NOTES
TO UNAUDITED FINANCIAL STATEMENTS
September
30, 2017
Note
1 - Organization and Nature of Business
Blow
& Drive Interlock (“the Company”) was incorporated on July 2, 2013 under the laws of the State of Delaware to
engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisitions. The Company makes,
markets and rents alcohol ignition interlock devices to DUI/DWI offenders as part of their mandatory court or motor vehicle department
programs. The Company has approval for its device in the following states: California, Colorado, Kansas, New York, Tennessee,
Arizona, Oregon, Kentucky, Oklahoma, Pennsylvania, and Texas.
In
2015, The Company formed BDI Manufacturing, Inc., an Arizona corporation, which is a 100% wholly owned subsidiary of Blow &
Drive Interlock Corporation.
The
Company makes, markets, installs and monitors a breath alcohol ignition interlock device (BAIID) called the BDI-747/1,
which is a mechanism that is installed on the steering column of an automobile and into which a driver exhales. The device in
turn provides a blood-alcohol concentration analysis. If the driver’s blood-alcohol content is higher than a certain pre-programmed
limit, the device prevents the ignition from engaging and the automobile from starting. These devices are often required for use
by DUI or DWI (“driving under the influence” or “driving while intoxicated”) offenders as part of a mandatory
court or motor vehicle department program.
The
Company licenses the rights to third party distributors to promote the BDI-747/1 and provide services related to the device. The
distributorships are for specific geographical areas (either entire states or certain counties within states). The Company currently
has entered into six distributorship agreements. Under the distribution agreements the Company typically receives a onetime fee,
and then is entitled to receive a per unit registration fee and a per unit monthly fee for each BDI-747/1 unit the distributor
has in inventory or on the road beginning thirty (30) days after the distributor receives the unit.
Note
2 – Basis of Presentation and Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting
principles in the United States of America, and pursuant to the rules and regulations of the Securities and Exchange Commission
and reflect all adjustments, consisting of normal recurring adjustments, which management believes are necessary to fairly present
the financial position, results of operations and cash flows of the Company.
Going
Concern
The
Company’s unaudited condensed consolidated financial statements are prepared using generally accepted accounting principles
in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company has not yet established an ongoing source of revenue sufficient to cover
its operating costs and allow it to continue as a going concern. As of September 30, 2017, the Company had an accumulated deficit
of $2,839,765. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital
to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced
to cease or reduce its operations.
In
order to continue as a going concern, the Company will need, among other things, additional capital resources. The Company will
continue to raise funds through the sale of its equity securities or issuance of notes payable to obtain additional operating
capital. The Company is dependent upon its ability to, and will continue to attempt to, secure additional equity and/or debt financing
until the Company can earn revenue and realize positive cash flow from its operations. There are no assurances that the Company
will be successful in earning revenue and realizing positive cash flow from its operations. Without sufficient financing it would
be unlikely that the Company will continue as a going concern.
Based
on the Company’s current rate of cash outflows, cash on hand and proceeds from the prior sale of equity securities and issuance
of notes payable, management believes that its
current cash will not be sufficient to meet
the anticipated cash needs for working capital for the next 12 months. The Company’s plans with respect to its liquidity
issues include, but are not limited to, the following:
|
1)
|
Continue
to issue restricted stock for compensation due to consultants and for its legacy accounts payable in lieu of cash payments;
and
|
|
|
|
|
2)
|
Seek
additional capital to continue its operations as it rolls out its current products. The Company is currently evaluating additional
debt or equity financing opportunities and may execute them when appropriate. However, there can be no assurances that the
Company can consummate such a transaction, or consummate a transaction at favorable pricing.
|
The
ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described
in the preceding paragraph and eventually secure other sources of financing and achieve profitable operations. These condensed
consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded
asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
Reclassifications
Certain
reclassifications have been made to amounts in prior periods to conform to the current period presentation. All reclassifications
have been applied consistently to the periods presented.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. 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 amounts of revenue and expenses during the reporting periods. Actual
results could differ from those estimates.
Revenue
Recognition
The
Company recognizes revenue when earned and related costs of sales and expenses when incurred. The Company recognizes revenue in
accordance with FASB ASC Topic 605-10-S99,
Revenue Recognition, Overall, SEC Materials
(“Section 605-10-S74”).
Section 605-10-S99 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of
an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectability
is reasonably assured. Cost of revenue consists of the cost of the purchased goods and labor related to the corresponding sales
transaction. When a right of return exists, the Company defers revenues until the right of return expires. The Company recognizes
revenue from services at the time the services are completed.
Monthly per unit fee revenue
is earned and recognized over the term of the contract as support services are provided. Revenues from territory exclusivity are
earned when there is persuasive evidence of an arrangement, delivery has occurred, the sales price has been determined and collectability
has been reasonably assured.
Accounts
Receivable and Allowance for Doubtful Accounts
The
Company’s accounts receivable primarily consist of trade receivables. The Company records an allowance for doubtful accounts
that is based on historical trends, customer knowledge, any known disputes, and the aging of the accounts receivable balances
combined with management’s estimate of future potential recoverability. Receivables are written off against the allowance
after all attempts to collect a receivable have failed. The Company believes its allowance for doubtful accounts as of September
30, 2017 and December 31, 2016 is adequate, but actual write-offs could exceed the recorded allowance.
Inventories
Inventories
are valued at the first-in first-out method and at September 30, 2017 and December 31, 2016 consists of spare parts for the BDI
747 monitoring units.
Convertible
Debt and Warrants Issued with Convertible Debt
Convertible
debt is accounted for under the guidelines established by ASC 470,
Debt with Conversion and Other Options
and ASC 740,
Beneficial Conversion Features
. The Company records a beneficial conversion feature (“BCF”) when convertible
debt is issued with conversion features at fixed or adjustable rates that are below market value when issued. If, however, the
conversion feature is dependent upon a condition being met or the occurrence of a specific event, the BCF will be recorded when
the related contingency is met or occurs. The BCF for the convertible instrument is recorded as a reduction, or discount, to the
carrying amount of the convertible instrument equal to the fair value of the conversion feature. The discount is then amortized
to interest over the life of the underlying debt using the effective interest method.
The
Company calculates the fair value of warrants issued with the convertible instruments using the Black-Scholes valuation method,
using the same assumptions used for valuing employee options for purposes of ASC 718,
Compensation – Stock Compensation
,
except that the contractual life of the warrant is used. Under these guidelines, the Company allocates the value of the proceeds
received from a convertible debt transaction between the conversion feature and any other detachable instruments (such as warrants)
on a relative fair value basis. The allocated fair value is recorded as a debt discount or premium and is amortized over the expected
term of the convertible debt to interest expense.
