Notes to Condensed Financial
Statements
(Unaudited)
Note
1 – Organization and Nature of Business
Effective
April 2, 2012, Ante5, Inc. changed its corporate name to Black Ridge Oil & Gas, Inc., and continues to be quoted on the OTCQB
under the trading symbol “ANFC”. Black Ridge Oil & Gas, Inc. (formerly Ante5, Inc.) (the “Company”)
became an independent company in April 2010. We became a publicly traded company when our shares began trading on July 1, 2010.
Since October 2010, we had been engaged in the business of acquiring oil and gas leases and participating in the drilling
of wells in the Bakken and Three Forks trends in North Dakota and Montana.
The
Company is focused on acquiring, investing in, and managing the oil and gas assets for our partners. We continue to pursue asset
acquisitions in all major onshore unconventional shale formations that may be acquired with capital from our existing joint venture
partners or other capital providers.
On
September 26, 2017, the Company finalized an equity raise utilizing a rights offering and backstop agreement, raising net proceeds
of $5,051,675 and issuing 431,819,910 shares. The proceeds were used to sponsor the Company’s obligations sponsoring a special
purpose acquisition company, discussed below, with the remainder for general corporate purposes.
On
October 10, 2017, the Company’s sponsored special purpose acquisition company, Black Ridge Acquisition Corp. (“BRAC”),
completed an initial public offering (“IPO”) raising $138,000,000 of gross proceeds (including proceeds from the exercise
of an over-allotment option by the underwriters on October 18, 2017). In addition, the Company purchased 445,000 BRAC units at
$10.00 per unit in a private placement transaction for a total contribution of $4,450,000 in order to fulfill its obligations
in sponsoring BRAC.
BRAC is a blank check company
formed for the purpose of entering into a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization
or other similar business combination with one or more businesses or entities. BRAC’s efforts to identify a prospective
target business will not be limited to a particular industry or geographic region although it intends to focus its search for
target businesses in the energy or energy-related industries with an emphasis on opportunities in the upstream oil and gas industry
in North America. Following the initial public offering and over-allotment, the Company owns 22% of the outstanding common stock
of BRAC and manages BRAC’s operations via a management services agreement.
Note
2 – Basis of Presentation and Significant Accounting Policies
The
interim condensed consolidated financial statements included herein, presented in accordance with United States generally accepted
accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to not make the information presented misleading.
These
statements reflect all adjustments, which in the opinion of management, are necessary for fair presentation of the information
contained therein. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. It is suggested that
these interim condensed financial statements be read in conjunction with the audited financial statements for the year ended December 31, 2017,
which were included in our Annual Report on Form 10-K. The Company follows the same accounting policies in the preparation
of interim reports.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the following entities:
Name
of entity
|
|
State
of Incorporation
|
|
Relationship
|
Black
Ridge Oil and Gas, Inc.
|
|
Nevada
|
|
Parent
|
Black
Ridge Acquisition Corp. (“BRAC”)
|
|
Delaware
|
|
Subsidiary
(1)
|
(1)
Wholly-owned
subsidiary through October 10, 2017, the date of BRAC’s IPO, following which it is consolidated as a variable interest entity.
The
Company has determined that BRAC, following its IPO, is a variable interest entity (“VIE”) and that the Company is
the primary beneficiary of the VIE. The Company determined that, due to the redemption feature associated with the IPO shares,
that the IPO shareholders are indirectly protected from the operating expenses of BRAC and it has the power to direct the activities
of BRAC through the date at which BRAC affords the stockholders the opportunity to vote to approve a proposed business combination.
Therefore, these consolidated financial statements herein contain the operations of BRAC from its inception on May 9, 2017. BRAC’s
IPO shareholders are reflected in our Consolidated Financial Statements as a non-controlling interest. The non-controlling interest
was recorded at fair value on October 10, 2017, with an addition on October 18, 2017 as a result of the underwriters’ exercise
of their over-allotment option. All significant inter-company transactions have been eliminated in the preparation of these financial
statements.
The
parent company, Black Ridge Oil & Gas, Inc. and Black Ridge Acquisition Corp. will be collectively referred to herein as the
“Company” or “Black Ridge”. The Company’s headquarters is in Minneapolis, Minnesota and substantially
all of its operations are in the United States.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles 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.
Environmental
Liabilities
The
oil and gas industry is subject, by its nature, to environmental hazards and clean-up costs. At this time, management knows of
no substantial losses from environmental accidents or events which would have a material effect on the Company resulting from
its previous ownership of oil and gas production assets.
Cash
and Cash Equivalents
Cash
equivalents include money market accounts which have maturities of three months or less. For the purpose of the statements of
cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents.
Cash equivalents are stated at cost plus accrued interest, which approximates market value. Cash equivalents on hand at June 30, 2018
and December 31, 2017 were $673 and $39,742, respectively, all held within the trust account.
Cash
in Excess of FDIC Insured Limits
The
Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are guaranteed
by the Federal Deposit Insurance Corporation (FDIC) and the Securities Investor Protection Corporation (SIPC) up to $250,000 and
$500,000, respectively, under current regulations. The Company had approximately $-0- and $977,089 in excess of FDIC and SIPC
insured limits at June 30, 2018 and December 31, 2017, respectively. The Company has not experienced any losses in such accounts.
