The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part
of these financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
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 25, 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 in 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.
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
–
Summary
of Significant Accounting Policies
Basis
of Accounting
Our financial statements are prepared using
the accrual method of accounting as generally accepted in the United States of America (U.S. GAAP) and the rules of the Securities
and Exchange Commission (SEC).
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 the 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.
BLACK RIDGE OIL & GAS, INC.
NOTES TO THE CONSOLIDATED 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.
Segment Reporting
FASB ASC 280-10-50 requires annual and
interim reporting for an enterprise’s operating segments and related disclosures about its products, services, geographic
areas and major customers. An operating segment is defined as a component of an enterprise that engages in business activities
from which it may earn revenues and expenses, and about which separate financial information is regularly evaluated by the chief
operating decision maker in deciding how to allocate resources. The Company operates as a single segment and will evaluate additional
segment disclosure requirements as it expands its operations.
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 Company was formerly a direct owner
of assets in the oil and gas industry. 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.
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. The Company had no cash equivalents on hand as of December 31, 2018 and December 31, 2017.
Restricted cash and securities held
in Trust Account
As of December 31, 2018 and 2017, $2,312
and $39,742 of cash, respectively, and $141,304,995 and $138,940,611, respectively, of marketable securities were 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 the upon dissolution of BRAC. The Company
may withdraw funds from the trust account to pay for BRAC’s income taxes and franchise fees.
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) up to $250,000 under current regulations. The Company had approximately $1,119,770 and $977,089 in excess of
FDIC insured limits at December 31, 2018 and 2017, respectively. As of December 31, 2018, the Company had not experienced losses
on these accounts and management believes the Company is not exposed to significant risks on such accounts.
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.
BLACK RIDGE OIL & GAS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
On December 22, 2017 the U.S. Tax Cuts
and Jobs Act of 2017 (“Tax Reform”) was signed into law. As a result of Tax Reform, the U.S. statutory rate was lowered
from 35% to 21% effective January 1, 2018, among other changes. ASC Topic 740 requires companies to recognize the effect of tax
law changes in the period of enactment; therefore, the Company was required to value its deferred tax assets and liabilities at
December 31, 2017 at the new rate. The SEC issued Staff Accounting Bulletin No. 118 (“SAB 108”) to address the application
of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations)
in reasonable detail to complete the accounting for certain effects of Tax Reform. The ultimate impact may differ from the provisional
amount, possibly materially, as a result of additional analysis, changes in interpretations and assumptions the Company has made,
additional regulatory guidance that may be issued and actions the Company may take as a result of Tax Reform.
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 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 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 long-lived assets related to continuing operations.
Depreciation expense was $9,472 and $10,848 for the years ended December 31, 2018 and 2017, respectively.
Revenue Concentration
All of the Company’s revenue earned
came from management fees earned through its management services agreement with Black Ridge Holding Company, LLC (“BRHC”).
Revenues were earned prior to June 30, 2017 from its management services agreement with BRHC, which was cancelled by BRHC effective
June 30, 2017.
Revenue Recognition
The Company recognizes management fee income
as services are provided.
Basic and Diluted Earnings (Loss) Per
Share
Basic earnings (loss) per share (“EPS”)
are computed by dividing net income (the numerator) by the weighted average number of common shares outstanding for the period
(the denominator). Diluted EPS is computed by dividing net income 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 years ended December 31, 2018 and 2017 are as follows:
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Weighted average common shares outstanding – basic
|
|
|
479,816,790
|
|
|
|
160,970,732
|
|
Plus: Potentially dilutive common shares:
|
|
|
|
|
|
|
|
|
Stock options and warrants
|
|
|
–
|
|
|
|
–
|
|
Weighted average common shares outstanding – diluted
|
|
|
479,816,790
|
|
|
|
160,970,732
|
|
BLACK RIDGE OIL & GAS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
For 2018 and 2017, potential dilutive securities
had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share. Stock options and warrants
excluded from the calculation of diluted EPS because their effect was anti-dilutive were 11,173,500 and 11,292,300 of December 31, 2018
and 2017, respectively.