For
modifications of convertible debt, the Company records a modification that changes the fair value of an embedded conversion feature,
including a BCF, as a debt discount which is then amortized to interest expense over the remaining life of the debt. If modification
is considered substantial (i.e. greater than 10% of the carrying value of the debt), an extinguishment of debt is deemed to have
occurred, resulting in the recognition of an extinguishment gain or loss.
Fair
Value of Financial Instruments
The
Company utilizes ASC 820-10, Fair Value Measurement and Disclosure, for valuing financial assets and liabilities measured on a
recurring basis. Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants as of the measurement date. The guidance also establishes a
hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable
inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would
use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in
valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
Level
1. Observable inputs such as quoted prices in active markets;
Level
2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level
3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The
table below describes the Company’s valuation of financial instruments using guidance from ASC 820-10:
|
|
Fair Value Measurements Using
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Balance December 31, 2016
|
|
$
|
-
|
|
|
$
|
73,556
|
|
|
$
|
-
|
|
Change in fair value of derivative liability
|
|
|
-
|
|
|
|
(11,019
|
)
|
|
|
-
|
|
Balance September 30, 2017 (unaudited)
|
|
$
|
-
|
|
|
$
|
62,537
|
|
|
$
|
-
|
|
Net
Income (Loss) Per Share
Basic
earnings per share is calculated by dividing income available to common stockholders by the weighted-average number of common
shares outstanding during each period. Diluted earnings per share is computed using the weighted average number of common and
dilutive common share equivalents outstanding during the period.
Stock
Based Compensation
The
Company recognizes stock-based compensation in accordance with FASB ASC Topic 718
Stock Compensation
, which requires the
measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including
employee stock options and employee stock purchases related to an employee stock purchase plan based on the estimated fair values.
For
non-employee stock-based compensation, the Company applies FASB ASC Topic 505
Equity-Based Payments to Non-Employees
, which
requires stock-based compensation related to non-employees to be accounted for based on the fair value of the related stock or
options or the fair value of the services on the grant date, whichever is more readily determinable in accordance with FASB ASC
Topic 718.
Concentrations
All
of the parts for the Company’s ignition interlock devices are purchased from one supplier in China. The loss of this supplier
could have a material impact on the Company’s ability to timely obtain additional units.
The
Company has multiple distributors as of September 30, 2017, and is actively engaging more in new markets. However, for the three
and nine months ended September 30, 2017, one distributor, licensed in four states, makes up approximately 100% and 91% percent
of all revenues from distributors, respectively, and 100% of accounts receivable at September 30, 2017. The loss of this distributer
would have a material impact on the Company’s revenues. Per an agreement dated January 21, 2018 that memorialized a September
30, 2017 oral agreement, the Company and its largest distributor cancelled their distributorship agreement dated September 5,
2015. See Note 15 below.
Income
Taxes
The
Company accounts for its income taxes in accordance with Income Taxes Topic of the FASB ASC 740, which requires recognition of
deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in operations in the period that includes the enactment date.
The
Company also follows ASC 740-10-25, which provides detailed guidance for the financial statement recognition, measurement and
disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with ASC Topic 740,
“
Accounting for Income Taxes”
. ASC 740-10-25 prescribes 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. It also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Derivative
Liabilities
The
Company assessed the classification of its derivative financial instruments as of September 30, 2017, which consist of convertible
instruments and rights to shares of the Company’s common stock, and determined that such derivatives meet the criteria for
liability classification under ASC 815.
ASC
815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments
and account for them as free-standing derivative financial instruments. These three criteria include circumstances in which (a)
the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic
characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument
and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with
changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative
instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception
to this rule when the host instrument is deemed to be conventional, as defined.
Convertible
Instruments
The
Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with professional
standards for “Accounting for Derivative Instruments and Hedging Activities”.
ASC
815-40 provides that, among other things, generally, if an event is not within the entity’s control or could require net
cash settlement, then the contract shall be classified as an asset or a liability.
Recently
Issued Accounting Pronouncements
In
September 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-13,
Revenue
Recognition, Revenue from Contracts with Customers, Leases.
The ASU adds SEC paragraphs to the new revenue and leases sections
of the Accounting Standards Codification (ASC or Codification) on the announcement the SEC Observer made at the 20 July 2017 EITF
meeting. The SEC Observer said that the SEC staff would not object if entities that are considered public business entities only
because their financial statements or financial information is required to be included in another entity’s SEC filing use
the effective dates for private companies when they adopt ASC 606, Revenue from Contracts with Customers, and ASC 842, Leases.
This would include entities whose financial statements are included in another entity’s SEC filing because they are significant
acquirees under Rule 3-05 of Regulation S-X, significant equity method investees under Rule 3-09 of Regulation S-X and equity
method investees whose summarized financial information is included in a registrant’s financial statement notes under Rule
4-08(g) of Regulation S-X. The Company is currently evaluating the impact of adopting this guidance.
In
July 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-11,
Earnings Per Share; Distinguishing Liabilities from
Equity; Derivatives and Hedging; Accounting for Certain Financial Instruments with Down Round Features; Replacement of the Indefinite
Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling
Interests with a Scope Exception.
An entity will no longer have to consider “down round” features (i.e., a provision
in an equity-linked financial instrument or an embedded feature that reduces the exercise price if the entity sells stock for
a lower price or issues an equity-linked instrument with a lower exercise price) when determining whether certain equity-linked
financial instruments or embedded features are indexed to its own stock. An entity that presents earnings per share (EPS) under
ASC 260 will recognize the effect of a down round feature in a freestanding equity-classified financial instrument only when it
is triggered. The effect of triggering such a feature will be recognized as a dividend and a reduction to income available to
common shareholders in basic EPS. The new guidance will require new disclosures for financial instruments with down round features
and other terms that change conversion or exercise prices. The ASU also replaces today’s indefinite deferral of the guidance
in ASC 480-10 for certain mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable
noncontrolling interests with a scope exception. This change does not require any transition guidance because it does not have
an accounting effect. The Company is currently evaluating the impact of adopting this guidance.
In
October 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-16,
Accounting for Income Taxes: Intra-Entity Asset
Transfers of Assets Other than Inventory.
The ASU eliminates the deferral of the tax effects of intra-entity asset transfers
other than inventory. As a result, the tax expense from the intercompany sale of assets, other than inventory, and associated
changes to deferred taxes will be recognized when the sale occurs even though the pre-tax effects of the transaction have not
been recognized. The effect of the adoption of the standard will depend on the nature and amount of any future transactions.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows; Classification of Certain Cash Receipts and Cash Payments.
