Item 1. Financial Statements.
September 30, 2017
C O N T E N T S
PART I - Financial Information
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Item 1. Financial Statements (Unaudited)
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Page
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Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016
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3
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Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016
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4
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Consolidated Statements of Changes in Stockholder's Deficit
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5
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Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016
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6
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Notes to Consolidated Financial Statements
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7
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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16
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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16
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Item 4. Controls and Procedures
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24
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PART II - Other Information
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Item 1. Legal Proceedings
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25
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Item 1A. Risk Factors
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25
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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25
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Item 3. Defaults upon Senior Securities
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26
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Item 4. Mine Safety Disclosures
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26
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Item 5. Other Information
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26
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Item 6. Exhibits
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26
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Signatures
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27
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BLACKRIDGE TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
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September 30,
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December 31,
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2017
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2016
|
|
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ASSETS
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|
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Current Assets
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|
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Cash
|
|
$
|
2,228,448
|
|
|
$
|
57,033
|
|
Inventory
|
|
|
26,068
|
|
|
|
-
|
|
Prepaid expenses
|
|
|
296,488
|
|
|
|
100,954
|
|
Total Current Assets
|
|
|
2,551,004
|
|
|
|
157,987
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|
|
|
|
|
|
|
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Intangible assets, net
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6,700,071
|
|
|
|
5,923,543
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Total Assets
|
|
$
|
9,251,075
|
|
|
$
|
6,081,530
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|
|
|
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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Current Liabilities
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|
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|
|
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Accounts payable and accrued expenses
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|
$
|
2,289,765
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|
|
$
|
2,038,273
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|
Accounts payable and accrued expenses – related party
|
|
|
384,667
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|
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|
709,725
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Accrued interest
|
|
|
53,923
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|
|
|
52,888
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|
Accrued interest – related party
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|
|
1,751,703
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|
|
|
1,241,911
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|
Advances – related party
|
|
|
225,000
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|
|
|
110,000
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|
Wages payable
|
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|
2,154,223
|
|
|
|
10,696,311
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|
Deferred revenue
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|
|
10,791
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|
|
|
19,988
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|
Short-term notes payable
|
|
|
50,232
|
|
|
|
89,221
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|
Current portion of long term debt
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|
|
400,000
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|
|
|
400,000
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|
Convertible notes, short term – related party
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|
|
284,172
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|
|
|
284,172
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|
Short term portion of convertible notes, long term – related party
|
|
|
3,712,638
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|
|
|
-
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|
Total Current Liabilities
|
|
|
11,317,114
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15,642,489
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Noncurrent Liabilities
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|
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Contingent liability
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37,500
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37,500
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Notes payable
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|
466,658
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|
800,000
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|
Convertible notes payable, long term – related party
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|
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-
|
|
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3,712,638
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Total Liabilities
|
|
|
11,821,272
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20,192,627
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Stockholders' Deficit
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Preferred Stock, Par Value $0.001, 5,000,000 shares authorized; 3,695,160 and 3,671,316 issued and outstanding as September 30, 2017 and December 31, 2016, respectively
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3,695
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3,671
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Common Stock, Par Value $0.001, 100,000,000 shares authorized; 64,268,227 and 13,325,681 issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
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64,268
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|
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|
13,326
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|
Additional paid-in capital
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|
43,097,722
|
|
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|
20,287,638
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Accumulated deficit
|
|
|
(45,735,882
|
)
|
|
|
(34,550,732
|
)
|
Subscription payable
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|
|
-
|
|
|
|
135,000
|
|
Total Stockholders' Deficit
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|
|
(2,570,197
|
)
|
|
|
(14,111,097
|
)
|
Total Liabilities and Stockholders' Deficit
|
|
$
|
9,251,075
|
|
|
$
|
6,081,530
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|
See accompanying notes to the unaudited consolidated financial statements.
BLACKRIDGE TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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For the Three Months Ended
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For the Nine Months Ended
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September 30,
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September 30,
|
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September 30,
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September 30,
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2017
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2016
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2017
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2016
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Revenues
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$
|
4,304
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|
|
$
|
26,550
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|
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$
|
42,006
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$
|
84,128
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Cost of Goods Sold
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|
-
|
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|
|
-
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|
258
|
|
|
|
-
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|
Gross Profit
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|
4,304
|
|
|
|
26,550
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|
|
41,748
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84,128
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|
|
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|
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Operating Expenses:
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Engineering
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|
122,932
|
|
|
|
23,676
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|
189,055
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|
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|
47,652
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Sales and marketing
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|
|
(20,412
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)
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|
|
-
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|
|
|
21,715
|
|
|
|
25,740
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|
General and administrative
|
|
|
4,883,037
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|
|
|
1,360,088
|
|
|
|
9,939,334
|
|
|
|
3,548,137
|
|
Total operating expenses
|
|
|
4,985,557
|
|
|
|
1,383,764
|
|
|
|
10,150,104
|
|
|
|
3,621,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations
|
|
|
(4,981,253
|
)
|
|
|
(1,357,214
|
)
|
|
|
(10,108,356
|
)
|
|
|
(3,537,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Interest income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
205
|
|
Interest expense
|
|
|
(730
|
)
|
|
|
(466,465
|
)
|
|
|
(73,338
|
)
|
|
|
(1,362,759
|
)
|
Interest expense – related party
|
|
|
(175,301
|
)
|
|
|
(168,933
|
)
|
|
|
(509,792
|
)
|
|
|
(489,966
|
)
|
Total other income (expense)
|
|
|
(176,031
|
)
|
|
|
(635,398
|
)
|
|
|
(583,130
|
)
|
|
|
(1,852,520
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Before Income Taxes
|
|
|
(5,157,284
|
)
|
|
|
(1,992,612
|
)
|
|
|
(10,691,486
|
)
|
|
|
(5,389,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss From Continuing Operations
|
|
|
(5,157,284
|
)
|
|
|
(1,992,612
|
)
|
|
|
(10,691,486
|
)
|
|
|
(5,389,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(484,927
|
)
|
|
|
-
|
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,737
|
)
|
|
|
-
|
|
Loss on discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(493,664
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(5,157,284
|
)
|
|
$
|
(1,992,612
|
)
|
|
$
|
(11,185,150
|
)
|
|
$
|
(5,389,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss From Continuing Operations per Common Share - Basic and Diluted
|
|
$
|
(0.13
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(0.40
|
)
|
Loss From Discontinued Operations per Common Share - Basic and Diluted
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(0.02
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding - Basic and Diluted
|
|
|
39,848,910
|
|
|
|
13,325,681
|
|
|
|
29,724,102
|
|
|
|
13,325,681
|
|
See accompanying notes to the unaudited consolidated financial statements.
