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Share Name | Share Symbol | Market | Type |
---|---|---|---|
Gawk Incorporated (CE) | USOTC:GAWK | OTCMarkets | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 0.0002 | 0.00 | 01:00:00 |
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2016
or
o |
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to __________
Commission File Number 000-55499
GAWK INC. |
(Exact name of registrant as specified in its charter) |
Nevada |
|
33-1220317 |
(State or other jurisdiction of incorporation or organization) |
|
(IRS Employer Identification No.) |
|
|
|
5300 Melrose Avenue, Suite 42, Los Angeles, CA |
|
90038 |
(Address of principal executive offices) |
|
(Zip Code) |
888-754-6190 |
(Registrant’s telephone number, including area code) |
|
N/A |
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x YES ¨ NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x YES ¨ NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
o |
Accelerated filer |
o |
Non-accelerated filer |
o |
Smaller reporting company |
x |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ¨ YES x NO
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. ¨ YES ¨ NO
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
1,280,741,569 common shares issued and outstanding as of December 8, 2016. |
|
|
PART I - FINANCIAL INFORMATION | ||||
Item 1. |
Financial Statements | 3 | ||
Item 2. |
Management's Discussion and Analysis of Financial Condition or Plan of Operation | 18 | ||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 24 | ||
Item 4. |
Controls and Procedures | 24 | ||
PART II - OTHER INFORMATION | ||||
Item 1. |
Legal Proceedings | 25 | ||
Item 1A. |
Risk Factors | 25 | ||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 26 | ||
Item 3. |
Defaults Upon Senior Securities | 26 | ||
Item 4. |
Mine Safety Disclosures | 26 | ||
Item 5. |
Other Information | 26 | ||
Item 6. |
Exhibits | 26 | ||
SIGNATURES |
|
Table of Contents |
PART I - FINANCIAL INFORMATION
GAWK INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
October 31, |
|
|
January 31, |
|
|||
|
|
2016 |
|
|
2016 |
|
|||
ASSETS |
|
|
|
|
|
|
|||
Current Assets |
|
|
|
|
|
|
|||
Cash and cash equivalents |
|
$ | 188,583 |
|
|
$ | 64,944 |
|
|
Accounts receivable |
|
|
246,749 |
|
|
|
45,721 |
|
|
Marketable securities - available for sale |
|
|
162,900 |
|
|
|
78,300 |
|
|
Deposit - CipherLoc |
|
|
562,500 |
|
|
|
562,500 |
|
|
Prepaid and other current assets |
|
|
55,514 |
|
|
|
32,200 |
|
|
Total Current Assets |
|
|
1,216,246 |
|
|
|
783,665 |
|
|
|
|
|
|
|
|
|
|
|
|
Equipment, net of depreciation of $0 and $73,740 |
|
|
- |
|
|
|
103,235 |
|
|
Intangible assets and proprietary technology, net of amortization $722,426 and $162,562 |
|
|
1,517,025 |
|
|
|
2,286,345 |
|
|
Goodwill |
|
|
4,043,486 |
|
|
|
4,076,505 |
|
|
Assets held for sale |
|
|
289,585 |
|
|
|
- |
|
|
TOTAL ASSETS |
|
$ | 7,066,342 |
|
|
$ | 7,249,750 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT |
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ | 819,162 |
|
|
$ | 717,469 |
|
|
Note payable, net of discounts of $2,687 and $0 |
|
|
146,152 |
|
|
|
85,000 |
|
|
Current portion of note payable -related party |
|
|
776,806 |
|
|
|
868,361 |
|
|
Current portion of convertible notes payable, net of discounts of $303,447 and $148,069 |
|
|
2,215,852 |
|
|
|
1,934,932 |
|
|
Investor payable - common shares |
|
|
658,000 |
|
|
|
658,000 |
|
|
Preferred shares payable |
|
|
- |
|
|
|
13,438 |
|
|
Contingent consideration |
|
|
1,000,000 |
|
|
|
1,000,000 |
|
|
Due to related parties |
|
|
288,873 |
|
|
|
27,942 |
|
|
Other current liabilities |
|
|
12,482 |
|
|
|
- |
|
|
Derivative liabilities |
|
|
890,267 |
|
|
|
620,237 |
|
|
Total Current Liabilities |
|
|
6,807,594 |
|
|
|
5,925,379 |
|
|
Long-Term Liabilities |
|
|
|
|
|
|
|
|
|
Convertible note payable, net of discounts of $42,850 and $56,358 |
|
|
2,650 |
|
|
|
10,307 |
|
|
Note payable -related party, less current portion |
|
|
- |
|
|
|
388,889 |
|
|
TOTAL LIABILITIES |
|
|
6,810,244 |
|
|
|
6,324,575 |
|
|
|
|
|
|
|
|
|
|
|
|
Series C Convertible Preferred stock, $0.001 par value, 100 shares designated; 14 shares issued and outstanding, respectively |
|
|
14,000,000 |
|
|
|
14,000,000 |
|
|
Series D Convertible Preferred stock, $0.001 par value, 1,000 shares designated; 1 and 0 share issued and outstanding, respectively |
|
|
100,000 |
|
|
|
- |
|
|
|
|
|
14,100,000 |
|
|
|
14,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Deficit |
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; authorized 100,000,000 shares |
|
|
|
|
|
|
|
|
|
Series A Preferred stock, $0.001 par value, 1,000 shares designated; 1,000 shares issued and outstanding |
|
|
1 |
|
|
|
1 |
|
|
Series B Convertible Preferred stock, $0.001 par value, 95,000,000 shares designated; 68,187,500 and 50,000,000 shares issued and outstanding, respectively |
|
|
68,188 |
|
|
|
50,000 |
|
|
Common stock, $0.001 par value, 1,400,000,000 shares authorized; 875,634,685 and 261,863,258 shares issued and outstanding, respectively |
|
|
875,634 |
|
|
|
261,863 |
|
|
Additional paid-in capital |
|
|
1,809,835 |
|
|
|
670,962 |
|
|
Accumulated deficit |
|
|
(16,597,560 | ) |
|
|
(14,057,651 | ) | |
Total Stockholders' Deficit |
|
|
(13,843,902 | ) |
|
|
(13,074,825 | ) | |
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT |
|
$ | 7,066,342 |
|
|
$ | 7,249,750 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3 |
|
Table of Contents |
GAWK INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
|
For the Three Months Ended October 31, |
|
|
For the Nine Months Ended October 31, |
|
||||||||||
|
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Revenue |
|
$ | 1,811,716 |
|
|
$ | 526,761 |
|
|
$ | 4,591,798 |
|
|
$ | 1,143,422 |
|
Cost of revenue |
|
|
1,221,442 |
|
|
|
332,704 |
|
|
|
3,210,305 |
|
|
|
725,333 |
|
Gross profit |
|
|
590,274 |
|
|
|
194,057 |
|
|
|
1,381,493 |
|
|
|
418,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
160,755 |
|
|
|
309,000 |
|
|
|
398,912 |
|
|
|
366,083 |
|
General and administration |
|
|
583,977 |
|
|
|
307,247 |
|
|
|
1,667,489 |
|
|
|
820,439 |
|
Accounts payable forgiven |
|
|
(250,000 | ) |
|
|
- |
|
|
|
(250,000 | ) |
|
|
- |
|
Research and development |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,500 |
|
Depreciation and amortization |
|
|
231,292 |
|
|
|
93,278 |
|
|
|
693,876 |
|
|
|
238,053 |
|
Total operating expenses |
|
|
726,024 |
|
|
|
709,525 |
|
|
|
2,510,277 |
|
|
|
1,427,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from operations |
|
|
(135,750 | ) |
|
|
(515,468 | ) |
|
|
(1,128,784 | ) |
|
|
(1,008,986 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
6,372 |
|
|
|
- |
|
|
|
16,658 |
|
|
|
- |
|
Interest expense, net |
|
|
(96,894 | ) |
|
|
(56,665 | ) |
|
|
(435,009 | ) |
|
|
(146,868 | ) |
Amortization of debt discount and deferred financing fees |
|
|
(269,046 | ) |
|
|
(105,203 | ) |
|
|
(835,664 | ) |
|
|
(284,303 | ) |
Unrealized gain (loss) on marketable securities |
|
|
67,200 |
|
|
|
(52,500 | ) |
|
|
84,600 |
|
|
|
128,550 |
|
Change in fair value of derivative liabilities |
|
|
(149,358 | ) |
|
|
(36,268 | ) |
|
|
(250,987 | ) |
|
|
(36,268 | ) |
Gain on settlement of debt |
|
|
9,277 |
|
|
|
- |
|
|
|
9,277 |
|
|
|
- |
|
Total other expense |
|
|
(432,449 | ) |
|
|
(250,636 | ) |
|
|
(1,411,125 | ) |
|
|
(338,889 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(568,199 | ) |
|
|
(766,104 | ) |
|
$ | (2,539,909 | ) |
|
$ | (1,347,875 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss |
|
$ | (568,199 | ) |
|
$ | (766,104 | ) |
|
$ | (2,539,909 | ) |
|
$ | (1,347,433 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and dilutive loss per common share |
|
$ | (0.00 | ) |
|
$ | (0.00 | ) |
|
$ | (0.01 | ) |
|
$ | (0.01 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
648,943,956 |
|
|
|
196,682,424 |
|
|
|
446,743,266 |
|
|
|
182,828,588 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4 |