The new standard addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.
The eight issues are: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments
with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration
payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of
corporate-owned life insurance policies, including bank-owned insurance policies; distribution received from equity method investees;
beneficial interests in securitization transactions; separately identifiable cash flows and application of the predominance principle.
The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within fiscal periods
beginning after December 15, 2019. The Company is currently evaluating the impact of adopting this guidance.
In
March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers.
The new standard clarifies the implementation
guidance on principal versus agent considerations in Topic 606,
Revenue from Contracts with Customers.
Topic 606 addresses
that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. When an entity is a principal
(that is, if it controls the specific good or service before that good or service is transferred to a customer) and satisfies
a performance obligation, the entity recognizes revenue in the gross amount of consideration to which it expects to be entitled
in exchange for the specific good or service transferred to the customer. When an entity is an agent and satisfies a performance
obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange
for arranging for the specific good or service to be provided by the other party. The new standard is effective for annual reporting
periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating
the impact of adopting this guidance.
In
February 2016, the FASB issued ASU No. 2016-2,
Leases.
The new standard establishes a right-of-use (ROU) model that requires
a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months.
Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. Similarly,
lessors will be required to classify leases as sales-type, finance or operating, with classification affecting the pattern of
income recognition. Classification for both lessees and lessors will be based on an assessment of whether risks and rewards as
well as substantive control have been transferred through a lease contract. The new standard is effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. A modified retrospective
transition approach is required for leases for leases existing at, or entered into after, the beginning of the earliest comparative
period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating
the impact of adopting this guidance.
Note
3 – Segment Reporting
The
Company has two reportable segments: (1) Monitoring and (2) Distributorships.
Monitoring
fees on Company installed units
The
Company rents units directly to customers and installs the units in the customer’s vehicles. The rental periods range from
a few months to 2 years and include a combination of down payments made by the customer and monthly payments paid under the agreements
with the Company. Revenue is recognized from these companies on the straight-line basis over the term of the agreement. Amounts
collected in excess of those earned are classified as deferred revenue in the balance sheet, and amounts earned in excess of amounts
collected are reflected in accounts receivable in the balance sheet at September 30, 2017 and December 31, 2016.
Distributorships
The
Company enters into arrangements that include multiple deliverables, which typically consist of the sale of exclusive distributorship
territory rights, startup supplies package, promotional material, three weeks of onsite training and ongoing monthly support services.
The Company accounts for each material element within an arrangement with multiple deliverables as separate units of accounting.
Revenue is allocated to each unit of accounting under the guidance of ASC Topic 605-25, Multiple-Element Revenue Arrangements,
which provides criteria for separating consideration in multiple-deliverable arrangements by establishing a selling price hierarchy
for determining the selling price of a deliverable. The selling price used for each deliverable is based on vendor-specific objective
evidence (“VSOE”) if available, third-party evidence if VSOE is not available, or estimated selling price if neither
VSOE nor third-party evidence is available. The Company is required to determine the best estimate of selling price in a manner
that is consistent with that used to determine the price to sell the deliverable on a standalone basis. The Company generally
does not separately sell distributorships or training on a standalone basis. Therefore, the Company does not have VSOE for the
selling price of these units nor is third party evidence available and thus management uses its best estimate of selling prices
in their allocation of revenue to each deliverable in the multiple element arrangement.
The
following table summarizes net sales and identifiable
operating income by segment:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross profit (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monitoring
|
|
$
|
336,322
|
|
|
$
|
56,634
|
|
|
$
|
562,313
|
|
|
$
|
173,571
|
|
Distributorships
|
|
|
41,276
|
|
|
|
78,225
|
|
|
|
229,990
|
|
|
|
78,225
|
|
Gross profit
|
|
|
377,598
|
|
|
|
134,859
|
|
|
|
792,303
|
|
|
|
251,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable segment operating expenses (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monitoring
|
|
|
86,543
|
|
|
|
5,911
|
|
|
|
143,955
|
|
|
|
21,468
|
|
Distributorships
|
|
|
3,552
|
|
|
|
9,810
|
|
|
|
89,642
|
|
|
|
9,810
|
|
|
|
|
90,095
|
|
|
|
15,721
|
|
|
|
233,597
|
|
|
|
31,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable segment operating income (c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monitoring
|
|
|
249,779
|
|
|
|
50,723
|
|
|
|
418,358
|
|
|
|
152,103
|
|
Distributorships
|
|
|
37,724
|
|
|
|
68,415
|
|
|
|
140,348
|
|
|
|
68,415
|
|
|
|
|
287,503
|
|
|
|
119,138
|
|
|
|
558,706
|
|
|
|
220,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of identifiable segment income to corporate income (d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll
|
|
|
288,512
|
|
|
|
32,391
|
|
|
|
457,288
|
|
|
|
103,666
|
|
Professional fees
|
|
|
16,603
|
|
|
|
4,266
|
|
|
|
93,505
|
|
|
|
65,887
|
|
General and administrative expenses
|
|
|
253,427
|
|
|
|
114,216
|
|
|
|
579,172
|
|
|
|
332,547
|
|
Depreciation
|
|
|
417
|
|
|
|
320
|
|
|
|
1,057
|
|
|
|
1,693
|
|
Interest expense
|
|
|
145,740
|
|
|
|
41,790
|
|
|
|
440,538
|
|
|
|
111,715
|
|
Change in fair value of derivative liability
|
|
|
6,474
|
|
|
|
(16,814
|
)
|
|
|
(11,018
|
)
|
|
|
2,798
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
116,541
|
|
|
|
305,000
|
|
|
|
116,541
|
|
Loss before provision for income taxes
|
|
|
(423,670
|
)
|
|
|
(173,572
|
)
|
|
|
(1,306,836
|
)
|
|
|
(514,329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
1,600
|
|
|
|
1,600
|
|
Net loss
|
|
$
|
(423,670
|
)
|
|
$
|
(173,572
|
)
|
|
$
|
(1,308,436
|
)
|
|
$
|
(515,929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net property, plant, and equipment assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monitoring
|
|
|
|
|
|
|
|
|
|
$
|
562,542
|
|
|
$
|
127,815
|
|
Distributorships
|
|
|
|
|
|
|
|
|
|
|
350,298
|
|
|
|
58,410
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
12,889
|
|
|
|
2,599
|
|
|
|
|
|
|
|
|
|
|
|
$
|
925,729
|
|
|
$
|
188,824
|
|
|
(a)
|
Segment
gross profit includes segment net sales less segment cost of sales
|
|
(b)
|
Identifiable
segment operating expenses consists of identifiable depreciation expense
|
|
(c)
|
Identifiable
segment operating income consists of segment gross profit less identifiable operating expense
|
|
(d)
|
General
corporate expense consists of all other non-identifiable expenses
|
Note
4 – Furniture and Equipment
Furniture
and equipment consist of the following:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Monitoring Units
|
|
$
|
1,198,057
|
|
|
$
|
419,898
|
|
Furniture, Fixtures, and Equipment
|
|
|
4,798
|
|
|
|
4,798
|
|
Software
|
|
|
11,667
|
|
|
|
-
|
|
Total Assets
|
|
|
1,214,522
|
|
|
|
424,696
|
|
Less: Accumulated Depreciation
|
|
|
(288,794
|
)
|
|
|
(68,350
|
)
|
Furniture and Equipment, net
|
|
$
|
925,728
|
|
|
$
|
356,346
|
|
Depreciation
expense for the three and nine months ended September 30, 2017 and 2016 were $90,512 and $16,041, and $234,654 and $32,971, respectively.