Stock-Based
Compensation
Under FASB ASC 718-10-30-2, all share-based
payments to employees, including grants of employee stock options, are to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative. Amortization of the fair values of stock options issued for services
and compensation totaled $310,731 and $574,851 for the years ended December 31, 2018 and 2017, respectively. The
fair values of stock options were determined 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 and are being amortized over the related implied service term, or vesting period.
Uncertain Tax Positions
In accordance with ASC 740, “Income
Taxes” (“ASC 740”), the Company recognizes the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be capable of withstanding examination by the taxing authorities based on the technical
merits of the position. 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 can 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. The Company 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
From time to time,
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, management believes that the impact of recently issued standards,
which are not yet effective, will not have a material impact on the Company's financial statements upon adoption.
In August, 2016, the FASB issued Accounting
Standards Update (ASU) No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
(a consensus of the Emerging Issues Task Force). This guidance provides guidance of eight specific cash flow issues. This amendment
is effective for periods beginning after December 15, 2017, with early adoption permitted. The Company adopted this standard on
January 1, 2018 and anticipates it will not have a material impact on its financial statements and related disclosures.
In November 2016, the FASB issued ASU No.
2016-18,
Restricted Cash
. This guidance standardizes the presentation of changes to restricted cash on the statement of
cash flows by requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents,
and amount generally described as restricted cash or restricted cash equivalents. The provisions of this standard are effective
for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2017, and early adoption
is permitted. The Company adopted this guidance effective January 1, 2018 and applied it retrospectively, and the standard did
not have a material impact on the Company’s combined financial statements and related disclosures
BLACK RIDGE OIL & GAS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
In January 2017, the FASB issued ASU No.
2017-01,
Business Combinations
(Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a
business to provide guidance in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets
or businesses. ASU 2017-01 provides a screen to determine when a set of assets is not a business, requiring that when substantially
all fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable
assets, the set of assets is not a business. A framework is provided to assist in evaluating whether both an input and a substantive
process are present for the set to be a business. ASU 2017-01 is effective for periods beginning after December 15, 2017, including
interim periods within those annual periods. No disclosures are required at transition and early adoption is permitted. The Company
adopted this standard on January 1, 2018 and will apply this guidance to future business combinations.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation — Stock Compensation
(Topic 718); Scope of Modification Accounting. The amendments in this ASU provide
guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications.
If the value, vesting conditions or classification of the award changes, modification accounting will apply. The guidance is effective
for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company adopted this guidance
effective January 1, 2018, and the standard did not have a material impact on the Company’s combined financial statements
and related disclosures.
In June 2018, the FASB issued ASU No. 2018-07,
Compensation — Stock Compensation
(Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting, which
simplifies accounting for share-based payment transactions resulting for acquiring goods and services from nonemployees. ASU 2018-07
is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption
is permitted. The Company is currently evaluating ASU 2018-07 and its impact on its combined financial statements or disclosures.
In July 2018, the FASB issued ASU No. 2018-10,
Codification Improvements to Topic 842, Leases
. The amendments in ASU 2018-10 provide additional clarification and implementation
guidance on certain aspects of the previously issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) and have the
same effective and transition requirements as ASU 2016-02. Upon the effective date, ASU 2018-10 will supersede the current lease
guidance in ASC Topic 840, Leases. Under the new guidance, lessees will be required to recognize for all leases, with the exception
of short-term leases, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured
on a discounted basis. Concurrently, lessees will be required to recognize a right-of-use asset, which is an asset that represents
the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2018-10 is effective for private
companies and emerging growth public companies for interim and annual reporting periods beginning after December 15, 2019, with
early adoption permitted. The guidance is required to be applied using a modified retrospective transition approach for leases
existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements. The
Company is currently assessing the impact this guidance will have on its combined financial statements.