BLACKRIDGE TECHNOLOGY INTERNATIONAL, INC
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
|
|
Shares
Outstanding - Preferred
|
|
|
Preferred
Stock
|
|
|
Shares
Outstanding - Common
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Subscriptions
Payable
|
|
|
Accumulated
Deficit
|
|
|
Total
Stockholders'
Deficit
|
|
Balance as of December 31, 2015
|
|
|
9,804
|
|
|
$
|
10
|
|
|
|
13,325,681
|
|
|
$
|
13,326
|
|
|
$
|
3,110,821
|
|
|
$
|
-
|
|
|
$
|
(27,334,912
|
)
|
|
$
|
(24,210,755
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of preferred stock
|
|
|
608,922
|
|
|
|
609
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,130,395
|
|
|
|
135,000
|
|
|
|
-
|
|
|
|
3,266,004
|
|
Note conversions
|
|
|
3,052,590
|
|
|
|
3,052
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,046,422
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,049,474
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,215,820
|
)
|
|
|
(7,215,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
|
3,671,316
|
|
|
|
3,671
|
|
|
|
13,325,681
|
|
|
|
13,326
|
|
|
|
20,287,638
|
|
|
|
135,000
|
|
|
|
(34,550,732
|
)
|
|
|
(14,111,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common share conversion
|
|
|
50,000
|
|
|
|
50
|
|
|
|
(500,000
|
)
|
|
|
(500
|
)
|
|
|
450
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Preferred share conversion
|
|
|
(88,658
|
)
|
|
|
(89
|
)
|
|
|
886,580
|
|
|
|
887
|
|
|
|
(798
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of preferred stock
|
|
|
62,502
|
|
|
|
63
|
|
|
|
-
|
|
|
|
-
|
|
|
|
374,937
|
|
|
|
(100,000
|
)
|
|
|
-
|
|
|
|
275,000
|
|
Issuance of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
18,064,121
|
|
|
|
18,063
|
|
|
|
8,409,388
|
|
|
|
(35,000
|
)
|
|
|
-
|
|
|
|
8,392,451
|
|
Issuance of restricted common stock in settlement of wages payable
|
|
|
-
|
|
|
|
-
|
|
|
|
22,064,105
|
|
|
|
22,064
|
|
|
|
13,216,389
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,238,453
|
|
Issuance of stock in conjunction with contracts
|
|
|
-
|
|
|
|
-
|
|
|
|
462,740
|
|
|
|
463
|
|
|
|
230,907
|
|
|
|
-
|
|
|
|
-
|
|
|
|
231,370
|
|
Issuance of stock for warrant exercise
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000,000
|
|
|
|
1,000
|
|
|
|
9,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000
|
|
Business acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
8,965,000
|
|
|
|
8,965
|
|
|
|
485,551
|
|
|
|
-
|
|
|
|
-
|
|
|
|
494,516
|
|
Issuance of warrants in conjunction with debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,002
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,002
|
|
Issuance of warrants in conjunction with advances
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,945
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,945
|
|
Share based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,313
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,313
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,185,150
|
)
|
|
|
(11,185,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2017
|
|
|
3,695,160
|
|
|
$
|
3,695
|
|
|
|
64,268,227
|
|
|
$
|
64,268
|
|
|
$
|
43,097,722
|
|
|
$
|
-
|
|
|
$
|
(45,735,882
|
)
|
|
$
|
(2,570,197
|
)
|
See accompanying notes to unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,185,150
|
)
|
|
$
|
(5,389,921
|
)
|
Net loss from discontinued operations
|
|
|
493,664
|
|
|
|
-
|
|
Net loss from continuing operations
|
|
|
(10,691,486
|
)
|
|
|
(5,389,921
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
327,869
|
|
|
|
227,883
|
|
Amortization of debt discounts
|
|
|
31,002
|
|
|
|
10,424
|
|
Common stock issued in conjunction with contracts
|
|
|
231,370
|
|
|
|
-
|
|
Warrants issued in conjunction with advances
|
|
|
27,945
|
|
|
|
-
|
|
Share based compensation
|
|
|
25,313
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
-
|
|
|
|
20,450
|
|
Inventory
|
|
|
(26,068
|
)
|
|
|
-
|
|
Prepaid expenses
|
|
|
(195,534
|
)
|
|
|
89,937
|
|
Accounts payable and accrued expenses
|
|
|
251,492
|
|
|
|
610,592
|
|
Accounts payable and accrued expenses – related party
|
|
|
(325,058
|
)
|
|
|
115,740
|
|
Accrued interest
|
|
|
1,035
|
|
|
|
1,352,335
|
|
Accrued interest – related party
|
|
|
509,792
|
|
|
|
489,966
|
|
Deferred revenue
|
|
|
(9,197
|
)
|
|
|
(4,237
|
)
|
Wages payable
|
|
|
4,527,900
|
|
|
|
921,425
|
|
Net Cash Used in Operating Activities, Continuing Operations
|
|
|
(5,313,625
|
)
|
|
|
(1,555,406
|
)
|
Net Cash Provided by Operating Activities, Discontinued Operations
|
|
|
45,028
|
|
|
|
-
|
|
Net Cash Used in Operating Activities
|
|
|
(5,268,597
|
)
|
|
|
(1,555,406
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Proceeds from business acquisition
|
|
|
10,559
|
|
|
|
-
|
|
Purchases of intangible assets
|
|
|
(935,932
|
)
|
|
|
(408,172
|
)
|
Net Cash Used in Investing Activities, Continuing Operations
|
|
|
(925,373
|
)
|
|
|
(408,172
|
)
|
Net Cash Used in Investing Activities, Discontinued Operations
|
|
|
-
|
|
|
|
-
|
|
Net Cash Used in Investing Activities
|
|
|
(925,373
|
)
|
|
|
(408,172
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
8,392,451
|
|
|
|
-
|
|
Proceeds from sale of preferred stock
|
|
|
275,000
|
|
|
|
1,152,000
|
|
Proceeds from warrant exercise
|
|
|
10,000
|
|
|
|
-
|
|
Proceeds from subscriptions payable
|
|
|
-
|
|
|
|
1,185,000
|
|
Proceeds from issuance of short term convertible notes
|
|
|
100,000
|
|
|
|
-
|
|
Proceeds from advances – related party
|
|
|
115,000
|
|
|
|
-
|
|
Repayments of short term notes
|
|
|
(38,989
|
)
|
|
|
-
|
|
Repayments of short term convertible notes
|
|
|
(100,000
|
)
|
|
|
-
|
|
Repayments on long term debt
|
|
|
(333,342
|
)
|
|
|
-
|
|
Net Cash Provided by Financing Activities, Continuing Operations
|
|
|
8,420,120
|
|
|
|
2,337,000
|
|
Net Cash Used in Financing Activities, Discontinued Operations
|
|
|
(54,735
|
)
|
|
|
-
|
|
Net Cash Provided by Financing Activities
|
|
|
8,365,385
|
|
|
|
2,337,000
|
|
|
|
|
|
|
|
|
|
|
Net Increase In Cash
|
|
|
2,171,415
|
|
|
|
373,422
|
|
Cash, Beginning of Period
|
|
|
57,033
|
|
|
|
3,020
|
|
Cash, End of Period
|
|
$
|
2,228,448
|
|
|
$
|
376,442
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
Wages payable included in capitalized intangible assets
|
|
$
|
168,465
|
|
|
$
|
764,362
|
|
Wages payable settled with common stock
|
|
$
|
13,238,453
|
|
|
|
-
|
|
Common stock converted to preferred stock
|
|
$
|
500
|
|
|
$
|
-
|
|
|
|
$
|
483,957
|
|
|
$
|
-
|
|
Warrants issued in conjunction with debt agreements
|
|
$
|
31,002
|
|
|
$
|
-
|
|
Warrants issued and expensed in conjunction with advances
|
|
$
|
27,945
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
15,502
|
|
|
$
|
-
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
See accompanying notes to the unaudited consolidated financial statements.
BLACKRIDGE TECHNOLOGY INTERNATIONAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
–
BlackRidge Technology International, Inc. (the "Company") was incorporated under the laws of the State of Nevada on March 15, 2004 under the name "
Grote Molen, Inc."
The Company sells identity based network security to protect hybrid cloud and mainframe workloads from cyber-attacks and insider threats.
On September 6, 2016, the Company entered into an agreement and plan of reorganization with BlackRidge Technology International, Inc., a Delaware corporation, and Grote Merger Co., a Delaware corporation providing for the Company's acquisition of BlackRidge in exchange for a controlling number of shares of the Company's preferred and common stock pursuant to the merger of Grote Merger Co. with and into BlackRidge, with BlackRidge continuing as the surviving corporation. The transaction contemplated in the agreement closed on February 22, 2017.
On July 2, 2017, the Company filed a Certificate to Accompany Restated Articles or Amended and Restated Articles with the Secretary of State of Nevada to, among other things, change the Company's name to BlackRidge Technology International, Inc.
On September 22, 2017, the Company formed a new business subsidiary called BlackRidge Secure Blockchain to pursue new market opportunities for securing blockchain applications.
Principles of Consolidation
- The Company and its subsidiaries consist of the following entities, which have been consolidated in the accompanying financial statements:
BlackRidge Technology International, Inc.
BlackRidge Technology Holding, Inc.
BlackRidge Technology, Inc.
BlackRidge Technology Government, Inc.
BlackRidge Secure Blockchain, Inc
All intercompany balances have been eliminated in consolidation.
Basis of Presentation
– The accompanying consolidated financial statements as of September 30, 2017 and for the three and nine months ended September 30, 2017 and 2016 are unaudited. In the opinion of management, all adjustments have been made, consisting of normal recurring items, that are necessary to present fairly the consolidated financial position as of September 30, 2017 as well as the consolidated results of operations and cash flows for the nine months ended September 30, 2017 and 2016 in accordance with U.S. generally accepted accounting principles. The results of operations for any interim period are not necessarily indicative of the results expected for the full year. The interim consolidated financial statements and related notes thereto should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended December 31, 2016.