$27,200 in monitoring units and $14,211 in related accumulated depreciation were disposed of in the three months ended September
30, 2017.
Note
5 – Deposits
Deposits
consist of the following:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Deposit for BDI-747 units
|
|
$
|
-
|
|
|
$
|
250,000
|
|
Other
|
|
|
5,131
|
|
|
|
6,254
|
|
Total
|
|
$
|
5,131
|
|
|
$
|
256,254
|
|
Note
6 – Accrued Expenses
Accrued
Expenses consist of the following:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Accrued payroll and payroll taxes
|
|
$
|
218,975
|
|
|
$
|
65,292
|
|
Miscellaneous
|
|
|
16,423
|
|
|
|
3,503
|
|
Total
|
|
$
|
235,398
|
|
|
$
|
68,795
|
|
Note
7 - Deferred revenue
The
Company classifies income as deferred until the terms of the contract or time frame have been met within the Company’s revenue
recognition policy. As of September 30, 2017 and December 31, 2016, deferred revenue consist of the following:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Monitoring deferred revenues
|
|
$
|
91,057
|
|
|
$
|
103,831
|
|
Distributorship deferred revenues
|
|
|
-
|
|
|
|
2,500
|
|
Total
|
|
$
|
91,057
|
|
|
$
|
106,331
|
|
Note
8 – Notes Payable
Notes
payable consist of the following:
|
|
September 30, 3017
|
|
|
December 31, 2016
|
|
|
|
Principal
|
|
|
Accrued interest
|
|
|
Principal
|
|
|
Accrued interest
|
|
Convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible note #1
|
|
$
|
7,500
|
|
|
$
|
208
|
|
|
$
|
7,500
|
|
|
$
|
31
|
|
Debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,104
|
)
|
|
|
-
|
|
Convertible note #2
|
|
|
50,000
|
|
|
|
2,034
|
|
|
|
50,000
|
|
|
|
1,617
|
|
Debt discount
|
|
|
(3,115
|
)
|
|
|
-
|
|
|
|
(20,620
|
)
|
|
|
-
|
|
Subtotal convertible notes net
|
|
|
54,385
|
|
|
|
2,242
|
|
|
|
33,776
|
|
|
|
1,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory note #1
|
|
|
-
|
|
|
|
-
|
|
|
|
990
|
|
|
|
-
|
|
Promissory note #2
|
|
|
-
|
|
|
|
-
|
|
|
|
13,278
|
|
|
|
-
|
|
Debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,510
|
)
|
|
|
-
|
|
Promissory note #3
|
|
|
50,000
|
|
|
|
1,500
|
|
|
|
50,000
|
|
|
|
-
|
|
Debt discount
|
|
|
(13,542
|
)
|
|
|
-
|
|
|
|
(32,292
|
)
|
|
|
-
|
|
Promissory note #4
|
|
|
10,000
|
|
|
|
2,200
|
|
|
|
10,000
|
|
|
|
400
|
|
Debt discount
|
|
|
(384
|
)
|
|
|
-
|
|
|
|
(7,308
|
)
|
|
|
-
|
|
Promissory note #5
|
|
|
36,100
|
|
|
|
1,504
|
|
|
|
36,100
|
|
|
|
3,581
|
|
Promissory note #6
|
|
|
5,040
|
|
|
|
-
|
|
|
|
5,040
|
|
|
|
106
|
|
Debt discount
|
|
|
(420
|
)
|
|
|
-
|
|
|
|
(4,200
|
)
|
|
|
-
|
|
Promissory note #7
|
|
|
24,960
|
|
|
|
2,629
|
|
|
|
24,960
|
|
|
|
-
|
|
Promissory note #8
|
|
|
50,000
|
|
|
|
2,083
|
|
|
|
50,000
|
|
|
|
-
|
|
Promissory note #9
|
|
|
50,400
|
|
|
|
1,050
|
|
|
|
-
|
|
|
|
-
|
|
Debt discount
|
|
|
(8,085
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Promissory note #10
|
|
|
70,000
|
|
|
|
2,917
|
|
|
|
-
|
|
|
|
-
|
|
Debt discount
|
|
|
(22,166
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Promissory note #11
|
|
|
75,000
|
|
|
|
3,411
|
|
|
|
-
|
|
|
|
-
|
|
Debt discount
|
|
|
(24,583
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subtotal promissory notes net
|
|
|
302,320
|
|
|
|
17,294
|
|
|
|
143,058
|
|
|
|
4,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty note #1
|
|
|
15,107
|
|
|
|
-
|
|
|
|
46,876
|
|
|
|
-
|
|
Debt discount
|
|
|
(14,549
|
)
|
|
|
-
|
|
|
|
(45,903
|
)
|
|
|
-
|
|
Royalty note #2
|
|
|
15,178
|
|
|
|
-
|
|
|
|
48,938
|
|
|
|
-
|
|
Debt discount
|
|
|
(14,844
|
)
|
|
|
-
|
|
|
|
(41,133
|
)
|
|
|
-
|
|
Royalty note #3
|
|
|
192,000
|
|
|
|
8,000
|
|
|
|
192,000
|
|
|
|
-
|
|
Debt discount
|
|
|
(128,000
|
)
|
|
|
-
|
|
|
|
(176,000
|
)
|
|
|
-
|
|
Royalty note #4
|
|
|
325,000
|
|
|
|
13,542
|
|
|
|
325,000
|
|
|
|
4,375
|
|
Debt discount
|
|
|
(225,894
|
)
|
|
|
-
|
|
|
|
(311,258
|
)
|
|
|
-
|
|
Subtotal royalty notes net
|
|
|
163,997
|
|
|
|
21,542
|
|
|
|
38,520
|
|
|
|
4,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party promissory note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party promissory note
|
|
|
-
|
|
|
|
-
|
|
|
|
97,749
|
|
|
|
-
|
|
Total notes
|
|
$
|
520,702
|
|
|
$
|
41,078
|
|
|
$
|
313,103
|
|
|
$
|
10,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
209,346
|
|
|
$
|
41,078
|
|
|
$
|
238,264
|
|
|
$
|
10,110
|
|
Long-term portion
|
|
$
|
311,356
|
|
|
|
-
|
|
|
$
|
74,839
|
|
|
$
|
-
|
|
Convertible
note #1:
On
August 7, 2015, the Company entered into an agreement with a third party non-affiliate and issued a 7.5% interest bearing convertible
debenture for $15,000 due on August 7, 2017, with conversion features commencing after 180 days following the date of the note.
