ITEM 1 - BUSINESS
Corporate History
We were incorporated on December 19, 2014 in the State of Nevada.
Overview
The Company is focused on providing real and valuable digital traffic to our customers’ ecommerce sites, and now with the Sharerails acquisition, to their actual retail locations. Our initial efforts were to detect digital marketing fraud for our customers. Sharerails expands our focus from just preventing fraud, to actually providing clean, high value marketing traffic to our customers from known good sources. We had revenues of $162,750 in the year ended December 31, 2016. On March 31, 2017, we acquired ShareRails, LLC, a Delaware limited liability company (“ShareRails”). ShareRails is now a wholly-owned subsidiary of the Company.
ShareRails provides its customers with a unique, interactive mobile platform for connecting shoppers and retailers. ShareRails has been operated by its two founders who will continue to work with us and ShareRails to service their existing enterprise clients and expand our customer base. We believe that together we will be able to further expand our reach into the social commerce and retail marketing industry.
The Market
Fraudulent digital traffic continues to plague traditional digital advertising methods. In addition, conventional brick and mortar retailers, much less affected by digital fraud, are simply being out competed by e-commerce heavyweights like Amazon and Alibaba. Fundamentally both e-commerce sites and retailers need one thing: real consumers buying their products. With the acquisition of Sharerails Grey Cloak has expanded its efforts from just preventing digital fraud to actually generating known good traffic to brick and mortar retailers and their ecommerce sites.
While large retailers like Sears, and Macy’s have been under considerable pressure, the evidence is that retail is, on a worldwide basis, re-inventing itself. Innovative retailers are changing their business models to accommodate new trends in consumer behavior away from commodity products and towards more customized, and high touch products and services. Malls for example, which are the main customers for the Sharerails products, are moving toward a more experiential environment with some of newer malls featuring art, music, and healthcare. Other malls are focusing on high end dining and entertainment. The retailers that are thriving in those environments focus on products and services which consumers typically need to see face to face before purchasing. Making retail more experiential we believe is a mega trend in retail, and will culminate in richer, more compelling physical shopping and related experiences.
Research indicates that mobile computing, artificial intelligence (AI), machine learning, and other technologies will drive changes in consumer behavior and the retail experience. It is Grey Cloaks plan to integrate technologies from companies like Sharerails into offerings that help retailers, malls (and other retail ‘aggregators’), use new technologies to drive actual sales.
Our intial product offering from Sharerails include the Sharerails cloud base platform and 3 add on services:
The Sharerails Local Inventory Service enables malls and their retailers to put their entire local inventory online. This creates an immediate digital presence which a normal mall website simply lacks.
The Sharerails Social Media add-on allows malls and retailers to create a turnkey social media experience around their products and location.
The Sharerails Concierge Service allows individuals at a retailer or a mall or other retail aggregator, to provide one to one mobile communications between sales and service personal and individual consumers. We believe this product will help drive the change in retail toward higher touch, personalized services and products.
At the moment the Company has a large luxury Mall in Hong Kong using the product as well as a mall here in the US. Both customers have options on more of their mall properties. The products can all be localized to specific languages and have clean mobile, tablet, and full screen interfaces. The Company generally sells the Local Inventory Service with the base and then endeavors to upsell the other two products which take advantage of our knowledge of the retailers’ local inventory.
Our Mission
Our mission is to provide meaningful electronic and foot traffic to brick and mortar retailers and their ecommerce sites and participate in the ongoing retooling of retail on a worldwide basis.
Anticipated Products
We believe that the Sharerails platform is a good base to use to become a premier provider of mobile and advanced technology to retailers worldwide.
The Company sees a lot of opportunity in these areas moving forward:
·Incorporation of AI in ‘good bot’ technology that allows retailers to participate in meaningful interactions with consumers using Facebook messenger and like platforms. We believe that the integration of bot technology with products like the Sharerails Concierge product described above, will be more compelling than custom mobile apps for the majority of consumers that favor text apps for communication.
·Integration of the Sharerails platform with Amazon’s Alexa, and like products will provide a future path for a more sophisticated interaction between brick and mortar retailers and consumers both in the home and in the mall and store
·Influencer marketing which leverages social media to provide traffic rather than traditional digital marketing is becoming a much bigger part of the overall digital marketing story, and we believe that the Sharerails social media platform, currently in use by Marie Claire, Australia can be a big part of that story.
Our product offerings are sold on a subscription basis, where price varies based on the size of the retailer or mall and the features of our product suite that they choose. Approximately we would expect revenues on a per customer basis (mall or retailer) to be:
·Small retailers: $500-$1,000 per month
·Medium size retailers and small retail aggregators (strip malls, airports, etc.) $2,500-$5,000 per month
·Large retailers, large malls, or aggregators: $5,000-$40,000 per month
Currently we are generating $25,000/month in recurring subscription revenue or services.
Accessing Our Technology
Our software applications run in the Amazon cloud. The overall system runs over redundant MySql or SQL server databases using the Amazon SAN for storage of the data. MySql and SQL Server are both relational database management systems (RDBMS). MySql is the most widely used open-source (RDBMS) enabling the delivery of reliable, high performance and scalable web based applications, while SQL Server offers features useful for several of the Sharerails products The Company also uses several of the Amazon cloud services including search and the data storage facility S3. Our use of Amazon computing services is based on a month to month agreement. Amazon has data centers in the U.S., Ireland, Brazil, Singapore, and Tokyo. All of our services can run in any of the data centers at any time based upon demand. This allows for scalability to very large numbers of concurrent users and clicks.
Sales and Marketing
We aspire to be a provider of “quality of visitor” information to businesses who use the internet world wide. Our first year efforts will be focused on deploying the software platform to key high end malls worldwide. We have a substantial contact network that we can use to get into most major commercial retail property owners in the US, Asia, and Europe.
Patents and Intellectual Property Rights
We have not filed for any intellectual property protection, however we believe we will be able to file several patents in the retail digital marketing space as our efforts expand to include AI and other leading edge technologies.
In addition to the patents we are considering, we use intellectual property law that may include a combination of copyright, trade secret and confidentiality agreements to protect our intellectual property. Our employees and independent contractors will be required to sign agreements acknowledging that all inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property, and assigning to us any ownership that they may claim in those works. Despite our precautions, it may be possible for third parties to obtain and use without consent intellectual property that we own. Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.
From time to time, we may encounter disputes over rights and obligations concerning intellectual property. While we believe that our product and service offerings do not infringe the intellectual property rights of any third party, we cannot assure you that we will prevail in any intellectual property dispute. If we do not prevail in such disputes, we may lose some or all of our intellectual property protection, be enjoined from further sales of the applications determined to infringe the rights of others, and/or be forced to pay substantial royalties to a third party.
Governmental Controls, Approval and Licensing Requirements
We are not currently subject to direct federal, state or local regulation other than the requirement to have a business license for the areas in which we conduct business. We do not anticipate being a governmental contractor. We may be, however, subject to United States export control restrictions.
Competition
We do not believe that there are competitors that substantially have our vision. Several companies are working on local search for malls and retailers, but they lack the long term vision which includes social media, one to one services, etc. We believe this will change as we succeed, but at the moment we do not see any other companies with our comprehensive offering. The above said, competition exists for each piece of our overall solution and we would expect such competition to broaden their offerings to become more competitive against our integrated product offering.
Employees
As of the date hereof, we do not have any employees other than our officers and directors and one employee. Our officers and directors will continue to work for us for the foreseeable future. We anticipate hiring appropriate personnel on an as-needed basis, and utilizing the services of independent contractors as needed.
ITEM 1A.
ITEM 1A. - RISK FACTORS.
As a smaller reporting company we are not required to provide a statement of risk factors. Nonetheless, we are voluntarily providing risk factors herein.
Any investment in our common stock involves a high degree of risk. You should consider carefully the following information, together with the other information contained in this Annual Report, before you decide to buy our common stock. If one or more of the following events actually occurs, our business will suffer, and as a result our financial condition or results of operations will be adversely affected. In this case, the market price, if any, of our common stock could decline, and you could lose all or part of your investment in our common stock.
We are developing software that provides digital marketing services to retailers. We face risks in developing our product candidates and services and eventually bringing them to market. We also face risks that our business model may become obsolete. The following risks are material risks that we face. If any of these risks occur, our business, our ability to achieve revenues, our operating results and our financial condition could be seriously harmed.
Risk Factors Related to the Business of the Company
We have a limited operating history, we are not profitable, and we do not expect to be profitable in the near future. There is no assurance our future operations will result in revenues sufficient to obtain or sustain profitability. If we cannot generate sufficient revenues to operate profitably, we may suspend or cease operations.
We were incorporated on December 19, 2014 and we have not fully developed our proposed business operations and have no significant revenue. We have limited operating history upon which an evaluation of our future success or failure can be made. Our net loss from inception to December 31, 2016, was $4,121,307, of which most is for interest expense, change in value of derivative instruments and professional fees in connection with our formation and initial stock offering. Based on our cash position of $24,102 as of December 31, 2016, we will need to raise additional capital from the sale of our stock or debt. Such funding may not be available, or may be available only on terms which are not beneficial and/or acceptable to us.
Our ability to maintain profitability and positive cash flow is dependent upon our ability to attract new customers who will buy our products and services, and our ability to generate sufficient revenue through the sale of those products and services.
Based upon current plans, we expect to incur operating losses in future periods because we will be incurring expenses that may exceed revenues. We cannot guarantee that we will be successful in generating sufficient revenues in the future. In the event we cannot generate sufficient revenues and/or secure additional financing, we may be forced to cease operations.
We have received all or nearly all of our revenues from one major customer during the past two years and the loss of this customer would have a substantial effect on our financial performance.
During the years ended December 31, 2016 and 2015, we received 100% and 85%, respectively, of our revenues from one customer. We do not have a written or oral agreement with this customer and there is no guarantee that this customer will purchase any additional software or consulting services from us. While the acquisition of ShareRails has now expanded our customer base, we would lose a significant source of revenues if we are unable to retain this customer.
Because our officers and directors have other outside business activities and will have limited time to spend on our business, our operations may be sporadic, which may result in periodic interruptions or suspensions of operations.
Because our officers and directors have other outside business activities and will only be devoting between 20-75% of their time, or 8-30 hours per week each, to our operations, our operations may be sporadic and occur at times which are convenient for them. These outside interests may deter from our development. In the event they are unable to fulfill any aspect of their duties, we may experience a shortfall or complete lack of sales resulting in little or no profits and eventual closure of the business.
Our auditors have substantial doubt about our ability to continue as a going concern.