Interim Financial Statements
– The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, the financial statements include all adjustments (consisting of normal recurring accruals) necessary in order to make the financial statements not misleading. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the final results that may be expected for the year ended December 31, 2017. For more complete financial information, these unaudited financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2016 filed with the SEC.
Use of Estimates
-
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimated by management.
Concentrations -
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The cash balance at times may exceed federally insured limits. Management believes the financial risk associated with these balances is minimal and has not experienced any losses to date. At September 30, 2017, the Company had cash balances in excess of FDIC insured limits of $1,952,254. At December 31, 2016, the Company did not have any cash balances in excess of FDIC insured limits.
Significant customers are those which represent more than 10% of the Company's revenue for each period presented, or the Company's accounts receivable balance as of each respective balance sheet date. For each significant customer, revenue as a percentage of total revenue and accounts receivable as a percentage of total net accounts receivable are as follows:
|
Revenue
|
|
Accounts Receivable
|
|
|
Nine Months Ended
September 30,
|
|
September 30,
|
|
Customers
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Customer A
|
|
|
74
|
%
|
|
|
37
|
%
|
|
|
-
|
|
|
|
-
|
|
Customer B
|
|
|
18
|
%
|
|
|
63
|
%
|
|
|
-
|
|
|
|
-
|
|
|
Revenue
|
|
|
Three Months Ended
September 30,
|
|
Customers
|
2017
|
|
2016
|
|
Customer A
|
|
|
38
|
%
|
|
|
100
|
%
|
Customer B
|
|
|
59
|
%
|
|
|
0
|
%
|
Inventory
- Inventory is valued at the lower of cost or market value. Product-related inventories are primarily maintained using the average cost method. When market value is determined to be less than cost, the Company records an allowance for obsolescence. The company's inventory assets at September 30, 2017 and December 31, 2016 consisted primarily of hardware appliances valued as follows:
|
|
As of
September 30,
2017
|
|
|
As of
December 31,
2016
|
|
Inventory
|
|
$
|
361,723
|
|
|
$
|
335,655
|
|
Less: allowance for obsolescence
|
|
|
(335,655
|
)
|
|
|
(335,655
|
)
|
|
|
$
|
26,068
|
|
|
$
|
-
|
|
Earnings (Loss) Per Share
– The basic computation of loss per share is based on the weighted average number of shares outstanding during the period presented in accordance with ASC 260, "Earnings Per Share". The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the period plus the common stock equivalents which would arise from the exercise of stock options and warrants outstanding using the treasury stock method and the average market price per share during the period. Common stock equivalents are not included in the diluted earnings per share calculation when their effect is antidilutive.
Reclassification
– Certain December 31, 2016
amounts disclosed in prior periods have been reclassified to conform to the current period presentation. Such reclassifications are for presentation purposes only and have no effect on the Company's net loss or financial position in any of the periods presented
Share-Based Payments and Stock-Based Compensation
– Share-based compensation awards, including stock options and restricted stock awards, are recorded at estimated fair value on the applicable award's grant date, based on estimated number of awards that are expected to vest. The grant date fair value is amortized on a straight-line basis over the time in which the awards are expected to vest, or immediately if no vesting is required. Share-based compensation awards issued to non-employees for services are recorded at either the fair value of the services rendered or the fair value of the share-based payments whichever is more readily determinable. The fair value of restricted stock awards is based on the fair value of the stock underlying the awards on the grant date as there is no exercise price.
Recently Enacted Accounting Standards
- From time to time, new accounting pronouncements are issued by 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 February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which supersedes Topic 840,
Leases
("ASU 2016-02"). The guidance in this new standard requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to the current accounting and eliminates the current real estate-specific provisions for all entities. The guidance also modifies the classification criteria and the accounting for sales-type and direct financing leases for lessors. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-02.
In May 2014, in addition to several amendments issued during 2016, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." This pronouncement updated the accounting guidance related to revenue from contracts with customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle is that a company should recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The standard defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required
within the revenue recognition process than are required under existing U.S. GAAP. In accordance with allowed private company guidelines, these updates are effective for the Company for its annual period beginning January 1, 2019, and interim periods within annual periods beginning January 1, 2020, with early adoption permitted. It shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact (if any) this new standard will have on our accounting policies and processes as well as our financial statements.
NOTE 2 –GOING CONCERN
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, during the nine months ended September 30, 2017 the Company incurred a net loss of $11,185,150 and inception to date losses are equal to $45,735,882. These factors raise substantial doubt about the ability of the Company to continue as a going concern. In this regard, management is proposing to raise any necessary additional funds not provided by operations through investment capital. There is no assurance that the Company will be successful in raising this additional capital or in achieving profitable operations. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
NOTE 3 – INTANGIBLE ASSETS
In accordance with ASC 350-40, ASC 350-50, and ASC 985-20, during the nine months ended September 30, 2017 and 2016, the Company capitalized $1,104,397 and $789,457, respectively, towards the development of software, intellectual property, and patent expenses.
The Company amortizes these costs over their related useful lives (approximately 7 to 20 years), using a straight-line basis. Fair value is determined through various valuation techniques, including market and income approaches as considered necessary. The Company recorded amortization of $327,869 and $227,883 related to intangible assets during the nine months ended September 30, 2017 and 2016, respectively.
NOTE 4 – NOTES PAYABLE
Short term notes
At September 30, 2017 and December 31, 2016, the Company had outstanding short-term debt totaling $50,232 and $89,221, respectively. These notes bear interest at the rates of between 10% and 12% annually and have maturity dates ranging from January 1, 2012 through December 31, 2014. As some of these notes have exceeded their initial maturity dates, they are subject to the default interest rate of 18% per annum.
The following table summarizes the Company's short-term notes payable for the nine months ended September 30, 2017 and the year ended December 31, 2016:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Beginning Balance
|
|
$
|
89,221
|
|
|
$
|
89,221
|
|
Notes acquired in business acquisition
|
|
|
208,811
|
|
|
|
-
|
|
Repayments – continuing operations
|
|
|
(38,989
|
)
|
|
|
-
|
|
Repayments – discontinued operations
|
|
|
(53,132
|
)
|
|
|
-
|
|
Notes divested in disposal of discontinued operations
|
|
|
(155,679
|
)
|
|
|
-
|
|
Ending Balance
|
|
$
|
50,232
|
|
|
$
|
89,221
|
|
Long term notes
On November 2, 2016 the Company entered into settlement agreements with two holders of convertible debt and other payables in which the Company agreed to issue new long-term debt agreements as settlement of amounts due. Pursuant to these agreements, the Company issued two non-interest bearing $600,000 notes payable in 36 equal installments of 16,667 beginning on January 1, 2017 and Maturing on December 1, 2019.
The following table summarizes the Company's long-term notes payable for the nine months ended September 30, 2017 and the year ended December 31, 2016:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Beginning Balance
|
|
$
|
1,200,000
|
|
|
$
|
-
|
|
Notes acquired in business acquisition
|
|
|
136,830
|
|
|
|
1,200,000
|
|
Repayments – continuing operations
|
|
|
(333,342
|
)
|
|
|
-
|
|
Repayments – discontinued operations
|
|
|
(1,603
|
)
|
|
|
-
|
|
Notes divested in disposal of discontinued operations
|
|
|
(135,227
|
)
|
|
|
-
|
|
Ending Balance
|
|
$
|
866,658
|
|
|
$
|
1,200,000
|
|
Short Term Portion of Long Term Debt
|
|
$
|
400,000
|
|
|
$
|
400,000
|
|
Long Term Debt
|
|
$
|
466,658
|
|
|
$
|
800,000
|
|
NOTE 5 – CONVERTIBLE NOTES
Short term convertible notes
On February 2, 2017, the Company issued a $100,000 convertible note bearing interest at 10% per annum. The note matures on March 31, 2018 and is convertible at a price of $0.66 per share at the holder's request. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 166,667 shares of the company's common stock at an exercise price of $0.60 per share. The warrants were valued at $31,002 using the Black-Scholes pricing model and were recorded as a discount to the debt agreement. The note was repaid in full on April 4, 2017 along with $1,785 in accrued interest.
