deficits since inception, continuing through the second quarter of 2018. We have been funded primarily by a combination of equity issuances and debt, to execute on our business plan and for working capital. Our principal source of liquidity is our cash. At June 30, 2018, we had cash totaling approximately $4,280. We believe our existing available cash is insufficient to enable the Company to meet the working capital requirements for the near future. Consequently, we will be required to raise additional capital to complete the development and commercialization of our current product. However, there can be no assurance that we will be able to raise additional capital on terms acceptable to us, or at all. In order to boost sales, we continue to explore potential expansion opportunities in the industry through mergers and acquisitions, enhancement of our existing products, development of new products and expansion into other international markets. We will incur increased costs as a result of being a public company, which could affect our profitability and operating results.
Management has determined that additional capital will be required in the form of equity or debt securities. In addition, if we cannot raise additional short term capital we will be forced to continue to further accrue liabilities due to our limited cash reserves. There are no assurances that management will be able to raise capital on terms acceptable to the Company. If we are unable to obtain sufficient amounts of additional capital, we may be required to reduce the scope of our planned development, which could harm our business, financial condition and operating results. If we obtain additional funds by selling any of our equity securities or by issuing common stock to pay current or future obligations, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution, or the equity securities may have rights preferences or privileges senior to the common stock. If adequate funds are not available to us when needed on satisfactory terms, we may be required to cease operating or otherwise modify our business strategy.
Going Concern and Management’s Liquidity Plans
As reflected in the condensed consolidated financial statements, the Company had an accumulated deficit of $12,680,181 at June 30, 2018, a net loss and net cash used in operating activities for the period then ended and since inception. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
| 20 |
The ability of the Company to continue its operations is dependent on management’s plans, which include the raising of capital through debt and/or equity markets, with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. The Company may need to incur additional liabilities with certain related parties to sustain the Company’s existence. There can be no assurance that the Company will be able to raise any additional capital.
We may also require additional funding to finance the growth of our anticipated future operations as well as to achieve our strategic objectives. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. In that event, the Company would be required to change its growth strategy and seek funding on that basis, if at all.
Our plan regarding these matters is to raise additional debt and/or equity financing to allow us the ability to cover our current cash flow requirements and meet our obligations as they become due. There can be no assurances that financing will be available or if available, that such financing will be available under favorable terms. In the event that we are unable to generate adequate revenues to cover expenses and cannot obtain additional financing in the near future, we may seek protection under bankruptcy laws. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
Financing Transactions
During the six months ended June 30, 2018, the Company sold $395,900 of Units to investors, net of certain costs. Each Unit was sold at a price of $10,000 per Unit and consisted of one (1) six (6) month, 18% convertible promissory note (36% on an annual basis) with a face value of $10,000 and four year warrants exercisable for an aggregate number of shares of common stock equal to 50% of the shares of common stock into which the Note is initially convertible, exercisable at a price of $0.10 per share. The Offerings Notes are due six months after the issuance of each note, as amended.
Each of the Notes will be convertible at an initial price equal to $0.06 per share. In addition, during the two month period commencing on each issuance of the Offering 3 Notes, as amended, the Notes will contain a look-back provision pursuant to which the Notes will be convertible at the lower of $0.06 or the lowest volume weighted average price of the Company’s common stock (the “VWAP”) during any 10 day period during such two (2) month period, provided however, in the event that the VWAP during any such ten (10) day period is less than $0.06, then the reset conversion price of the Notes shall be no lower than $0.03.
The Notes also contain a reset provision to the same price as any future offering in the next three (3) years in the event that the conversion or offering price of securities offered in such subsequent offering is less than the Conversion Price of the Notes in this Offering.