|
Table of Contents |
GAWK INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For the Nine Months Ended October 31, |
|
|||||
|
|
2016 |
|
|
2015 |
|
||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
||
Net loss |
|
$ | (2,539,909 | ) |
|
$ | (1,347,875 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Common stock issued for services |
|
|
- |
|
|
|
150,083 |
|
Common stock options issued for services |
|
|
177,000 |
|
|
|
- |
|
Common stock issued for legal settlement |
|
|
- |
|
|
|
54,000 |
|
Stock-based compensation |
|
|
221,913 |
|
|
|
216,000 |
|
Amortization of debt discount and deferred financing fees |
|
|
835,664 |
|
|
|
284,303 |
|
Unrealized gain on marketable securities |
|
|
(84,600 | ) |
|
|
(128,550 | ) |
Depreciation and amortization |
|
|
693,876 |
|
|
|
238,053 |
|
Expense for conversion of debt |
|
|
- |
|
|
|
8,540 |
|
Accounts payable forgiven |
|
|
(250,000 | ) |
|
|
- |
|
Change in fair value of derivative liabilities |
|
|
250,987 |
|
|
|
36,268 |
|
Gain on settlement of debt |
|
|
(9,277 | ) |
|
|
- |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
(Increase) decrease in operating assets: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(170,800 | ) |
|
|
(7,115 | ) |
Prepaid expenses and other assets |
|
|
(2,565 | ) |
|
|
|
|
Increase (decrease) in operating liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
402,215 |
|
|
|
138,330 |
|
Due to related parties |
|
|
260,931 |
|
|
|
38,620 |
|
Other current liabilities |
|
|
3,962 |
|
|
|
- |
|
Net Cash Used In Operating Activities |
|
|
(210,603 | ) |
|
|
(319,343 | ) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Acquisition of XTELUS, net of cash acquired |
|
|
397 |
|
|
|
- |
|
Net cash paid for acquisition of Net D’s assets |
|
|
- |
|
|
|
(138,250 | ) |
Net Cash Provided by (Used in) Investing Activities |
|
|
397 |
|
|
|
(138,250 | ) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from notes payable |
|
|
147,050 |
|
|
|
25,000 |
|
Proceeds from convertible notes, net of original issue discounts and deferred financing fees |
|
|
691,733 |
|
|
|
191,000 |
|
Proceeds from notes payable - related party |
|
|
25,000 |
|
|
|
- |
|
Payment of notes payable - related party |
|
|
(505,444 | ) |
|
|
- |
|
Payment of convertible notes payable |
|
|
(33,333 | ) |
|
|
- |
|
Payment of notes payable |
|
|
(11,161 | ) |
|
|
- |
|
Proceeds from issuance of Series B Preferred stock |
|
|
20,000 |
|
|
|
17,500 |
|
Proceeds from issuance of common stock |
|
|
- |
|
|
|
5,000 |
|
Net Cash Provided By Financing Activities |
|
|
333,845 |
|
|
|
238,500 |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes |
|
|
- |
|
|
|
442 |
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
123,639 |
|
|
|
(218,651 | ) |
Cash and cash equivalents, beginning of period |
|
|
64,944 |
|
|
|
255,455 |
|
Cash and cash equivalents, end of period |
|
$ | 188,583 |
|
|
$ | 36,804 |
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ | 242,902 |
|
|
$ | - |
|
Cash paid for taxes |
|
$ | - |
|
|
$ | - |
|
|
|
|
|
|
|
|
|
|
Non-cash financing transactions: |
|
|
|
|
|
|
|
|
Acquisition of XTELUS through issuance of preferred shares |
|
$ | 100,000 |
|
|
$ | - |
|
Series B Preferred shares issued to settle preferred share payable |
|
$ | 13,438 |
|
|
$ | - |
|
Preferred share payable for preferred C stock |
|
$ | - |
|
|
$ | 1,000,000 |
|
Acquisition of goodwill |
|
$ | - |
|
|
$ | 3,554,622 |
|
Issuance of preferred shares payable for acquisition |
|
$ | - |
|
|
$ | 2,000,000 |
|
Issuance of investor payable for acquisition |
|
$ | - |
|
|
$ | 1,556,000 |
|
Issuance of common stock for conversion of debt and accrued interest |
|
$ | 509,353 |
|
|
$ | 64,030 |
|
Common stock issued in exchange for warrants |
|
$ | 41,000 |
|
|
$ | 206,000 |
|
Intangible assets assumed from acquisition |
|
$ | - |
|
|
$ | 363,128 |
|
Accounts payable assumed from acquisition |
|
$ | - |
|
|
$ | 11,750 |
|
Debt discount from derivative liability |
|
$ | 848,172 |
|
|
$ | 166,500 |
|
Note payable assumed from acquisition |
|
$ | - |
|
|
$ | 350,000 |
|
Reclassification of derivative liability from additional paid in capital due to tainted instruments |
|
$ | - |
|
|
$ | 586,250 |
|
Derivative resolution |
|
$ | 1,006,129 |
|
|
$ | 122,588 |
|
Accrued interest added to principal |
|
$ | 1,159 |
|
|
$ | - |
|
Convertible note issued for prepayment penalty |
|
$ | 31,438 |
|
|
$ | - |
|
Replacement of note payable to Convertible note |
|
$ | 75,000 |
|
|
$ | - |
|
Reclassification of assets as held for sale |
|
$ | 289,585 |
|
|
$ | - |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5 |
|
Table of Contents |
GAWK INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2016
NOTE 1 - DESCRIPTION OF BUSINESS
Gawk Incorporated (“we”, “our”, the “Company”) was incorporated in the state of Nevada on January 6, 2011 with principal business address at 5300 Melrose Avenue, Suite 42, Los Angeles, CA. The Company offers a suite of cloud communications, cloud connectivity, cloud computing, and managed cloud-based applications solutions to small, medium, and large businesses; and offers domestic and international voice services to communications carriers worldwide. It offers a suite of advanced data center and cloud-based services, including fault tolerant, high availability cloud servers, which comprise platform as a service, infrastructure as a service, and a content delivery network; managed network services that converge voice and data applications, structured cabling, wireless, and security services, as well as include Internet access via Ethernet or fiber at speeds ranging from 10 Mbps to 10 Gbps; and data center solutions, including cloud services, colocation services, and business continuity services, such as storage and security. Our website is located at www.gawkinc.com
NOTE 2 - BASIS OF PRESENTATION OF INTERIM FINANCIAL STATEMENTS
Basis of Presentation of Interim Financial Statements
The accompanying interim unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended October 31, 2016 are not necessarily indicative of the results that may be expected for the year ending January 31, 2017. Notes to the unaudited interim consolidated financial statements that would substantially duplicate the disclosures contained in the audited consolidated financial statements for fiscal year 2016 have been omitted. This report should be read in conjunction with the audited consolidated financial statements and the footnotes thereto for the fiscal year ended January 31, 2016 included in the Company’s Form 10-K as filed with the Securities and Exchange Commission on May 24, 2016.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net revenues and expenses recognized during the periods presented. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, actual results could differ from these estimates.
Reclassifications
Certain amounts in the fiscal 2016 financial statements have been reclassified to conform to the fiscal 2017 presentation.
Revenue Recognition
The Company pursues opportunities to realize revenues from consulting services. It is the company’s policy that revenues and gains will be recognized in accordance with ASC Topic 605-10-25, “Revenue Recognition.” Under ASC Topic 605-10-25, revenue earning activities are recognized when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.
6 |
|
Table of Contents |
Our Business Services revenue includes monthly recurring charges (“MRC”) to customers, for whom charges are contracted over a specified period of time, and variable usage fees charged to customers that purchase our business products and services. Revenue recognition commences after the provisioning, testing and acceptance of the service by the customer. MRCs continue until the expiration of the contract, or until cancellation of the service by the customer. To the extent that payments received from a customer are related to a future period, the payment is recorded as deferred revenue until the service is provided or the usage occurs.