Restricted
cash and securities held in Trust Account
The
Company had $
673
of
cash equivalents and $139,955,881 of marketable securities on June 30, 2018 and $
39,742
of cash
equivalents and $138,940,611 of marketable securities on December 31, 2017 held in the Trust Account which is restricted for the
benefit of the BRAC’s IPO shareholders to be available for those shareholders in the event they elect to redeem their shares
following an approved business combination or upon the dissolution of BRAC.
Income
Taxes
The
Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets
and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be
recovered. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such
assets to be more likely than not.
Fair
Value of Financial Instruments
Under
FASB ASC 820-10-05, the Financial Accounting Standards Board establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant
measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements
as reflected herein. The carrying amounts of cash, accounts payable and accrued expenses reported on the balance sheets are estimated
by management to approximate fair value primarily due to the short term nature of the instruments.
The
Company had no items that required fair value measurement on a recurring basis.
Property
and Equipment
Property
and equipment that are not oil and gas properties are recorded at cost and depreciated using the straight-line method over their
estimated useful lives of three to seven years. Expenditures for replacements, renewals, and betterments are capitalized. Maintenance
and repairs are charged to operations as incurred. Long-lived assets, other than oil and gas properties, are evaluated for impairment
to determine if current circumstances and market conditions indicate the carrying amount may not be recoverable. The Company has
not recognized any impairment losses on non-oil and gas long-lived assets. Depreciation expense was $5,115 and $5,734 for the
six months ended June 30, 2018 and 2017, respectively.
Revenue
Concentration
All
of the Company’s revenue in 2017 was earned from management fees earned through its management services agreement with Black
Ridge Holding Company, LLC (“BRHC”). The management services agreement with BRHC was cancelled by BRHC effective June
30, 2017.
Revenue
Recognition
The
Company recognizes management fee income as services are provided.
Stock-Based
Compensation
The
Company adopted FASB guidance on stock based compensation upon inception at April 9, 2010. Under FASB ASC 718-10-30-2, all share-based
payments to employees, including grants of employee stock options, are recognized in the income statement based on their fair
values. Expense related to common stock and stock options issued for services and compensation totaled $166,763 and $318,984 for
the six months ended June 30, 2018 and 2017, respectively, using the Black-Scholes options pricing model and an effective term
of 6 to 6.5 years based on the weighted average of the vesting periods and the stated term of the option grants and the discount
rate on 5 to 7 year U.S. Treasury securities at the grant date.
Uncertain
Tax Positions
Effective
upon inception at April 9, 2010, the Company adopted standards for accounting for uncertainty in income taxes. These standards
prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. These standards also provide guidance on de-recognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition.
Various
taxing authorities may periodically audit the Company’s income tax returns. These audits include questions regarding the
Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax
jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes,
the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance
has been established, is audited and fully resolved. Black Ridge Oil & Gas, Inc. has not yet undergone an examination
by any taxing authorities.
The
assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with
the Company’s various filing positions.
Recent
Accounting Pronouncements
New
accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) that are adopted by the
Company as of the specified effective date. If not discussed below, management believes there have been no developments to recently
issued accounting standards, including expected dates of adoption and estimated effects on our financial statements, from those
disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.
Note
3 – Going Concern
As
shown in the accompanying financial statements, as of June 30, 2018, the Company had an unrestricted cash balance of $413,112
and total working capital of $234,838. The Company has no revenue source presently. Based on projections of cash expenditures
in the Company’s current business plan, the cash on hand would be insufficient to fund the Company’s general and administrative
expenses over the next year.
The
Company continues to pursue sources of additional capital through various management fee agreements and financing transactions
or arrangements, including joint venturing of projects, equity financing or other means. Additionally, as online gambling becomes
legal in certain states, we may be due additional proceeds from our legacy settlement agreement with successors of Peerless/Electra
Works if they choose to obtain licenses to operate in those states. We may not be successful in identifying suitable funding transactions
in a sufficient time period or at all, and we may not obtain the capital we require by other means. If we do not succeed in raising
additional capital, our resources may not be sufficient to fund our business.
The
financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s
ability to continue as a going concern. These financial statements also do not include any adjustments relating to the recoverability
and classification of recorded asset amounts, or amounts and classifications of liabilities that might be necessary should the
Company be unable to continue as a going concern.
Note
4 – Rights Offering and Formation of Black Ridge Acquisition Corp.
The
Company filed a Registration Statement on Form S-1 (the “Registration Statement”) with the Securities and Exchange
Commission (the “SEC”) to register the issuance of 431,819,910 shares of common stock in the Rights Offering that
was declared effective by the SEC on August 3, 2017. Pursuant to the Rights Offering, the Company distributed, on a pro rata basis,
one right for each share of common stock owned by shareholders on August 2, 2017 (the “Record Date”). Each right permitted
a shareholder to purchase up to nine shares of common stock at a subscription price of $0.012 per share. The Rights Offering expired
on September 8, 2017 (the “Expiration Date”).
In
connection with the Rights Offering, the Company also entered into a Standby Purchase Agreement (the “Backstop Agreement”)
with a consortium of investors, including members of the Company’s board of directors and our Chief Executive Officer (collectively,
the “Backstop Purchasers”), who agree to purchase up to $2.9 million of the unsubscribed shares following the completion
of the rights offering.
On
September 26, 2017, the Company completed the Rights Offering, raising gross proceeds of $5,181,839 and issued 431,819,910 shares
in connection with the exercise of rights in connection with the Rights Offering and related Backstop Agreement. Under the Rights
Offering the Company’s current shareholders exercised rights to purchase 199,811,421 shares of stock for a total of $2,397,737.