In July 2018, the FASB issued ASU No. 2018-09,
Codification Improvements
. These amendments provide clarifications and corrections to certain ASC subtopics including the
following: Income Statement - Reporting Comprehensive Income – Overall (Topic 220-10), Debt - Modifications and Extinguishments
(Topic 470-50), Distinguishing Liabilities from Equity – Overall (Topic 480-10), Compensation - Stock Compensation - Income
Taxes (Topic 718-740), Business Combinations - Income Taxes (Topic 805-740), Derivatives and Hedging – Overall (Topic 815-10),
and Fair Value Measurement – Overall (Topic 820-10). The majority of the amendments in ASU 2018-09 will be effective in annual
periods beginning after December 15, 2019. The Company is currently evaluating and assessing the impact this guidance will have
on its combined financial statements.
In July 2018, the FASB issued ASU No. 2018-11,
“Leases (Topic 842):
Targeted Improvements.
The amendments in ASU 2018-11 related to transition relief on comparative
reporting at adoption affect all entities with lease contracts that choose the additional transition method and separating components
of a contract affect only lessors whose lease contracts qualify for the practical expedient. The amendments in ASU 2018-11 are
effective for private companies and emerging growth public companies for fiscal years beginning after December 15, 2019, and interim
periods within those fiscal years. The Company is currently assessing the impact this guidance will have on its combined financial
statements.
BLACK RIDGE OIL & GAS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
In August 2018, the FASB issued ASU No.
2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value
Measurement
. The amendments in ASU 2018-13 modify the disclosure requirements associated with fair value measurements based
on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments on changes in unrealized
gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements,
and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual
period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods
presented upon their effective date. The amendments are effective for all entities for fiscal years beginning after December 15,
2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The
Company is currently evaluating ASU 2018-13 and its impact on its combined financial statements.
Note 3 – Going Concern
As shown in the accompanying financial
statements, as of December 31, 2018 the Company had a cash balance of $1,503,500 and total working capital of $898,097 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 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. 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 warrants issued to related parties fair value was estimated
to be $4,179 (see Note 15). The Company incurred $130,164 in costs associated with raising capital, which has been netted against
stockholders’ equity. Additionally as part of Backstop agreement, the Company issued 435,000 warrants to purchase its common
stock at $0.01 for participants in the Backstop Agreement. The warrants fair value was estimated to be $10,135 (see Note 15).
BLACK RIDGE OIL & GAS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
On October 10, 2017 and October 18, 2017,
in connection with the underwriter exercising its over-allotment option, the Company used $4,450,000 of the net proceeds of the
Rights Offering to fulfill its obligation as sponsor of a special purpose acquisition company, BRAC, as part of BRAC’s 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 intended to be 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 the sale
of 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 the 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.
BLACK RIDGE OIL & GAS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
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 $10.06 per Public Share. The common stock
subject to redemption will be recorded at a redemption value and classified a temporary equity upon the completion of the IPO,
in accordance with Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity”.
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.
Proposed Business Combination
On December 19, 2018,
BRAC entered into a business combination agreement (the “Business Combination Agreement”) with Allied Esports Entertainment,
Inc. (“Allied Esports”), Ourgame International Holdings Ltd. (“Ourgame”), Noble Link Global Limited, a
wholly-owned subsidiary of Ourgame (“Noble”), and Primo Vital Ltd., also a wholly-owned subsidiary of Ourgame (“Primo”),
pursuant to which BRAC will acquire two of Ourgame’s global esports and entertainment assets, Allied Esports and WPT Enterprises,
Inc. (“WPT”) . See Note 19.
BLACK RIDGE OIL & GAS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
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 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 loss for the year ended December 31, 2017 to
arrive at the net loss attributable to the Company and the non-controlling interest on the balance sheet was 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 $28,710 to BROG for such services during the year ended December
31, 2017. 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 upon redemption of the redeemable shares held by the BRAC IPO shareholders as a non-controlling interest as per 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 – 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.
BLACK RIDGE OIL & GAS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Note 7 – Prepaid Expenses
Prepaid expenses consist of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Prepaid insurance costs
|
|
$
|
28,751
|
|
|
$
|
24,999
|
|
Prepaid employee benefits
|
|
|
11,865
|
|
|
|
11,716
|
|
Prepaid office and other costs
|
|
|
13,319
|
|
|
|
32,102
|
|
Total prepaid expenses
|
|
$
|
53,935
|
|
|
$
|
68,817
|
|
Note 8 – Related Party
As described in Note
4, 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.