Our 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. Our auditor’s report reflects that our ability to continue as a going concern is dependent upon our ability to raise additional capital from the sale of common stock and, ultimately, the achievement of significant operating revenues. If we are unable to continue as a going concern, our stockholders will lose their investment. We will be required to seek additional capital to fund future growth and expansion. No assurance can be given that such financing will be available or, if available, that it will be on commercially favorable terms. Moreover, favorable financing may be dilutive to our stockholders.
Our controlling stockholders have significant influence over the Company.
Our officers and directors own stock representing approximately 72% of shareholder votes. As a result they will possess a significant influence over our affairs and may have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the company, which in turn could materially and adversely affect the market price of our common stock. Our minority shareholders will be unable to affect the outcome of stockholder voting as long as our officers and directors retain a controlling interest.
Our current officers and directors may set salaries and perquisites in the future, which the Company is unable to support with its current assets.
At present, Mr. Bossung and Mr. Nejman are each being paid $140,000 per year. Mr. Bossung and Mr. Nejman have deferred a portion of their salary and are being paid $8,000 per month until the Company can afford their full salary. Mr. Covely, through a company he owns, is being paid for programming hours and hosting fees at amounts that vary monthly based on hours worked and the type of work performed.
Although Mr. Covely, Mr. Bossung and Mr. Nejman have written employment or services agreements, our officers and directors may decide to award themselves higher salaries and other benefits. We do not have significant revenues, and there is no guarantee that we will have significant revenue in the near future. If we do not increase our revenues, we will be unable to support any higher salaries or other benefits for management, which may cause us to cease operations.
We may engage in strategic transactions that fail to enhance stockholder value.
From time to time, we may consider possible strategic transactions, including the potential acquisitions or licensing of products or technologies or acquisition of companies, and other alternatives with the goal of maximizing stockholder value. We may never complete a strategic transaction, and in the event that we do complete a strategic transaction, such as the acquisition of ShareRails, implementation of such transactions may impair stockholder value or otherwise adversely affect our business. Any such transaction may require us to incur non-recurring or other charges and may pose significant integration challenges and/or management and business disruptions, any of which could harm our results of operation and business prospects.
We may not be able to gain or sustain market acceptance for our products and services.
Failure to establish a brand and presence in the marketplace on a timely basis could adversely affect our financial condition and results of operations. Moreover, there can be no assurance that we will successfully complete our development and introduction of new products and services or that any such products and services will achieve acceptance in the marketplace. We may also fail to develop and deploy new products and services on a timely basis.
The market for products and services in the digital marketing business is highly competitive, and we may not be able to compete successfully.
The market for our software and services is intensely and increasingly competitive and subject to rapidly changing technology and evolving standards. In addition, many companies in our target market are offering, or may soon offer, products and services that may compete with our soon to be released product. Our current primary competitors generally fall into two categories: large software companies, including suppliers of traditional retail POS and other systems to retailers that provide one or more capabilities that are competitive with our software, and new and emerging software companies and digital marketing agencies that the company may or may not know about We expect competition to increase as other established and emerging companies enter the local retail marketing space, and as customer requirements evolve and as new products and technologies are introduced. We expect this to be particularly true with respect to our cloud-based software. This is a relatively new and evolving area of software, and we anticipate competition to increase based on customer demand for this type of product.
Many of our competitors, particularly large software companies and larger marketing agencies, have longer operating histories, significantly greater financial, technical, marketing, distribution, professional services or other resources and greater name recognition than we do. In addition, many of our competitors have strong relationships with our potential customers and extensive knowledge of the industry. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements. Moreover, many of these competitors may be willing to bundle services we are charging for into their other product offerings, often at significant discounts. Increased competition may lead to price cuts, alternative pricing structures or the introduction of products available for free or a nominal price. We may not be able to compete successfully against current and future competitors, and our business, results of operations and financial condition will be harmed if we fail to meet these competitive pressures.
Our ability to compete successfully in our market depends on a number of factors, both within and outside of our control. Some of these factors include ease and speed of product deployment and use, analytical and statistical capabilities, performance and scalability, the quality and reliability of our customer service and support, total cost of ownership, return on investment for the customer. Any failure by us to compete successfully in any one of these or other areas will adversely affect our business, results of operations and financial condition.
Moreover, current and future competitors may also make strategic acquisitions or establish cooperative relationships among themselves or with others. By doing so, these competitors may increase their ability to meet the needs of our potential customers. In addition, our prospective indirect sales channel partners may establish cooperative relationships with our competitors. These relationships may limit our ability to sell our product through specific distributors, technology providers, database companies and distribution channels and allow our competitors to rapidly gain significant market share. These developments could limit our ability to obtain sales from potential customers. If we are unable to compete successfully against current and future competitors, our business, results of operations and financial condition would be harmed.
We have incurred costs in completing the transaction with ShareRails and failure to successfully integrate ShareRails will have an adverse impact on our financial position and prevent us from obtaining the benefits that the transaction would have given us.
We have recently completed our acquisition of ShareRails. Our executives have spent considerable time and incurred legal and accounting costs in acquiring ShareRails. If we are unable to fully integrate ShareRails into our business or maintain ShareRails’ customer base, we will not be able to acquire the technologies, partnerships and potential customers that the transaction was intended given us. The increase in acquisition and integration costs without the corresponding benefit will have an adverse impact on our financial statements and foreclose potential revenue-producing opportunities in the near future.
Our success is highly dependent on our ability to penetrate the market for digital marketing services as well as the growth and expansion of that market.
The market for local inventory based digital marketing and related services like ours is relatively new, rapidly evolving and unproven. Our success will depend in large part on our ability to create a new market for local inventory based digital marketing. It is difficult to predict customer adoption and renewal rates, customer demand for our products, the size, growth rate and expansion of these markets, the entry of competitive products or the success of existing competitive products. Our ability to penetrate the existing market and any expansion of the emerging market depends on a number of factors, including the cost, performance and perceived value associated with our product, as well as customers’ willingness to adopt a different approach to driving foot traffic. Furthermore, many potential customers have made significant investments in other local inventory or local digital marketing software systems and may be unwilling to invest in new software. If we are unable to complete and sell our local inventory based digital marketing cloud based system, our business, results of operations and financial condition would be adversely affected.
Real or perceived errors, failures or bugs in our software could adversely affect our results of operations and growth prospects.
Because our software is new, not tested, undetected errors, failures or bugs may occur. Our software may or will be installed and used in computing environments with different operating systems, and equipment and networking configurations, which may cause errors or failures of our software or other aspects of the computing environment into which it is deployed. In addition, deployment of our software into computing environments may expose undetected errors, compatibility issues, failures or bugs in our software. Despite testing by us, errors, failures or bugs may not be found in our software until it is released to our customers. Moreover, our customers could incorrectly implement or inadvertently misuse our software, which could result in customer dissatisfaction and adversely impact the perceived utility of our product as well as our brand. Any of these real or perceived errors, compatibility issues, failures or bugs in our software could result in negative publicity, reputational harm, loss of or delay of our software, loss of competitive position or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem. Alleviating any of these problems could require significant expenditures of our capital and other resources and could cause interruptions, which could cause us to lose potential customers and could adversely affect our results of operations.
Our success depends on our ability to sell our product and establish an indirect sales channel.
We need to establish indirect sales and sales channel partners, such as original equipment manufacturers, technology partners, systems integrators and resellers. Indirect sales channel partners are becoming an increasingly important aspect of software sales. We cannot be certain that we will be able to identify suitable indirect sales channel partners. To the extent we do identify such partners, we will need to negotiate the terms of a commercial agreement with them under which the partner would distribute our software. We cannot be certain that we will be able to negotiate commercially-attractive terms with any channel partner, if at all. In addition, all channel partners must be trained to distribute our products. There can be no assurance that our channel partners will comply with the terms of our commercial agreements with them or will continue to work with us when our commercial agreements with them expire or are up for renewal. If we are unable to maintain our relationships with these channel partners, or these channel partners fail to live up to their contractual obligations, our business, results of operations and financial condition could be harmed.
Economic uncertainties or downturns could materially adversely affect our business.
Current or future economic uncertainties or downturns could adversely affect our business and results of operations. Negative conditions in the general economy including conditions resulting from changes in gross domestic product growth, the continued sovereign debt crisis, financial and credit market fluctuations, political deadlock, natural catastrophes, warfare and terrorist attacks on the United States, Europe, the Asia Pacific region or elsewhere, could cause a decrease in business investments, including corporate spending on for local inventory based digital marketing software.
General worldwide economic conditions have experienced a significant downturn and continue to remain unstable. These conditions make it extremely difficult for us to forecast and plan future business activities accurately, and they could cause our potential customers to reevaluate their decisions to purchase our product, which could delay and lengthen our sales cycles or result in cancellations of planned purchases. Furthermore, during challenging economic times our potential customers may tighten their advertising budgets which may impact their spend on local inventory based digital marketing products. To the extent purchases of our software are perceived by potential customers to be discretionary, sales of our product may never occur. Also, customers may choose to develop in-house software as an alternative to using our product.
We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular industry. If the economic conditions of the general economy or industries in which we operate do not improve, or worsen from present levels, our business, results of operations, financial condition and cash flows could be adversely affected.
We are dependent on the services of key personnel and failure to attract qualified management could limit our growth and negatively impact our results of operations.
We are highly dependent on the principal members of our management team, including our Chief Executive Officer, Fred Covely, and our President, Joseph Nejman, for our local inventory based digital marketing products and services. We are also dependent on technical and programing personnel. At this time, we do not know of the availability of such experienced management personnel or how much it may cost to attract and retain such personnel. The loss of the services of any member of senior management or the inability to hire experienced technical or programing personnel could have a material adverse effect on our financial condition and results of operations.
Other companies may claim that we have infringed upon their intellectual property or proprietary rights.
We do not believe that our products and services violate third-party intellectual property rights; however, we have not had an independent party conduct a study of possible patent infringements. Nevertheless, we cannot guarantee that claims relating to violation of such rights will not be asserted by third parties. If any of our products or services are found to violate third-party intellectual property rights, we may be required to expend significant funds to re-engineer or cause to be re-engineered one or more of those products or services to avoid infringement, or seek to obtain licenses from third parties to continue offering our products and services without substantial re-engineering, and such efforts may not be successful.
In addition, future patents may be issued to third parties upon which our products and services may infringe. We may incur substantial costs in defending against claims under any such patents. Furthermore, parties making such claims may be able to obtain injunctive or other equitable relief, which effectively could block our ability to further develop or commercialize some or all of our products or services in the United States or abroad, and could result in the award of substantial damages against us. In the event of a claim of infringement, we may be required to obtain one or more licenses from third parties. There can be no assurance that we will be able to obtain such licenses at a reasonable cost, if at all. Defense of any lawsuit or failure to obtain any such license could be costly and have a material adverse effect on our business.