Under the Backstop Agreement, the Backstop Purchasers purchased 232,008,489 shares of stock for a total of $2,784,102. Additionally,
as part of the Backstop agreement, the Company issued 435,000 warrants to purchase its common stock at $0.01 to participants in
the Backstop Agreement. The fair value of the warrants was estimated to be $10,135. Officers and directors of the Company purchased
173,843,308 shares between the Rights Offering and as participants of the Backstop Agreement for $2,086,120 and received 179,376
warrants to purchase shares of common stock at $0.01 per share for their participation in the Backstop Agreement. The remaining
257,976,602 shares were purchased by non-related parties for proceeds of $2,965,555. The fair value of the warrants issued to
related parties was estimated to be $4,179. The Company incurred $130,164 in costs associated with raising capital, which has
been netted against stockholders’ equity.
On
October 10, 2017 and October 18, 2017, in connection with the underwriter exercising its over-allotment option, the Company
use
d
$4,450,000 of
the net proceeds of the Rights Offering to fulfill its obligation as sponsor of a special
purpose acquisition company,
Black Ridge Acquisition Corp. (“BRAC”), as part of BRAC’s initial public
offering (IPO). BRAC was formed on May 9, 2017 with the purpose of becoming the special acquisition company as a wholly owned
subsidiary of the Company with an initial equity contribution of $25,000. After the IPO, the Company retained ownership of 22%
of BRAC’s common stock. The remaining
proceeds from the Rights Offering following the sponsorship
are being
used for general corporate purposes.
Note
5 – BRAC’s IPO, Consolidation of BRAC and Non-controlling Interest
BRAC’s
IPO
The
registration statement for the BRAC’s IPO was declared effective on October 4, 2017. The registration statement was initially
declared effective for 10,000,000 units (“Units” and, with respect to the common stock included in the Units being
offered, the “Public Shares”), but the offering was increased to 12,000,000 Units pursuant to Rule 462(b) under the
Securities Act of 1933, as amended. On October 10, 2017, the Company consummated the Initial Public Offering of 12,000,000 units,
generating gross proceeds of $120,000,000.
Simultaneous
with the closing of the Initial Public Offering, BRAC sold 400,000 units (the “Placement Units”) at a price of $10.00
per Unit in a private placement to BROG, generating gross proceeds of $4,000,000. BROG’s investment in BRAC’s common
stock is eliminated in consolidation.
Transaction
costs relating to the IPO amounted to $2,882,226, consisting of $2,400,000 of underwriting fees and $482,226 of other costs.
Following
the closing of the IPO on October 10, 2017, an amount of $120,600,000 ($10.05 per Unit) from the net proceeds of the sale of the
Units in the IPO and the Placement Units was placed in a trust account (“Trust Account”) and is invested in U.S. government
securities, within the meaning set forth in Section 2(a)(16) of the Investment Company Act of 1940, as amended (the “Investment
Company Act”), with a maturity of 180 days or less or in any open-ended investment company that holds itself out as a money
market fund selected by the Company meeting the conditions of paragraphs (d)(2), (d)(3) and (d)(4) of Rule 2a-7 of the Investment
Company Act, as determined by the Company, until the earlier of: (i) the consummation of a Business Combination or (ii) the distribution
of the Trust Account, as described below.
On
October 18, 2017, in connection with the underwriters’ exercise of their over-allotment option in full, BRAC sold an additional
1,800,000 Units and sold an additional 45,000 Placement Units to BROG at $10.00 per Unit, generating total proceeds of $18,450,000.
Transaction costs for underwriting fees on the sale of the over-allotment units were $360,000. Following the closing, an additional
$18,090,000 of the net proceeds ($10.05 per Unit) was placed in the Trust Account, bringing the total aggregate proceeds held
in the Trust Account to $138,690,000 ($10.05 per Unit). BROG’s investment in BRAC’s common stock is eliminated in
consolidation.
BRAC’s
management has broad discretion with respect to the specific application of the net proceeds of the IPO and private placement,
although substantially all of the net proceeds are intended to be applied generally toward consummating a Business Combination.
There is no assurance that BRAC will be able to complete a Business Combination successfully. Upon the closing of the IPO,
$
10.05
per Unit sold
in the IPO, including some of the proceeds of the Private Placements was deposited in a trust account (“Trust Account”)
to be held until the earlier of (i) the consummation of its initial Business Combination or (ii) BRAC’s failure to consummate
a Business Combination within 21 months from the consummation of the IPO (the “Combination Period”). Placing funds
in the Trust Account may not protect those funds from third party claims against BRAC. Although BRAC will seek to have all vendors,
service providers, prospective target businesses or other entities it engages, execute agreements with BRAC waiving any claim
of any kind in or to any monies held in the Trust Account, there is no guarantee that such persons will execute such agreements.
The Trust Account is maintained by a third party trustee. The remaining net proceeds (not held in the Trust Account) may be used
to pay for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative
expenses. Additionally, the interest earned on the Trust Account balance may be released to BRAC for any amounts that are necessary
to pay BRAC’s income and other tax obligations and up to $50,000 that may be used to pay for the costs of liquidating BRAC.