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 has recognized
no expense related to the plan as the grant of shares is contingent on a future event.
BRAC Loan
In order to finance transaction costs in
connection with an intended initial business combination, BROG, and its officers, directors or their affiliates may, but are not
obligated to, loan BRAC funds as may be required. If BRAC consummates an initial business combination, BRAC would repay such loaned
amounts. In the event that the initial business combination does not close, BRAC may use a portion of the working capital held
outside the trust account to repay such loaned amounts, but no proceeds from BRAC’s trust account would be used for such
repayment. Up to $1,500,000 of such loans may be convertible into units of the post business combination entity at a price of $10.00
per unit at the option of the lender. The units would be identical to the Placement Units.
BLACK RIDGE OIL & GAS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
As of December 31, 2018,
BROG has loaned BRAC, in the form of a convertible promissory note, an aggregate of $350,000 to cover expenses related to a proposed
business combination. This note, issued on December 10, 2018, is unsecured, non-interest bearing and is payable at the consummation
by BRAC of a merger, share exchange, asset acquisition, or other similar business combination, with one or more businesses or entities
(a “Business Combination”). Upon consummation of a Business Combination, the principal balance of the note may be converted,
at BROG’s option, to units at a price of $10.00 per unit. The terms of the units are identical to the units issued by BRAC
in its initial public offering, except the warrants included in such units will be non-redeemable and may be exercised on
a cashless basis, in each case so long as they continue to be held by BROG or its permitted transferees. If BROG converts the entire
principal balance of the convertible promissory note, it would receive 35,000 units. If a Business Combination is not consummated,
the note will not be repaid by BRAC and all amounts owed thereunder by BRAC will be forgiven except to the extent that BRAC has
funds available to it outside of its trust account established in connection with the initial public offering. The issuance of
the note was exempt pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.
Note 9 – Investment
in Black Ridge Holding Company, LLC
An investment in Black
Ridge Holding Company, LLC as of December 31, 2016 represented our equity interest in Black Ridge Holding Company, LLC (“BRHC”)
following a debt restructuring and related activity.
Dissolution of BRHC
The Company and the other
members of 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 other members 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 to $4,645 in value, were
distributed directly to the Company from BRHC. As a result of the transactions, eliminating the Company’s basis in its investment
in BRHC and deducting certain transaction related expenses, the Company recorded a gain of $1,030,145.
Note 10 – Property and Equipment
Property and equipment at December 31, 2018 and December 31,
2017, consisted of the following:
|
December 31,
|
|
December 31,
|
|
2018
|
|
2017
|
Property and equipment
|
$
|
128,156
|
|
$
|
128,156
|
Less: Accumulated depreciation and amortization
|
|
(126,931)
|
|
|
(117,459)
|
Total property and equipment, net
|
$
|
1,225
|
|
$
|
10,697
|
During the year ended December 31, 2017 we sold certain assets
with a book value of $6,874 for proceeds of $2,160, resulting in a loss on disposal of $4,714.
Depreciation of property and equipment was $9,472 and $10,848,
respectively, for the years ended December 31, 2018 and 2017.
Note 11 – Fair Value of Financial
Instruments
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.
BLACK RIDGE OIL & GAS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
The Company has cash and cash equivalents
and a revolving credit facility that must be measured under the 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 balances sheet as of December 31, 2018
and 2017:
|
|
Fair Value Measurements at December 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,503,500
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments held in trust
|
|
|
141,307,307
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Total assets
|
|
|
142,810,807
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
142,810,807
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
Fair Value Measurements at December 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,477,089
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Restricted cash and investments held in trust
|
|
|
138,980,353
|
|
|
|
–
|
|
|
|
–
|
|
Total assets
|
|
|
140,457,442
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
140,457,442
|
|
|
$
|
–
|
|
|
$
|
–
|
|
There were no transfers of financial assets
or liabilities between Level 1 and Level 2 inputs for the years ended December 31, 2018 and 2017.