Payments of interest only were due monthly beginning September 2015. The loan is convertible at 70% of the average of the closing
prices for the common stock during the five trading days prior to the conversion date. In connection with this Convertible note
payable, the Company recorded a $5,770 discount on debt, related to the beneficial conversion feature of the note to be amortized
over the life of the note or until the note is converted or repaid. This note was bifurcated with the embedded conversion option
recorded as a derivative liability at fair value (See Note 9). On May 6, 2016 the note holder elected to convert $7,500 in principal
into 30,000 shares of common stock. The note is currently in default.
In
connection with the issuance of the August Convertible Note Payable, the Company issued a warrant on August 7, 2015 to purchase
30,000 shares of the Company’s common stock at a purchase price of $0.50 per share. The Black Scholes model was used in
valuing the warrants in determining the relative fair value of the warrants issued in connection with the convertible note payable
using the following inputs: Expected Term – 3 years, Expected Dividend Rate – 0%, Volatility – 100%, Risk Free
Interest Rate -1.08%. The Company recorded an additional $4,873 discount on debt, related to the relative fair value of the warrants
issued associated with the note to be amortized over the life of the note.
Convertible
note #2
On
November 24, 2015, the Company entered into an agreement with an existing non-affiliated shareholder, and issued a 10% interest
bearing convertible debenture for $50,000 due on November 19, 2017. Payments of interest only are due monthly beginning December
2015. The loan is convertible at 70% of the average of the closing prices for the common stock during the five trading days prior
to the conversion date, but may not be converted if such conversion would cause the holder to own more than 9.9% of outstanding
common stock after giving effect to the conversion (which limitation may be removed by the holder upon 61 days advanced notice
to the company). In connection with this Convertible Note Payable, the Company recorded a $32,897 discount on debt, related to
the beneficial conversion feature of the note to be amortized over the life of the note or until the note is converted or repaid.
This note was bifurcated with the embedded conversion option recorded as a derivative liability at fair value. As of September
30, 2017, this note has not been converted.
In
connection with the issuance of the November convertible note payable, the Company issued a warrant to purchase 80,000 shares
of common stock at an exercise price of $0.80 per share. The warrant has an exercise period of two years from the date of issuance.
The Black Scholes model was used in valuing the warrants in determining the relative fair value of the warrants issued in connection
with the convertible note payable using the following inputs: Expected Term – 2 years, Expected Dividend Rate – 0%,
Volatility – 100%, Risk Free Interest Rate -.61%. The Company recorded an additional $13,783 discount on debt, related to
the relative fair value of the warrants issued associated with the note to be amortized over the life of the note.
Promissory
note #1:
On
December 18, 2015, the Company entered into a borrowing facility with a third party. The initial note value was for a principal
balance of $10,200. The Company is allowed to draw limited additional funds at any time. During 2016 the Company drew an additional
$13,100 in connection with this borrowing facility. The interest due is dependent on a cost schedule that is tied to the date
of repayment of the principle. This borrowing facility was paid back in January 2017.
Promissory
note #2:
On
January 29, 2016, the Company entered into a note payable agreement with a third party. The note was for a principal balance of
$44,850 in exchange for $29,505 in cash. The initial borrowing was paid back in August 2016. Subsequent to this initial repayment,
the Company borrowed an additional $28,600 in September of 2016. The subsequent borrowing was paid back in April 2017.
Promissory
note #3:
On
March 30, 2016, the Company entered into a borrowing agreement with a third party. The note was for a principal balance of $50,000
and included 50,000 restricted common shares. The promissory note has a maturity date of June 30, 2018, and bears interest at
18% per annum. The purchaser did not sign the agreement nor deliver the proper consideration prior to March 31, 2016. The exchange
of the $50,000 in cash consideration by the purchaser and the issuance of the 50,000 restricted common shares by the Company was
made in conjunction with delivery of the signed purchase agreement and promissory note on April 5, 2016. The Company recorded
a debt discount of $50,000 related to the relative fair value of the issued shares associated with the note to be amortized over
the life of the note.
Promissory
note #4:
On
September 23, 2016, the Company provided an agreement to a third party to obtain a $10,000 promissory note in exchange for 100,000
restricted common shares and $10,000 in cash. The promissory note had a maturity date of October 31, 2017 and bears interest at
24% per annum. On October 31, 2017, the note was amended to extend the maturity date to October 31, 2018. There are no other changes
to the note. The Company recorded a debt discount of $10,000 related to the relative fair value of the issued shares associated
with the note to be amortized over the life of the note.
Promissory
note #5:
On
September 30, 2016, the Company provided an agreement to a third party to obtain a $36,100 promissory note in exchange for $36,100
in cash. The promissory note had a maturity date of October 1, 2017 and bears interest at 25% per annum. The note required interest
only payments of $752 per month and a balloon payment of $36,100 for principle upon maturity. The note, along with promissory
notes #7, #8, #9, #10, and #11(collectively “The Notes” and all to the same note holder), were amended November 1,
2017 and principal payments on The Notes is to be in sixty monthly payments of $15,000 principal and $10,000 monthly fee to commence
December 1, 2018.
Promissory
note #6:
On
November 1, 2016, the Company provided an agreement to a third party to obtain a $5,040 promissory note in exchange for $5,040
in cash. The promissory note had a maturity date of November 1, 2017 and bears interest at 25% per annum. On November 1, 2017,
the note was amended to extend the maturity date to November 1, 2018. There are no other changes to the note. The note requires
interest only payments of $105 per month. In connection with the issuance of the note payable, the Company issued a warrant to
purchase 50,000 shares of common stock at an exercise price of $0.10 per share. The warrant has an exercise period of four years
from the date of issuance. The Black Scholes model was used in valuing the warrants in determining the relative fair value of
the warrant using the following inputs: Expected Term – 4 years, Expected Dividend Rate – 0%, Volatility – 329%,
Risk Free Interest Rate -1.56%. The Company recorded a discount of $5,040, related to the relative fair value of the warrants
issued associated with the note to be amortized over the life of the note.