Our success depends on our ability to protect our proprietary technology.
Our success depends, to a significant degree, upon the protection of our proprietary technology, and that of any licensors. Legal fees and other expenses necessary to obtain and maintain appropriate patent protection could be material. Insufficient funding may inhibit our ability to obtain and maintain such protection. Additionally, if we must resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome and expensive, and could involve a high degree of risk to our proprietary rights if we are unsuccessful in, or cannot afford to pursue, such proceedings.
We may also rely on trademarks, trade secrets and contract law to protect certain of our proprietary technology. There can be no assurance that any trademarks will be approved, that such contract will not be breached, or that if breached, we will have adequate remedies. Furthermore, there can be no assurance that any of our trade secrets will not become known or independently discovered by third parties.
Our future growth may be inhibited by the failure to implement new technologies.
Our future growth is partially tied to our ability to improve our knowledge and implementation of mobile, AI, machine learning, and other advanced technologies in a retail environment, which is a rapidly changing market. The inability to successfully implement commercially technologies in response to market conditions in a manner that is responsive to our customers’ requirements could have a material adverse effect on our business.
Risks Related To Our Common Stock
The market price of our common stock may be volatile and may be affected by market conditions beyond our control.
The market price of our common stock is subject to significant fluctuations in response to, among other factors:
·variations in our operating results and market conditions specific to technology companies;
·changes in financial estimates or recommendations by securities analysts;
·announcements of innovations or new products or services by us or our competitors;
·the emergence of new competitors;
·operating and market price performance of other companies that investors deem comparable;
·changes in our board or management;
·sales or purchases of our common stock by insiders;
·commencement of, or involvement in, litigation;
·changes in governmental regulations; and
·general economic conditions and slow or negative growth of related markets.
In addition, if the market for stocks in our industry or the stock market in general, experiences a loss of investor confidence, the market price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause the price of our common stock to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to the board of directors and management.
If we are unable to pay the costs associated with being a public, reporting company, we may not be able to continue trading on the OTCQB and/or we may be forced to discontinue operations.
Our common stock is listed for trading on the OTCQB. We expect to have significant costs associated with being a public, reporting company, which may raise substantial doubt about our ability to continue trading on the OTCQB and/or continue as a going concern. Our ability to continue trading on the OTCQB and/or continue as a going concern will depend on positive cash flow, if any, from future operations and on our ability to raise additional funds through equity or debt financing. If we are unable to achieve the necessary product sales or raise or obtain needed funding to cover the costs of operating as a public, reporting company, our common stock may be deleted from the OTCQB and/or we may be forced to discontinue operations.
Our common stock is listed for quotation on the OTCQB tier of the marketplace maintained by OTC Markets Group, Inc., which may make it more difficult for investors to resell their shares due to suitability requirements.
Our common stock is currently quoted on the OTCQB tier of the marketplace maintained by OTC Markets Group, Inc. Broker-dealers often decline to trade in over-the-counter stocks given the market for such securities are often limited, the stocks are more volatile, and the risk to investors is greater. These factors may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of their shares. This could cause our stock price to decline.
Our principal stockholders have the ability to exert significant control in matters requiring stockholder approval and could delay, deter, or prevent a change in control of our company.
Fred Covely, William Bossung, Joseph Nejman and Dmitry Chourpo collectively own common and preferred stock with over 74% of the shareholder votes. As a result, they have the ability to influence matters affecting our shareholders, including the election of our directors, the acquisition or disposition of our assets, and the future issuance of our shares. Because they control such shares, investors may find it difficult to replace our management if they disagree with the way our business is being operated. Because the influence by these shareholders could result in management making decisions that are in the best interest of those shareholders and not in the best interest of the investors, you may lose some or all of the value of your investment in our common stock. Investors who purchase our common stock should be willing to entrust all aspects of operational control to our current management team.
We do not intend to pay dividends in the foreseeable future.
We do not intend to pay any dividends in the foreseeable future. We do not plan on making any cash distributions in the manner of a dividend or otherwise. Our Board presently intends to follow a policy of retaining earnings, if any.
Future sales and issuances of our capital stock or rights to purchase capital stock could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to decline.
Future sales and issuances of our capital stock or rights to purchase our capital stock could result in substantial dilution to our existing stockholders. We may sell common stock, convertible securities and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time. If we sell any such securities in subsequent transactions, investors may be materially diluted. New investors in such subsequent transactions could gain rights, preferences and privileges senior to those of holders of our common stock.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.
We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.
As a result of disclosure of information in this annual report and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and results of operations.
The market for penny stock has suffered in recent years from patterns of fraud and abuse
Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:
·control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
·manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
·boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced salespersons;
·excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and,
·the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequential investor losses.
Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.
Due to the lack of a developed trading market for our securities, you may have difficulty selling your shares.
Our stock currently trades on the OTCQB tier maintained by OTC Markets Group, Inc. There currently is a very limited public trading market for our common stock. The lack of a deveoped public trading market for our shares may have a negative effect on your ability to sell your shares in the future and it also may have a negative effect on the price, if any, for which you may be able to sell your shares. As a result an investment in the shares may be illiquid in nature and investors could lose some or all of their investment.
Our status as an “emerging growth company” under the JOBS Act OF 2012 may make it more difficult to raise capital when we need to do it.
Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” and because we will have an extended transition period for complying with new or revised financial accounting standards, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.
Our internal controls may be inadequate, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officer and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Our internal controls may be inadequate or ineffective, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public.
We will incur ongoing costs and expenses for SEC reporting and compliance, without increased revenue we may not be able to remain in compliance, making it difficult for investors to sell their shares, if at all.
Going forward, we will have ongoing SEC compliance and reporting obligations. Such ongoing obligations will require the Company to expend additional amounts on compliance, legal and auditing costs. In order for us to remain in compliance, we will require increased revenues to cover the cost of these filings, which could comprise a substantial portion of our available cash resources. If we are unable to generate sufficient revenues to remain in compliance, it may be difficult for you to resell any shares you may purchase, if at all.
We have outstanding convertible debt, which, if repaid will require a significant amount of capital, or if converted into our common stock could have a material adverse effect on our stock price.
We have entered into various convertible promissory notes with an aggregate outstanding balance of $459,750 as of December 31, 2016. The convertible promissory notes are convertible into our common stock at various conversion prices. See “Note 7 - Convertible Debt” in the Notes to the Financial Statements.
Repayment of the notes must be done at a premium to the then-outstanding balance. If, rather than repay these notes, we allow them to convert into our common stock after six months, the stock could be sold into the open market at the time of conversion can cause the price for our common stock to decline.
We have the right to issue additional common stock without consent of stockholders. This would have the effect of diluting investors’ ownership and could decrease the value of their investment.
We are authorized to issue up to 500,000,000 shares of common stock, of which there were 72,508,922 shares issued and outstanding as of April 13, 2017. An additional 9,756,250 shares of common stock may be issued and outstanding if all of our currently outstanding warrants were exercised and converted into common stock, and an additional 144,588,860 if all of our currently outstanding shares of Series A Convertible Preferred Stock were converted into common stock. We therefore have up to an additional 266,354,032 authorized but unissued shares of our common stock, not taking into consideration shares of our common stock to be issued upon any conversion of our convertible notes, that may be issued by us for any purpose without the consent or vote of our stockholders that would dilute stockholders’ percentage ownership of our company.
Our officers and directors can sell some of their stock, which may have a negative effect on our stock price and ability to raise additional capital, and may make it difficult for investors to sell their stock at any price.
Our officers and directors, as a group, are the beneficial owners of 130,941,645 shares of our common stock, representing approximately 72% of our total issued shares. Each individual officer and director may be able to sell up to 1% of our outstanding stock (currently approximately 725,089 shares) every 90 days in the open market pursuant to Rule 144, which may have a negative effect on our stock price and may prevent us from obtaining additional capital. In addition, if our officers and directors are selling their stock into the open market, it may make it difficult or impossible for investors to sell their stock at any price.
Our common stock is governed under The Securities Enforcement and Penny Stock Reform Act of 1990.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Such exceptions include any equity security listed on NASDAQ and any equity security issued by an issuer that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for three years, (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three years, or (iii) average annual revenue of at least $6,000,000, if such issuer has been in continuous operation for less than three years. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.
The forward looking statements contained in this annual report may prove incorrect.
This Annual Report contains certain forward-looking statements, including among others: (i) anticipated trends in our financial condition and results of operations; (ii) our business strategy for expanding distribution; and (iii) our ability to distinguish ourselves from our current and future competitors. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. In addition to the other risks described elsewhere in this “Risk Factors” discussion, important factors to consider in evaluating such forward-looking statements include: (i) changes to external competitive market factors or in our internal budgeting process which might impact trends in our results of operations; (ii) anticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the biotechnology industry; and (iv) various competitive factors that may prevent us from competing successfully in the marketplace. In light of these risks and uncertainties, many of which are described in greater detail elsewhere in this “Risk Factors” discussion, there can be no assurance that the events predicted in forward-looking statements contained in this annual report will, in fact, transpire.
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this Annual Report, including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation, and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or similar expressions. These statements are only predictions and involve known and unknown risks and uncertainties, including the risks outlined under “Risk Factors” and elsewhere in this annual report.
Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievement. We are not under any duty to update any of the forward-looking statements after the date of this annual report to conform these statements to actual results, unless required by law.
ITEM 1B
ITEM 1B - UNRESOLVED STAFF COMMENTS
This Item is not applicable to us as we are not an accelerated filer, a large accelerated filer, or a well-seasoned issuer; however, we are voluntarily disclosing that we have not received any written comments from the Commission staff more than 180 days before the end of our fiscal year to which this Annual Report relates regarding our periodic or current reports under the Securities Exchange Act of 1934 and that remain unresolved.
ITEM 2
ITEM 2 - PROPERTIES
We do not currently maintain office space.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
We are not a party to or otherwise involved in any legal proceedings.
In the ordinary course of business, we are from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of our management, other than as set forth herein, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.
ITEM 4
ITEM 4 - MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is quoted on the OTCPink tier of the marketplace maintained by OTC Markets Group, Inc. under the symbol “GRCK.” Our stock has traded there since November 6, 2015. Our common stock trades on a limited or sporadic basis and should not be deemed to constitute an established public trading market. There is no assurance that there will be liquidity in the common stock.
The following table sets forth the high and low transaction price for each quarter within the fiscal year ended December 31, 2016 and 2015, as provided by OTC Markets Group, Inc. The information reflects prices between dealers, and does not include retail markup, markdown, or commission, and may not represent actual transactions.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to a few exceptions which we do not meet. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.