Note 12 – Promissory Note
Promissory Note
On July 7, 2017 the Company entered into
a $500,000 Promissory Note (the Note) issued to Cadence Bank, N.A. (Cadence) and a Security Agreement by the Company in favor of
Cadence. The Note bore interest at 4.5% per annum payable monthly and was due on October 7, 2017. The Note was repaid in full on
September 14, 2017. The Note was secured by the Company’s deposit account at Cadence and all of the Company’s rights,
title and interests in and to the contractual rights of the Company to receive payment from Chambers Energy Management for the
purchase of the Company’s interest in Black Ridge Holding Company, LLC. The Company incurred and paid $4,313 in interest
on the Note and paid $4,400 in origination fees and other set up costs that are included in interest expense on the statement of
operations for the year ended December 31, 2017.
BLACK RIDGE OIL & GAS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Note 13 – 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.
During 2018, the Company issues 45,000
shares of common stock as a result of warrant exercises.
Note 14 – Options
No options were granted
during the years ended December 31, 2018 and 2017.
Options Cancelled
During the years ended December 31, 2018
and 2017, 61,800 and 87,700 options, respectively, were forfeited by a former employee.
Options Expired
During the years ended December 31, 2018,
and 2017, 12,000 and 12,000 options, respectively, with a strike price of $0.08 per share and $0.29 per share, respectively, expired.
Options Exercised
No options were exercised during the years
ended December 31, 2018 and 2017.
The following is a summary of information
about the Stock Options outstanding at December 31, 2018.
|
|
Shares Underlying
|
Shares Underlying Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Shares
|
|
Average
|
|
Weighted
|
|
Shares
|
|
Weighted
|
|
|
Underlying
|
|
Remaining
|
|
Average
|
|
Underlying
|
|
Average
|
Range of
|
|
Options
|
|
Contractual
|
|
Exercise
|
|
Options
|
|
Exercise
|
Exercise Prices
|
|
Outstanding
|
|
Life
|
|
Price
|
|
Exercisable
|
|
Price
|
$0.03 - $1.00
|
|
10,783,500
|
|
5.75 years
|
|
$0.29
|
|
8,989,067
|
|
$0.32
|
BLACK RIDGE OIL & GAS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
The following is a summary of activity
of outstanding stock options:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise
|
|
|
|
of Shares
|
|
|
Prices
|
|
Balance, December 31, 2016
|
|
|
10,957,000
|
|
|
|
0.29
|
|
Options expired
|
|
|
(12,000
|
)
|
|
|
(0.29
|
)
|
Options cancelled
|
|
|
(87,700
|
)
|
|
|
(0.17
|
)
|
Options granted
|
|
|
–
|
|
|
|
–
|
|
Options exercised
|
|
|
–
|
|
|
|
–
|
|
Balance, December 31, 2017
|
|
|
10,857,300
|
|
|
|
0.29
|
|
Options expired
|
|
|
(12,000
|
)
|
|
|
(0.08
|
)
|
Options cancelled
|
|
|
(61,800
|
)
|
|
|
(0.51
|
)
|
Options granted
|
|
|
–
|
|
|
|
–
|
|
Options exercised
|
|
|
–
|
|
|
|
–
|
|
Balance, December 31, 2018
|
|
|
10,783,500
|
|
|
|
0.29
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2018
|
|
|
8,989,067
|
|
|
$
|
0.32
|
|
The Company
expensed $310,731 and $574,851 from the amortization of common stock options during the years ended
December 31, 2018 and 2017, respectively.
Note 15 – Warrants
Warrants Granted
No warrants were granted during the year
ended December 31, 2018.
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.
Warrants Cancelled
No warrants were cancelled during the years
ended December 31, 2018 and 2017.
Warrants Expired
No warrants were expired during the years
ended December 31, 2018 and 2017.
Warrants Exercised
45,000 warrants were exercised during the
year ended December 31, 2018 for $.01 per share resulting in proceeds of $450.
No warrants were exercised during the year
ended December 31, 2017.