BROG has agreed that it will be liable to ensure that the proceeds in the Trust Account are not reduced below $10.05 per share
by the claims of target businesses or claims of vendors or other entities that are owed money by BRAC for services rendered or
contracted for or products sold to BRAC, but there is no assurance that BROG will be able to satisfy its indemnification obligations
if it is required to do so. Additionally, the agreement entered into by BROG specifically provides for two exceptions to the indemnity
it has given: it will have no liability (1) as to any claimed amounts owed to a target business or vendor or other entity who
has executed an agreement with BRAC waiving any right, title, interest or claim of any kind they may have in or to any monies
held in the Trust Account, or (2) as to any claims for indemnification by the underwriters of the IPO against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
Initial
Business Combination
Pursuant
to the Nasdaq Capital Markets listing rules, BRAC’s initial Business Combination must be with a target business or businesses
whose collective fair market value is at least equal to 80% of the balance in the Trust Account at the time of the execution of
a definitive agreement for such Business Combination, although this may entail simultaneous acquisitions of several target businesses.
The fair market value of the target will be determined by BRAC’s board of directors based upon one or more standards generally
accepted by the financial community (such as actual and potential sales, earnings, cash flow and/or book value). The target business
or businesses that BRAC acquires may have a collective fair market value substantially in excess of 80% of the Trust Account balance.
In order to consummate such a Business Combination, BRAC may issue a significant amount of its debt or equity securities to the
sellers of such business and/or seek to raise additional funds through a private offering of debt or equity securities. If BRAC’s
securities are not listed on NASDAQ after the IPO, BRAC would not be required to satisfy the 80% requirement. However, BRAC intends
to satisfy the 80% requirement even if BRAC’s securities are not listed on NASDAQ at the time of the initial Business Combination.
BRAC
will provide the public stockholders, who are the holders of the common stock which was sold as part of the Units in the IPO,
whether they are purchased in the IPO or in the aftermarket, or “Public Shares”, including BROG to the extent that
it purchases such Public Shares (“Public Stockholders”), with an opportunity to redeem all or a portion of their Public
Shares of BRAC’s Common stock, irrespective of whether they vote for or against the proposed transaction or if BRAC conducts
a tender offer, upon the completion of the initial Business Combination either (1) in connection with a stockholder meeting called
to approve the Business Combination, or (ii) by means of a tender offer, at a per-share price, payable in cash, equal to the aggregate
amount then on deposit in the Trust Account including interest (net of franchise and income taxes payable, divided by the number
of then outstanding Public Shares. The amount in the Trust Account, net of franchise and income taxes payable, currently amounts
to
$10.09 per
Public
Share. BRAC will proceed with a Business Combination only if BRAC has net tangible assets of at
least $5,000,001
upon
such consummation of a Business Combination and in the case of a stockholder vote, a majority of the outstanding shares voted
are voted in favor of the Business Combination. The decision as to whether BRAC will seek stockholder approval of a proposed Business
Combination or conduct a tender offer will be made by BRAC, solely in its discretion, based on a variety of factors such as the
timing of the transaction and whether the terms of the transaction would otherwise require it to seek stockholder approval under
the law or stock exchange listing requirement. If a stockholder vote is not required and BRAC decides not to hold a stockholder
vote for business or other legal reasons, BRAC will, pursuant to the proposed amended and restated certificate of incorporation,
(i) conduct the redemptions pursuant to Rule 13e-4 and Regulation 14E of the Exchange Act, which regulate issuer tender offers,
and (ii) file tender offer documents with the SEC prior to completing the initial Business Combination which contain substantially
the same financial and other information about the initial Business Combination and the redemption rights as is required under
Regulation 14A of the Exchange Act, which regulates the solicitation of proxies.
BROG
has agreed to vote its Founder Shares and any Public Shares purchased during or after the IPO in favor of the initial Business
Combination, and BRAC’s executive officers and directors have also agreed to vote any Public Shares purchased during or
after the IPO in favor of the Initial Business
Combination.
BROG entered into a letter agreement, pursuant to which it agreed to waive its redemption rights with respect to the Founder Shares,
shares included in the Placement Units and Public Shares in connection with the completion of the initial Business Combination.
In addition, BROG has agreed to waive its rights to liquidating distributions from the Trust Account with respect to the Founder
Shares and shares included in the Placement Units if BRAC fails to complete the initial Business Combination within the prescribed
time frame. However, if BROG (or any of BRAC’s executive officers, directors or affiliates) acquires Public Shares in or
after the IPO, it will be entitled to liquidating distributions from the Trust Account with respect to such Public Shares in the
event BRAC does not complete the initial Business Combination within such applicable time period.
Failure
to Consummate a Business Combination
If
BRAC is unable to complete the initial Business Combination within the Combination Period, BRAC must: (i) cease all operations
except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter,
redeem the public shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account,
including interest (which interest shall be net of franchise fees and income taxes payable divided by the number of then outstanding
Public Shares, which redemption will completely extinguish Public Stockholders’ rights as stockholders (including the right
to receive further liquidation distributions, if any), subject to applicable law, and (iii) as promptly as reasonably possible
following such redemption, subject to the approval of BRAC’s remaining stockholders and BRAC’s Board of Directors,
dissolve and liquidate, subject in the case of clauses (ii) and (iii) to BRAC’s obligations under Delaware law to provide
for claims of creditors and the requirements of other applicable law.
Consolidation
of BRAC and Non-controlling Interest
The
Company has determined that BRAC, following its IPO, is a variable interest entity (“VIE”) and that the Company is
the primary beneficiary of the VIE. The Company determined that, due to the redemption feature associated with the IPO shares,
that the IPO shareholders are indirectly protected from the operating expenses of BRAC and BROG has the power to direct the activities
of BRAC through the date at which BRAC affords the stockholders the opportunity to vote to approve a proposed business combination.