Our Carrier Services revenue is primarily derived from usage fees charged to other carriers that terminate voice traffic over our network. Variable revenue is earned based on the length of a call, as measured by the number of minutes of duration. It is recognized upon completion of the call, and is adjusted to reflect the allowance for billing adjustments. Revenue for each customer is calculated from information received through our network switches. Our customized software tracks the information from the switches and analyzes the call detail records against stored detailed information about revenue rates. This software provides us with the ability to complete a timely and accurate analysis of revenue earned in a period. We believe that the nature of this process is such that recorded revenues are unlikely to be revised in future periods.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, accounts receivable, accounts payable and accrued liabilities, and debt. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments.
The Company adopted ASC Topic 820, “ Fair Value Measurements ,” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The standard provides a consistent definition of fair value which focuses on an exit price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard also prioritizes, within the measurement of fair value, the use of market-based information over entity specific information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date.
The three-level hierarchy for fair value measurements is defined as follows:
· |
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; liabilities in active markets; |
· |
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability other than quoted prices, either directly or indirectly, including inputs in markets that are not considered to be active; or directly or indirectly including inputs in markets that are not considered to be active; |
· |
Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement |
The following table summarizes fair value measurements by level at October 31, 2016 and January 31, 2016 measured at fair value on a recurring basis:
Carrying Value at October 31, 2016
October 31, 2016 |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Marketable securities- available for sale |
|
|
162,900 |
|
|
|
- |
|
|
|
- |
|
|
|
162,900 |
|
Total assets |
|
|
162,900 |
|
|
|
- |
|
|
|
- |
|
|
|
162,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
|
- |
|
|
|
- |
|
|
|
890,267 |
|
|
|
890,267 |
|
Total liabilities |
|
|
- |
|
|
|
- |
|
|
|
890,267 |
|
|
|
890,267 |
|
7 |
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Table of Contents |
Carrying Value at January 31, 2016
January 31, 2016 |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Marketable securities- available for sale |
|
|
78,300 |
|
|
|
- |
|
|
|
- |
|
|
|
78,300 |
|
Total assets |
|
|
78,300 |
|
|
|
- |
|
|
|
- |
|
|
|
78,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
|
- |
|
|
|
- |
|
|
|
620,237 |
|
|
|
620,237 |
|
Total liabilities |
|
|
- |
|
|
|
- |
|
|
|
620,237 |
|
|
|
620,237 |
|
Recent Accounting Pronouncements
No accounting standards or interpretations issued recently are expected to a have a material impact on the Company's financial position, operations or cash flows.
NOTE 3 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has a net loss for the nine months ended October 31, 2016 of $2,539,909, an accumulated deficit of $16,597,560, cash flows used in operating activities of $210,603 and needs additional cash to maintain its operations.
These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's continued existence is dependent upon management's ability to develop profitable operations, continued contributions from the Company's executive officers to finance its operations and the ability to obtain additional funding sources to explore potential strategic relationships and to provide capital and other resources for the further development and marketing of the Company's products and business.
NOTE 4 - ACQUISITION
On June 27, 2016, the Company entered into an acquisition agreement with NEOGEN Holdings LLC, whereby the Company acquired 100% of the membership interest of XTELUS LLC and XETLUS S.A. (“XTELUS”). The acquisition of XTELUS met the definition of a business in accordance with FASB ASC Topic 805, "Business Combinations". As such, the Company accounted for the acquisition as a business combination.
Management determined that the Company was the acquirer in the business combination in accordance with FASB ASC Topic 805, "Business Combinations," based on the following factors: (i) there was a change in control of XTELUS; (ii) the Company was the entity in the transaction that issued its equity instruments, and in a business combination, the acquirer usually is the entity that issues its equity interests; (iii) the Company's pre-transaction directors retained the largest relative voting rights of the Company post-transaction; (iv) the composition of the Company's current board of directors and management was the result of the appointment by the Company's pre-transaction directors.
The purchase price paid for the acquisition of XTELUS amounted to $100,000 and consisted of 1 Series D Preferred Stock, which is convertible into $100,000 of common shares at any time following 12 months from the issuance of such shares. The following table summarizes the fair value of the consideration paid by the Company and the fair value amounts assigned to the assets acquired on the acquisition date:
Fair Value of Consideration: |
|
June 26,
|
|
|
1 share of Series D Preferred Shares |
|
$ | 100,000 |
|
Total Purchase Price |
|
$ | 100,000 |
|
|
|
|
|
|
Assets and Liabilites: |
|
June 26,
|
|
|
Current assets |
|
$ | 51,374 |
|
Current liabilities |
|
|
(29,260 | ) |
Goodwill |
|
|
77,886 |
|
Fair value of total assets |
|
$ | 100,000 |
|
8 |
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Table of Contents |
Revenues of $498,035 and net loss of $51,376 since the acquisition date are included in the consolidated statements of operations and comprehensive income (loss) for the nine months ended October 31, 2016.
Unaudited proforma results of operations for the nine months ended October 31, 2016 and 2015 as though the Company acquired XTELUS on the first day of each period are set forth below:
NOTE 5 - NOTES PAYABLE
The Company had the following notes payable and notes payable - related party outstanding as of October 31, 2016 and January 31, 2016:
Notes Payable
|
|
October 31,
|
|
|
January, 31,
|
|
||
Dated – October 30, 2014 |
|
$ | 10,000 |
|
|
$ | 10,000 |
|
Dated – June 3, 2015 |
|
|
- |
|
|
|
25,000 |
|
Dated – December 11, 2015 |
|
|
- |
|
|
|
50,000 |
|
Dated – August 4, 2016 |
|
|
25,000 |
|
|
|
- |
|
Dated – September 30, 2016 |
|
|
113,839 |
|
|
|
- |
|
Total notes payable |
|
$ | 148,839 |
|
|
$ | 85,000 |
|
Less: debt discount and deferred financing fees |
|
|
(2,687 | ) |
|
|
- |
|
|
|
|
146,152 |
|
|
|
85,000 |
|
Less: current portion of notes payable |
|
|
146,152 |
|
|
|
85,000 |
|
Long-term portion of notes payable |
|
|
- |
|
|
|
- |
|
The Company recognized amortization expense related to the debt discount and deferred financing fees of $263 and $0 for the nine months ended October 31, 2016 and 2015, respectively.
Dated - October 30, 2014
On October 30, 2014, the Company exercised the comprehensive acquisition agreement of Webrunner, LLC (“Webrunner”) and in the acquisition the Company assumed the debt of RNC Media in the amount of $10,000. The Note does not have any interest payable and is due upon demand.
Dated - June 3, 2015, December 11, 2015
The two notes were issued to Mr. Doyle Knudson, are subject to annual interest of 15% and are convertible into a total of 863,000 common shares. The note issued on June 3, 2015 matured in December 2015. On August 4, 2016, the Company entered into the new agreement with Crossover Capital Fund I, LLC, which the Company issued a new convertible note of $75,000 for the payment of the two notes of $75,000. As a result of this agreement, the Company recognized gain on debt settlement of $9,277.
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Dated – August 4, 2016
The note was issued to Mr. Doyle Knudson, are subject to annual interest of 15% and are convertible into 250,000 common shares. The note matured in February 2017.
Dated – September 30, 2016
The Company entered into the revenue based factoring agreement with Powerup Lending Group, Ltd. and received cash of $125,000. The note includes an original issue discount and financing fee of $2,950 and the Company received cash of $122,050. The Company is required to make weekly principal and interest payments of $4,560 for a period of 34 weeks through May 30, 2017.
Notes Payable - related party
|
|
October 31,
|
|
|
January, 31,
|
|
||
Dated – April 23, 2015 |
|
$ | 221,250 |
|
|
$ | 282,250 |
|
Dated - January 18, 2016 |
|
|
555,556 |
|
|
|
975,000 |
|
Total notes payable |
|
|
776,806 |
|
|
|
1,257,250 |
|
Less: current portion of notes payable |
|
|
776,806 |
|
|
|
868,361 |
|
Long-term notes payable |
|
$ | - |
|
|
$ | 388,889 |
|
Dated - April 23, 2015
On May 1, 2015, in connection with the acquisition of the assets of Net D Consulting, Inc. (“Net D”), the Company issued a $350,000 note which bears no interest and matures on October 7, 2016. The Company made repayments on the note of $61,000 during the nine months ended October 31, 2016.