BLACK RIDGE OIL & GAS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
The following is a summary of activity
of outstanding warrants:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise
|
|
|
|
of Shares
|
|
|
Prices
|
|
Balance, December 31, 2016
|
|
|
–
|
|
|
$
|
–
|
|
Warrants expired
|
|
|
–
|
|
|
|
–
|
|
Warrants cancelled
|
|
|
–
|
|
|
|
–
|
|
Warrants granted
|
|
|
435,000
|
|
|
|
0.01
|
|
Warrants exercised
|
|
|
–
|
|
|
|
–
|
|
Balance, December 31, 2017
|
|
|
435,000
|
|
|
|
0.01
|
|
Warrants expired
|
|
|
–
|
|
|
|
–
|
|
Warrants cancelled
|
|
|
–
|
|
|
|
–
|
|
Warrants granted
|
|
|
–
|
|
|
|
–
|
|
Warrants exercised
|
|
|
(45,000
|
)
|
|
|
0.01
|
|
Balance, December 31, 2018
|
|
|
390,000
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2018
|
|
|
390,000
|
|
|
$
|
0.01
|
|
Note 16 - BRAC Rights
and Warrants
Initial Public Offering
Pursuant to the 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 its 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.
BLACK RIDGE OIL & GAS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
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.
|
BLACK RIDGE OIL & GAS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
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 17 – Income
Taxes
We account for income taxes under the provisions
of ASC Topic 740,
Income taxes,
which provides for an asset and liability approach for income taxes. Under this approach,
deferred tax assets and liabilities are recognized based on anticipated future tax consequences, using currently enacted tax laws,
attributable to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts calculated for income tax purposes.
The Company will not consolidate income
tax returns for Black Ridge Oil & Gas, Inc. and Black Ridge Acquisition Corp. For the years ended December 31, 2018 the impact
of both returns are combined in the presentation.
Our provision for income taxes for the
years ended December 31, 2018 and 2017 consisted of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current taxes
|
|
$
|
556,757
|
|
|
$
|
85,722
|
|
Deferred taxes
|
|
|
19,116
|
|
|
|
(18,678
|
)
|
Net income tax provision (benefit)
|
|
$
|
575,873
|
|
|
$
|
67,044
|
|
BLACK RIDGE OIL & GAS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
The effective income tax rate for the years
ended December 31, 2018 and 2017 consisted of the following:
|
|
December 31, 2018
|
|
|
|
BROG
|
|
|
BRAC
|
|
|
Combined
|
|
Federal statutory income tax rate
|
|
|
21.0%
|
|
|
|
21.0%
|
|
|
|
21.0%
|
|
State income taxes
|
|
|
7.7%
|
|
|
|
7.7%
|
|
|
|
7.7%
|
|
Permanent differences
|
|
|
0.1%
|
|
|
|
4.8%
|
|
|
|
3.9%
|
|
Change in valuation allowance
|
|
|
(28.8%
|
)
|
|
|
0.0%
|
|
|
|
(5.2%
|
)
|
Net effective income tax rate
|
|
|
0.0%
|
|
|
|
33.5%
|
|
|
|
27.4%
|
|
|
|
December 31, 2017
|
|
|
|
BROG
|
|
|
BRAC
|
|
|
Combined
|
|
Federal statutory income tax rate
|
|
|
35.0%
|
|
|
|
30.8%
|
|
|
|
39.6%
|
|
State income taxes
|
|
|
3.6%
|
|
|
|
6.8%
|
|
|
|
0.1%
|
|
Effect of current statutory rate change on deferred taxes
|
|
|
38.2%
|
|
|
|
0.0%
|
|
|
|
80.2%
|
|
Effect of 2018 federal rate change on deferred taxes
|
|
|
(1469.2%
|
)
|
|
|
4.0%
|
|
|
|
(3092.1%
|
)
|
Permanent differences
|
|
|
(0.3%
|
)
|
|
|
0.2%
|
|
|
|
(0.7%
|
)
|
Change in valuation allowance
|
|
|
1392.7%
|
|
|
|
0.0%
|
|
|
|
2926.8%
|
|
Net effective income tax rate
|
|
|
0.0%
|
|
|
|
41.8%
|
|
|
|
(46.1%
|
)
|
The 2018 and 2017 combined reconciliations
above are weighted averages of the two separate taxable entities as such we have presented the individual entity reconciliations.