Holders
As of April 13, 2017, there were 72,508,922 shares of our common stock issued and outstanding and held by 52 holders of record, not including shares held in “street name” in brokerage accounts which is unknown.
Dividend Policy
We have not paid any dividends on our common stock and do not expect to do so in the foreseeable future. We intend to apply our earnings, if any, in expanding our operations and related activities. The payment of cash dividends in the future will be at the discretion of the Board of Directors and will depend upon such factors as earnings levels, capital requirements, our financial condition and other factors deemed relevant by the Board of Directors.
Securities Authorized for Issuance under Equity Compensation Plans
We do not currently have a stock option or grant plan.
Recent Issuance of Unregistered Securities
The following sales of equity securities occurred during the three month period ended December 31, 2016 and for the three month period ended March 31, 2017:
Convertible Notes
We have sold convertible notes to various investors. The exhibits shows the date of each note, the amount of the note, the interest rate and the maturity date of the note:
Each note bears interest at the rate indicated and is due on the maturity date listed in the note. Some of the notes are convertible into shares of our common stock from the date which is 181 days after the date of the note through the later of (i) the maturity date and (ii) the date of payment of the default amount due upon certain change of control transactions or a default of the note. Conversion of the notes is not allowed to the extent the conversion would result in beneficial ownership by the holder and its affiliates of more than 9.99% of our outstanding shares of common stock. Some of the notes are convertible into shares of our common stock from the original date of the loan.
On some of the notes the conversion price of the notes is the lesser of $0.20 or a price equal to 50% of the lowest closing bid price of our common stock on the OTCQB, during the 20 trading day period prior to the conversion of a note. If our common stock is “chilled” by the Depository Trust Company at the time of conversion, the conversion price will be $0.20 or a price equal to 40% of the lowest closing bid price of our common stock on the OTCQB, during the 20 trading day period prior to the conversion of a note. Some of the notes have different discounts to market and some are based on 25 day trading period.
A default interest rate of 22% applies for any principal or interest that is not paid when due for some of the notes. 	
The issuances were exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, the investor was sophisticated and familiar with our operations, and there was no solicitation in connection with the offering.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
As a smaller reporting company we are not required to provide the information required by this Item.
ITEM 7
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.
Although the forward-looking statements in this Annual Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.
Summary Overview
We were formed in December 2014 and, therefore, have a relatively short operating history. Our business is primarily focused on developing mobile, web-based programs to help retailers better connect with their customers. We are also developing a cloud based software to detect advertising fraud on the internet. We had revenues of approximately $163,000 in the year ended December 31, 2016, 100% of which was from a single customer.
ShareRails, LLC
On March 31, 2017, we acquired ShareRails, LLC (“ShareRails”). ShareRails provides its clients with a unique mobile platform for connecting shoppers and retailers. ShareRails has been operated by its two founders who will continue to work with us to service ShareRails’ existing enterprise clients and expand our customer base. We believe that together we will be able to further expand our reach into the social commerce and retail marketing industry.
As part of the acquisition, we have brought on one of ShareRails’ founders, Joseph Nejman, to serve as our President and on our Board of Directors. His experience and contacts will help us to penetrate new markets and develop innovative products.
Going Concern
As a result of our financial condition, we have received a report from our independent registered public accounting firm for our financial statements for the years ended December 31, 2016 and 2015 that includes an explanatory paragraph describing the uncertainty as to our ability to continue as a going concern. Since its inception, the Company has been engaged substantially in financing activities and developing its business plan and incurring start up costs and expenses. As a result, the Company incurred accumulated net losses from Inception (December 19, 2014) through the period ended December 31, 2016 of $4,121,307. In addition, the Company’s development activities since inception have been financially sustained through equity financing. Management plans to seek funding through debt and equity financing.
Results of Operations for the Years Ended December 31, 2016 and
Introduction
We had revenues of $162,750 for the year ended December 31, 2016. Our operating expenses were $988,510 for the year ended December 31, 2016, and consisted primarily of general and administrative expenses associated with getting the company public.
Revenues and Net Operating Loss
Our revenues, operating expenses, and net operating loss for the years ended December 31, 2016 and 2015 were as follows:
Revenues
The Company had revenues of $162,750 and $115,551 for the years ended December 31, 2016 and 2015, respectively. Approximately 100% and 85% of the total revenue came from a single customer during the years ended December 31, 2016 and 2015, respectively.
Direct Costs of Sales
Direct costs of sales were $26,933 and $46,626 for the years ended December 31, 2016 and 2015, respectively, and consisted of computer programmer and hosting costs.
General and Administrative
General and administrative expense was $758,427 and $386,601 for the years ended December 31, 2016 and 2015, an increase of $371,826. The increase was due primarily to costs related to going public and the costs for maintaining listing. In the year ended December 31, 2016, general and administrative expense consisted mainly of consulting $486,622, selling expenses of $5,332, commissions of $26,283, transfer agent and filing fees of $7,707, and accounting fees of $14,500. In the year ended December 31, 2015, general administrative expense consisted mainly of consulting $71,671, selling expenses of $57,902, commissions of $33,808, transfer agent and filing fees of $21,610, and accounting fees of $22,000.
General and administrative - related party expense was $203,150 for the year ended December 31, 2016, a decrease of $210,107, and consisted of salaries and wages of $96,000 and consulting fees of $107,150. It was $413,257 for the year ended December 31, 2015 and consisted of salaries and wages of $68,000 and consulting fees of $345,257.
Net Operating Loss
Our net operating loss was $825,760 and $730,933 for the years ended December 31, 2016 and 2015, respectively, an increase of $94,827.
Other Income and Expense
Other expense for the year ended December 31, 2016 was $2,545,175, a decrease of $2,545,114, and consisted primarily of interest expense, change in fair value of derivatives and loss on extinguishment of debt. Other income for the year ended December 31, 2015 was $61 and consisted of interest income.
Net Loss
Our net loss for the year ended December 31, 2016 was $3,370,935, or $(0.21) per share, an increase of $2,640,063 from the year ended December 31, 2015 when it was $730,872, or $(0.05) per share.
Liquidity and Capital Resources
Introduction
During the years ended December 31, 2016 and 2015, because we generated only nominal revenues, we had negative operating cash flows. Our cash on hand as of December 31, 2016 was $24,102, which was derived primarily from the sale of convertible notes to investors. Our monthly cash flow burn rate in 2016 was approximately $45,000. Although we have moderate short term cash needs, as our operating expenses increase we will face strong medium to long term cash needs. We anticipate that these needs will be satisfied through the issuance of debt or the sale of our securities until such time as our cash flows from operations will satisfy our cash flow needs. With the acquisition of ShareRails, we expect to see an increase in revenues over the next few years that will help us maintain the cash we need to operate our business. However, we have incurred additional expenses in the acquisition of ShareRails and the additional costs to be incurred through this expansion of our operations will increase our need for additional cash flow.
Our cash, current assets, total assets, current liabilities, and total liabilities as of December 31, 2016 and December 31, 2015 are as follows:
Our cash increased by $22,566 as of December 31, 2016 as compared to December 31, 2015. Our total current assets decreased by $6,530, from $150,360 to $143,830 as a result of a decrease in prepaid expenses of $97,391 offset by an increase in accounts receivable of $22,000 and a new note receivable-related party of $46,295. Our total assets decreased by $8,940, from $155,123 to $146,183, primarily for the same reasons.
Our current liabilities increased from $25,152 as of December 31, 2015 to $2,505,602 as of December 31, 2016 and consisted of accounts payable of $23,799 and accrued payroll and taxes of $6,111. Our total liabilities increased by $2,480,450 during the year ended December 31, 2016 due primarily to the issuance of $485,000 in convertible debt with adjustments for the change in value on derivative liability, resulting in derivative liabilities of $2,038,952. The change in derivative liabilities results from the adjustable conversion rate on our convertible debt and warrants.
In order to repay our obligations in full or in part when due, we will be required to raise significant capital from other sources. There is no assurance, however, that we will be successful in these efforts.
Cash Requirements
Our cash on hand as of December 31, 2016 was $24,102. Our monthly cash flow burn rate in 2016 was approximately $45,000. Although we have moderate short term cash needs, as our operating expenses increase we will face strong medium to long term cash needs. We anticipate that these needs will be satisfied through the sale of our securities until such time as our cash flows from operations will satisfy our cash flow needs.
Sources and Uses of Cash
Operations
Our net cash used in operating activities for the years ended December 31, 2016 and 2015 was $537,058 and $497,847, respectively, an increase of $39,211. Our net cash used in operating activities consisted primarily of our net loss of $3,370,935 and an increase in accounts receivable of $22,000, offset primarily by warrants issued for services of $315,019, non-cash interest of $1,045,187, change in fair value of derivative liability of $1,423,715 and a gain on settlement of debt of $47,969.
Investments
Our cash flow used in investing activities for the years ended December 31, 2016 and 2015 was $47,876 and $6,350, respectively. For 2016, the increase represented payments for note receivable-related party of $46,295 and the purchase of fixed assets of $1,581.
Financing
Our net cash provided by financing activities for the years ended December 31, 2016 and 2015 was $607,500 and $505,000, respectively, an increase of $102,500. For 2016, the increase was the result of proceeds from issuance of convertible debt of $485,000, proceeds from the issuance of notes payable of $35,000, proceeds from the modification of warrants of $50,000, and proceeds from the exercise of warrants of $37,500.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in our consolidated financial statements and related notes. Our significant accounting policies are described in Note 2 to our consolidated financial statements included in our Annual Report on Form 10- K for the year ended December 31, 2016. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and such differences may be material.
Management considers the following policies critical because they are both important to the portrayal of our financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ from these good faith estimates and judgments.
Recent Accounting Pronouncements
Management has considered all recent accounting pronouncements issued since the last audit of the Company’s financial statements. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s financial statements.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company we are not required to provide the information required by this Item.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Grey Cloak Tech, Inc.
We have audited the accompanying balance sheets of Grey Cloak Tech, Inc. as of December 31, 2016 and 2015 and the related statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Grey Cloak Tech, Inc.as of December 31, 2016 and 2015, and the results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As described in Note 3 the Company has generated minimal revenues from operations. Since its inception, the Company has been engaged substantially in financing activities and developing its business plan and incurring start-up costs and expenses. As a result, the Company incurred accumulated net losses from Inception (December 19, 2014) through the period ended December 31, 2016 of $4,121,307. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. Management plans are also disclosed in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/S/Paritz & Company, P.A.
Hackensack, New Jersey
April 17, 2017
GREY CLOAK TECH INC
BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
GREY CLOAK TECH INC
STATEMENT OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
GREY CLOAK TECH INC
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these financial statements.