Short term convertible notes – related party
On October 31, 2013, the Company agreed to convert balances owed to the Company's Corporate Council (as defined below) in the amount of $183,172 into a 42 month convertible note bearing interest at 12% annually and convertible into 203,525 shares of convertible preferred stock at the rate of $0.90 per share. At September 30, 2017 and December 31, 2016, the principal balance was still outstanding, and the Company had accrued interest for this note in the amount of $122,506 and $84,172, respectively, which is included in accrued interest – related party on the Company's consolidated balance sheets. The note carries a default rate of 18% for any principal not paid by the maturity date.
On November 30, 2015, the Company's Chief Technology Officer and significant shareholder invested $101,000 via a one year convertible note bearing interest at 12% annually and convertible into 112,223 shares of convertible preferred stock at the rate of $0.90 per share. At September 30, 2017 and December 31, 2016, the Company has accrued interest for this note in the amount of $30,430 and $13,947, respectively, which is included in accrued interest – related party on the Company's consolidated balance sheets. The note carries a default rate of 18% for any principal not paid by the maturity date.
Long term convertible notes – related party
During 2011 to 2014, the Company's Chief Technology Officer and significant shareholder of the Company loaned a total of $2,673,200 to the Company. On October 1, 2014, all prior notes including accrued interest were combined into a single $3,712,637 convertible note bearing interest at 12% annually and convertible into 4,125,154 shares of preferred stock at the rate of $0.90 per share. At September 30, 2017 and December 31, 2016, the Company had accrued interest for this note in the amount of $1,598,767 and $1,143,791, respectively, which is included in accrued interest – related party on the Company's consolidated balance sheets. The note, as amended, matures on November 15, 2017 if the officer elects not to convert. The note carries a default rate of 18% for any principal not paid by the maturity date.
Convertible debt holders are entitled, at their option, to convert all or part of the principal and accrued interest into shares of the Company's common stock at the conversion prices and terms discussed above. The Company has determined that any embedded conversion options do not possess a beneficial conversion feature, and therefore has not separately accounted for their value.
The following table summarizes the Company's convertible notes payable for the nine months ended September 30, 2017 and the year ended December 31, 2016:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Beginning Balance
|
|
$
|
3,996,810
|
|
|
$
|
13,815,094
|
|
Proceeds from issuance of convertible notes, net of issuance discounts
|
|
|
68,998
|
|
|
|
-
|
|
Repayments
|
|
|
(100,000
|
)
|
|
|
-
|
|
Conversion of notes payable into preferred stock
|
|
|
-
|
|
|
|
(9,452,000
|
)
|
Conversion of related party notes payable into preferred stock
|
|
|
-
|
|
|
|
(230,763
|
)
|
Settlement agreements
|
|
|
-
|
|
|
|
(145,945
|
)
|
Amortization of discounts
|
|
|
31,002
|
|
|
|
10,424
|
|
Ending Balance
|
|
$
|
3,996,810
|
|
|
$
|
3,996,810
|
|
Convertible notes, short term, net of issuance discounts
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible notes, short term – related party
|
|
$
|
284,172
|
|
|
$
|
284,172
|
|
Short term portion of convertible notes, long term – related party
|
|
$
|
3,712,638
|
|
|
$
|
-
|
|
convertible notes, long term – related party
|
|
$
|
-
|
|
|
$
|
3,712,638
|
|
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases approximately 6,818 square feet of office space under a 64 month operating lease which expires during April 2020. The amounts reflected in the table below are for the aggregate future minimum lease payments under the non-cancelable facility operating leases. Under lease agreements that contain escalating rent provisions, lease expense is recorded on a straight-line basis over the lease term.
The Company also leases approximately 202 square feet of office space under a 12 month operating lease which originally expired in 2016. The lease was renewed and is renewable at the Company's option annually at a flat monthly amount of $400. The amounts reflected in the table below are for the aggregate future minimum lease payments under the non-cancelable facility operating leases.
Rent expense was $136,134 and $175,164 for the nine months ended September 30, 2017 and 2016, respectively.
As of September 30, 2017, future minimum lease payments are as follows:
Year Ending December 31,
|
|
|
|
2017 (three months)
|
|
$
|
44,562
|
|
2018
|
|
|
179,950
|
|
2019
|
|
|
183,609
|
|
2020
|
|
|
78,612
|
|
Total minimum lease payments
|
|
$
|
486,733
|
|
On August 1, 2017, the Company entered into a 36 month lease of computer equipment. The lease carries a monthly payment of $2,871 with the option to purchase the equipment at its fair market value at the end of the lease.
Restricted Stock Commitments
The Company has committed to settling a significant portion of its current accounts payable balances through the future issuance of restricted stock units. While the terms of these agreements have not yet been formalized with employees and outside contractors, they could have a potentially dilutive effect to current shareholders.
Contingent Liability
On October 15, 2011, the Company entered into an agreement with a consultant by which the consultant's invoices for the previous four months would be accrued as a liability to be paid out upon (a) the Company's successful raising of $10,000,000 in capital funding, or (b) the Company reaching total revenues of $10,000,000. The Company has a balance due under this agreement of $37,500 at September 30, 2017 and December 31, 2016, respectively.
Legal Proceedings
On December 2, 2016, AltEnergy Cyber, LLC ("Plaintiff") instituted a legal action in Connecticut against the Company and Robert Zahm. The complaint alleged that (i) the Company improperly extended the maturity date of the Plaintiff's convertible note in the amount of $1,500,000 and (ii) improperly converted the loan into the Company's stock. The Complaint alleges that the Company is liable to the Plaintiff for $4,500,000 plus interest. This litigation is still ongoing. During the quarter, Robert Zahm was dismissed from the proceedings for lack of personal jurisdiction. The Company believes this claim to be without merit, and intends to vigorously defend itself against it.
NOTE 7 ‑ RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 2017, the Company incurred interest expense on notes to related parties in the aggregate amount of $509,792 (see Note 5 – Convertible Notes).
During nine months ended September 30, 2017, the Company incurred professional expenses in the amount of $87,500 and made payments of $246,239 pursuant to a consulting contract with a business owned by Jay Wright, the Company's Corporate Counsel. Unpaid amounts due under this contract are included in Jay Wright's payable balances in the chart below.
During the nine months ended September 30, 2017, the Company incurred professional expenses in the amount of $90,000, which was paid through the issuance of restricted stock, to Robert Lentz, a board member, for services related to business development activities performed that were outsid
e the scope of his board position.
Accounts payable related party
At September 30, 2017 and December 31, 2016, the Company had a balance in related party accounts payable of $384,667 and $709,725, respectively, which consisted of the following:
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Party Name:
|
Relationship:
|
Nature of transactions:
|
|
2017
|
|
|
2016
|
|
Jay Wright
|
Corporate Counsel
|
Consulting fees
|
|
$
|
197,056
|
|
|
$
|
355,795
|
|
John Hayes
|
Chief Technology Officer
|
Expense reimbursement
|
|
|
178,607
|
|
|
|
308,485
|
|
Robert Graham
|
Chairman and Chief Executive Officer
|
Expense reimbursement
|
|
|
4
|
|
|
|
45,445
|
|
Robert Graham
|
Chairman and Chief Executive Officer
|
Rent
|
|
|
9,000
|
|
|
|
-
|
|
|
|
|
|
$
|
384,667
|
|
|
$
|
709,725
|
|
NOTE 8 ‑ STOCKHOLDERS' EQUITY
The Company has authorized 100 million shares of common stock, $0.001 par value, and 5 million shares of preferred stock, $0.001 par value. Each share of the Company's preferred stock is convertible into 10 shares of common stock, subject to adjustment, has voting rights equal to its common stock equivalent, 7% cumulative dividend rights, and has liquidation rights that entitle the recipient to the receipt of net assets on a pro-rata basis. The Company has 64,268,227 and 13,325,681 common shares issued and outstanding and 3,695,160 and 3,671,316 preferred shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively.
On February 22, 2017, we completed the actions contemplated by the Reorganization Agreement (see note 10 – Business Acquisitions/Dispositions) and merged with and into BlackRidge with BlackRidge continuing as the surviving corporation. Upon completion of the Agreement, the Company issued 3,783,791 shares of its newly designated Series A Preferred Stock and 12,825,683 shares of common stock to the stockholders of BlackRidge in exchange for all the issued and outstanding shares of Series A Preferred Stock and Common Stock of BlackRidge. Because BlackRidge continues as the surviving entity, the net effect from this transaction on the outstanding stock of the Company was the addition of 8,965,000 shares of common stock held by the investors of the Company at the time of the acquisition.