When one entity has a loss and the other has income, the weighted average produces results that are skewed higher or lower than
the individual components. BROG's state income tax rate as of December 31, 2018 increased by 4.1% from 3.6% as of December 31,
2017, to 7.7%. This increase in the effective tax rate is attributable to changes in the federal rate. BRAC's state income tax
rate as of December 31, 2018 increased by 0.9% from 6.8% as of December 31, 2017, to 7.7%.
The components of the deferred tax assets
and liabilities as of December 31, 2018 and 2017 are as follows:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Federal and state net operating loss carryovers
|
|
$
|
7,402,252
|
|
|
$
|
6,712,288
|
|
Stock compensation
|
|
|
2,294,552
|
|
|
|
1,947,147
|
|
Property and equipment
|
|
|
459
|
|
|
|
501
|
|
Unrealized loss on marketable equity securities held in trust account
|
|
|
–
|
|
|
|
18,678
|
|
Reorganization costs
|
|
|
38,508
|
|
|
|
34,001
|
|
Total deferred tax assets
|
|
$
|
9,735,771
|
|
|
$
|
8,712,615
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable equity securities held in trust account
|
|
|
(438
|
)
|
|
|
–
|
|
Total deferred liabilities
|
|
|
(438
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
|
9,735,333
|
|
|
|
8,712,615
|
|
Less: valuation allowance
|
|
|
(9,735,771
|
)
|
|
|
(8,693,937
|
)
|
Deferred tax assets (liabilities)
|
|
$
|
(438
|
)
|
|
$
|
18,678
|
|
BLACK RIDGE OIL & GAS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
As of December 31, 2018,
the Company has net operating loss carryover of approximately $25,754,131. Under existing Federal law, the net operating loss
may be utilized to offset taxable income through the year ended December 31, 2035. A portion of the net operating
loss carryover begins to expire in 2030.
ASC Topic 740 provides that a valuation
allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the
deferred tax asset will not be realized. In 2018, BROG increased its valuation allowance from $8,693,937 to $9,735,771 to adjust
for the increase in net deferred tax assets primarily increased federal operating loss carryovers. The Company believes it is more
likely than not that the benefit of these remaining assets will not be realized by BROG. The company did not place a valuation
allowance on deferred tax asset for BRAC related to the capitalized merger and acquisition costs. The Company believes it is more
likely than not that the benefit of these remaining assets will be realized by BRAC.
The Company files annual
US Federal income tax returns and annual income tax returns for the states of Minnesota, North Dakota and Montana. We are not subject
to income tax examinations by tax authorities for years before 2013 for all returns. Income taxing authorities have conducted no
formal examinations of our past federal or state income tax returns and supporting records.
The Company adopted the
provisions of ASC Topic 740 regarding uncertainty in income taxes. The Company has found no significant uncertain tax positions
as of any date on or before December 31, 2018.
Note 18 – Commitments
and Contingencies
The Company is involved in various inquiries,
administrative proceedings and litigation relating to matters arising in the normal course of business. The Company 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.
Management is not able to estimate the minimum loss to be incurred, if any, as a result of the final outcome of the matters arising
in the normal course of business but believes they are not likely to have a material adverse effect upon the Company’s financial
position or results of operations and, accordingly, no provision for loss has been recorded.
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.
BLACK RIDGE OIL & GAS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Note 19 – BRAC’s Proposed
Business Combination
Business Combination Agreement
On December 19, 2018, BRAC entered into an Agreement and Plan
of Reorganization (the “Agreement”) by and among BRAC, Black Ridge Merger Sub, Corp., a Delaware corporation and wholly-owned
subsidiary of BRAC formed on December 19, 2018 (“Merger Sub”), Allied Esports Entertainment, Inc. (the “Allied
Esports”), Ourgame International Holdings Ltd. (“Ourgame”), Noble Link Global Limited, a wholly-owned subsidiary
of Ourgame (“Noble”), and Primo Vital Ltd., also a wholly-owned subsidiary of Ourgame (“Primo”).