Therefore, these consolidated financial statements contain the operations of the BRAC from its inception on May 9, 2017. BRAC’s
IPO shareholders are reflected in our Consolidated Financial Statements as a redeemable non-controlling interest. The non-controlling
interest was recorded at fair value on October 10, 2017, with an addition on October 18, 2017 as a result of the underwriters’
exercise of their over-allotment option. The net earnings attributable to the IPO shareholders are subtracted from the net gain
(loss) for any period to arrive at the net loss attributable to the Company and the non-controlling interest on the balance sheet
is adjusted to include the net earnings attributable to the IPO shareholders.
Intercompany
transactions and eliminations
BROG
is paid a management fee by BRAC of $10,000 per month as part of an administrative services agreement, which commenced October
5, 2017, for general and administrative services including the cost of office space and personnel dedicated to BRAC. BROG is reimbursed
for any out-of-pocket expenses, particularly travel, incurred in connection with activities on BRAC’s behalf, including
but not limited to identifying potential target businesses and performing due diligence on suitable business combinations. There
is no cap or ceiling on the reimbursement of out-of-pocket expenses incurred by BRAC. BRAC paid a total of $60,000 to BROG for
such services for the six months ended June 30, 2018. The management services income of BROG and the management services expense
of BRAC as well as any balances due between the companies for such services or reimbursements were eliminated in consolidation.
BROG’s
investment in BRAC and the resulting equity recorded by BRAC have been eliminated upon consolidation. Additionally, as a result
of recognizing the fair value of the redeemable shares held by the BRAC IPO shareholders as a non-controlling interest as per
FASB ASC 810-10-45-23, BROG has recognized an adjustment of $3,932,126 to additional paid-in capital. The non-controlling interest
in BRAC held by the BRAC’s IPO shareholders is presented on the balance sheet as temporary equity.
Note
6 – Cancellation of Management Services Agreement and Sale of BRHC Assets
All
of our management fee income in 2017 resulted from our management services agreement with Black Ridge Holding Company (BRHC),
a company formed in 2016 as a result of our restructuring and of which we continued to hold a small equity interest, the remainder
being held by one of our former creditors. On April 3, 2017, BROG was notified by BRHC of their termination of our Management
Services Agreement and that they had finalized the sale of BRHC’s oil and gas assets to a third party. On April 3, 2017,
BRHC signed a Contribution Agreement that provided for the transfer of ownership and title of all oil and gas assets held by BRHC
in exchange for preferred membership interest in the acquiring LLC (the “BRHC Sale”). Consistent with the terms of
the Management Services Agreement, the Company was paid for our management services through June 30, 2017.
The
Company, Chambers Energy Capital II, LP and CEC II TE, LLC (together with Chambers Energy Capital II, LP the “Chambers Affiliates”)
as the members of Black Ridge Holding Company, LLC (“BRHC”) agreed to dissolve and wind up BRHC and filed a Certificate
of Cancellation under the Delaware Limited Liability Company Act as of October 3, 2017. On October 2, 2017, the Company entered
into an agreement with the Chambers Affiliates whereby certain assets distributed to the Company upon the dissolution and winding
up of BRHC effective as of October 1, 2017 were sold to the Assignees in exchange for cash consideration of $1,078,394. Additionally,
cash and receivables totaling $4,645 in value were distributed directly to the Company from BRHC.
Note
7 – Prepaid Expenses
Prepaid
expenses consist of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Prepaid insurance costs
|
|
$
|
42,696
|
|
|
$
|
24,999
|
|
Prepaid employee benefits
|
|
|
11,034
|
|
|
|
11,716
|
|
Prepaid office and other costs
|
|
|
44,939
|
|
|
|
32,102
|
|
Total prepaid expenses
|
|
$
|
98,669
|
|
|
$
|
68,817
|
|
Note
8 – Property and Equipment
Property
and equipment at June 30, 2018 and December 31, 2017, consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Property and equipment
|
|
$
|
128,156
|
|
|
$
|
128,156
|
|
Less: Accumulated depreciation and amortization
|
|
|
(122,574
|
)
|
|
|
(117,459
|
)
|
Total property and equipment, net
|
|
$
|
5,582
|
|
|
$
|
10,697
|
|
During
the six months ended June 30, 2017 we sold certain assets with a net book value of $6,874 for proceeds of $2,160, resulting in
a loss on disposal of $4,714.
The
Company recognized depreciation expense of $5,115 and $5,734 for the six month periods ended June 30, 2018 and 2017, respectively.
Note
9 – Related Party Transactions
On
March 1, 2018, the Board of Directors (the “Board”) of the Company approved and adopted the Black Ridge Gas, Inc.
2018 Management Incentive Plan (the “Plan”) and the form of 2018 Management Incentive Plan Award Agreement (the “Award
Agreement”).