Promissory
note #7:
On
November 1, 2016, the Company provided an agreement to a third party to obtain a $24,960 promissory note in exchange for $24,960
in cash. The promissory note had a maturity date of November 1, 2017 and bears interest at 25% per annum. The note required total
payments of $520 per month and a balloon payment of $24,960 for principle upon maturity. The note, along with promissory notes
#5, #8, #9, #10, and #11(collectively “The Notes” and all to the same note holder), were amended November 1, 2017
and principal payments on The Notes is to be in sixty monthly payments of $15,000 principal and $10,000 monthly fee to commence
December 1, 2018.
Promissory
note #8:
On
November 1, 2016, the Company provided an agreement to a third party to obtain a $50,000 promissory note in exchange for $50,000
in cash. The promissory note had a maturity date of November 1, 2019 and bears interest at 25% per annum. The note required total
payments of $1,042 per month and a balloon payment of $50,000 for principle upon maturity. The note, along with promissory notes
#5, #7, #9, #10, and #11(collectively “The Notes” and all to the same note holder), were amended November 1, 2017
and principal payments on The Notes is to be in sixty monthly payments of $15,000 principal and $10,000 monthly fee to commence
December 1, 2018.
Promissory
note #9:
On
January 15, 2017, the Company provided an agreement to a third party to obtain a $50,400 promissory note in exchange for $50,400
in cash. The promissory note had a maturity date of January 15, 2018 and bears interest at 25% per annum. The note required total
payments of $1,042 per month and a balloon payment of $50,000 for principle upon maturity. The Company recorded a debt discount
of $27,720 related to the value of the issued shares associated with the process of obtaining the note to be amortized over the
life of the note. The note, along with promissory notes #5, #7, #8, #10, and #11 (collectively “The Notes” and all
to the same note holder), were amended November 1, 2017 and principal payments on The Notes is to be in sixty monthly payments
of $15,000 principal and $10,000 monthly fee to commence December 1, 2018.
Promissory
note #10:
On
February 27, 2017, the Company provided an agreement to a third party to obtain a $70,000 promissory note in exchange for $70,000
in cash. The promissory note had a maturity date of February 27, 2020 and bears interest at 25% per annum. The note required total
payments of $1,458 per month and a balloon payment of $70,000 for principle upon maturity. The Company recorded a debt discount
of $28,000 related to the value of the issued shares associated with the process of obtaining the note to be amortized over the
life of the note. The note, along with promissory notes #5, #7, #8, #9, and #11 (collectively “The Notes” and all
to the same note holder), were amended November 1, 2017 and principal payments on The Notes is to be in sixty monthly payments
of $15,000 principal and $10,000 monthly fee to commence December 1, 2018.
Promissory
note #11:
On
March 16, 2017, the Company provided an agreement to a third party to obtain a $75,000 promissory note in exchange for $75,000
in cash. The promissory note had a maturity date of March 16, 2020 and bears interest at 25% per annum. The note required total
payments of $1,563 per month and a balloon payment of $75,000 for principle upon maturity. The Company recorded a debt discount
of $30,000 related to the value of the issued shares associated with the process of obtaining the note to be amortized over the
life of the note. The note, along with promissory notes #5, #7, #8, #9, and #11 (collectively “The Notes” and all
to the same note holder), were amended November 1, 2017 and principal payments on The Notes is to be in sixty monthly payments
of $15,000 principal and $10,000 monthly fee to commence December 1, 2018.
Royalty
note #1:
On
January 20, 2016, the company entered into a non-interest bearing note payable and royalty agreement with a third party. Under
the note, the Company borrowed $65,000 and began to repay the principal amount at a rate of approximately $937 per month with
escalations to approximately $3,531 per month as of February 2017 until the note is paid in full. In addition, starting in February
2018, the Company will pay the lender a royalty fee of five ($5) dollars per month for every ignition interlock devise that the
Company has on the road in customers’ vehicles up to eight hundred (800) in perpetuity, and for every unit over 800, the
Company will owe the lender $1 per month per device in perpetuity. In connection with this note, the Company recorded a debt discount
of $65,000 relating to the future royalty payments, to be amortized over the life of the note.
On
September 30, 2016, the Company entered into Amendment No. 1 to Royalty note #1 in order to remove a security interest in the
Company’s assets to secure repayment of the original note and amend the royalty provisions of the original note to be $1
for each Device on the road beginning in the 25
th
month after the date of the original note. In connection with this
amendment, the Company issued 425,000 shares of restricted common stock. Pursuant to ASC 470 this amendment is a deemed extinguishment
of the debt and the resulting revised debt is set up as a new note. In connection therewith, the Company recorded a loss on extinguishment
of $116,541 during the year ended December 31, 2016.
Royalty
note #2:
On
March 29, 2016, the company consummated a non-interest bearing note payable and royalty agreement with a relative of the CEO with
terms almost identical to the note referenced above. Under the note, the Company borrowed $55,000 and began to repay the principal
amount at a rate of approximately $937 per month with escalations to approximately $3,531 per month as of April 2017 until the
note is paid in full. In addition, starting in February 2018, the Company will pay the lender a royalty fee of five ($5) dollars
per month for every ignition interlock devise that the Company has on the road in customers’ vehicles up to eight hundred
(800) in perpetuity, and for every unit over 800, the Company will owe the lender $1 per month per device in perpetuity. In connection
with this note, the Company recorded a debt discount of $55,000 relating to the future royalty payments, to be amortized over
the life of the note.
On
September 30, 2016, the Company entered into Amendment No. 1 to Royalty note #2 to amend the royalty provisions of the original
note to be $1 for each Device on the road beginning in the 25
th
month after the date of the Royalty note #2. In connection
with this amendment, the Company issued 50,000 shares of restricted common stock and recorded an additional debt discount of $8,959.
This amendment was accounted for as a debt modification pursuant to ASC 470.
Royalty
note #3:
On
September 30, 2016, the Company entered into a Loan and Security Agreement (the “LSA”) with Doheny Group, LLC, a Delaware
limited liability company (“Doheny”), under which Doheny agreed to loan up to $542,400 in two phases, to be used to
acquire additional parts and supplies to manufacture the Company’s proprietary breath alcohol ignition interlock devices.