GREY CLOAK TECH INC
STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
GREY CLOAK TECH INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 and 2015
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Grey Cloak Tech Inc. (the “Company”) was incorporated in the State of Nevada on December 19, 2014. The Company was formed to provide cloud based software to detect advertising fraud on the internet.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash
Cash includes cash in banks, money market funds, and certificates of term deposits with maturities of less than three months from inception, which are readily convertible to known amounts of cash and which, in the opinion of management, are subject to an insignificant risk of loss in value.
Fixed Assets
Property and equipment are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, as follows:
GREY CLOAK TECH INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 and 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The estimated useful lives are based on the nature of the assets as well as current operating strategy and legal considerations such as contractual life. Future events, such as property expansions, property developments, new competition, or new regulations, could result in a change in the manner in which the Company uses certain assets requiring a change in the estimated useful lives of such assets.
Maintenance and repairs that neither materially add to the value of the asset nor appreciably prolong its life are charged to expense as incurred. Gains or losses on disposition of property and equipment are included in the statements of operations. There were no dispositions during the periods presented.
Website
The Company capitalizes the costs associated with the development of the Company’s website pursuant to ASC Topic 350. Other costs related to the maintenance of the website are expensed as incurred. Amortization is provided over the estimated useful lives of 3 years using the straight-line method. The Company has commenced amortization upon completion of the Company’s fully operational website. Amortization expense for the years ended December 31, 2016 and 2015 was $933 and $700, respectively.
Revenue Recognition
We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the product or service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable.
The Company will record revenue when it is realizable and earned and the computer programming services or marketing services have been rendered to the customers. Additionally, the Company will record revenue from the sale of its software when the software is delivered to the customer or it will be recognized ratably throughout the term of the contract.
Concentration
One customer accounted for 100% and 85% of total revenue earned during the years ended December 31, 2016 and 2015, respectively. 100% and 100% of the accounts receivable is due from this customer at December 31, 2016 and 2015, respectively.
GREY CLOAK TECH INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 and 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Advertising
Advertising costs are anticipated to be expensed as incurred; however, there were advertising costs included in general and administrative expenses for the years ended December 31, 2016 and 2015.
Income Taxes
The Company accounts for income taxes using the asset and liability method in accordance with ASC 740, “Accounting for Income Taxes”. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. As of December 31, 2016 and 2015, the Company did not have any amounts recorded pertaining to uncertain tax positions.
Fair Value Measurements
The Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.
The estimated fair value of certain financial instruments, including cash and cash equivalents are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.
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:
GREY CLOAK TECH INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 and 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Level 1 - quoted prices in active markets for identical assets or liabilities
Level 2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 - inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
The derivative liabilities in connection with the conversion feature of the convertible debt, classified as a Level 3 liability, is the only financial liability measure at fair value on a recurring basis.
The change in Level 3 financial instrument is as follows:
Balance, January 1, 2016
$ -
Issued during the year ended December 31, 2016
982,481
Change in fair value recognized in operations
1,423,715
Converted during the year ended December 31, 2016
(367,244)
Balance, December 31, 2016
$ 2,038,952
Convertible Instruments
The Company evaluates and account for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities”.
Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include 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 other GAAP 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.
GREY CLOAK TECH INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 and 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: 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.
The Company accounts for the conversion of convertible debt when a conversion option has been bifurcated using the general extinguishment standards. The debt and equity linked derivatives are removed at their carrying amounts and the shares issued are measured at their then-current fair value, with any difference recorded as a gain or loss on extinguishment of the two separate accounting liabilities. During the year ending December 31, 2016, the Company recognized a gain on extinguishment of $47,969 from the conversion of convertible debt with a bifurcated conversion option.
Common Stock Purchase Warrants
The Company classifies as equity any contracts that require physical settlement or net-share settlement or provide a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as defined in ASC 815-40 ("Contracts in Entity's Own Equity"). The Company classifies as assets or liabilities any contracts that require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control) or give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification is required.
GREY CLOAK TECH INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 and 2015
NOTE 3 - GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has generated minimal revenues from operations. Since its inception, the Company has been engaged substantially in financing activities and developing its business plan and incurring start up costs and expenses. As a result, the Company incurred accumulated net losses from Inception (December 19, 2014) through the period ended December 31, 2016 of $4,121,307. In addition, the Company’s development activities since inception have been financially sustained through equity financing. Management plans to seek funding through debt and equity financing.
NOTE 4 - RELATED PARTY
For the year ended December 31, 2015, the Company had expenses totaling $46,082 to a company owned by an officer and director and to the officer and director for consulting fees, which is included in general and administrative expenses - related party on the accompanying statement of operations. As of December 31, 2015, there was no accounts payable to the related party.
For the year ended December 31, 2015, the Company had expenses totaling $31,920 to former officer for consulting fees, which is included in general and administrative expenses - related party on the accompanying statement of operations. As of December 31, 2015, there was no accounts payable to the related party.
For the year ended December 31, 2015, the Company had expenses totaling $28,000 to former officer for salaries, which is included in general and administrative expenses - related party on the accompanying statement of operations. As of December 31, 2015, there was no accounts payable to the related party.
For the years ended December 31, 2016 and 2015, the Company had expenses totaling $96,000 and $40,000, respectively, to an officer and director for salaries, which is included in general and administrative expenses - related party on the accompanying statement of operations. As of December 31, 2016, there was no accounts payable - related party.
For the years ended December 31, 2016, the Company had expenses totaling $107,150 and $69,637 to a company owned by an officer and director for consulting fees, which is included in general and administrative expenses - related party on the accompanying statement of operations. As of December 31, 2016, there was $19,799 in accounts payable - related party.
For the year ended December 31, 2015, the Company had expenses totaling $197,618 to a director for the fair value of warrants issued for consulting fees, which is included in general and administrative expenses - related party on the accompanying statement of operations.
GREY CLOAK TECH INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 and 2015
NOTE 5 - NOTES PAYABLE
On June 9, 2016, the Company executed a promissory note for $20,000. The loan bears interest at 18% per annum and is due on December 9, 2016. The Company issued 60,000 shares of common stock to the lender as part of this note. The fair value of the shares were recorded as a debt discount and amortized over the life of the loan.
During the year ended December 31, 2016, the Company recorded interest expense of $1,800 and amortization of debt discount of $13,200.
During the year ended December 31, 2016, the Company allowed the lender to assign the debt to another third party. The third party and the Company agreed to extend the maturity date to June 9, 2017 and the debt became convertible into common stock at a rate of $0.04. During December 2016, the entire principal amount of the debt was converted into 500,000 shares of common stock and the accrued interest was paid in full with cash.
NOTE 6 - NOTES PAYABLE - RELATED PARTY
On July 28, 2016, the Company received a loan of $15,000 from an officer and director of the Company. The loan bears interest at 8% per annum and due the earlier of January 27, 2017 or when the Company receives financing of over $45,000. As of the date of this filing, the debt is in default and the Company is renegotiating the debt.
NOTE 7 - CONVERTIBLE DEBT
On January 23, 2016, the Company executed a convertible promissory note for $50,000. The loan had an original issue discount of $6,000 and legal fees of $1,000. The loan bears interest at 8% per annum and is due on January 23, 2017. The lender has the right to convert the principal amount and unpaid interest of the loan on or after 180 days to convert at a rate of 56% of the lowest trading price during the prior 20 days of conversion. On July 21, 2016, the Company allowed the lender to transfer the principal balance and accrued interest to three entities. The principal balance of the loan was increased to include the accrued interest to date. Once the lender had the right to convert, the Company recorded a derivative liability. On August 22, 2016, one of the lenders agreed to convert their entire amount of principal and interest of $38,735 into 576,406 shares of common stock.
GREY CLOAK TECH INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 and 2015
NOTE 7 - CONVERTIBLE DEBT (continued)
On March 7, 2016, the Company executed a convertible promissory note for $100,000. The loan bears interest at 10% per annum and is due on December 7, 2016. The lender has the right to convert the principal amount and unpaid interest of the loan at $0.10 per share if the market price is greater than $0.25. If the market price is less than or equal to $0.25 but greater than $0.10, then the conversion price is $0.05. If the market price is less than or equal to $0.10 then the conversion price is $0.02. On May 5, 2016, the Company amended the terms of the note and issued 600,000 warrants as part of the loan agreement which was effective as of March 7, 2017. The Company calculated the debt discount based on the allocated fair value of the beneficial conversion feature and the fair value of the warrants. The Company recorded a debt discount of $100,000. On September 30, 2016, the Company received $50,000 from the lender and extension of the maturity date of the loan and in exchange agreed to modify the conversion rate and the exercise price of the warrants. The Company agreed to reduce the exercise price of the warrants from $0.80 to $0.10.
On August 22, 2016, the Company executed a convertible promissory note for up to $300,000 and has received a total of $30,000 with an original issue discount of $5,000 in the first tranche. The loan bears interest at 8% per annum. The first tranche is due on August 22, 2017. In the event of default, the interest rate increases to 22% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan at a rate of 56% of the lowest trading price during the prior 20 days of conversion. However, if the stock price is below $0.10 then the loan can convert at a rate of 46% of the lowest trading price during the prior 20 days of conversion. Additionally, the Company issued 60,000 warrants as part the convertible promissory note. The warrants have an exercise price of $0.50 and can be exercised for 5 years. The fair value of the warrants were recorded as a debt discount and amortized over one year. On October 27, 2016, the Company received the second tranche of $30,000 with an original issue discount of $5,000. The second tranche is due on October 27, 2017.
On August 26, 2016, the Company executed a convertible promissory note for $55,000. The loan bears interest at 12% per annum. The loan is due on May 1, 2017. In the event of default, the interest rate increases to 22% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan on or after 180 days to convert at a rate of either the lesser of $0.20 or 50% of the lowest trading price during the prior 20 days of conversion. On September 7, 2016, the Company and the lender mutually agreed to remove the waiting period on the conversion and the Company recorded a derivative liability. During the year ended December 31, 2016, the lender converted $15,000 plus accrued interest of $69 into 259,484 shares of common stock.
GREY CLOAK TECH INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 and 2015
NOTE 7 - CONVERTIBLE DEBT (continued)
On September 7, 2016, the Company executed a convertible promissory note for $50,000. The loan bears interest at 12% per annum and interest payments are due monthly. The loan is due on September 6, 2017. In the event of default, the interest rate increases to 20% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan on or after 180 days to convert at a rate of either the lesser of $0.40 or 50% of the lowest trading price during the prior 20 days of conversion.