In
connection with the approval of the Plan and Award Agreement, the Board approved the issuance of awards (the “Awards”)
to certain individuals including officers and directors (the “Grantees”), representing a percentage of the shares
of BRAC held by the Company as of the date of closing of a business combination for the acquisition of a target business as described
in the BRAC prospectus dated October 4, 2017, as follows:
|
|
Percentage
of BRAC Shares Owned by the
|
Name
|
|
Company
Granted to the Grantee
|
Bradley
Berman
|
|
1.6%
|
Lyle
Berman
|
|
1.6%
|
Benjamin
Oehler
|
|
1.6%
|
Joe
Lahti
|
|
1.6%
|
Kenneth
DeCubellis
|
|
4.0%
|
Michael
Eisele
|
|
2.8%
|
James
Moe
|
|
2.1%
|
The
Company currently owns 3,895,000 shares of BRAC common stock and has rights to an additional 445,000 shares that would be issued
on the date of the closing of a business combination. The actual number of shares of BRAC stock granted to the Grantees will be
determined on the date of closing of a business combination and will be issued one year from that date. The Company will recognize
no expense related to the Awards until a business combination is probable.
Note
10 – Fair Value of Financial Instruments
The
Company adopted FASB ASC 820-10 upon inception at April 9, 2010. Under FASB ASC 820-10-5, fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase
the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities
must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.
The
Company had revolving credit facilities that must be measured under the new fair value standard. The Company’s financial
assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level
1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability
to access at the measurement date.
Level
2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability
(e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market
data by correlation or other means (market corroborated inputs).
Level
3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset
or liability.
The
following schedule summarizes the valuation of financial instruments at fair value on a recurring basis in the balance sheets
as of June 30, 2018 and December 31, 2017:
|
|
Fair Value Measurements at June 30, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments held in trust
|
|
$
|
139,956,554
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
413,112
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Total assets
|
|
|
140,369,666
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total liabilities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
140,369,666
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
Fair Value Measurements at December 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments held in trust
|
|
$
|
138,980,353
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
1,477,089
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Total assets
|
|
|
140,457,442
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total liabilities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
140,457,442
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Note
11 – Changes in Stockholders’ Equity
Preferred
Stock
The
Company has 20,000,000 authorized shares of $0.001 par value preferred stock. No shares have been issued to date.
Common
Stock
The
Company has 500,000,000 authorized shares of $0.001 par value common stock.
On
September 26, 2017, the Company issued 199,811,421 shares of common stock in a Rights Offering, raising gross proceeds of $2,397,737,
and issued an additional 232,008,789 shares in a private placement (the Backstop Agreement), raising gross proceeds of $2,784,102.
The Company incurred $130,164 in costs associated with the Rights Offering and Backstop Agreement.
Note
12 – Options
Options
Granted
No
options were granted during the six months ended June 30, 2018 and 2017.
The
Company recognized a total of $166,763 and $318,984 of compensation expense during the six months ended June 30, 2018 and 2017,
respectively, related to common stock options issued to Employees and Directors that are being amortized over the implied service
term, or vesting period, of the options. The remaining unamortized balance of these options is $271,752 as of June 30, 2018.
Options
Exercised
No
options were exercised during the six months ended June 30, 2018 and 2017.
Options
Forfeited
A
total of 22,000 options were forfeited during the six months ended June 30, 2018. No options were forfeited during the six months
ended June 30, 2017.
Note
13 – Warrants
Warrants
Granted
No
warrants were granted during the six months ended June 30, 2018 and 2017.
Warrants
Exercised
No
warrants were exercised during the six months ended June 30, 2018 and 2017.
Outstanding
Warrants
The
Company issued 435,000 warrants to purchase shares at $0.01 per share to participants of the Backstop Agreement on September 22,
2017.
The Company accounted for the warrants as an expense of the Rights Offering which resulted in
a charge directly to stockholders’ equity. The Company estimated the fair value of these warrants to be approximately $10,135
(or $.0233 per warrant) using the Black-Scholes option-pricing model. The fair value of the warrants was estimated as of the date
of grant using the following assumptions: (1) expected volatility of 388%, (2) risk-free interest rate of 1.89% and (3) expected
life of five years.
Note
14 - BRAC Rights and Warrants
Initial
Public Offering
Pursuant
to its Initial Public Offering and including the subsequent over-allotment option exercised by the underwriter, BRAC sold 13,800,000
Units at a purchase price of $10.00 per Unit. Each Unit consists of one share of common stock, one right (“Public Right”)
and one warrant (“Public Warrant”). Each Public Right will convert into one-tenth (1/10) of one share of common stock
upon consummation of a Business Combination. Each Public Warrant entitles the holder to purchase one share of common stock at
an exercise price of $11.50.
Private
Placement
Simultaneous
with the Initial Public Offering and over-allotment option exercise, BROG purchased an aggregate of 445,000 Placement Units at
a price of $10.00 per Unit (or an aggregate purchase price of $4,450,000). Each Placement Unit consists of one share of common
stock (“Placement Share”), one right (“Placement Right”) and one warrant (each, a “Placement Warrant”)
to purchase one share of the common stock at an exercise price of $11.50 per share. The proceeds from the Placement Units were
added to the proceeds from the Initial Public Offering held in the Trust Account. If BRAC does not complete a Business Combination
within the Combination Period, the proceeds of the sale of the Placement Units will be used to fund the redemption of the Public
Shares (subject to the requirements of applicable law) and the Placement Rights and Placement Warrants will expire worthless.
The
Placement Units are identical to the Units sold in the Initial Public Offering except that the Placement Warrants (i) are not
redeemable by BRAC and (ii) may be exercised for cash or on a cashless basis, so long as they are held by BROG or any of its permitted
transferees. In addition, the Placement Units and their component securities may not be transferable, assignable or salable until
after the consummation of a Business Combination, subject to certain limited exceptions.