Subject to the Agreement, (i) Noble will merge with and into
Allied Esports (the “Redomestication Merger”) with Allied Esports being the surviving entity in such merger and (ii)
immediately after the Redomestication Merger, Merger Sub will merge with and into Allied Esports with Allied Esports being the
surviving entity of such merger (the “Transaction Merger” and together with the Redomestication Merger, the “Mergers”).
The Mergers will result in BRAC acquiring two of Ourgame’s
global esports and entertainment assets, Allied Esports International, Inc. (“Allied Esports”) and WPT Enterprises,
Inc. (“WPT”). Allied Esports is a premier esports entertainment company with a global network of dedicated esports
properties and content production facilities. WPT is the creator of the World Poker Tour® (WPT®) – the premier name
in internationally televised gaming and entertainment with brand presence in land-based tournaments, television, online and mobile.
The proposed transaction will seek to strategically combine the globally recognized Allied Esports brand with the three-pronged
business model of the iconic World Poker Tour, featuring in-person experiences, multiplatform content and interactive services,
to leverage the high-growth opportunities in the global esports industry.
Upon consummation of the Mergers (the “Closing”),
BRAC will issue to the former owners of Allied Esports and WPT (i) an aggregate of 11,602,754 shares of common stock, par value
$0.0001 per share, of BRAC’s common stock and (ii) an aggregate of 3,800,003 warrants to purchase shares of common stock
of BRAC.
In addition to the consideration described above, the former
owners of Allied Esports and WPT will be entitled to receive their pro rata portion of an aggregate of an additional 3,846,153
shares of BRAC’s common stock if the last sales price of BRAC’s common stock equals or exceeds $13.00 per share (as
adjusted for stock splits, stock dividends, reorganizations and recapitalizations) for thirty (30) consecutive days at any time
during the five (5) year period commencing on the date of the Closing (the “Closing Date”).
Proposed Changes to the Capital Structure
BRAC is seeking shareholder approval to
amend its charter to increase the authorized shares of BRAC’s common stock to 65,000,000 shares.
Conditions to Consummation of the Business
Combination
Consummation of the transactions contemplated by the Agreement
is subject to certain closing conditions including, among others, (i) approval by the stockholders of BRAC and Ourgame, and (ii)
that BRAC have available cash in an amount not less than $80,000,000 after payment to stockholders who elect to redeem their shares
of common stock in accordance with the provisions of BRAC’s Charter Documents.
Termination
The Agreement may be
terminated at any time prior to the consummation of the Agreement (whether before or after the Company’s shareholder vote
has been obtained) by mutual written consent of the Company and Ourgame, Noble and the Acquired Company and in certain other limited
circumstances, including if the Proposed Business Combination has not been consummated by July, 10, 2019.
BLACK RIDGE OIL & GAS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Note 20 – Subsequent
Events
The Company evaluates events that have
occurred after the balance sheet date through the date hereof, which these financial statements were issued. No events occurred
of a material nature that would have required adjustments to or disclosure in these financial statements except as follows:
On February 20, 2019, BRAC issued a $100,000 convertible
promissory note to the BROG. After issuing the promissory note, the total amount of convertible promissory notes issued to BROG
is $450,000. The loan is unsecured, non-interest bearing and is payable at the consummation of a Business Combination. Upon consummation
of a Business Combination, the principal balance of the note may be converted, at the Sponsor’s option, to units at a price
of $10.00 per unit. The terms of the units will be identical to the units issued by BRAC in its initial public offering, except
the warrants included in such units will be non-redeemable and may be exercised on a cashless basis, in each case so long as they
continue to be held by BROG or its permitted transferees. If BROG converts the entire principal balance of the convertible promissory
note, it would receive an additional 10,000 units. If a Business Combination is not consummated, the note will not be repaid by
BRAC and all amounts owed thereunder by BRAC will be forgiven except to the extent that BRAC has funds available to it outside
of its trust account established in connection with the initial public offering. The issuance of the note was exempt pursuant to
Section 4(a)(2) of the Securities Act of 1933, as amended.