On September 22, 2016, the Company executed a convertible promissory note for $5,000. The loan bears interest at 12% per annum. The loan is due on December 31, 2016. In the event of default, the interest rate increases to 22% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan on or after 180 days to convert at a rate of either the lesser of $0.20 or 50% of the lowest trading price during the prior 20 days of conversion.
On September 22, 2016, the Company executed a convertible promissory note for $5,000. The loan bears interest at 12% per annum. The loan is due on December 31, 2016. In the event of default, the interest rate increases to 22% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan on or after 180 days to convert at a rate of either the lesser of $0.20 or 50% of the lowest trading price during the prior 20 days of conversion.
On October 5, 2016, the Company executed a convertible promissory note for $55,000 with an original issue discount of $10,000. The loan bears interest at 12% per annum. The loan is due on December 31, 2016. In the event of default, the interest rate increases to 22% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan on or after 180 days to convert at a rate of either the lesser of $0.20 or 50% of the lowest trading price during the prior 20 days of conversion.
On November 16, 2016, the Company executed a convertible promissory note for $55,000. The loan bears interest at 12% per annum. The loan is due on August 17, 2017. In the event of default, the interest rate increases to 18% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan at a rate of 45% of the lowest trading price during the prior 20 days of conversion. The loan has prepayment defaults in the event the Company repays the debt prior to maturity.
On November 29, 2016, the Company executed a convertible promissory note for $86,250 with an original issue discount of $9,000 and prepaid interest of $2,250. The loan bears interest at a fixed amount of $2,250. The loan is due on February 28, 2017. The lender has the right to convert the principal amount and unpaid interest of the loan at a rate of 70% of the lowest closing bid price during the prior 25 days of conversion.
During the year ended December 31, 2016, the Company recorded interest expense of $18,433 and amortization of debt discount of $218,819.
The Company has determined that the conversion feature embedded in the notes referred to above that contain a potential variable conversion amount constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt.
GREY CLOAK TECH INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 and 2015
NOTE 8 - INCOME TAX
The provisions for federal income tax at 34% for the years ended December 31, 2016 and 2015 consist of the following:
The tax effects of temporary differences that give rise to the Company’s net deferred tax assets as of December 31, 2016 and 2015 are as follows:
The Company has approximately $1,179,800 of net operating losses (“NOL”) carried forward to offset taxable income in future years which expire commencing in fiscal 2034. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the assessment, management has established a full valuation allowance against all of the deferred tax assets relating to NOLs for every period because it is more likely than not that all of the deferred tax assets will not be realized.
GREY CLOAK TECH INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 and 2015
NOTE 9 - STOCKHOLDERS’ EQUITY
Authorized Stock
The Company has authorized 75,000,000 common shares with a par value of $0.001 per share. Each common share entitles the holder to one vote on any matter on which action of the stockholders of the corporation is sought. During February 2017, the Company increased authorized number of shares to 500,000,000. Also, the Company increased the preferred stock to 75,000,000 shares and designated 25,000,000 shares of preferred stock to Series A Convertible Preferred Stock.
Common Share Issuances
On January 30, 2015 the Company issued 3,290,000 units to unaffiliated investors in a Regulation D 506 private placement for proceeds of $329,000. Each unit consists of one share of common stock and one common stock purchase warrant. Each common stock purchase warrant entitles the holder to purchase one share of common stock for each warrant at an exercise price of $0.50 and expire on December 31, 2016.
On February 9, 2015 the Company issued 10,000 units for proceeds of $1,000 to an unaffiliated investor in the private placement disclosed above.
On September 28, 2015, the Company issued 250,000 shares of common stock to an investor for cash totaling $100,000.
On November 9, 2015, the Company issued 125,000 units to two investors for cash totaling $50,000. Each unit consists of one share of common stock and one common stock purchase warrant. Each common stock purchase warrant entitles the holder to purchase one share of common stock for each warrant at an exercise price of $0.40 and expire on November 9, 2018.
On November 13, 2015, the Company issued 50,000 shares of common stock to an investor that exercised their warrants for cash totaling $25,000.
On January 5, 2016, the Company issued 10,000 shares of common stock to an investor that exercised their warrants for cash totaling $5,000.
On February 2, 2016, the Company issued 484,183 shares of common stock for the cashless exercise of 650,000 warrants.
GREY CLOAK TECH INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 and 2015
NOTE 9 - STOCKHOLDERS’ EQUITY(continued)
On April 20, 2016, the Company issued 65,000 shares of common stock to investors that exercised their warrants for cash totaling $32,500.
On June 9, 2016, the Company agreed to issue 60,000 shares of common stock to the lender as part of the note payable.
On August 22, 2016, the Company issued 576,406 shares of common stock for the conversion of debt totaling $38,735 and gain on settlement of debt of $3,016.
On September 9, 2016, the Company issued 259,484 shares of common stock for the conversion of debt totaling $15,069.
On September 30, 2016, the Company issued 469,537 shares of common stock for the cashless exercise of 600,000 warrants with an exercise price of $0.10.
On December 9, 2016, the Company issued 500,000 shares of common stock for the conversion of debt totaling $20,000.
Warrant Issuances
On September 28, 2015, the Company granted 650,000 warrants to an individual for consulting services. The warrants can purchase 650,000 shares of common stock with an exercise price of $0.25 and expire on September 28, 2018. Of the total, 350,000 warrants vest immediately and the remaining 300,000 warrants will vest 33.33% upon the acquisition of 17 million IP addresses, 33.33% upon the acquisition of additional 17 million IP addresses and 33.33% upon the acquisition of additional 16 million IP addresses. On February 2, 2016, the Company agreed to waive the vesting provision and the individual executed a cashless exercise of 650,000 warrants and received 484,183 shares of common stock.
On March 4, 2016, the Company entered into a consulting services agreement to provide business development services and issued 600,000 warrants. The warrants allow the holder to purchase 600,000 shares of common stock at an exercise price of $0.80 per share and are exercisable for 2 years. On May 5, 2016, the Company and the consultant agreed to rescind the agreement.
GREY CLOAK TECH INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 and 2015
NOTE 9 - STOCKHOLDERS’ EQUITY(continued)
On August 1, 2016, the Company entered into a consulting services agreement with a third party entity for an indefinite period of time. The services will continue until either party provides thirty days written notice of termination. The compensation for the agreement is 6,500,000 cashless exercise warrants. The warrants are exercisable at $0.12 per share and have a life of three years. The first 500,000 warrants vest immediately and the remaining 6,000,000 warrants vest upon consummation of a transaction as defined in the agreement, during the term of the consulting agreement or the six month period after the termination.
On August 22, 2016, the Company granted 60,000 warrants as part of convertible debt. The warrants allow the holder to purchase 60,000 shares of common stock at an exercise price of $0.51 per share and are exercisable for 5 years.
As of December 31, 2016, there were 9,756,250 warrants outstanding, of which 2,756,250 are fully vested.
NOTE 10 - SUBSEQUENT EVENTS
On January 23, 2017, the Company issued 1,555,119 shares of common stock for debt conversion of $52,252 which consists of $50,000 in principal and $2,250 in accrued interest.
On February 22, 2017, the Company issued 289,000 shares of common stock for debt conversion of $8,011 which consists of $7,511 in principal and $500 in fees.
On February 23, 2017, the Company increased authorized number of shares to 500,000,000. Also, the Company increased the preferred stock to 75,000,000 shares and designated 25,000,000 shares of preferred stock to Series A Convertible Preferred Stock. The designation was completed in March 31, 2017.
On February 24, 2017, the Company executed a convertible promissory note for $85,000. The loan bears interest at 12% per annum. The loan is due on November 24, 2017. In the event of default, the interest rate increases to 24% per annum. The lender has the right to convert the principal amount and unpaid interest of the loan on or after 180 days to convert at a rate of 45% of the lowest trading price during the prior 20 days of conversion.
On March 6, 2017, the Company issued 300,000 shares of common stock for debt conversion of $8,100 which consists of $7,600 in principal and $500 in fees.
GREY CLOAK TECH INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 and 2015
NOTE 10 - SUBSEQUENT EVENTS (continued)
On March 1, 2017, the Company issued 616,895 shares of common stock for debt conversion of $16,656 which consists of $14,889 in principal, $1,267 in accrued interest and $500 in fees.
On March 14, 2017, the Company issued 1,578,926 shares of common stock for debt conversion of $42,631 which consists of $40,000 in principal and $2,631 in accrued interest.
On March 28, 2017, the Company issued 711,111 shares of common stock for warrant exercise.
On March 31, 2017, the Company entered into a Share Exchange Agreement by and among the Company, ShareRails, LLC, Joseph Nejman, Dmitry Chourpo and Joseph Nejman, in his capacity as the Selling Members’ Representative whereby we issued and exchanged 91,619,170 shares of our common and 2,857,685 shares of our Series A Convertible Preferred Stock for all of the outstanding units of ShareRails, LLC, a Delaware limited liability company (“ShareRails”). Through this exchange of securities pursuant to the Exchange Agreement (the “Exchange”), ShareRails is now our wholly-owned subsidiary.
On March 31, 2017, the Company entered into an Employment Agreement with Joseph Nejman, our President. Pursuant to Mr. Nejman’s Employment Agreement, we have agreed to pay Mr. Nejman an annual base salary of $140,000, and he may receive employee stock options as determined by the Board of Directors. Any employee stock options granted will vest immediately upon the consummation of aggregate equity financing by the Company equal to $2,000,000 that results from Mr. Nejman’s direct efforts. Mr. Nejman is eligible to receive a 20% commission on gross sales that are a direct result of his sales efforts, up to a maximum of his base salary in any calendar year. Mr. Nejman’s employment is “at will” and either party may terminate the agreement at any time. If terminated without Cause or as a result of Constructive Termination, Mr. Nejman will receive severance equal to three months pay at his most recent Base Salary. If Mr. Nejman is terminated for Cause, Disability or death, or voluntarily resigns, he will not receive any severance, only unpaid salary as of the date of termination and vested benefits.
On March 31, 2017, the Company entered into an Employment Agreement with William Bossung, our Chief Financial Officer. Pursuant to Mr. Bossung’s Employment Agreement, we have agreed to pay Mr. Bossung an annual base salary of $140,000, and he may receive employee stock options as determined by the Board of Directors. Any employee stock options granted will vest immediately upon the consummation of aggregate equity financing by the Company equal to $2,000,000 that results from Mr. Bossung’s direct efforts. Mr. Bossung is eligible to receive a 20% commission on gross sales that are a direct result of his sales efforts, up to a maximum of his base salary in any calendar year. Mr. Bossung’s employment is “at will” and either party may terminate the agreement at any time. If terminated without Cause or as a result of Constructive Termination, Mr. Bossung will receive severance equal to three months pay at his most recent Base Salary. If Mr. Bossung is terminated for Cause, Disability or death, or voluntarily resigns, he will not receive any severance, only unpaid salary as of the date of termination and vested benefits.