Between January 13, 2017 and February 27, 2017, the Company issued 62,502 shares of the Company's preferred stock along with 5 year warrants to purchase 625,000 shares of the Company's common stock at an exercise price per share of $0.70 to several investors for aggregate proceeds of $375,000, or $0.60 per share. The warrants were valued at $104,765 using the Black-Scholes pricing model.
Between February 27, 2017 and August 29, 2017, the Company issued 10,364,121 shares of the Company's common stock and 5 year warrants to purchase 6,755,291 shares of the Company's common stock at an average exercise price per share of $0.51 to several investors for aggregate proceeds of $4,666,453. The warrants were valued at $1,248,536 using the Black-Scholes pricing model. The Company paid consultant and business development fees of $89,000 related to these issuances.
On February 2, 2017, the Company issued warrants to purchase 166,667 shares of the Company's common stock at an exercise price of $0.60 per share in conjunction with a debt agreement. The warrants were valued at $31,002 using the Black-Scholes pricing model and were recorded as a discount to the debt agreement.
Between February 9, 2017 and March 6, 2017, the Company issued warrants to purchase 150,001 shares of the Company's common stock at an exercise price per share of $0.60 to several parties in conjunction with short term notes and advances. The warrants were valued at $27,945 using the Black-Scholes pricing model and were recorded to additional paid in capital.
On March 31, 2017, the Company issued 1,000,000 shares of the Company's common stock in connection with the exercise of a warrant to purchase shares at $0.01 per share. The Company received $10,000 in proceeds for the warrant exercise.
On August 29, 2017, the Company converted 88,658 shares of the Company's preferred stock into 886,580 shares of the Company's common stock after receiving a conversion exercise from a preferred stockholder.
Between August 31, 2017 and September 25, 2017, the Company issued 7,700,000 shares of the Company's common stock and 5 year warrants to purchase 7,700,000 shares of the Company's common stock at an exercise price per share of $0.50 to several investors for aggregate proceeds of $3,850,000. The warrants were valued at $1,800,288 using the Black-Scholes pricing model.
On September 11, 2017, the Company issued 22,064,105 shares of the Company's common stock to satisfy $13,238,453 in wages payable at a per share price of $0.60. The stock contains a 10 month restriction on transfers and/or sales.
Between September 11, 2017 and September 27, 2017, the Company issued an aggregate 462,740 shares of the Company's common stock as settlement of contracts valued at $231,370 at a per share price of $0.50.
The significant assumptions used in the Black-Scholes valuation of the warrants are as follows:
Stock price on the valuation date
|
|
$
|
0.45 – 0.50
|
|
Warrant exercise price
|
|
$
|
0.10 - 0.70
|
|
Dividend yield
|
|
|
0.00
|
%
|
Years to maturity
|
|
|
5.0
|
|
Risk free rate
|
|
|
1.50 – 2.02
|
%
|
Expected volatility
|
|
|
52.49 - 55.43
|
%
|
NOTE 9 – SHARE BASED COMPENSATION
During the three and nine months ended September 31, 2017, the Company issued 2,900,000 5 year options to purchase common stock to employees. The options were valued at $814,716 using the Black-Scholes pricing model. As of September 30, 2017, the total unrecognized expense for unvested share based compensation is $789,404.
The activity of options granted to during the nine months ended September 30, 2017 is as follows:
|
|
Employee
Options
Outstanding
|
|
Beginning Balance – December 31, 2016
|
|
|
-
|
|
Granted
|
|
|
2,900,000
|
|
Exercised
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
Ending Balance – September 30, 2017
|
|
|
2,900,000
|
|
Vested options
|
|
|
90,075
|
|
Unvested options
|
|
|
2,809,958
|
|
NOTE 10 – BUSINESS ACQUISITION
On September 6, 2016, the Company and BlackRidge entered into an Agreement and Plan of Reorganization (the "Reorganization Agreement") originally dated as of September 6, 2016, and amended on February 22, 2017 to update the number of common shares, warrants, and options granted and outstanding as of the closing date.
On February 22, 2017, we completed the actions contemplated by the Reorganization Agreement and merged with and into BlackRidge with BlackRidge continuing as the surviving corporation ("Reorganization"). Upon completion of the Agreement, we issued 3,783,791 shares of our newly designated Series A Preferred Stock and 12,825,683 shares of Common Stock to the stockholders of BlackRidge in exchange for all the issued and outstanding shares of Series A Preferred Stock and Common Stock of BlackRidge. Additionally, certain stockholders of BlackRidge returned for cancellation a total of 16,284,330 shares of our Common Stock. Upon the completion of the Reorganization, BlackRidge became a wholly-owned subsidiary of the Company and the Company had a total of 3,783,791 shares of Series A Preferred Stock and 21,790,683 shares of Common Stock outstanding, with the former BlackRidge stockholders owning 3,783,791 shares or 100% of Series A Preferred Stock and 12,825,683 shares or approximately 58.9% of Common Stock. Upon completion of the Reorganization, we also had outstanding warrants entitling the holders to acquire a total of 18,541,579 shares of the Company's Common Stock at an average exercise price of $0.46 per share. The Reorganization resulted in a change of control of the Company. For accounting purposes, BlackRidge was treated as the acquirer and the historical financial statements of BlackRidge became the Company's historical financial statements. The acquisition is intended to constitute a tax-free reorganization pursuant to the applicable provisions of the Internal Revenue Code of 1986, as amended.
NOTE 11 – DISCONTINUED OPERATIONS
On March 31, 2017, the Company completed the sale of substantially all the assets, other than cash, used in or connection with the Company's home grain mill and kitchen mixer business to John Hofman and Bruce Crane, former officers and directors of the Company, in consideration for the assumption by such persons of substantially all the liabilities incurred by the Company in connection with such business. The assets divested consisted of the non-cybersecurity assets of the Company and included accounts receivable, inventory, deposits, property and equipment and intangible assets. The liabilities divested included the non-cybersecurity liabilities of the Company and included accounts payable and accrued expenses and long and short-term notes payable and accrued interest thereon. Upon completion of the divestiture, the Company recognized a $484,927 loss on disposal. Additionally, during the period from February 22, 2017 through March 31, 2017, the Company incurred a loss from discontinued operations of $8,737.
The following table shows the value of assets and liabilities divested:
Assets
|
|
|
|
Accounts receivable
|
|
$
|
40,044
|
|
Deposits and prepaid expenses
|
|
|
90,559
|
|
Inventory
|
|
|
1,157,555
|
|
Property and equipment
|
|
|
117,254
|
|
Intangible assets
|
|
|
62,820
|
|
Total Assets
|
|
|
1,468,232
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
692,399
|
|
Notes payable – short term
|
|
|
64,000
|
|
Notes payable – short term, related party
|
|
|
91,679
|
|
Line of credit
|
|
|
135,227
|
|
Total Liabilities
|
|
|
983,305
|
|
|
|
|
|
|
Loss on disposal
|
|
$
|
484,927
|
|
NOTE 12 - SUBSEQUENT EVENTS
We have evaluated all events that occurred after the balance sheet date through the date when our financial statements were issued to determine if they must be reported. Management has determined that other than as disclosed below, there were no additional reportable subsequent events to be disclosed.
Business Developments
On October 13, 2017, the Company formed a new business subsidiary called BlackRidge Secure Services to work with partners on Secure Supervisory Control and Data Acquisition Systems ("SCADA") infrastructure and to design and deliver secure systems using BlackRidge Technology products for use by the Utilities Industry
Equity
On October 31, 2017, the Company received proceeds of $33,334 for the exercise of warrants to purchase 55,556 shares of the Company's common stock at a price of $0.60 per share.
On November 9, 2017, the Company issued 706,226 shares of the Company's common stock to several vendors as settlement of an aggregate $423,736 in accounts payable.
Notes Payable
On November 9, 2017, the Company converted a related party note payable in the amount of $3,712,638 plus accrued interest of $1,665,990 into 10,757,254 shares of the Company's common stock at a price of $0.50 per share. The Company also extended warrants to purchase an additional 5,378,627 shares of the Company's common stock at $0.50 per share as additional consideration.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking Statements
Statements made in this Quarterly Report which are not purely historical are forward-looking statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and our business, including, without limitation, (i) our ability to raise capital, and (ii) statements preceded by, followed by or that include the words "may," "would," "could," "should," "expects," "projects," "anticipates," "believes," "estimates," "plans," "intends," "targets" or similar expressions.
Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following: general economic or industry conditions, nationally and/or in the communities in which we may conduct business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, our ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting our current or potential business and related matters.
Accordingly, results actually achieved may differ materially from expected results in these statements. Forward-looking statements speak only as of the date they are made. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
General
BlackRidge Technology International, Inc., formerly known as Grote Molen, Inc., (the "Company") was incorporated under the laws of the State of Nevada on March 15, 2004.
We develop and market next generation cyber defense solutions that stop cyber-attacks and block unauthenticated access. Our network and server security products are based on our patented Transport Access Control technology and are designed to isolate, cloak and protect servers and cloud services and segment networks for regulatory compliance. BlackRidge products are used in enterprise and government computing environments, the industrial Internet of Things ("IoT"), and other cloud service provider and network systems.
Reorganization Agreement
On September 6, 2016, the Company and BlackRidge Technology Holdings, Inc., a Delaware corporation ("BlackRidge") entered into an Agreement and Plan of Reorganization (the "Reorganization Agreement") originally dated as of September 6, 2016, and amended on February 22, 2017 to update the number of common shares, warrants, and options granted and outstanding as of the closing date.
On February 22, 2017, we completed the actions contemplated by the Reorganization Agreement and merged with and into BlackRidge with BlackRidge continuing as the surviving corporation ("Reorganization"). Upon completion of the Agreement, we issued 3,783,791 shares of our newly designated Series A Preferred Stock and 12,825,683 shares of Common Stock to the stockholders of BlackRidge in exchange for all the issued and outstanding shares of Series A Preferred Stock and Common Stock of BlackRidge. Additionally, certain stockholders of the Company returned for cancellation a total of 16,284,330 shares of our Common Stock. Upon the completion of the Reorganization, BlackRidge became a wholly-owned subsidiary of the Company and the Company had a total of 3,783,791 shares of Series A Preferred Stock and 21,790,683 shares of Common Stock outstanding, with the former BlackRidge stockholders owning 3,783,791 shares or 100% of Series A Preferred Stock and 12,825,683 shares or approximately 58.9% of Common Stock. Upon completion of the Reorganization, we also had outstanding warrants entitling the holders to acquire a total of 18,541,579 shares of the Company's Common Stock at an average exercise price of $0.46 per share. The Reorganization resulted in a change of control of the Company. For accounting purposes, BlackRidge will be treated as the acquirer and the historical financial statements of BlackRidge will become the Company's historical financial statements. The acquisition is intended to constitute a tax-free reorganization pursuant to the applicable provisions of the Internal Revenue Code of 1986, as amended.
At the closing of the Reorganization, Robert Graham was appointed as President, and John Bluher was appointed Chief Financial Officer, Treasurer and Secretary. In addition, Bruce Crane resigned from his position as a director and Robert Graham was appointed as a director of the Company to fill the vacancy created by such resignation. John Hofman, our remaining director, resigned from such position effective following our compliance with rule 14f-1 promulgated under the Exchange Act, and John Hayes and Robert Lentz were appointed as directors of the Company effective at such time as Mr. Hofman's resignation became effective.
On March 31, 2017, the Company completed the sale of substantially all assets, other than cash, used in or connection with the Company's home grain mill and kitchen mixer business to John Hofman and Bruce Crane, former officers and directors of the Company, in consideration for the assumption by such persons of substantially all the liabilities incurred by the Company in connection with such business. The assets divested consisted of the non-cybersecurity assets of the Company and included accounts receivable, inventory, deposits, property and equipment and intangible assets. The liabilities divested included the non-cybersecurity liabilities of the Company and included accounts payable and accrued expenses and long and short-term notes payable and accrued interest thereon.
On July 2, 2017, the Company filed Restated Articles with the Secretary of State of Nevada to, among other things, change the Company's name to BlackRidge Technology International, Inc.
Business
The Company develops, markets and supports a family of products that provide a next generation cyber security solution for protecting enterprise networks and cloud services. With our patented technology, network and server resources located in the enterprise, datacenters and cloud systems, are better protected, less expensive to protect, and less vulnerable to compromise from cyber-attacks. We believe that our identity-based approach to network and cloud security offers superior performance compared to legacy network security approaches, and reduces the total cost of ownership for organizations by eliminating malicious and unwanted traffic from their networks and systems.
BlackRidge products provide advanced capabilities compared to advanced firewalls in applications such as network segmentation and isolating cloud services. BlackRidge also cloaks protected network resources from network mapping, reconnaissance and other forms of unauthorized access and attacks which cannot be blocked by advanced firewalls.
Our proprietary technology, BlackRidge Transport Access Control ("TAC"), authenticates user or device identity and applies security policies across networks and cloud services before application sessions are established. Underlying BlackRidge TAC is our patented First Packet Authentication™ which conveys and authenticates identity in the "first packet" of a TCP network session request. This fundamental invention addresses a security gap in how the Internet operates: the inability to authenticate network traffic sources. Without authentication, unidentified and unauthorized users and devices can scan, probe and access networks and cloud services. This security gap is exploited in all cyber-attacks through the process of network scanning and reconnaissance, and it has been further exposed and magnified by cloud services, mobile connectivity, and the IoT.
The Company's technology is first to market with this approach of enforcing security policy based on cryptographically secured identity on every TCP/IP session.
Our products are protected by multiple U.S. Patents including "First Packet Authentication," "Concealing a Network Connected Device," "Digital Identity Authentication," and "Statistical Object Identification."
Products
BlackRidge and our partners sell network security products and solutions based on our proprietary BlackRidge TAC software technology. BlackRidge TAC provides high throughput and low latency network security that operates pre-session, in real time, before other security defenses engage. BlackRidge products can be deployed inside a network to cloak and protect servers and segment networks, in front of existing security stacks to filter anonymous traffic, or as part of service provider or OEM (as defined below) solution.
The BlackRidge solution is available in the following product configurations, with additional platform support under development:
|
·
|
1U rack-mountable 1GbE or 10GbE network appliance
|
|
·
|
1GbE fanless desktop appliance
|
|
·
|
VMware ESXi™
virtual appliance
|
|
·
|
IBM z Systems™ LPAR and IBM z/VM® software appliances
|
|
·
|
Amazon Web Services appliances
|
BlackRidge products are priced on a per appliance or gateway and on the total number of user and device identities supported in an implementation. Enterprise and OEM licensing along with subscription pricing are available. BlackRidge appliances can support up to 100,000 identities and 4,000,000 sessions, providing a highly scalable enterprise solution that operates with low latency and high throughput compared to current network security devices.
Network and cloud deployments options include deploying in-line as a Layer 2 transparent bridge or logically inline as a Layer 3 gateway for cloud deployments. BlackRidge software and systems are designed to be highly resilient and can be configured for high availability and failover. Security policies can be verified during deployment with progressive modes of bridge, monitor and audit, and then enforce policy.
Support and Maintenance
BlackRidge offers standard and premium support to our end-customers and channel partners, where our channel partners typically deliver level one support and we provide level two and level three support. The support for our end customers includes ongoing maintenance services for both hardware and software to receive software upgrades, bug fixes, and repairs. End customers typically purchase these services for a one year or longer term at the time of the initial product sale and typically renew for successive one year or longer periods.
Professional Services.
Professional services are primarily delivered through our channel partners and include experts who plan, design, and deploy effective security solutions tailored to our end-customers' specific requirements. These services include solution design and planning, configuration, and installation. Our education services provide online and classroom-style training and are also primarily delivered through our internal team.
Technology Alliance Partners
BlackRidge participates in an ecosystem of technology alliance partners to extend the breadth and depth of our products and partner solutions. By helping to ease the complications that organizations face when implementing multi-layered security solutions, our technology alliances facilitate integrated solution design, accelerate the time to realize value, and enhance our role as a strategic security partner.
Markets, Customers and Distribution Channels
The BlackRidge network security and cyber defense solution is broadly applicable to virtually all enterprise and government market segments. Whether deployed directly in a customer's environment or consumed as part of cloud service or solution, BlackRidge provides a new level of cyber defense not available in the market today.
BlackRidge markets and sells its products through multiple channels, including direct sales, integrator and reseller channel partners, cloud and managed service providers, and through strategic Original Equipment Manufacturer ("OEM") partners to both government and commercial users. The initial sales focus and market entry strategy for BlackRidge was originally the US Department of Defense, which is a key leverage point for the company's current commercial and government sales efforts. Our customers and partners include IBM, Ciena, Crimson Logic, the US Department of Defense, the US Department of Energy, Marist College, Splunk and mid-market and large financial institutions.