Rights
Each
holder of a right will receive one-tenth (1/10) of one share of common stock upon consummation of a Business Combination, even
if a holder of such right converted all ordinary shares held by it in connection with a Business Combination. No fractional shares
will be issued upon exchange of the rights. No additional consideration will be required to be paid by a holder of rights in order
to receive its additional shares upon consummation of a Business Combination as the consideration related thereto has been included
in the Unit purchase price paid for by investors in the Initial Public Offering. If BRAC enters into a definitive agreement for
a Business Combination in which BRAC will not be the surviving entity, the definitive agreement will provide for the holders of
rights to receive the same per share consideration the holders of the shares of common stock will receive in the transaction on
an as-converted into shares of common stock basis and each holder of rights will be required to affirmatively covert its rights
in order to receive 1/10 of a share of common stock underlying each right (without paying additional consideration). The shares
of common stock issuable upon exchange of the rights will be freely tradable (except to the extent held by affiliates of BRAC).
If
BRAC is unable to complete a Business Combination within the Combination Period and BRAC liquidates the funds held in the Trust
Account, holders of rights will not receive any of such funds with respect to their rights, nor will they receive any distribution
from BRAC’s assets held outside of the Trust Account with respect to such rights, and the rights will expire worthless.
Further, there are no contractual penalties for failure to deliver securities to the holders of the rights upon consummation of
a Business Combination. Additionally, in no event will BRAC be required to net cash settle the rights. Accordingly, the rights
may expire worthless.
The
rights included in the Private Units sold in the Private Placement are identical to the rights included in the Units sold in the
Initial Public Offering, except that, among others, the rights including the shares issuable upon exchange of such rights, are
being purchased pursuant to an exemption from the registration requirements of the Securities Act and will become tradable only
after certain conditions are met or the resale of such rights (including underlying securities) is registered under the Securities
Act.
Warrants
Warrants
may only be exercised for a whole number of shares. No fractional shares will be issued upon exercise of the Warrants. The Warrants
will become exercisable on the later of (a) 30 days after the consummation of a Business Combination or (b) October 10, 2018.
No Warrants will be exercisable for cash unless BRAC has an effective and current registration statement covering the shares of
common stock issuable upon exercise of the Warrants and a current prospectus relating to such shares. Notwithstanding the foregoing,
if a registration statement covering the shares of common stock issuable upon the exercise of the Warrants is not effective within
30 days from the consummation of a Business Combination, the holders may, until such time as there is an effective registration
statement and during any period when BRAC shall have failed to maintain an effective registration statement, exercise the Warrants
on a cashless basis pursuant to an available exemption from registration under the Securities Act. If an exemption from registration
is not available, holders will not be able to exercise their Warrants on a cashless basis. The Warrants will expire five years
from the consummation of a Business Combination or earlier upon redemption or liquidation.
The
Private Warrants will be identical to the Warrants underlying the Units sold in the Initial Public Offering, except the Private
Warrants will be exercisable for cash (even if a registration statement covering the shares of common stock issuable upon exercise
of such Private Warrants is not effective) or on a cashless basis, at the holder’s option, and will not be redeemable by
BRAC, in each case so long as they are still held by BROG or its affiliates.
BRAC
may call the Warrants for redemption (excluding the Private Warrants but including any outstanding Warrants issued upon exercise
of the unit purchase option issued to EarlyBirdCapital), in whole and not in part, at a price of $.01 per Warrant:
|
•
|
at
any time while the Warrants are exercisable,
|
|
•
|
upon
not less than 30 days’ prior written notice of redemption to each Warrant holder,
|
|
•
|
if,
and only if, the reported last sale price of the shares of common stock equals or exceeds
$18.00 per share, for any 20 trading days within a 30 trading day period ending on the
third business day prior to the notice of redemption to Warrant holders, and
|
|
•
|
if,
and only if, there is a current registration statement in effect with respect to the
shares of common stock underlying such Warrants at the time of redemption and for the
entire 30-day redemption period and continuing each day thereafter until the date of
redemption.
|
If
BRAC calls the Warrants for redemption, management will have the option to require all holders that wish to exercise the Warrants
to do so on a “cashless basis,” as described in the warrant agreement.
The
exercise price and number of shares of common stock issuable upon exercise of the Warrants may be adjusted in certain circumstances
including in the event of a stock dividend, extraordinary dividend or recapitalization, reorganization, merger or consolidation.
However, the Warrants will not be adjusted for issuances of shares of common stock at a price below its exercise price. Additionally,
in no event will BRAC be required to net cash settle the Warrants. If BRAC is unable to complete a Business Combination within
the Combination Period and BRAC liquidates the funds held in the Trust Account, holders of Warrants will not receive any of such
funds with respect to their Warrants, nor will they receive any distribution from BRAC’s assets held outside of the Trust
Account with respect to such Warrants. Accordingly, the Warrants may expire worthless.