We are obligated to file annual, quarterly and current reports with the SEC pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In addition, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the rules subsequently implemented by the SEC and the Public Company Accounting Oversight Board have imposed various requirements on public companies, including requiring changes in corporate governance practices. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities of ours more time-consuming and costly. We expect to spend between $100,000 and $150,000 in legal and accounting expenses annually to comply with our reporting obligations and Sarbanes-Oxley. These costs could affect profitability and our results of operations.
| 21 |
Summary Cash flows for the Six Months Ended June 30, 2018 and 2017:
| Six Months Ended | ||||||||
| June 30, 2018 | June 30, 2017 | |||||||
| Net cash used in operating activities | $ | (302,752 | ) | $ | (381,810 | ) | ||
| Net cash used in investing activities | $ | – | $ | (37,500 | ) | |||
| Net cash provided by financing activities | $ | 292,946 | $ | 383,381 | ||||
Cash Used in Operating Activities
Our primary uses of cash from operating activities include payments to consultants for research and development, compensation and related costs, legal and professional fees, computer and internet expenses and other general corporate expenditures.
Cash used in operating activities consist of net loss adjusted for certain non-cash items, primarily equity-based compensation expense, amortization of debt discount, and amortization of debt issuance costs during the six months ended June 30, 2018, as well as the effect of changes in working capital and other activities.
The adjustments for the non-cash items increased from the six months ended June 30, 2017 to the six months ended June 30, 2018 due primarily to a decrease in equity based compensation, amortization of the debt discount and debt issuance costs recorded on the notes payable and changes in derivative liabilities during the current period. In addition, the net increase in cash from changes in working capital activities from the six months ended June 30, 2017 to the six months ended June 30, 2018 primarily consisted of an increase in accrued expenses primarily due to an increase in accrued payroll and payroll related expenses, accrued accounting fees, accrued director’s fees and accrued consulting fees, business development, financial advisory services and investor relations.
Cash Provided by Financing Activities
Cash provided by financing activities consists primarily of net proceeds from issuance or repayments of notes payable, convertible promissory notes and related party loans.
Cash provided by financing activities decreased from the six months ended June 30, 2017 to the six months ended June 30, 2018, primarily driven by a decrease in proceeds from the convertible notes.
Critical Accounting Policies
Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“U.S. GAAP”). U.S. GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to U.S. GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
| 22 |
Our significant accounting policies are summarized in Note 3 of our condensed consolidated financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
We believe the following critical accounting policies and procedures, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from these estimates. The Company’s significant estimates and assumptions include the fair value of the Company’s equity instruments, convertible debt, derivative liabilities, stock-based compensation, and the valuation allowance relating to the Company’s deferred tax assets.
Recently Issued Accounting Pronouncements
See Note 3 to our condensed consolidated financial statements for the six months ended June 30, 2018, included elsewhere in this document.
Off Balance Sheet Arrangements:
We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are an emerging growth company and are not required to provide the information under this item pursuant to Regulation S-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer/Chief Financial Officer, to allow timely decisions regarding required disclosure.
In connection with the preparation of this quarterly report on Form 10-Q, an evaluation was carried out by management, with the participation of our Chief Executive Officer/Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2018.
Based on that evaluation, management concluded, as of the end of the period covered by this report, that our disclosure controls and procedures were not effective in recording, processing, summarizing, and reporting information required to be disclosed, within the time periods specified in the Securities and Exchange Commission’s rules and forms due to the existence of certain material weaknesses identified in the “Risk Factors and Special Considerations” section in Form 10-K as filed by the Company with the SEC on April 30, 2018.
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Changes in Internal Controls over Financial Reporting
As of the end of the period covered by this report, there have been no changes in the internal controls over financial reporting during the quarter ended June 30, 2018, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
In the ordinary course of business, the Company will occasionally be threatened with litigation from vendors for overdue fees. The Company will respond to any such threats in due course.
As an emerging company, we are not required to provide the information required by this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None.
ITEM 4. mine safety disclosures
Not applicable.
None.
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The following exhibits are included with this report.
| 31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) | |
| 31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) | |
| 32.1 | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Schema Document | |
| 101.CAL | XBRL Calculation Linkbase Document | |
| 101.DEF | XBRL Definition Linkbase Document | |
| 101.LAB | XBRL Label Linkbase Document | |
| 101.PRE | XBRL Presentation Linkbase Document |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on September 14, 2018.
|
PEERLOGIX, INC.
By: /s/ Ray Colwell Ray Colwell Chief Executive Officer and Principal Executive Officer |
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