Within the commercial markets, BlackRidge sells both direct and through our strategic partners to large enterprise accounts, and indirectly through certain channel partners to specific verticals and international market segments. Our initial market entry strategy for the commercial market is to sell directly in order to establish customer and analyst references with large enterprises in North America that have high security and compliance requirements. These include more complex regulated enterprises such as Financial Services and Insurance companies. Our channel partners are recruited to assist with expanding enterprise sales, commercializing specific vertical markets, and penetrating the international markets. Revenue from commercial sales includes product licensing fees, installation services, and annual support based on a standard price list.
In the government markets, BlackRidge sells its standard commercial products through a wholly owned subsidiary, BlackRidge Technology Government, to government integrators and contractors who re-sell to the Department of Defense (DOD) and civilian agencies. BlackRidge has been involved with the DOD for over five years, including our initial product development funding which was provided by the U.S. DOD. The BlackRidge products have been designed for several large DOD programs and they have been extensively tested and validated for use by the Defense Information Systems Agency labs. The timing of the DOD adoption of BlackRidge products depends on approval of budgets and final product testing approvals from the DOD. BlackRidge Government revenue is net of government discounts, contracting fees, and channel and service partner discounts.
The BlackRidge OEM and service provider partnership strategy is to make targeted investments to capitalize on opportunities in specific market segments such as the industrial Internet of Things (IoT), Blockchain network and server equipment providers, and cloud solution providers. For these markets and our partners, BlackRidge TAC is deployed as an integrated or embedded capability in the partners' vertical market solutions, and our technology will be sold and supported by our partner. BlackRidge provides unique, integrated identity-based cyber defense for these OEM products or service offerings that provides our end user customer with a competitive market advantage in the face of today's advanced cyber threats. Revenue from OEM offerings flows from embedded product licensing fees and support fees that are somewhat unique to each OEM offering.
Marketing
Our marketing is focused on building our brand reputation and market awareness for our platform, driving customer demand and building a strong sales pipeline, and working with our channel and OEM partners. Our marketing team when fully developed will consist of corporate marketing, channel marketing, lead development, operations, and corporate communications. Marketing activities include demand generation, digital marketing programs, product launch activities, managing our corporate and investor website, trade shows and conferences, and press and analyst relations.
Research and Development
We continue to enhance our BlackRidge TAC software, the core software used in the BlackRidge products. This software is responsible for the TAC token generation, token validation, the token cache, packet processing and the insertion of TAC tokens into TCP connection requests. The TAC software has been developed domestically within the U.S. using only U.S. citizens. This software includes implementations of granted and pending patents owned by BlackRidge.
We continue to pursue research and development to improve our existing products. These improvements include making our products easier to manage, easier to deploy in large numbers, and improvements in our integrations with 3rd party products that communicate with BlackRidge products.
Our product development efforts release software with new features from time to time. When a new feature is significant enough, we produce a major software release. In between major software releases, there may be one or more minor software releases that also introduce less significant new features.
Intellectual Property
BlackRidge focuses on developing patent protection for products it develops and for products and features that are anticipated. We constantly perfect and file new applications. We continue to develop our products; we will continue to file additional patent applications where appropriate.
The granted patents focus on the communication of identity tokens at the network layer (6,973,496, 8,346,951), combining Identity authentication at different security layers (8,281,127, 8,635,445), insuring the integrity of token authentication (8,572,697) and using identity to select amongst a set of trusted resources (9,118,644). The pending applications focus on extending the above protections (13/987,747, 14/544,987, 14/998,645), using network identity in a firewall (14/545,988), making network routing policy decisions using identity (14/999,317) and detecting tampering of hardware and software systems (13/199,050).
As of release 3.0, our products use the technology described in patents 6,973,496, 8,346,951 and 8,572,697 as well as technology described in some of our pending applications. As we continue to add products and features, we will be incorporating technology described in additional patents and applications. All patents and completed applications are assigned to BlackRidge Technology Holdings, Inc.
Granted Patents
Concealing a Network Connected Device US Patent number 6,973,496, Patent Application U.S. Ser. No. 10/094,425. Filed 5 March 2002, Granted 6 December 2005, 1 Claim.
Method for Digital Identity Authentication US Patent number 8,281,127, Patent Application U.S. Ser. No. 12/658,113. Filed 1 February 2010, Granted 2 October 2012, 20 Claims.
Method for First Packet Authentication US Patent number 8,346,951, Patent Application U.S. Ser. No. 11/242,637. Filed 30 Sept 2005, Granted 1 January 2013, 25 Claims.
Method for Statistical Object Identification US Patent number 8,572,697, Patent Application U.S. Ser. No. 13/373,586. Filed 18 November 2011, Granted 29 October 2013, 43 Claims.
Method for Digital Identity Authentication US Patent number 8,635,445, Patent Application U.S. Ser. No. 13/573,077. Filed 16 August 2012, Granted 21 January 2014, 23 Claims.
Method for Directing Requests to Trusted Resources US Patent number 9,118,644, Patent Application U.S. Ser. No. 13/573,238. Filed 30 August 2012, Granted 25 August 2015, 27 Claims.
Published Pending Applications
Method for Statistical Object Identification Patent Application U.S. Ser. No. 13/987,747, filed 27 August 2013, continuation-in-part of Patent 8,572,697.
Unpublished Pending Applications
U.S. Patent Applications are published by the patent office 18 months after filing.
Method for Network Security Using Statistical Object Identification Patent Application U.S. Ser. No. 14/544,987, filed 11 March 2015, continuation-in-part of Patent 8,572,697.
Method for Attribution Security System Patent Application U.S. Ser. No. 14/545,988, filed 13 July 2015.
Method for Statistical Object Identification Patent Application U.S. Ser. No. 14/998,645, filed 16 January 2016, continuation-in-part of Patent 8,572,697.
Method for Using Authenticated Requests to Select Network Routes Patent Application U.S. Ser. No. 14/999,317, filed 22 April, 2016.
Secure Cloud Computing System Patent Application U.S. Ser. No. pending, filed 6 August 2016, continuation-in-part of Patent Applications U.S. Ser. No. 13/199,050 and 13/999,757.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:
Accounts Receivable
Trade accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts. We determine the allowance for doubtful accounts by identifying potential troubled accounts and by using historical experience and future expectations applied to an aging of accounts. Trade accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded as income when received. We determined that no allowance for doubtful accounts was required at September 30, 2017 and December 31, 2016.
Intangible Assets
Acquired intangible assets are recorded at estimated fair value, net of accumulated amortization. Costs incurred in obtaining certain patents and intellectual property as well as software development expenses, are capitalized and amortized over their related estimated useful lives, using a straight-line basis consistent with the underlying expected future cash flows related to the specific intangible asset. Costs to renew or extend the life of intangible assets are capitalized and amortized over the remaining useful life of the asset. Amortization expenses are included as a component of selling, general and administrative expenses in the consolidated statements of operations. The Company's continued ability to extend and/or renew the rights associated with these intangible assets may have an impact on future cash flows.
Useful life estimates for the Company's significant intangible asset classes are as follows:
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Useful Life
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Patent Costs
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20 years
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Software Licenses
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7 years
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Software Development Costs
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15 years
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Impairment of Long-Lived Assets
The Company reviews long-lived assets, at least annually, to determine if impairment has occurred and whether the economic benefit of the asset (fair value of assets to be used and fair value less disposal cost for assets to be disposed of) is expected to be less than the carrying value. Triggering events, which signal further analysis, consist of a significant decrease in the asset's market value, a substantial change in the use of an asset, a significant physical change in the asset, a significant change in the legal or business climate that could affect the asset, an accumulation of costs significantly in excess of the amount originally expected to acquire or construct the asset, or a history of losses that imply continued loss associated with assets used to generate revenue.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. Revenue generally is recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities.
Revenue recognition for multiple-element arrangements requires judgment to determine if multiple elements exist, whether elements can be accounted for as separate units of accounting, and if so, the fair value for each of the elements.