Dated - January 18, 2016
On January 18, 2016, in connection with the acquisition of Connexum, the Company issued a $1,000,000 note to Net D which bears annual interest of 18%. The Company is required to make monthly principal and interest payments of $63,806 for a period of 18 months through August 1, 2017. The Company paid principal and interest payments of $444,444 for the nine months ended October 31, 2016.
NOTE 6 - CONVERTIBLE NOTES PAYABLE
The Company had the following convertible notes payable outstanding as of October 31, 2016 and January 31, 2016:
|
|
October 31,
|
|
|
January, 31,
|
|
||
Promissory Note - Issued August 22, 2014, with a fixed conversion price of $0.10 per common share or 17,000,000 shares of common stock. |
|
$ | 1,700,000 |
|
|
$ | 1,700,000 |
|
Promissory notes – Issued in fiscal year 2016, with variable conversion features. |
|
|
114,444 |
|
|
|
449,666 |
|
Promissory notes – Issued in fiscal year 2017, with variable conversion features. |
|
|
750,355 |
|
|
|
- |
|
Total convertible notes payable |
|
|
2,564,799 |
|
|
|
2,149,666 |
|
Less: debt discount and deferred financing fees |
|
|
(346,297 | ) |
|
|
(204,427 | ) |
|
|
|
2,218,502 |
|
|
|
1,945,239 |
|
Less: current portion of convertible notes payable |
|
|
2,215,852 |
|
|
|
1,934,932 |
|
Long-term convertible notes payable |
|
$ | 2,650 |
|
|
$ | 10,307 |
|
The Company recognized amortization expense related to the debt discount and deferred financing fees of $835,401 and $284,303 for the nine months ended October 31, 2016 and 2015, respectively.
10 |
|
Table of Contents |
Promissory Note - August 22, 2014
In connection with the settlement agreement entered into with Doyle Knudson, an investor, in 2014, the Company issued a $1.8 million convertible promissory note with a fixed conversion price of $0.10 per share or 17,000,000 shares of common stock. The note is subject to annual interest of 10%, matured in August 2015 and is currently past due. In May and December 2015, a total of $100,000 note principal was transferred to another lender.
Due to the variable conversion rates in the other convertible notes (see below), the $1,700,000 balance of the note became tainted and the embedded fixed conversion option was bifurcated and accounted for as a derivative liability. The Company recorded a discount on the convertible note due to a beneficial conversion feature of $358,200 and amortized $0 and $208,950 for the nine months ended October 31, 2016 and 2015, respectively.
Promissory Notes - Issued in fiscal year 2016
During the year ended January 31, 2016, the Company issued a total of $449,666 notes with the following terms:
· |
Terms ranging from 9 months to 2 years |
· |
Annual interest rates ranging from 5% to 12% |
· |
Convertible at the option of the holders either at issuance or 180 days from issuance. The note dated September 29, 2015 is convertible at the later of the maturity date or date of default. |
· |
Conversion prices are typically based on the discounted (50% to 60% discount) lowest trading prices of the Company’s shares during various periods prior to conversion. Certain notes allow for the conversion price to be the lower of $0.01 or the discounted trading price |
Certain notes allow the Company to redeem the notes at rates ranging from 118% to 148% depending on the redemption date provided that no redemption is allowed after the 180 th day. Likewise, certain notes include original issue discounts totaling to $24,166. During the year ended January 31, 2016, the Company also recognized deferred financing fees totaling $55,142
The Company determined that the conversion feature met the definition of a liability in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity's Own Stock and therefore bifurcated the embedded conversion option once the note becomes convertible and accounted for it as a derivative liability. The fair value of the conversion feature was recorded as a debt discount and amortized to interest expense over the term of the note.
The Company valued the conversion feature using the Black Scholes valuation model. The fair value of the derivative liability for all the notes that became convertible during the year amounted to $459,733. $250,733 of the value assigned to the derivative liability was recognized as a debt discount to the notes while the balance of $209,000 was recognized as a “day 1” derivative loss.
During the nine months ended October 31, 2016, the fair value of the derivative liability for all the notes that became convertible amounted to $327,870. $219,500 of the value assigned to the derivative liability was recognized as a debt discount to the notes while the balance of $108,370 was recognized as a “day 1” derivative loss.
During the nine months ended October 31, 2016, the Company repaid notes with principal amounts totaling to $33,333 and converted notes with principal amounts of $303,048 and accrued interest of $21,692 into 150,793,678 shares of common stock. The corresponding derivative liability at the date of conversion of $553,477 was credited to additional paid in capital.
During the nine months ended October 31, 2016, the Company assigned 10 notes with principal amounts totaling to $375,750 to one lender which resulted to the payment of prepayment penalties amounting to $142,672.
11 |
|
Table of Contents |
Promissory Notes - Issued in fiscal year 2017
During the nine months ended October 31, 2016, the Company issued a total of $927,272 notes with the following terms:
· |
Terms ranging from 9 months to 20 months |
· |
Annual interest rates ranging from 8% to 12% |
· |
Convertible at the option of the holders either at issuance or 180 days from issuance. |
· |
Conversion prices are typically based on the discounted (50% discount) lowest trading prices of the Company’s shares during various periods prior to conversion. Certain notes allow for the conversion price to be a floor of $0.0005 and $0.00005 per share. |
Certain notes allow the Company to redeem the notes at rates ranging from 118% to 150% depending on the redemption date provided that no redemption is allowed after the 180 th day. Likewise, certain notes include original issue discounts totaling to $70,476. During the nine months ended October 31, 2016, the Company also recognized deferred financing fees totaling $58,625 and the Company received cash of $691,733.
The Company determined that the conversion feature met the definition of a liability in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity's Own Stock and therefore bifurcated the embedded conversion option once the note becomes convertible and accounted for it as a derivative liability. The fair value of the conversion feature was recorded as a debt discount and amortized to interest expense over the term of the note.
The Company valued the conversion feature using the Black Scholes valuation model. The fair value of the derivative liability for all the notes that became convertible during the nine months ended October 31, 2016 amounted to $1,299,291. $628,672 of the value assigned to the derivative liability was recognized as a debt discount to the notes while the balance of $670,619 was recognized as a “day 1” derivative loss.
During the nine months ended October 31, 2016, the Company converted notes with principal amounts of $176,918 and accrued interest of $7,695 into 421,977,749 shares of common stock. The corresponding derivative liability at the date of conversion of $314,434 was credited to additional paid in capital.
NOTE 7 - DERIVATIVE LIABILITIES
The Company analyzed the conversion option for derivative accounting consideration under ASC 815, Derivatives and Hedging, and hedging, and determined that the instrument should be classified as a liability since the conversion option becomes effective at issuance resulting in there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.
ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income or expense item.
The Company determined our derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of October 31, 2016. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each convertible note is estimated using the Black-Scholes valuation model. The following weighted-average assumptions were used in the October 31, 2016 and January 31, 2016 valuations:
|
|
Nine Months
|
|
|
Year
|
|
||
|
|
October 31,
|
|
|
January 31,
|
|
||
Expected term |
|
0.008 - 1.50 years |
|
|
0.4 - 2 years |
|
||
Expected average volatility |
|
120% - 381 |
% |
|
249% - 328 |
% |
||
Expected dividend yield |
|
|
- |
|
|
|
0 |
|
Risk-free interest rate |
|
0.00% - 0.67 |
% |
|
0.05% - 0.83 |
% |
12 |
|
Table of Contents |
At October 31, 2016, the estimated fair values of the liabilities measured on a recurring basis are as follows:
October 31, 2016 |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Promissory Note – Issued August 22, 2014 |
|
$ | - |
|
|
$ | - |
|
|
$ | 6,800 |
|
|
$ | 6,800 |
|
Promissory Notes – Issued in fiscal year 2016 |
|
|
- |
|
|
|
- |
|
|
|
137,737 |
|
|
|
137,737 |
|
Promissory Notes – Issued in fiscal year 2017 |
|
|
- |
|
|
|
- |
|
|
|
745,620 |
|
|
|
745,620 |
|
Warrants -Issued in fiscal year 2016 |
|
|
- |
|
|
|
- |
|
|
|
110 |
|
|
|
110 |
|
Warrants -Issued in fiscal year 2017 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total liabilities |
|
$ | - |
|
|
$ | - |
|
|
$ | 890,267 |
|
|
$ | 890,267 |
|
The following table summarizes the changes in the derivative liabilities during the nine months ended October 31, 2016:
Fair Value Measurements Using Significant Observable Inputs (Level 3) |
|
|||
|
|
|
|
|
Balance - January 31, 2016 |
|
$ | 620,237 |
|
Addition of new derivatives recognized as debt discounts |
|
|
848,172 |
|
Addition of new derivatives recognized as options compensation |
|
|
177,000 |
|
Addition of new derivatives recognized as loss on derivatives |
|
|
778,989 |
|
Derivatives settled upon conversion of debt and exercise of warrants |
|
|
(1,006,129 | ) |
Loss on change in fair value of the derivative |
|
|
(528,002 | ) |
Balance - October 31, 2016 |
|
$ | 890,267 |
|
The net loss on derivatives during the nine months ended October 31, 2016 and 2015 was $250,987 and $36,268, respectively.