Under the terms of the LSA, the first phase will be a loan of up to $192,000 to acquire parts and supplies to manufacture 600
Devices; and the second phase will be a loan of up to $350,400 to acquire parts and supplies to manufacture 1,000 Devices.
The
Phase 1 Loan was funded in the amount of $192,000 by Doheny on September 30, 2016, upon which the Company forwarded the funds
to its supplier on or about October 5, 2016, in order to acquire parts and supplies to manufacture 600 Devices. Both the Phase
1 Loan and the Phase 2 Loan mature three years from the date of funding, and are at an interest rate of 25% per annum. The note
requires interest only payments of $4,000 per month. The Company can prepay the Phase 1 Loan and the Phase 2 Loan (if applicable)
at any time without penalty. In exchange for Doheny funding the Phase 1 Loan, the Company issued Doheny a promissory note for
$192,000 and also issued Doheny shares of common stock equal to 4.99% of the then-outstanding common stock, pursuant to the terms
of a stock purchase agreement. As a result, on or about October 7, 2016, the Company issued Doheny 845,913 shares of common stock.
In addition, upon funding of any portion of the Phase 2 loan (Royalty Note #4 below) then the Company is obligated to issue Doheny
that number of additional shares of common stock that equals 5% of the then-outstanding common stock. Until the Company repays
the Phase 1 Loan and the Phase 2 Loan, as applicable, Doheny has anti-dilution rights for the percentage of stock Doheny owns
in the event the Company issues additional shares of common stock during that period. The Company also entered into a Royalty
Agreement with Doheny, under which Doheny was granted perpetual royalty rights on all Devices when the Company has 500 or more
Devices in service whether rented to end users or distributors. The royalty amounts vary between $1 and $2 per Device depending
on a variety of factors. The Company recorded a debt discount of $192,000 related to the relative fair value of the issued shares
associated with the Phase 1 note to be amortized over the life of the note.
On
August 3, 2017, the Company entered into an amendment (“Amendment No. 1 to Royalty Agreement”) with Doheny Group,
LLC. The amendment amends the calculation of royalty amounts to a monthly calculation of $1.30 per unit (whether retail or wholesale
unit) on the total number of units each month in perpetuity. The amendment also amends the payment of royalties to commence from
and after the effective date of the amendment on all units at customers, beginning with the first unit.
Royalty
note #4:
On
November 4, 2016, the Company agreed to fund an initial portion of the Phase 2 loan as described in “Royalty note #3”
above. In connection with this funding the common stock ownership percentage of Doheny Group was increased to 9.95%. As also described
in “Royalty note #3” above Doheny has anti-dilution privileges to maintain 9.95% of common stock ownership at no additional
cost until both Royalty note #3 and Royalty note #4 are paid in full. As of September 30, 2017, the Company has drawn $325,000
out of the maximum allowance of $350,400 in connection with Royalty note #4.
Related
party promissory note
On
February 16, 2014, the Company entered into a note payable agreement with Laurence Wainer, the director, President and sole officer
of the Company. The note was for a principal balance of $160,000 and bears interest at 7.75% per annum. Principal and interest
payments are due in 60 equal monthly installments beginning in March 2014 of $3,205. The Company and Laurence Wainer entered into
an additional agreement effective April 2014 suspending loan repayments until January 2015. As of January 2015, the payments have
resumed. On March 31, 2017 the Company entered into an agreement with Mr. Wainer to issue to him 1,000,000 Series A Preferred
Shares in exchange $25,537 in accrued salary. On May 19
,
2017, the Company amended the March 31, 2017 agreement to
forgive $45,000 in debt owed by Company to Mr. Wainer instead of the forgiveness of $25,537 in accrued salary. The Company paid
back the remaining amounts due under this note in June 2017.
Note
9 – Derivative Financial Instruments
The
Company applies the provisions of ASC Topic 815-40, Contracts in Entity’s Own Equity (“ASC Topic 815-40”), under
which convertible instruments, which contain terms that protect holders from declines in the stock price, may not be exempt from
derivative accounting treatment. As a result, embedded conversion options (whose exercise price is not fixed and determinable)
in convertible debt (which is not conventionally convertible due to the exercise price not being fixed and determinable) are initially
recorded as a liability and are revalued at fair value at each reporting date using the Black Sholes Model.
The
Company has a $7,500 and a $50,000 convertible note with variable conversion pricing outstanding at September 30, 2017. The following
inputs were used within the Black Sholes Model to determine the initial relative fair value: Expected Term – .85 and 1.11
years, Expected Dividend Rate – 0%, Volatility – 312%, Risk Free Interest Rate - 0.55%.
The
Company revalues these derivatives each quarter using the Black Sholes Model. The change in valuation is accounted for as a gain
or loss in derivative liability. The following table describes the Derivative liability as of September 30, 2017 and December
31, 2016.
Balance December 31, 2016
|
|
$
|
73,556
|
|
Change in fair market value of derivatives
|
|
|
(11,019
|
)
|
Balance September 30, 2017 (unaudited)
|
|
$
|
62,537
|
|
Note
10 – Accrued Royalties Payable
In
connection with the Royalty Notes number 1-4 as discussed in Note 8 above the Company has estimated the royalties to be paid out
in perpetuity. These estimates were performed at the inception for the notes to reflect the associated debt discount. Payments
on such royalty notes became due in October 2016 upon the Company hitting certain sales milestones as set forth in the royalty
agreements.
Note
11 – Stockholders’ Equity
Preferred
Stock
The
Company’s articles of incorporation authorize the Company to issue up to 20,000,000 preferred shares of $0.001 par value.
Series
A Preferred Stock
The
Company has been authorized to issue 1,000,000 shares of Series A Preferred Stock. The Series A shares have the following preferences:
no dividend rights; no liquidation preference over the Company’s common stock; no
conversion rights; no redemption rights; no call rights by the Company; each share of Series A Preferred stock will have one hundred
(100) votes on all matters validly brought to the Company’s common stockholders
.
During
the three months ended March 31, 2017, the Company entered into a material definitive agreement to issue 1,000,000 shares of series
A preferred stock to an officer and director of the Company with a preliminary estimated value of $350,000. As of September 30,
2017, the total number of preferred shares issued or issuable was 1,000,000.
Common
Stock
The
Company has authorized 100,000,000 shares of $.0001.
Holders of common stock are entitled
to one vote for each share held. There are no restrictions that limit the Company’s ability to pay dividends on its common
stock, subject to the requirements of the Delaware Revised Statutes. The Company has not declared any dividends since incorporation.
During
the nine months ended September 30, 2017, the Company issued 27,180 shares of $0.001 par value common stock for services with
a value of $13,913. The Company also issued 195,400 shares, valued at $85,720, to a related party in connection with obtaining
debt financing.