GREY CLOAK TECH INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 and 2015
NOTE 10 - SUBSEQUENT EVENTS (continued)
On March 31, 2017, the Company entered into a Development Services Agreement with Covely Information Systems, a company owned and operated by Fred Covely, our Chief Executive Officer (the “Covely Agreement”). Pursuant to the Covely Agreement, we have agreed to pay Covely Information Services for services depending on monthly programming hours and hosting fees, as billed by Covely Information Systems. Billing will be variable and based on the income we receive from one of our clients and other services performed on our behalf. Payment is subject to deferment to the following month for any portion we are unable to pay because of insufficient capital. Covely Information Systems is an independent contractor and either party may terminate the agreement at any time. If the Covely Agreement is terminated for any reason, Covely Information Systems will not receive any severance, only the amount due for services performed prior to the date of termination.
On April 1, 2017, the Company entered into a Development Services Agreement with Dimicho Pty. Ltd., a company owned and operated by Dmitry Chourpo, one of the founders and prior owners of ShareRails (the “Dimicho Agreement”). Pursuant to the Dimicho Agreement, we have agreed to pay Dimicho Pty. Ltd. $8,000 per month for development and support of our software applications and web services. The payment is subject to deferment to the following month for any portion we are unable to pay because of insufficient capital. Dimicho Pty. Ltd. will dedicate no less than one full-time development resource exclusively to our client needs, work projects and business interest. Dimicho Pty. Ltd. is an independent contractor and either party may terminate the agreement at any time. If the Dimicho Agreement is terminated for any reason, Dimicho Pty. Ltd. will not receive any severance, only the amount due for services performed prior to the date of termination.
On March 31, 2017, the Company issued 6,280,745 shares of common stock, restricted in accordance with Rule 144, to Brad Holden, a former member of ShareRails, in connection with the Exchange and to satisfy obligations owed to Mr. Holden by ShareRails, our wholly-owned subsidiary.
On March 31, 2017, the Company issued a total of 13,307,405 shares of Series A Convertible Preferred Stock to officers, directors and shareholders.
On March 31, 2017, the Company issued a total of 7,550,000 shares of common stock to officers, directors and shareholders of the Company in exchange for 1,261,333 shares of Series A Convertible Preferred stock.
On March 31, 2017, the Company issued a total of 9,191,387 shares of Series A Convertible Preferred Stock to officers and shareholders in exchange for 55,148,320 shares of common stock.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There are no events required to be disclosed under this Item.
ITEM 9A
ITEM 9A - CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of December 31, 2016, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2016, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described in Item 9A(b).
Our principal executive officers do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive officers have determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
(b) Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, as amended, as a process designed by, or under the supervision of, our principal executive and principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States and includes those policies and procedures that:
·Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and any disposition of our assets;
·Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
·Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, Management identified the following two material weaknesses that have caused management to conclude that, as of December 31, 2016, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:
1. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
2. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us to provide only our management’s report in this Annual Report.
(c) Remediation of Material Weaknesses
To remediate the material weakness in our documentation, evaluation and testing of internal controls we plan to engage a third-party firm to assist us in remedying this material weakness once resources become available.
We also intend to remedy our material weakness with regard to insufficient segregation of duties by hiring additional employees in order to segregate duties in a manner that establishes effective internal controls once resources become available.
(d) Changes in Internal Control over Financial Reporting
No change in our system of internal control over financial reporting occurred during the period covered by this report, fourth quarter of the fiscal year ended December 31, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B
ITEM 9B - OTHER INFORMATION
None.
PART III
ITEM 10
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The following table sets forth the names, ages, and biographical information of each of our current directors and executive officers, and the positions with the Company held by each person, and the date such person became a director or executive officer of the Company. Our executive officers are elected annually by the Board of Directors. The directors serve one-year terms until their successors are elected. The executive officers serve terms of one year or until their death, resignation or removal by the Board of Directors. Family relationships among any of the directors and officers are described below.
Fred Covely, age 59, has served as our President, Chief Executive Officer, and a member of our Board of Directors since our inception. Mr. Covely has both a technical and business background in software. Fred has been involved in all aspects of the software industry over the past 30 years including technical, sales, legal, and management. In the 1990’s, Fred was the chief architect for the Peregrine Network Management System which was subsequently purchased by Hewlett Packard. Fred was a founder at BCF Technology, which was founded in September 2003, an insurance software company ultimately sold to Vertafore in August 2006. From August 2006 through December 2010, Fred remained as the Chief Technical Officer of Vertafore for and was responsible for a software division of Vertafore. From January 2011 to August 2013, Fred was the President of Codee Software which was a company that programmed and sold consumer QR codes. From August 2013 through December 2014, Fred has been an outside computer consultant for several companies involved in digital marketing.
William Bossung, age 59, has served as our Secretary, Chief Financial Officer, and a member of our Board of Directors since our inception. Mr. Bossung has a diverse background in Corporate Finance, Insurance and Accounting. From September 2003 to August 2006, Mr. Bossung was a founder of BCF Technology with Mr. Covely, an insurance software company that was ultimately sold to Vertafore in August 2006. From August 2006 through December 2014, Mr. Bossung was the managing partner of Bishop Equity Partners LLC, a small boutique private equity firm that invests in both private and public companies and purchases and restructures debt from companies. During January 2012, Mr. Bossung founded Splash Beverage Group, a beverage distribution company that distributes both alcohol and non-alcohol products, and is currently one of their Directors. From June 2012 through August 2013, Mr. Bossung was the Director of Business Development at Splash Beverage. Mr. Bossung currently holds an Insurance License in various states. He holds a bachelor’s degree in accounting and finance from Bloomsburg State University.
Joseph Nejman, age 36, was appointed to our Board of Directors on March 17, 2017. Mr. Nejman is the founder of ShareRails. Since January 2010, as an Entrepreneur In Residence for Eric Schmidt’s TomorrowVentures, Joseph led seed investments and co-founded the Tomorrow Media incubator to focus on social commerce. Prior to TomorrowVentures, from April 2007 to January 2010, Joseph worked at Google in a variety of business development roles with a focus on local markets, mobile, and entertainment. Joseph also founded Brandcasting in March 2008 - responsible for Britney Spears’ digital business and strategy. He is a proud Harvard Alum (2003) and member of the Olympic Club lacrosse team in San Francisco. Joseph recently participated in Swire's blueprint B2B accelerator program and works with major malls and brands in Hong Kong, China, and the US.
Family Relationships
There are no family relationships between any of our officers or directors.
Other Directorships; Director Independence
Other than as set forth above, none of our officers and directors is a director of any company with a class of securities registered pursuant to section 12 of the Exchange Act or subject to the requirements of section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.
For purposes of determining director independence, we have applied the definitions set out in NASDAQ Rule 5605(a)(2). The OTCQB on which shares of common stock are quoted does not have any director independence requirements. The NASDAQ definition of “Independent Officer” means a person other than an Executive Officer or employee of the Company or any other individual having a relationship which, in the opinion of the Company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. According to the NASDAQ definition, none of our directors are independent.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers and persons who own more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
To the Company’s knowledge, none of its officers, directors, or beneficial owners of more than ten percent of its common stock failed to file on a timely basis reports required by section 16(a) of the Exchange Act during the most recent fiscal year or prior fiscal years.
Board Committees
Our Board of Directors does not maintain a separate audit, nominating or compensation committee. Functions customarily performed by such committees are performed by its Board of Directors as a whole. We are not required to maintain such committees under the applicable rules of the OTCQB. We do not currently have an “audit committee financial expert” since we currently do not have an audit committee in place. We intend to create board committees, including an independent audit committee, in the near future.
We do not currently have a process for security holders to send communications to the Board.
During the fiscal years ended December 31, 2016 and 2015, the Board of Directors met as necessary.
Involvement in Certain Legal Proceedings
None of our officers or directors has, in the past ten years, filed bankruptcy, been convicted in a criminal proceeding or named in a pending criminal proceeding, been the subject of any order, judgment, or decree of any court permanently or temporarily enjoining him or her from any securities activities, or any other disclosable event required by Item 401(f) of Regulation S-K.
Code of Ethics
We have not adopted a written code of ethics, primarily because we believe and understand that our officers and directors adhere to and follow ethical standards without the necessity of a written policy.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
Narrative Disclosure of Executive Compensation
For the year ended December 31, 2015, the Company had expenses totaling $46,082 to a company owned by William Bossung, our Chief Financial Officer and Director, for consulting fees, which is included in general and administrative expenses - related party on the accompanying statement of operations. As of December 31, 2015, there was no accounts payable to the related party.
For the years ended December 31, 2016 and 2015, the Company had expenses totaling $96,000 and $40,000, respectively, to Mr. Bossung for salaries, which is included in general and administrative expenses - related party on the accompanying statement of operations. As of December 31, 2016, there was $0 in accounts payable - related party.
For the years ended December 31, 2016, the Company had expenses totaling $103,150 and $69,637 to a company owned by Fred Covely, our Chief Executive Officer and Director, for consulting fees, which is included in general and administrative expenses - related party on the accompanying statement of operations. As of December 31, 2016, there was $19,799 in accounts payable - related party.
For the year ended December 31, 2015, the Company had expenses totaling $197,618 to a prior director, Brian Dunn, for the fair value of warrants issued for consulting fees, which is included in general and administrative expenses - related party on the accompanying statement of operations.
We did not have written employment agreements with any of our executives during the year ended December 31, 2016. All are at-will employees or consultants whose compensation is set forth in the Summary Compensation Table below.
Summary Compensation Table
The following table sets forth information with respect to compensation earned by our Chief Executive Officer, President, and Chief Financial Officer for the years ended December 31, 2016 and 2015.
Director Compensation
On September 25, 2015, we entered into a Consulting Services Agreement with The Dunn Group, LLC, pursuant to which we engaged the services of its principal, Brian J. Dunn. Pursuant to the agreement, we issued one million (1,000,000) warrants to The Dunn Group to purchase shares of our common stock at $0.25 per share, which warrants shall vest only upon a change of control of the company or the acquisition by the company of certain IP addresses, and agreed to further compensate him based on sales as a direct result of his efforts, as well as capital raised by us and upon a sale of the company. We further entered into a Director Agreement with Mr. Dunn pursuant to which we agreed to issue two million (2,000,000) warrants to purchase shares of our common stock at $0.25 per share, which warrants shall vest one-half (1/2) immediately and one-half (1/2) on April 1, 2016 or upon a change of control of the company, and agreed to indemnify him for losses incurred as a result of his serving as a director.