NOTE 8 - EQUITY
Preferred Stock
Series A Preferred Stock
There were no issuances of the Series A Preferred Stock during the nine months ended October 31, 2016
Series B Convertible Preferred Stock
During the nine months ended October 31, 2016, the Company issued Series B Preferred shares, as follows:
· |
On December 21, 2015, the Company recorded preferred stock payable of $13,438 for 13,437,500 Series B Preferred shares related to the acquisition of the assets of Net D. During the nine months ended October 31, 2016 the Company issued 13,437,500 Series B Preferred shares to settle this payable. |
· |
On February 3, 2016, 4,750,000 shares were sold for cash of $20,000. On issuance, value of the underlining common stock represented a beneficial conversion feature of $23,344. The beneficial conversion feature will be recognized when the preferred stock becomes convertible on August 3, 2016 as a deemed dividend. |
13 |
|
Table of Contents |
Series C Convertible Preferred Stock
There were no issuances of the Series C Preferred Stock during the nine months ended October 31, 2016.
Series D Convertible Preferred Stock
On June 23, 2016, pursuant to its Articles of Incorporation and Bylaws, the Board of Directors of the Company, unanimously approved the designation of a new series of preferred stock, "Series D Convertible Preferred Stock.
Each share of the Series D Preferred Stock shall be convertible, at the option of the holder thereof and subject to notice requirements at any time following 12 months from the issuance of such shares, into such number of fully paid and non-assessable common shares worth $100,000.
During nine months ended October 31, 2016, the Company issued 1 share of Series D Preferred Stock with a fair value of $100,000 in connection with the acquisition of XTELUS (see Note 4).
As of October 31, 2016 and January 31, 2016, 1 and 0 shares of Series D Preferred Stock were issued and outstanding, respectively.
Common stock
During the nine months ended October 31, 2016, the Company issued common shares, as follows:
· |
572,771,427 common shares were issued for the conversion of debt and accrued interest of $509,352. |
|
|
|
|
|
· |
41,000,000 common shares in exchange for the exercise of options for no consideration |
Warrants and Options
Options
During nine months ended October 31, 2016, the Company entered into three separate agreements with consultants to provide the Company with consulting services in exchange for options of 17,000,000, 5,000,000 and 17,000,000 with an exercise price of $0, respectively. The options can be exercised by the holder any time prior to June 30, August 31, and September 30, 2016. These options were tainted as a result of the convertible notes with variable conversion rates (see Note 7) and were accounted for as derivative instruments at the time of issuance. The fair value of the options amounting to $177,000 was recorded as stock compensation expense during the nine months ended October 31, 2016, with a corresponding credit to derivative liability (see Note 7).
A summary of activity during the period ended October 31, 2016 follows:
|
|
Options Outstanding |
|
|||||
|
|
|
|
|
Weighted Average |
|
||
|
|
Shares |
|
|
Exercise Price |
|
||
|
|
|
|
|
|
|
||
Outstanding, January 31, 2016 |
|
|
36,100,000 |
|
|
$ | 0.03 |
|
Granted |
|
|
39,000,000 |
|
|
$ | - |
|
Exercised |
|
|
(41,000,000 | ) |
|
$ | (0.0009 | ) |
Forfeited/expired |
|
|
(5,000,000 | ) |
|
$ | - |
|
Outstanding, October 31, 2016 |
|
|
29,100,000 |
|
|
$ | 0.03 |
|
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The following table summarizes information relating to outstanding and exercisable stock options as of October 31, 2016:
Options Outstanding |
|
|
Options Exercisable |
|
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Number of
|
|
|
Weighted Average Remaining Contractual life (in years) |
|
|
Weighted Average
|
|
|
Number of
|
|
|
Weighted Average
|
|
|||||
|
9,100,000 |
|
|
|
3.00 |
|
|
$ | 0.10 |
|
|
|
9,100,000 |
|
|
$ | 0.10 |
|
|
20,000,000 |
|
|
|
0.08 |
|
|
$ | 0.005 |
|
|
|
20,000,000 |
|
|
$ | 0.005 |
|
|
29,100,000 |
|
|
|
1.00 |
|
|
$ | 0.03 |
|
|
|
29,100,000 |
|
|
$ | 0.03 |
|
The options have an intrinsic value at October 31, 2016 and January 31, 2016 of $0 and $59,400, respectively.
Employee Incentive Bonus Plan
On June 27, 2016, the Company entered into employee agreement with two employees that contain preferred share issuance incentive bonuses based on various sales targets for XTELUS, for the 12- month period ending June 27, 2017. The first award contains cash compensation of $10,000 per month and the ability to earn 500,000 shares of Series B preferred stock if XTELUS revenue of $1,000,000 is generated within 12 months. The second award contains cash compensation of $20,000 per month, 5 shares of Series D preferred stock earned on June 27, 2017 (with 1 share earned immediately upon revenue of $100,000 being generated within first six months) and the ability to earn up to 6,500,000 shares of Series B preferred stock based upon XTELUS revenue targets up to $1,000,000 over 12 months and up to an additional 3,000,000 shares of Series B preferred stock based upon XTELUS revenue targets up between $1,000,000 and greater than $7,000,000 over 12 months. The Company assessed the probability that the revenue targets will be met and determined that the target revenue will most likely meet $1,000,000 and based on the stock awards, estimated the fair value of 6,500,000 shares of Preferred B stock at $32,500, 5 shares of Preferred D stock at $500,000 and 500,000 shares of Preferred B stock at $2,500, respectively. For the period ended October 31, 2016, the Company recognized stock based compensation of $221,912 under these awards, with a corresponding credit to additional paid in capital.
NOTE 9 - RELATED PARTY TRANSACTIONS
As of October 31, 2016 and January 31, 2016, the CEO had accrued salaries of $98,000 and $0, respectively.
During the nine months ended October 31, 2016 and 2015, the CEO advanced the Company cash of $200 and $0, respectively. As of October 31, 2016 and January 31, 2016, the amount owed to the CEO for advances was $200 and $0, respectively.
As of October 31, 2016, the Company has outstanding notes payable to Net D totaling to $776,806 in connection with the Company’s acquisition of Connexum and certain assets of Net D. The sole owner of Net D is a director and officer of the Company. Net D also performs certain services for the Company in connection with the latter’s Carrier Services business. During the period ended October 31, 2016, the Company incurred total fees in connection with such services of $58,784.
As of October 31, 2016 and January 31, 2016, the Company owed related parties $288,873 and $27,942, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Licensing Agreement / Deposit
On June 11, 2014, we entered into a license and subscription agreement with Cloud Medical Doctor Software Corporation formerly National Scientific Corporation (NSCT) which changed its name to Cipher Loc Corporation and ticker symbol to (CLOK) ("Cloud") for $1,125,000. The agreement grants to us a non-exclusive encryption license agreement which entitles us to utilize Cloud's encryption software solution within the Customer's business. We purchased a 48 months encryption licensing agreement to incorporate into our existing web based software. The licensing agreement will protect members of our platform from hackers and other privacy intrusion vehicles. CipherLoc has various features that will further protect our members and end users of our web developed platform. During the year ended January 31, 2016, the Company wrote off 50% of the deposit amounting to $562,500 to impairment expense. As of October 31, 2016, the software has not been delivered to the Company and the remaining amount of $562,500 continues to be reported as a deposit in the consolidated balance sheet.
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Contingency
Connexum, LLC.
On January 18, 2016, the Company entered into an acquisition agreement with Net D, whereby the Company acquired 100% of the membership interest of Connexum, LLC (“Connexum”). The agreement also provided for contingent consideration of 1 Series C Preferred share convertible into $1,000,000 common shares if Connexum achieves 80% of anticipated revenue and another 1 Series C Preferred share convertible into $1,000,000 common shares if Connexum achieves 100% of anticipated revenue within one year from the date of acquisition. The Company determined that Connexum will meet 80% of the anticipated revenue and has recognized the fair value of the contingent consideration of $1,000,000 both as of October 31, 2016 and January 31, 2016.
Windstream Holdings, Inc.