Additionally, the Company issued
and sold 3,737,154 shares of its common stock to several investors for an aggregate purchase price of $653,098. In addition, the
Company issued 447,914 common shares in accordance with the anti-dilution provisions of Royalty notes #3 and #4 (see Note 8).
The total number of shares issued or issuable as of September 30, 2017 was 24,057,961.
Note
12 – Warrants
The
Company issued warrants in individual sales and in connection with common stock purchase agreements. The warrants have expiration
dates ranging from three to four years from the date of grant and exercise prices ranging from $0.10 to $.35.
The
Company issued 1,000 warrants for services rendered. The warrants have expiration dates of four years from the date of grant and
an exercise price of $1.00. The Black Scholes model was used in valuing the warrants in determining the relative fair value of
the warrant using the following inputs: Expected Term – 4 years, Expected Dividend Rate – 0%, Volatility – 286%,
Risk Free Interest Rate -1.54%.
A
summary of warrant activity for the periods presented is as follows:
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Warrants for Common Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding and exercisable as of December 31, 2014
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
110,000
|
|
|
|
0.72
|
|
|
|
2.27
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited, cancelled, expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of December 31, 2015
|
|
|
110,000
|
|
|
$
|
0.72
|
|
|
$
|
2.10
|
|
|
|
-
|
|
Granted
|
|
|
50,000
|
|
|
|
0.10
|
|
|
|
4.00
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited, cancelled, expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of December 31, 2016
|
|
|
160,000
|
|
|
$
|
0.53
|
|
|
$
|
1.97
|
|
|
|
5,250
|
|
Granted
|
|
|
4,977,298
|
|
|
|
0.46
|
|
|
|
4.00
|
|
|
|
407,614
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited, cancelled, expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding as of Septemner 30, 2017
|
|
|
5,137,298
|
|
|
$
|
0.46
|
|
|
$
|
3.38
|
|
|
|
412,864
|
|
Note
13 – Income (Loss) Per Share
Net
income (loss) per share is provided in accordance with FASB ASC 260-10,
“Earnings per Share”.
Basic net income
(loss) per common share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed by dividing
net income (loss) by the weighted average shares outstanding, assuming all dilutive potential common shares were issued, unless
doing so is anti-dilutive.
The
following shares are not included in the computation of diluted income (loss) per share, because their inclusion would be anti-dilutive:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Preferred shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Convertible notes
|
|
|
375,082
|
|
|
|
194,008
|
|
|
|
375,082
|
|
|
|
205,737
|
|
Warrants
|
|
|
5,137,298
|
|
|
|
110,000
|
|
|
|
5,137,298
|
|
|
|
110,000
|
|
Options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total anti-dilutive weighted average shares
|
|
|
5,512,380
|
|
|
|
304,008
|
|
|
|
5,512,380
|
|
|
|
315,737
|
|
If
all dilutive securities had been exercised at September 30, 2017 the total number of common shares outstanding would be as follows:
Common Shares
|
|
|
24,057,961
|
|
Preferred Shares
|
|
|
-
|
|
Convertible notes
|
|
|
375,082
|
|
Warrants
|
|
|
5,137,298
|
|
Options
|
|
|
-
|
|
Total potential shares
|
|
|
29,570,341
|
|
Note
14 – Commitments and Contingencies
On
December 1, 2016, the Company entered into a four-year lease with Cahuenga Management LLC for a storefront location at 15503 Cahuenga
Blvd., North Hollywood, California 91601. Base rent under the lease is $2,200 per month, with an escalating provision up to $2,404
throughout the lease term. The rental agreement includes operating expenses such as common area maintenance, property taxes and
insurance.
On
August 28, 2017, the Company entered into a one-year lease with B3 Investments, LLC for a storefront location at Suites D104 and
D105, 2406 24
th
Street, South Phoenix, Arizona. Base rent under the lease is $1,350 per month plus 2% ($27) rental
tax. The rental agreement includes operating expenses such as common area maintenance, property taxes and insurance.
Legal
Proceedings
In
the ordinary course of business, the Company from time to time is involved in various pending or threatened legal actions. The
litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse
effect upon the Company’s financial condition and/or results of operations. However, in the opinion of management, other
than as set forth herein, matters currently pending or threatened against the Company are not expected to have a material adverse
effect on the Company’s financial position or results of operations.
Note
15 – Settlement with Distributor
On
January 21, 2018, the Company and its major distributor memorialized a September 30, 2017 oral agreement that terminated their
September 5, 2015 distributorship agreement. The distributor had failed to timely make required monthly payments. The Company
agreed to not pursue amounts due it from the distributor under the distributorship agreement. However, in the settlement agreement,
the parties agreed Lopez would pay the Company the amounts it would have been entitled to under the distributorship agreement
if Lopez is paid any amounts from customers or sub-distributors for periods prior to the termination of the distributorship agreement.
The Company agreed to assist the distributor in attempting to collect from any sub-distributors that have not paid the distributor
amounts owed. The Company has sent letters to all customers of the distributor and believes that it will retain most, if not all,
customers. If customers are not retained, the customers will need to have the interlock device removed and returned to the Company.
The Company had approximately 900 interlock units rented to the distributor. As of September 30, 2017, $35,979 in distributor
revenue and accounts receivable were reversed out.
Note
16 – Subsequent Events
The
Company follows the guidance in FASB ASC Topic 855,
Subsequent Events
(“ASC 855”), which provides guidance
to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before
the consolidated financial statements are issued or are available to be issued. ASC 855 sets forth (i) the period after the balance
sheet date during which management of a reporting entity evaluates events or transactions that may occur for potential recognition
or disclosure in the consolidated financial statements, (ii) the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its consolidated financial statements, and (iii) the disclosures that an
entity should make about events or transactions that occurred after the balance sheet date.
Subsequent
to September 30, 2017, and through the date of this filing, the Company has issued a total of 1,072,536 common shares for an aggregate
cash purchase price of $142,300. In connection with these sales of common shares the Company has also issued warrants for 284,600
common shares.
On
November 1, 2017, the Company and the Doheny Group entered into an amendment to their November 1, 2016 loan agreement. The new
loan agreement extends the term of the loan for sixty months and is to be paid back in sixty equal monthly payments of $25,000
consisting of $15,000 principal payment and a monthly fee of $10,000 to commence on December 1, 2018.
On
November 1, 2017, the Company and Joseph Haridim entered into an amendment to their October 31, 2016 loan agreement. The new loan
agreement extends the term of the loan for twelve months and the loan is now due in full on November 1, 2018.