Unit
Purchase Option
On
October 10, 2017, BRAC sold to the underwriter and its designees, for $100, an option to purchase up to 600,000 Units exercisable
at $11.50 per Unit (or an aggregate exercise price of $6,900,000) commencing on the later of the first anniversary of the effective
date of the registration statement related to the Initial Public Offering and the consummation of a Business Combination. The
unit purchase option may be exercised for cash or on a cashless basis, at the holder’s option, and expires five years from
the effective date of the registration statement related to the Initial Public Offering. The Units issuable upon exercise of this
option are identical to those offered in the Initial Public Offering. BRAC accounted for the unit purchase option, inclusive of
the receipt of $100 cash payment, as an expense of the Initial Public Offering resulting in a charge directly to stockholders’
equity. BRAC estimated the fair value of this unit purchase option to be approximately $1,778,978 (or $2.97 per Unit) using the
Black-Scholes option-pricing model. The fair value of the unit purchase option granted to the underwriters was estimated as of
the date of grant using the following assumptions: (1) expected volatility of 35%, (2) risk-free interest rate of 1.94% and (3)
expected life of five years. The option and such units purchased pursuant to the option, as well as the common stock underlying
such units, the rights included in such units, the common stock that is issuable for the rights included in such units, the warrants
included in such units, and the shares underlying such warrants, have been deemed compensation by FINRA and are therefore subject
to a 180-day lock-up pursuant to Rule 5110(g)(1) of FINRA’s NASDAQ Conduct Rules. Additionally, the option may not be sold,
transferred, assigned, pledged or hypothecated for a one-year period (including the foregoing 180-day period) following the date
of Initial Public Offering except to any underwriter and selected dealer participating in the Initial Public Offering and their
bona fide officers or partners. The option grants to holders demand and “piggy back” rights for periods of five and
seven years, respectively, from the effective date of the registration statement with respect to the registration under the Securities
Act of the securities directly and indirectly issuable upon exercise of the option. BRAC will bear all fees and expenses attendant
to registering the securities, other than underwriting commissions which will be paid for by the holders themselves. The exercise
price and number of units issuable upon exercise of the option may be adjusted in certain circumstances including in the event
of a stock dividend, or BRAC’s recapitalization, reorganization, merger or consolidation. However, the option will not be
adjusted for issuances of ordinary shares at a price below its exercise price.
Note
15 – Income Taxes
The
Company accounts for income taxes under ASC Topic 740,
Income Taxes,
which provides for an asset and liability approach
of accounting for income taxes. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future
tax consequences, using currently enacted tax laws, attributed to temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts calculated for income tax purposes.
BROG
and BRAC file returns independently and do not file as a consolidated group. We currently estimate that our effective tax rate
for the year ending December 31, 2018 will be 0% for BROG and 28.7% for BRAC.
For
BROG, losses incurred during the period from April 9, 2011 (inception) to June 30, 2018 could be used to offset future tax liabilities.
Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is “more likely than
not” that some component or all of the benefits of deferred tax assets will not be realized. As of June 30, 2018, net deferred
tax assets were $10,117,350, with no deferred tax liability, primarily related to net operating loss carryforwards. A valuation
allowance of approximately $10,117,350 was applied to the net deferred tax assets. Therefore BROG has no tax expense for 2018
to date.
For
BRAC, the tax expense for the six months ended June 30, 2018 of $243,226 was primarily driven by the Company’s interest
income offset by general and administrative expenses resulting in income before the provision for income taxes and unrealized
gains on marketable securities resulted in a reduction of the deferred tax asset.
In
accordance with FASB ASC 740, the Company has evaluated its tax positions and determined there are no significant uncertain tax
positions as of any date on, or before, June 30, 2018.
Note
16 – Commitments and Contingencies
The
Company from time to time may be involved in various inquiries, administrative proceedings and litigation relating to matters
arising in the normal course of business. The Company is not aware of any inquiries or administrative proceedings and is not currently
a defendant in any material litigation and is not aware of any threatened litigation that could have a material effect on the
Company.
The
Company periodically maintains cash balances at banks in excess of federally insured amounts. The extent of loss, if any, to be
sustained as a result of any future failure of a bank or other financial institution is not subject to estimation at this time.
BRAC’s
agreements with underwriters
BRAC
engaged the underwriters as advisors in connection with its Initial Business Combination to assist it in holding meetings with
its shareholders to discuss the potential business combination and the target business’ attributes, introduce it to potential
investors that are interested in purchasing its securities, assist it in obtaining shareholder approval for the business combination
and assist it with its press releases and public filings in connection with the business combination. BRAC will pay its underwriters
a cash fee for such services upon the consummation of its initial business combination in an amount equal to 3.5% of the gross
proceeds of its offering (exclusive of any applicable finders’ fees which might become payable).
Registration
rights
The
holders of BROG’s shares of BRAC issued and outstanding on the date of BRAC’s Initial Public Offering, as well as
the holders of the private units and any units BROG, and its officers, directors or their affiliates may be issued in payment
of working capital loans made to BRAC (and all underlying securities), are entitled to registration rights pursuant to a registration
rights agreement dated
October 4, 2017
.
The holders of a majority of these securities are entitled to make up to two demands that BRAC register such securities. The holders
of the majority of the BROG’s shares can elect to exercise these registration rights at any time commencing three months
prior to the date on which these shares of BRAC’s common stock are to be released from escrow. The holders of a majority
of the private units and units issued to BROG, and its officers, directors or their affiliates in payment of working capital loans
made to us (or underlying securities) can elect to exercise these registration rights at any time after BRAC consummates a business
combination. In addition, the holders have certain “piggy-back” registration rights with respect to registration statements
filed subsequent to our consummation of a business combination. The Company would bear the expenses incurred in connection with
the filing of any such registration statements.
Note
17 – Subsequent Events
The
Company evaluates events that have occurred after the balance sheet date through the date these financial statements were issued.
No events occurred of a material nature that would have required adjustments to or disclosures in these financial statements.