At the time of acquisition of Connexum, Windstream Holdings, Inc. ("Windstream"), a provider of voice and data network communications, and managed services, to businesses in the United States, claimed that Connexum owed them $600,000, which charges Connexum denies. In 2015, Connexum contracted with Windstream to purchase high cost long distance services. When receiving the initial invoices Connexum noticed the bill was not what was expected and issued a dispute for the incorrect charges and paid the non-disputed amount of just over $20,000. Then, without notice, Windstream turned off services. Shortly thereafter Windstream and Connexum disputed over high cost traffic. Windstream continued to bill Connexum for many months even after disconnecting its service, which ended up totaling nearly $580,000 of disputed fees. At the time of disconnection, there was approximately $20,000 in actual unpaid usage fees. It is unlikely that the Company would pay these fees. Windstream has not threatened litigation at this point and Connexum is actively working to settle the disputed amount.
On May 25, 2016, the Company reached a settlement with Windstream for $20,000. As of the filing of this report, the Company paid the $20,000.
Tarpon Bay Partners LLC
On May 26, 2016, Tarpon Bay Partners, LLC (“Tarpon Bay”) initiated action against the Company in New York State Supreme Court, case #652178/2016. Tarpon Bay has elected for summary judgment in lieu of complaint. Tarpon Bay is claiming, inter alia, that the Company owes $93,500 in unpaid notes and services. The claims stems from intended transactions the Company was to enter with Tarpon Bay. Tarpon Bay was to provide the Company with funding and certain services in exchange for promissory notes from the Company. The notes were executed by the Company, but Tarpon Bay provided no funding or services and is not entitled to repayment of any note given by the Company. The Company intends to vehemently defend the foregoing action.
NOTE 12 – ASSETS HELD FOR SALE
On October 31, 2016, the Company entered into the asset purchase and sale agreement (the “Agreement”) with Giggle Fiber, LLC. Pursuant to the terms of the Agreement, the Company sold the equipment and customer list of Webrunner for $400,000, payable in instalments. As title will not transfer until payments are made we are classifying these assets as held for sale as of October 31, 2016.
The following table summarizes the carrying amounts of the assets held for sale;
|
|
October 31, |
|
|
Assets held for sale |
|
2016 |
|
|
Equipment, net of depreciation of $117,984 |
|
$ | 58,991 |
|
Intangible assets, net of amortization $239,378 |
|
|
119,689 |
|
Goodwill |
|
|
110,905 |
|
Total assets held for sale |
|
$ |
289,585 |
|
16 |
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Table of Contents |
NOTE 13 – ACCOUNTS PAYABLE FORGIVEN
During the period ended October 31, 2016, a vendor forgave accounts payable owing of $250,000. The Company recorded the amount to operating expenses on the Statement of Operations.
NOTE 14 - SUBSEQUENT EVENT
Subsequent to October 31, 2016, the Company sold the equipment and customer list of Webrunner for $400,000 (see Note 12).
Subsequent to October 31, 2016, the Company issued common shares as follows;
· | 405,106,884 shares of common stock for the conversion of debt and accrued interest of $51,379. |
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Item 2. Management's Discussion and Analysis of Financial Condition or Plan of Operation
FORWARD-LOOKING STATEMENTS
Management’s Discussion and Analysis contains various “forward looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding future events or the future financial performance of the Company that involve risks and uncertainties. Certain statements included in this Form 10-Q, including, without limitation, statements related to anticipated cash flow sources and uses, and words including but not limited to “anticipates”, “believes”, “plans”, “expects”, “future” and similar statements or expressions, identify forward looking statements. Any forward-looking statements herein are subject to certain risks and uncertainties in the Company’s business, including but not limited to, reliance on key customers and competition in its markets, market demand, delayed payments of accounts receivables, technological developments, maintenance of relationships with key suppliers, difficulties of hiring or retaining key personnel and any changes in current accounting rules, all of which may be beyond the control of the Company. Management will elect additional changes to revenue recognition to comply with the most conservative SEC recognition on a forward going accrual basis as the model is replicated with other similar markets (i.e. SBDC). The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth therein.
Forward-looking statements involve risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors and risks that could affect our results and achievements and cause them to materially differ from those contained in the forward-looking statements include those identified in the section titled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended January 31, 2016, as well as other factors that we are currently unable to identify or quantify, but that may exist in the future.
In addition, the foregoing factors may affect generally our business, results of operations and financial position. Forward-looking statements speak only as of the date the statement was made. We do not undertake and specifically decline any obligation to update any forward-looking statements.
General Overview
We were incorporated in the state of Nevada on January 6, 2011 and our principal business address 5300 Melrose Avenue, Suite 42, Las Angeles, CA 90038. Gawk, Inc. offers a suite of cloud communications, cloud connectivity, cloud computing, and managed cloud-based applications solutions to small, medium, and large businesses; and offers domestic and international voice services to communications carriers worldwide. It offers a suite of advanced data center and cloud-based services, including fault tolerant, high availability cloud servers, which comprise platform as a service, infrastructure as a service, and a content delivery network; managed network services that converge voice and data applications, structured cabling, wireless, and security services, as well as include Internet access via Ethernet or fiber at speeds ranging from 10 Mbps to 10 Gbps; and data center solutions, including cloud services, colocation services, and business continuity services, such as storage and security. www.gawkinc.com.
As a result of our growth through acquisition, Gawk continues to go through a significant transformation and has expanded its business customer base and added a significant number of network facilities and points of presence expanding its geographic reach. Through this strategy, we acquired advanced systems and infrastructure, augmented our management team and employee base with talented, experienced, well-trained professionals, while continuing to provide a strong platform for further acquisitions. During the past fiscal year and current reporting period, we completed three transactions which have significantly grown our revenue base while greatly enhancing our service offerings within the voice arena. The first was an asset purchase of Net D completed on May 1, 2015, the second was an acquisition of Connexum completed near the end of our fiscal year on January 18, 2016, and the third was the acquisition of XTELUS completed on June 27, 2016.
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The Future of Gawk
Gawk is pursuing a three-tiered growth strategy: developing specialized solutions for key vertical markets, targeting cloud services companies for acquisition, and accelerating organic growth. Our continuing effort to deliver advanced cloud solutions to companies with more complex requirements is supported by our cloud solutions platform that allows us to rapidly respond to our customers and potential customers’ needs for customized or enhanced solutions. We also intend to continue to develop vertically oriented solutions to expand our revenue opportunities and further differentiate our service suite. We intend to acquire additional cloud services companies that can further expand our customer base, allow us to introduce additional cloud products and services, and gain scale. Our strategy to organically grow our Business Services revenue includes securing large strategic distribution partners, increasing our direct as well as indirect channel sales efforts, upselling solutions to our existing base and leveraging our management, Board of Directors and shareholder relationship network.
Results of Operations
Three Months Ended October 31, 2016, Compared to Three Months Ended October 31, 2015
Revenue
|
|
For the Three Months Ended October 31, |
|
|
|
|
|
|
||||||||
|
|
2016 |
|
|
2015 |
|
|
Change |
|
|
% |
|
||||
Revenue |
|
$ | 1,811,716 |
|
|
$ | 526,761 |
|
|
$ | 1,284,955 |
|
|
|
244 | % |
Cost of revenue |
|
|
1,221,442 |
|
|
|
332,704 |
|
|
|
888,738 |
|
|
|
267 | % |
Gross profit |
|
$ | 590,274 |
|
|
$ | 194,057 |
|
|
$ | 396,217 |
|
|
|
204 | % |
Gross profit percentage |
|
|
33 | % |
|
|
37 | % |
|
|
|
|
|
|
|
|
The increase in revenue by 244% during 2016, is primarily related to the business combination of Connexum during the past year and XTELUS during the three months ended October 31, 2016.
Cost of revenue likewise increased by 267% during 2016, which is primarily related to the business combination of Connexum during the past year and XTELUS during the current period.
Operating Expenses
|
|
For the Three Months Ended October 31, |
|
|
|
|
|
|
||||||||
|
|
2016 |
|
|
2015 |
|
|
Change |
|
|
% |
|
||||
Stock-based compensation |
|
$ | 160,755 |
|
|
$ | 309,000 |
|
|
$ | (148,245 | ) |
|
(48%) |
|
|
General and administration |
|
|
583,977 |
|
|
|
307,247 |
|
|
|
276,730 |
|
|
|
90 | % |
Accounts payable forgiven |
|
|
(250,000 | ) |
|
|
- |
|
|
|
(250,000 | ) |
|
|
- |
|
Depreciation and amortization |
|
|
231,292 |
|
|
|
93,278 |
|
|
|
138,014 |
|
|
|
148 | % |
Total operating expenses |
|
$ | 726,024 |
|
|
$ | 709,525 |
|
|
$ | 16,499 |
|
|
|
2 | % |
Stock-based compensation expenses decreased 48% for the three months ended October 31, 2016, as compared to the three months ended October 31, 2015. Stock-based compensation is the compensation for directors, our employees and external consultants. The decrease in stock based compensation expenses is primarily due to no stock compensation to an external consultant for the three months ended October 31, 2016 as compared to the same period in 2015.
