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
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State of Incorporation
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Relationship
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Black Ridge Oil and Gas, Inc.
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Nevada
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Parent
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Black Ridge Acquisition Corp. (“BRAC”)
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Delaware
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Subsidiary
(1)
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(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 September 30, 2018 and December 31, 2017
were $623 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 $1,822,733 and $977,089 in excess of FDIC and SIPC insured limits at September 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 $
623
of cash equivalents and $140,579,824 of marketable securities on September 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.
Basic and Diluted Loss Per Share
The basic net loss per share is computed
by dividing the net income (loss) (the numerator) by the weighted average number of common shares outstanding for the period (the
denominator). Diluted net income (loss) per common share is computed by dividing the net income (loss) by the weighted average
number of common shares and potential common shares outstanding (if dilutive) during each period. Potential common shares include
stock options, warrants and restricted stock. The number of potential common shares outstanding relating to stock options, warrants
and restricted stock is computed using the treasury stock method.
The reconciliation of the denominators
used to calculate basic EPS and diluted EPS for the three and nine months ended September 30, 2018 and 2017 are as follows:
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2018
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2017
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2018
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2017
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Weighted average common shares outstanding – basic
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479,821,911
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64,438,566
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479,807,318
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53,526,470
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Plus: Potentially dilutive common shares:
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Stock options and warrants
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221,053
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–
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237,953
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–
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Weighted average common shares outstanding – diluted
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480,042,964
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64,438,566
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480,045,271
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53,526,470
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Stock options and warrants excluded from
the calculation of diluted EPS because their effect was anti-dilutive were 10,835,300 and 11,380,000 for the three months ended
September 30, 2018 and 2017, respectively, and 10,835,300 and 11,380,000 for the nine months ended September 30, 2018 and 2017,
respectively.
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 $7,650 and $8,291 for the nine months ended September 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 $244,664 and $473,053 for the nine months ended September
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 September 30, 2018, the Company had an unrestricted cash balance of $2,138,678 and total working capital of $1,808,107.
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. 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 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 $90,000 to BROG for such services for the nine months ended September
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 – Settlement Income
On August 21,
2018, the Company entered into an agreement to modify the terms of the Settlement Agreement and Release entered into as of September
27, 2012 between the Company, Peerless Media, Ltd. and ElectraWorks, Ltd.. Based on the new agreement, the Company received $2.25
million and agreed to terminate its rights to any additional payments under the original Settlement Agreement.
The Company
also paid a 5% fee of $112,500 to a former officer as part of an agreement with the former officer related to the 2012 settlement
agreement.
Note 8 – Prepaid Expenses
Prepaid expenses consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Prepaid insurance costs
|
|
$
|
35,724
|
|
|
$
|
24,999
|
|
Prepaid employee benefits
|
|
|
11,034
|
|
|
|
11,716
|
|
Prepaid office and other costs
|
|
|
69,700
|
|
|
|
32,102
|
|
Total prepaid expenses
|
|
$
|
116,458
|
|
|
$
|
68,817
|
|
Note 9 – Property and Equipment
Property and equipment at September 30, 2018 and December 31,
2017, consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Property and equipment
|
|
$
|
128,156
|
|
|
$
|
128,156
|
|
Less: Accumulated depreciation and amortization
|
|
|
(125,109
|
)
|
|
|
(117,459
|
)
|
Total property and equipment, net
|
|
$
|
3,047
|
|
|
$
|
10,697
|
|
During the nine months ended September
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 $7,650 and $8,291 for the nine month periods ended September 30, 2018 and 2017, respectively.
Note 10 – 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 specific
business combination is probable.
Note 11 – 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’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 September 30, 2018 and December 31, 2017:
|
|
Fair Value Measurements at September 30, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments held in trust
|
|
$
|
140,580,447
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
2,138,678
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Total assets
|
|
|
142,719,125
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total liabilities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
142,719,125
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
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 12 – 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.
The Company issued 45,000 shares during
the nine months ended September 30, 2018 as a result of warrant exercises, receiving net proceeds of $450.
Note 13 – Options
Options Granted
No options were granted during the nine
months ended September 30, 2018 and 2017.
The Company recognized a total of $244,664
and $473,053 of compensation expense during the nine months ended September 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 $193,851 as of September 30, 2018.
Options Exercised
No options were exercised during the nine
months ended September 30, 2018 and 2017.
Options Forfeited
A total of 22,000 options were forfeited during the nine months
ended September 30, 2018. No options were forfeited during the nine months ended September 30, 2017.
Note 14 – Warrants
Warrants Granted
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.
No warrants were granted during the nine
months ended September 30, 2018.
Warrants Exercised
Warrants to purchase 45,000 shares were exercised in the nine
months ended September 30, 2018 for proceeds of $450.
Note 15 - 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 16 – 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 September 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 September 30, 2018, net deferred tax assets were $9,619,748,
with no deferred tax liability, primarily related to net operating loss carryforwards. A valuation allowance of approximately $9,619,748
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
nine months ended September 30, 2018 of $398,752 was primarily driven by the Company’s interest income offset by
general and administrative expenses resulting in income before the provision for income taxes. Unrealized gains on marketable
securities resulted in a reduction of the deferred tax asset of $18,678 as of December 31, 2017 and created the deferred tax
liability of $182 as of September 30, 2018.
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, September
30, 2018.
Note 17 – 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 18 – 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.