The Company may enter into arrangements that can include various combinations of software, services, and hardware. Where elements are delivered over different periods of time, and when allowed under U.S. GAAP, revenue is allocated to the respective elements based on their relative selling prices at the inception of the arrangement, and revenue is recognized as each element is delivered. We use a hierarchy to determine the fair value to be used for allocating revenue to elements: (i) vendor-specific objective evidence of fair value ("VSOE"), (ii) third-party evidence, and (iii) best estimate of selling price ("ESP"). For software elements, we follow the industry specific software guidance which only allows for the use of VSOE in establishing fair value. Generally, VSOE is the price charged when the deliverable is sold separately or the price established by management for a product that is not yet sold if it is probable that the price will not change before introduction into the marketplace. ESPs are established as best estimates of what the selling prices would be if the deliverables were sold regularly on a stand-alone basis. Our process for determining ESPs requires judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable.
Any revenue received that does not yet meet the above recognition standards is recorded to unearned revenue, and held as a liability until recognition occurs.
Income Taxes
We account for income taxes in accordance with FASB ASC Topic 740,
Income Taxes
, using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
FASB ASC Topic 740,
Income Taxes,
requires us to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, we must measure the tax position to determine the amount to recognize in our consolidated financial statements. We performed a review of our material tax positions in accordance with recognition and measurement standards established by ASC Topic 740 and concluded we had no unrecognized tax benefit that would affect the effective tax rate if recognized for the nine months ended September 30, 2017 and 2016.
We include interest and penalties arising from the underpayment of income taxes, if any, in our consolidated statements of operations in general and administrative expenses. As of September 30, 2017 and December 31, 2017, we had no accrued interest or penalties related to uncertain tax positions.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses, notes payable and convertible debt. The carrying amount of these financial instruments approximates fair value because of the short-term nature of these items.
Results of Operations
Three Months Ended September 30, 2017 Compared to the Three Months Ended September 30, 2016
Sales
Total sales during the three months ended September 30, 2017 were $4,304, as compared to sales during the three months ended September 30, 2016 of $26,550, a decrease of $22,246. This decrease was due to a reduction in one-time sales. Management believes historical sales not to be indicative of future expectations due to our historically limited business operations.
Operating Expenses
Our selling, general and administrative expenses were $4,985,557 for the three months ended September 30, 2017, compared to $1,383,764 for the three months ended September 30, 2016, an increase of $3,601,793, or approximately 260%. The increase in selling, general and administrative expenses in the current year is primarily attributable to an approximate $100,000 increase in engineering expense related to new product testing, a $1,540,000 increase in professional fees coupled with an increase of $845,000 in general and administration costs related to our increased activity as we implement our business plan and an increase of approximately $1,100,000 in onetime, non-cash stock compensation accruals. We expect that these onetime professional fee and stock compensation expenses will not continue in future periods.
Interest Income (Expense)
Other expense includes interest expense on our indebtedness, a portion of which is indebtedness to related parties. Total net interest expense was $176,031 and $635,398 for the three months ended September 30, 2017 and 2016, respectively. The decrease in interest expense of $459,367 in the current year is attributable primarily to the conversion of approximately $14 million of convertible debt into equity in the prior year.
Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016
Sales
Total sales during the nine months ended September 30, 2017 were $42,006, as compared to sales during the nine months ended September 30, 2016 of $84,128, a decrease of $42,380. This decrease was due to a reduction in one-time sales. Management believes historical sales not to be indicative of future expectations due to our historically limited business operations.
Operating Expenses
Our selling, general and administrative expenses were $10,150,104 for the nine months ended September 30, 2017, compared to $3,621,529 for the nine months ended September 30, 2016, an increase of $6,528,575, or approximately 180%. The increase in selling, general and administrative expenses in the current year is primarily attributable to an approximate $140,000 increase in engineering expense due to new product testing, a $2,780,000, increase in professional fees, a $1,110,000 increase in salaries and wages coupled with an increase of $845,000 in general and administration costs related to our increased activity as we implement our business plan and an increase of approximately $1,100,000 in onetime, non-cash stock compensation accruals. We expect that these onetime professional fee and stock compensation expenses will not continue in future periods.
Interest Income (Expense)
Other expense includes interest expense on our indebtedness, a portion of which is indebtedness to related parties. Total net interest expense was $583,130 and $1,852,520 for the nine months ended September 30, 2017 and 2016, respectively. The decrease in interest expense of $1,269,390 in the current year is attributable primarily to the conversion of approximately $14 million of convertible debt in the prior year.
Loss on disposal of discontinued operations
On March 31, 2017, the Company completed the sale of substantially all the assets, other than cash, used in or connection with the Company's home grain mill and kitchen mixer business to John Hofman and Bruce Crane, former officers and directors of the Company, in consideration for the assumption by such persons of substantially all the liabilities incurred by the Company in connection with such business. The assets divested consisted of the non-cybersecurity assets of the Company and included accounts receivable, inventory, deposits, property and equipment and intangible assets. The liabilities divested included the non-cybersecurity liabilities of the Company and included accounts payable and accrued expenses and long and short-term notes payable and accrued interest thereon. Upon completion of the divestiture, the Company recognized a $484,927 non-cash loss on disposal.
Loss from discontinued operations
During the period from February 22, 2017 through March 31, 2017, the Company recognized a loss from discontinued operations of $8,737. This loss was primarily driven by lower than anticipated product sales of the entity that was eventually sold.
Liquidity and Capital Resources
At September 30, 2017, we had total current assets of $2,551,004, including cash of $2,228,448, and current liabilities of $11,317,114, resulting in working capital deficit of $8,766,110. Our current assets and working capital included inventory of $26,068 and prepaid expenses of $296,488.
In addition, as September 30, 2017, we had total stockholders' deficit of $2,570,197. As we have worked toward our acquisition and new product launches, we have primarily financed recent operations, the development of technologies, and the payment of expenses through the issuance of our debt, common stock, preferred stock and warrants.
For the nine months ended September 30, 2017, net cash used in operating activities was $5,268,597, as a result of our net loss from continued operations of $11,185,150 and increases in inventory of $26,068, prepaid expenses of $195,534, and decreases in deferred revenue of $9,197, accounts payable and accrued expenses – related party of $325,058, partially offset by non-cash expenses totaling $643,499, and increases in accounts payable and accrued expenses of $251,492, accrued interest of $1,035, accrued interest - related party of $509,792, wages payable of $4,527,900, loss from discontinued operation of $493,664 and cash flows from discontinued operations of $45,028.
By comparison, for the nine months ended September 30, 2016, net cash used in operating activities was $1,555,406, as a result of our net loss of $5,389,921 and a decrease in deferred revenue of $4,237, partially offset by non-cash expenses of $238,307, decreases in receivable of $20,450, and increases in prepaid expense of 89,937, accounts payable and accrued expenses of $610,592, accounts payable – related party of $115,740, accrued interest of $1,352,335, accrued interest – related party of $489,966 and wages payable of $921,425.
Cash used in investing activities for the nine months ended September 30, 2017 was $925,373 compared to $408,172 for the nine months ended September 30, 2016. The increase of 517,201 in the current period is due primarily to an increase in capitalized engineering costs related to the Company's technology development.
For the nine months ended September 30, 2017, net cash provided by financing activities was $8,365,385, comprised of proceeds from the sale of common stock of $8,392,451, preferred stock of $275,000 and warrants exercised of $10,000, proceeds from short term notes of $100,000 and advances – related party of $115,000, partially offset by the repayment of short-term notes of $38,989, repayments of short-term convertible notes of $100,000, repayments of long-term notes of $333,342 and cash outflows from discontinued operations of $54,735.
For the nine months ended September 30, 2016, net cash provided by financing activities was $2,337,000, comprised of proceeds from the sale of preferred stock of $1,152,000 and proceeds from subscriptions payable of $1,185,000.
Based on our current business plan, we anticipate that our operating activities will use approximately $500,000 in cash per month over the next twelve months, or $6 million. Currently we do not have enough cash on hand to fully implement our business plan, and will require additional funds within the next year. We believe that our operations will not begin to generate significant cash flows until the fourth quarter of 2017 when we expect to begin new product contracts.
In order to remedy this liquidity deficiency, we are actively seeking to raise additional funds through the sale of equity and debt securities, and ultimately plan to generate substantial positive operating cash flows. Our internal sources of funds will consist of cash flows from operations, but not until we begin to realize substantial revenues from sales. If we are unable to raise additional funds in the near term, we may not be able to fully implement our business plan, and it is unlikely that we will be able to continue as a going concern.
Off-balance Sheet Arrangements
None.