General and administrative expenses increased by $276,730 or 90% for the three months ended October 31, 2016, from $307,247 for the three months ended October 31, 2015. The increase in general and administrative expenses is primarily related to the business combination of Connexum during the past year and XTELUS during the quarter ended October 31, 2015.
For the three months ended October 31, 2016, the Company recognized accounts payable forgivenof $250,000, as compared to accounts payable forgiven for the three months ended October 31, 2016 of $0.
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Depreciation and amortization expenses were $231,292 from $93,278 for the three months ended October 31, 2016 and 2015, respectively. Depreciation and amortization expenses increased in 2016, due to the business combination of Connexum whereas the assets were placed in service and depreciate over a three (3) year period starting January 18, 2016, respectively.
Net loss
For the three months ended October 31, 2016, the Company had a net loss of $568,199, as compared to a net loss for the nine months ended October 31, 2015 of $766,104.
Nine Months Ended October 31, 2016, Compared to Nine Months Ended October 31, 2015
Revenue
|
|
For the Nine Months Ended October 31, |
|
|
|
|
|
|
||||||||
|
|
2016 |
|
|
2015 |
|
|
Change |
|
|
% |
|
||||
Revenue |
|
$ | 4,591,798 |
|
|
$ | 1,143,422 |
|
|
$ | 3,448,376 |
|
|
|
302 | % |
Cost of revenue |
|
|
3,210,305 |
|
|
|
725,333 |
|
|
|
2,484,972 |
|
|
|
343 | % |
Gross profit |
|
$ | 1,381,493 |
|
|
$ | 418,089 |
|
|
$ | 963,404 |
|
|
|
230 | % |
Gross profit percentage |
|
|
30 | % |
|
|
37 | % |
|
|
|
|
|
|
|
|
Revenue was $4,591,798 and $1,143,422 for the nine months ended October 31, 2016 and 2015, respectively. The increase in revenue by 302%, during 2016, is primarily related to the business combination of Net D and Connexum during the past year and XTELUS during the quarter ended October 31, 2016.
Cost of revenue was $3,210,305 and $725,333 for the nine months ended October 31, 2016 and 2015, respectively. The increase in cost of revenue of 343%, is primarily related to the business combination of Net D and Connexum during the past year and XTELUS during quarter ended October 31, 2016.
Operating Expenses
|
|
For the Nine Months Ended October 31, |
|
|
|
|
|
|
||||||||
|
|
2016 |
|
|
2015 |
|
|
Change |
|
|
% |
|
||||
Stock-based compensation |
|
$ | 398,912 |
|
|
$ | 366,083 |
|
|
$ | 32,829 |
|
|
|
9 | % |
General and administration |
|
|
1,667,489 |
|
|
|
820,439 |
|
|
|
847,050 |
|
|
|
103 | % |
Accounts payable forgiven |
|
|
(250,000 | ) |
|
|
- |
|
|
|
(250,000 | ) |
|
|
- |
|
Research and development |
|
|
- |
|
|
|
2,500 |
|
|
|
(2,500 | ) |
|
(100%) |
|
|
Depreciation and amortization |
|
|
693,876 |
|
|
|
238,053 |
|
|
|
455,823 |
|
|
|
191 | % |
Total operating expenses |
|
$ | 2,510,277 |
|
|
$ | 1,427,075 |
|
|
$ | 1,083,202 |
|
|
|
76 | % |
Stock-based compensation expenses decreased to 9% for the nine months ended October 31, 2016, as compared to the nine months ended October 31, 2015. Stock-based compensation is the compensation for directors, our employees and external consultants.
General and administrative expenses increased to $1,667,489 from $820,439 for the nine months ended October 31, 2016 and 2015, respectively. The increase in general and administrative expenses is primarily related to the business combination of Net D and Connexum during the past year and XTELUS during current year.
For the nine months ended October 31, 2016 the Company recognized accounts payable forgiven of $250,000, as compared to accounts payable forgiven for the nine months ended October 31, 2016 of $0.
Depreciation and amortization expenses increased to $693,876 from $238,053 for the nine months ended October 31, 2016 and 2015, respectively. Depreciation and amortization expenses increased due to the business combination of Net D and Connexum whereas the assets were placed in service and depreciate over a three (3) year period starting May 1, 2015 and January 18, 2016, respectively.
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Net loss
For the nine months ended October 31, 2016, the Company had a net loss of $2,539,909, as compared to a net loss for the nine months ended October 31, 2015 of $1,347,875.
Liquidity and Capital Resources
The following table presents selected financial information on our capital as of October 31, 2016 and January 31, 2016.
|
|
October 31, |
|
|
January 31, |
|
|
|
|
|
|
|||||
|
|
2016 |
|
|
2016 |
|
|
Change |
|
|
% |
|
||||
Current Assets |
|
$ | 1,216,246 |
|
|
$ | 783,665 |
|
|
$ | 432,581 |
|
|
|
55 | % |
Current Liabilities |
|
|
6,807,594 |
|
|
|
5,925,379 |
|
|
|
882,215 |
|
|
|
15 | % |
Working Capital Deficiency |
|
$ | 5,591,348 |
|
|
$ | 5,141,714 |
|
|
$ | 449,634 |
|
|
|
9 | % |
The following table presents selected financial information on our cash flows as of and for the nine months ended October 31, 2016 and 2015.
|
|
For the Nine Months Ended October 31, |
|
|
|
|||||||
|
|
2016 |
|
|
2015 |
|
|
Change |
|
|||
Cash Flows used in Operating Activities |
|
$ | 210,603 |
|
|
$ | 319,343 |
|
|
$ | (108,740 | ) |
Cash Flows provided by (used in) Investing Activities |
|
|
397 |
|
|
|
(138,250 | ) |
|
|
138,647 |
|
Cash Flows from Financing Activities |
|
|
333,845 |
|
|
|
238,500 |
|
|
|
95,345 |
|
Foreign currency translation adjustment |
|
|
- |
|
|
|
442 |
|
|
|
(442 | ) |
Net Increase (Decrease) in Cash During the Period |
|
$ | 123,639 |
|
|
$ | (218,651 | ) |
|
$ | 342,290 |
|
As of October 31, 2016 and January 31, 2016 our cash was $188,583 and $64,944, respectively. The Company does not believe its existing balances of cash and cash equivalents will be sufficient to satisfy its working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with its existing operations over the 12 months.
As of October 31, 2016, we experienced an increase in working capital deficiency of $449,634 or 9%, as compared to January 31, 2016. The reduction in working capital during 2016 was primarily from current assets only increasing by $432,581 and currently liabilities increasing by $882,215, as compared to January 31, 2016. Current assets increasedprimarily due to an increase in accounts receivable of $201,028 and cash of $123,639.The increase in current liabilities by was due to an increase in accounts payable and accrued liabilities of $101,693, due to related parties of $260,931, convertible notes payable of $280,920, and derivative liabilities of $270,030.
Cash flows from operations. The decrease in cash flows used in operating activities was primarily attributable to an adjustments to net income relating to non-cash expenses.
Cash flows from investing activities . Cash provided by investing activities was $397 for the nine months ended October 31, 2016 and cash used in investing activities was $138,250 for nine months ended October 31, 2015. Net cash received for acquisition of XTELUS was $397 for the nine months ended October 31, 2016. Net cash paid for acquisition of Net D’s assets was $138,250 for the nine months ended October 31, 2015.
Cash flows from financing activities . Cash provided by financing activities were $333,845 and $238,500 for the nine months ended October 31, 2016 and 2015, respectively. We received cash from convertible notes of $691,733, note payable of $147,050, note payable – related party of $25,000 and issuance of Series B Preferred stock of $20,000 and paid note payable of $11,161, notes payable – related party of $505,444 and convertible note of $33,333 for the nine months ended October 31, 2016. We received cash from note payable of 25,000, convertible notes of $191,000, issuance of common stock of $5,000 and issuance of Series B Preferred stock of $17,500 for the nine months ended October 31, 2015.
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We expect to incur substantial expenses and generate significant operating losses as we continue to grow our operations, as well as incur expenses related to operating as a public company and compliance with regulatory requirements.