For the years ended December 31, 2016 and 2015, other than Mr. Dunn, none of the members of our Board of Directors received compensation for his or her service as a director.
Outstanding Equity Awards at Fiscal Year-End
We do not currently have a stock option or grant plan.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of April 13, 2017, certain information with respect to the Company’s equity securities owned of record or beneficially by (i) each Officer and Director of the Company; (ii) each person who owns beneficially more than 5% of each class of the Company’s outstanding equity securities; and (iii) all Directors and Executive Officers as a group.
(1)Unless otherwise indicated, the address of the shareholder is c/o Grey Cloak Tech Inc.
(2)Unless otherwise indicated, based on 72,508,922 shares of common stock issued and outstanding. Shares of common stock subject to convertible preferred stock and options or warrants currently exercisable, or exercisable or convertible within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage of any other person.
(3)Indicates one of our officers or directors.
(4)Includes 6,024,536 shares of our Series A Convertible Preferred Stock. Each share is convertible into six shares of our common stock.
The issuer is not aware of any person who owns of record, or is known to own beneficially, five percent or more of the outstanding securities of any class of the issuer, other than as set forth above. There are no classes of stock other than common stock issued or outstanding.
There are no current arrangements which will result in a change in control.
We do not currently have a stock option or grant plan.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Nejman Employment Agreement
On March 31, 2017, we entered into an Employment Agreement with Joseph Nejman, our President. Pursuant to Mr. Nejman’s Employment Agreement, we have agreed to pay Mr. Nejman an annual base salary of $140,000, and he may receive employee stock options as determined by the Board of Directors. At present, Mr. Nejman has deferred a portion of his salary and is being paid $8,000 per month until the Company can afford their full salary. Any employee stock options granted will vest immediately upon the consummation of aggregate equity financing by the Company equal to $2,000,000 that results from Mr. Nejman’s direct efforts. Mr. Nejman is eligible to receive a 20% commission on gross sales that are a direct result of his sales efforts, up to a maximum of his base salary in any calendar year. Mr. Nejman’s employment is “at will” and either party may terminate the agreement at any time.
If terminated without Cause or as a result of Constructive Termination, Mr. Nejman will receive severance equal to three months pay at his most recent Base Salary. If Mr. Nejman is terminated for Cause, Disability or death, or voluntarily resigns, he will not receive any severance, only unpaid salary as of the date of termination and vested benefits. The Employment Agreement includes non-compete and non-solicitation provisions that apply during the term of the Employment Agreement and for a period of one year after Mr. Nejman’s termination. Capitalized terms in this section not defined herein have the meaning given to such terms in the Employment Agreement.
Mr. Nejman’s Employment Agreement also requires that certain proprietary information of the Company be kept confidential. The Company will be the owner of certain intellectual property conceived or made by Mr. Nejman prior to termination of the Employment Agreement.
Bossung Employment Agreement
	On March 31, 2017, we entered into an Employment Agreement with William Bossung, our Chief Financial Officer. Pursuant to Mr. Bossung’s Employment Agreement, we have agreed to pay Mr. Bossung an annual base salary of $140,000, and he may receive employee stock options as determined by the Board of Directors. At present, Mr. Bossung has deferred a portion of his salary and is being paid $8,000 per month until the Company can afford their full salary. Any employee stock options granted will vest immediately upon the consummation of aggregate equity financing by the Company equal to $2,000,000 that results from Mr. Bossung’s direct efforts. Mr. Bossung is eligible to receive a 20% commission on gross sales that are a direct result of his sales efforts, up to a maximum of his base salary in any calendar year. Mr. Bossung’s employment is “at will” and either party may terminate the agreement at any time.
If terminated without Cause or as a result of Constructive Termination, Mr. Bossung will receive severance equal to three months pay at his most recent Base Salary. If Mr. Bossung is terminated for Cause, Disability or death, or voluntarily resigns, he will not receive any severance, only unpaid salary as of the date of termination and vested benefits. The Employment Agreement includes non-compete and non-solicitation provisions that apply during the term of the Employment Agreement and for a period of one year after Mr. Bossung’s termination. Capitalized terms in this section not defined herein have the meaning given to such term in the Employment Agreement.
Mr. Bossung’s Employment Agreement also requires that certain proprietary information of the Company be kept confidential. The Company will be the owner of certain intellectual property conceived or made by Mr. Bossung prior to termination of the Employment Agreement.
Covely Information Systems - Development Services Agreement
On March 31, 2017, we entered into a Development Services Agreement with Covely Information Systems, a company owned and operated by Fred Covely, our Chief Executive Officer (the “Covely Agreement”). Pursuant to the Covely Agreement, we have agreed to pay Covely Information Services for services depending on monthly programming hours and hosting fees, as billed by Covely Information Systems. Billing will be variable and based on the income we receive from one of our clients and other services performed on our behalf. Payment is subject to deferment to the following month for any portion we are unable to pay because of insufficient capital. Covely Information Systems is an independent contractor and either party may terminate the agreement at any time.
If the Covely Agreement is terminated for any reason, Covely Information Systems will not receive any severance, only the amount due for services performed prior to the date of termination. The Covely Agreement includes non-compete and non-solicitation provisions that apply during the term of the Covely Agreement and for a period of one year after termination. Capitalized terms in this section not defined herein have the meaning given to such term in the Covely Agreement.
The Covely Agreement also requires that certain proprietary information of the Company be kept confidential. The Company will be the owner of certain intellectual property conceived or made by Covely Information Systems prior to termination of the Covely Agreement.
Dimicho Pty. Ltd. - Development Services Agreement
On April 1, 2017, we entered into a Development Services Agreement with Dimicho Pty. Ltd., a company owned and operated by Dmitry Chourpo (the “Dimicho Agreement”). Pursuant to the Dimicho Agreement, we have agreed to pay Dimicho Pty. Ltd. $8,000 per month for development and support of our software applications and web services. The payment is subject to deferment to the following month for any portion we are unable to pay because of insufficient capital. Dimicho Pty. Ltd. will dedicate no less than one full-time development resource exclusively to our client needs, work projects and business interest. Dimicho Pty. Ltd. is an independent contractor and either party may terminate the agreement at any time.
If the Dimicho Agreement is terminated for any reason, Dimicho Pty. Ltd. will not receive any severance, only the amount due for services performed prior to the date of termination. The Dimicho Agreement includes non-compete and non-solicitation provisions that apply during the term of the Dimicho Agreement and for a period of one year after termination. Capitalized terms in this section not defined herein have the meaning given to such term in the Dimicho Agreement.
The Dimicho Agreement also requires that certain proprietary information of the Company be kept confidential. The Company will be the owner of certain intellectual property conceived or made by Dimicho Pty. Ltd. prior to termination of the Dimicho Agreement.
Other Arrangements
For the year ended December 31, 2015, the Company had expenses totaling $46,082 to a company owned by Fred Covely and directly to Mr. Covely for consulting fees, which is included in general and administrative expenses - related party on the accompanying statement of operations. As of December 31, 2015, there was no accounts payable to Mr. Covely.
For the years ended December 31, 2016 and 2015, the Company had expenses totaling $96,000 and $40,000, respectively, to William Bossung for salaries, which is included in general and administrative expenses - related party on the accompanying statement of operations. As of December 31, 2016, there was no accounts payable to Mr. Bossung.
For the years ended December 31, 2016, the Company had expenses totaling $103,150 and $69,637 to a company owned by Fred Covely for consulting fees, which is included in general and administrative expenses - related party on the accompanying statement of operations. As of December 31, 2016, there was $19,799 in accounts payable to Mr. Covely.
On September 25, 2015, we entered into a Consulting Services Agreement with The Dunn Group, LLC, pursuant to which we engaged the services of its principal, Brian J. Dunn. Pursuant to the agreement, we issued one million (1,000,000) warrants to The Dunn Group to purchase shares of our common stock at $0.25 per share, which warrants shall vest only upon a change of control of the company or the acquisition by the company of certain IP addresses, and agreed to further compensate him based on sales as a direct result of his efforts, as well as capital raised by us and upon a sale of the company. We further entered into a Director Agreement with Mr. Dunn pursuant to which we agreed to issue two million (2,000,000) warrants to purchase shares of our common stock at $0.25 per share, which warrants shall vest one-half (1/2) immediately and one-half (1/2) on April 1, 2016 or upon a change of control of the company, and agreed to indemnify him for losses incurred as a result of his serving as a director. For the year ended December 31, 2015, we had expenses totaling $197,618 to a director for the fair value of warrants issued for consulting fees
Director Independence
For purposes of determining director independence, we have applied the definitions set out in NASDAQ Rule 5605(a)(2). The OTCQB on which shares of common stock are quoted does not have any director independence requirements. The NASDAQ definition of “Independent Officer” means a person other than an Executive Officer or employee of the Company or any other individual having a relationship which, in the opinion of the Company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. According to the NASDAQ definition, none of our directors are independent.
ITEM 14
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
Paritz & Company, PA was our independent registered public accounting firm for the years ended December 31, 2016 and 2015 and has served as our independent registered public accounting firm since our inception.
Audit and Non-Audit Fees
The following table presents fees for professional services rendered by Paritz & Company, PA for the audit of the Company’s annual financial statements for the years ended December 31, 2016 and 2015.
(1) Audit fees were principally for audit and review services.
Of the fees described above for the year ended December 31, 2016, all were approved by the entire Board of Directors.
PART IV
ITEM 15
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following financial statements are filed as part of this report:
(a)(2) Financial Statement Schedules
We do not have any financial statement schedules required to be supplied under this Item.
(a)(3) Exhibits
Refer to (b) below.
(b) Exhibits
(1)Incorporated by reference from our Registration Statement on Form S-1 dated and filed with the Commission on March 6, 2015.
(2)Incorporated by reference from our Second Amended Registration Statement on Form S-1/A dated and filed with the Commission on June 3, 2015.
(3)Incorporated by reference from our Third Amended Registration Statement on Form S-1/A dated and filed with the Commission on June 19, 2015.
(4)Incorporated by reference from our Current Report on Form 8-K dated and filed with the Commission on December 11, 2015.
(5)Incorporated by reference from our Annual Report on Form 10-K for the year ended December 31, 2015, dated and filed with the Commission on March 30, 2016.
(6)Incorporated by reference from our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016, dated and filed with the Commission on November 22, 2016.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: April 17, 2017
/s/ Fred Covely
By: Fred Covely
Its:
Chief Executive Officer
and Director
Dated: April 17, 2017
/s/ William Bossung
By: William Bossung
Its: Chief Financial Officer, Principal Accounting Officer, and Director
Dated: April 17, 2017
/s/ Joseph Nejman
By: Joseph Nejman
Its: President and Director