The independent auditor’s report on our financial statements contains explanatory language that substantial doubt exists about our ability to continue as a going concern. We have an accumulated deficit at October 31, 2016 of $16,609,560 and need additional cash flows to maintain our operations. We depend on the continued need to raise financing to finance our operations and need to obtain additional funding sources to explore potential strategic relationships and to provide capital and other resources for the further development and marketing of our products and business. We expect our cash needs for the next 12 months to be $750,000 to fund our operations. The ability of the Company to continue its operations is dependent on the successful execution of management’s plans, which include expectations of raiding debt or equity based capital until such time that funds from operations are sufficient to fund working capital requirements. The Company may need to incur additional liabilities with related parties to sustain the Company’s existence. There is no assurance that such funding, if required will be available to us or, if available, will be available upon terms favorable to us.
These factors raise doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company’s continued existence is dependent upon management’s ability to develop profitable operations, continued contributions from the Company’s executive officers to finance its operations and the ability to obtain additional funding sources to explore potential strategic relationships and to provide capital and other resources for the further development and marketing of the Company’s products and business.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Critical Accounting Policies
Substantially all of the Company’s accounts receivable balance is related to trade receivables. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. The Company will maintain allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments for services. Accounts with known financial issues are first reviewed and specific estimates are recorded. The remaining accounts receivable balances are then grouped in categories by the number of days the balance is past due, and the estimated loss is calculated as a percentage of the total category based upon past history. Account balances are charged against the allowance when it is probable the receivable will not be recovered.
Revenue Recognition
The Company pursues opportunities to realize revenues from consulting services. It is the company’s policy that revenues and gains will be recognized in accordance with ASC Topic 605-10-25, “Revenue Recognition.” Under ASC Topic 605-10-25, revenue earning activities are recognized when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.
Our Business Services revenue includes monthly recurring charges (“MRC”) to customers, for whom charges are contracted over a specified period of time, and variable usage fees charged to customers that purchase our business products and services. Revenue recognition commences after the provisioning, testing and acceptance of the service by the customer. MRCs continue until the expiration of the contract, or until cancellation of the service by the customer. To the extent that payments received from a customer are related to a future period, the payment is recorded as deferred revenue until the service is provided or the usage occurs.
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Our Carrier Services revenue is primarily derived from usage fees charged to other carriers that terminate voice traffic over our network. Variable revenue is earned based on the length of a call, as measured by the number of minutes of duration. It is recognized upon completion of the call, and is adjusted to reflect the allowance for billing adjustments. Revenue for each customer is calculated from information received through our network switches. Our customized software tracks the information from the switches and analyzes the call detail records against stored detailed information about revenue rates. This software provides us with the ability to complete a timely and accurate analysis of revenue earned in a period. We believe that the nature of this process is such that recorded revenues are unlikely to be revised in future periods.
Long-lived Assets
The Company reviews its fixed assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Goodwill and Other Intangible Assets
We account for goodwill and intangible assets in accordance with ASC 350 "Intangibles-Goodwill and Other" ("ASC 350"). ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. In addition, ASC 350 requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification of reporting units; assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions or the occurrence of one or more confirming events in future periods could cause the actual results or outcomes to materially differ from such estimates and could also affect the determination of fair value and/or goodwill impairment at future reporting dates.
The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed, either on a straight-line or accelerated basis over the estimated periods benefited. Patents, technology and other intangibles with contractual terms are generally amortized over their respective legal or contractual lives. Customer relationships, brands and other non-contractual intangible assets with determinable lives are amortized over periods 3 years. When certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable lives may be adjusted.
We have no off-balance sheet arrangements including arrangements that would affect the liquidity, capital resources, market risk support and credit risk support or other benefits.
Derivative Financial Instruments
The fair value of an embedded conversion option that is convertible into a variable amount of shares and warrants that include price protection reset provision features are deemed to be “down-round protection” and, therefore, do not meet the scope exception for treatment as a derivative under ASC 815 “Derivatives and Hedging,” since “down-round protection” is not an input into the calculation of the fair value of the conversion option and warrants and cannot be considered “indexed to the Company’s own stock” which is a requirement for the scope exception as outlined under ASC 815.
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The accounting treatment of derivative financial instruments requires that the Company record the embedded conversion option and warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.
The Black-Scholes option valuation model was used to estimate the fair value of the embedded conversion options and warrants. The model includes subjective input assumptions that can materially affect the fair value estimates. The expected volatility is estimated based on the most recent historical period of time, of our common stock, equal to the weighted average life of the options.
Conversion options are recorded as debt discount and are amortized as interest expense over the life of the underlying debt instrument.
WHERE YOU CAN FIND MORE INFORMATION
You are advised to read this Quarterly Report on Form 10-Q in conjunction with other reports and documents that we file from time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q, Annual Report on Form 10-K, and Current Reports on Form 8-K that we file from time to time. You may obtain copies of these reports directly from us or from the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E. Washington, D.C. 20549, and you may obtain information about obtaining access to the Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains information for electronic filers at its website http://www.sec.gov.
Item 3. 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 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures were designed to provide reasonable assurance that the controls and procedures would meet their objectives. As required by SEC Rule 13a-15(b), our Chief Executive Officer and Principal Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective.
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Our Chief Executive Officer and Principal Financial Officer are responsible for establishing and maintaining adequate internal control over our financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has used the framework set forth in the report entitled Internal Control-Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, to evaluate the effectiveness of our internal control over financial reporting. Based on this assessment, our Chief Executive Officer and Principal Financial Officer have concluded that our internal control over financial reporting were not effective as of October 31, 2016. There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Our company's material weaknesses in financial reporting were:
a. There is no segregation of duties as our CEO is also our CFO.
b. It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of certain events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On or around April 27, 2016, Tarpon Bay Partners, LLC (“Tarpon Bay”) initiated action against the Company in New York State Supreme Court, case #652178/2016. Tarpon Bay has elected for summary judgment in lieu of complaint. Tarpon Bay is claiming, inter alia, that the Company owes $93,500 in unpaid notes and services. The claims stems from intended transactions the Company was to enter with Tarpon Bay. Tarpon Bay was to provide the Company with funding and certain services in exchange for promissory notes from the Company. The notes were executed by the Company, but Tarpon Bay provided no funding or services and is not entitled to repayment of any note given by the Company. The Company intends to vehemently defend the foregoing action.
On or around July 22, 2016, the Company’s wholly owned subsidiary, Webrunners, Inc. (“Webrunners”), filed a law suit (“WR v. Management”) against several former Webrunners directors and officers for mismanaging Webrunners and usurping or interfering with Webrunners’ business relationships. On or around July 22, 2016, the former management and related entities filed a lawsuit against the Company in the Superior Court of Orange County, CA case #30-2016-00865197-CU-BC-CJC, alleging, inter alia, breach of the agreements pursuant to which the Company acquired Webrunners, fraud, and negligent misrepresentation. The Company filed a counterclaim on or around September 9, 2016, alleging, inter alia, breach of contract. On or around September 15, 2016, the court in WR v. Management granted an injunction against the former management forcing them to turn over all documents and assets of Webrunners and preventing them from interfering further with Webrunners’ business.
As a “smaller reporting company”, we are not required to provide the information required by this Item.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended October 31, 2016, the Company issued 417,624,152 common shares for the conversion of debt and accrued interest of $173,346 and 17,000,000 common shares in exchange for options for no consideration.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
None.
Exhibit Number |
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Description of Exhibits |
3.1 |
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Articles of Incorporation (1) |
3.2 |
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Bylaws (1) |
10.1* |
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Acquisition agreement with NEOGEN Holdings Inc. |
14.1 |
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Code of Ethics (2) |
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101.INS** |
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XBRL Instance Document |
101.SCH** |
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XBRL Taxonomy Schema |
101.CAL** |
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XBRL Taxonomy Calculation Linkbase |
101.DEF** |
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XBRL Taxonomy Definition Linkbase |
101.LAB** |
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XBRL Taxonomy Label Linkbase |
101.PRE** |
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XBRL Taxonomy Presentation Linkbase |
___________
(1) |
Filed as an Exhibit on Form S-1 with the SEC on April 6, 2012. |
(2) |
10-SB/12g filed on February 13, 2008 |
* Filed herewith.
**Furnished herewith
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In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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GAWK INC. |
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(Registrant) |
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Dated: December 20, 2016 |
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/s/ Scott Kettle |
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Scott Kettle |
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Chief Executive Officer |
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(Principal Executive Officer) |
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Dated: December 20, 2016 |
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/s/ Chris Hall |
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Chris Hall |
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Chief Financial Officer |
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(Principal Financial Officer and Principal Accounting Officer) |
|
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1 Year Gawk (CE) Chart |
1 Month Gawk (CE) Chart |
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