FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
–
BlackRidge Technology International, Inc. (the "Company" or, “we”, “us”, “our” and similar terminology) was incorporated under the laws of the State of Nevada on March 15, 2004 under the name “
Grote Molen, Inc.”
The Company develops and markets next generation cyber defense solutions that stop cyber-attacks and block unauthenticated access. The Company’s network and server security products are based on patented Transport
Access Control technology (the “Blackridge Technology”) and are designed to isolate, cloak and protect servers and cloud services and segment networks for regulatory compliance. The Company’s products are used in enterprise and government
computing environments, the industrial “internet of things” and other cloud service provider and network systems.
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, Inc. to pursue
new market opportunities for securing blockchain applications. On August 31, 2018, the Company filed for the dissolution of Blackridge Secure Blockchain Inc. after determining it would not be utilized.
On October 13, 2017, the Company formed a new business subsidiary called BlackRidge Secure Services, Inc. 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.
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 Services, Inc.
All intercompany balances have been eliminated in consolidation.
Fair Value of Financial Instruments
- The
Company's financial instruments consist of cash, accounts receivable, prepaid expenses, 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.
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 December 31, 2018 and 2017,
the Company had cash balances in excess of FDIC insured limits of $4,110,236 and $169,751.
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
|
|
|
Year Ended December 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Customer A
|
|
|
77
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
Customer B
|
|
|
10
|
%
|
|
|
12
|
%
|
|
|
-
|
%
|
|
|
15
|
%
|
Customer C
|
|
|
4
|
%
|
|
|
41
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
Customer D
|
|
|
-
|
%
|
|
|
34
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
Cash and Cash Equivalents
- The Company
considers all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
- Accounts receivable represents trade obligations from customers that are subject to normal trade collection terms and are recorded at the invoiced amount, net of any allowance for doubtful accounts, and do not typically
bear interest. The Company assesses the collectability of the accounts by taking into consideration the aging of accounts receivable, changes in customer credit worthiness, general market and economic conditions, and historical experience. Bad
debt expenses are recorded as part of selling, general and administrative expenses in the consolidated statements of operations. The Company writes off the receivable balance against the allowance when management determines a balance is
uncollectible. The Company also reviews its customer discounts and an accrual is made for discounts earned but not yet utilized at each period end. The Company does not believe there to be any question as to the collectability of its receivables
as of December 31, 2018 and 2017 and has, therefore, not created an allowance as of this date.
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 December 31, 2018 and 2017 consisted primarily of hardware
appliances valued as follows:
|
|
As of
December 31,
2018
|
|
|
As of
December 31,
2017
|
|
Inventory
|
|
$
|
391,658
|
|
|
$
|
376,063
|
|
Less: allowance for obsolescence
|
|
|
(335,655
|
)
|
|
|
(335,655
|
)
|
|
|
$
|
56,003
|
|
|
$
|
40,408
|
|
Revenue Recognition
- We account for product
revenue in accordance with Accounting Standards Codification 605, Revenue Recognition, and all related interpretations. 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.
Property and Equipment -
Property
and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed on a straight-line basis over the estimated useful lives of the respective assets or, in the case of leasehold
improvements, the remaining lease term, if shorter. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed, and the resulting gains or losses are recorded as part of other income or expense
in the statements of operations. Repairs and maintenance costs are expensed as incurred.
The estimated useful lives of the property and equipment are as follows:
Property and Equipment
|
Estimated Useful Life
|
Building improvements
|
15 years
|
Furniture, fixtures and equipment
|
7 years
|
Computer equipment
|
5 years
|
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:
|
Useful Life
|
Patent Costs
|
20 years
|
Software Licenses
|
7 years
|
Software Development Costs
|
15 years
|
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.
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.
Income Taxes
-
Income taxes are provided in
accordance with ASC 740 Accounting for Income Taxes. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carry forwards. Deferred tax expense (benefit) results
from the net change during the year of deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of all of the deferred tax
assets will be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Provision for income taxes consists of federal and state income taxes in the United States. Due to uncertainty as to the
realization of benefits from our deferred tax assets, including net operating loss carry-forwards and other tax credits, we have a full valuation allowance reserved against such assets. We expect to maintain this full valuation allowance at least
in the near term.
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.
These updates are effective for
the Company for its annual period ending December 31, 2019, and interim periods within those fiscal years.
The Company is currently evaluating the impact of the adoption of ASU 2014-09.
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 year ended December 31, 2018 the Company incurred a net loss of $17,150,967 and inception to date losses are equal to $67,047,343.
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 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2018 and 2017:
|
|
As of
December 31,
2018
|
|
|
As of
December 31,
2017
|
|
Estimated
Useful
Life
|
Building improvements
|
|
|
55,390
|
|
|
|
55,390
|
|
15 years
|
Furniture, fixtures and equipment
|
|
|
26,101
|
|
|
|
26,101
|
|
7 years
|
Computer equipment
|
|
|
6,926
|
|
|
|
8,927
|
|
5 years
|
Less: accumulated depreciation
|
|
|
(9,596
|
)
|
|
|
(790
|
)
|
|
|
|
$
|
78,821
|
|
|
$
|
87,628
|
|
|
The Company records depreciation expense on a straight-line basis over the estimated life of the related asset. The Company recorded depreciation expense of $8,807 and $790 during
the years ended December 31, 2018 and 2017.
NOTE 4 –
INTANGIBLE ASSETS
In accordance with ASC 350-40, ASC 350-50, and ASC 985-20, during the years ended December 31, 2018 and
2017, the Company capitalized $2,332,715 and $1,563,122, 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 $455,999 and $443,021 related to intangible assets during
years ended December 31, 2018 and 2017, respectively.
Intangible assets consisted of the following at December 31, 2018 and 2017:
|
|
As of
December 31,
2018
|
|
|
As of
December 31,
2017
|
|
Estimated
Useful Life
|
Patent Costs
|
|
|
542,846
|
|
|
|
397,417
|
|
15 years
|
Software Licenses
|
|
|
58,260
|
|
|
|
58,260
|
|
7 years
|
Software Development Costs
|
|
|
10,208,061
|
|
|
|
8,020,775
|
|
5 years
|
Less: accumulated amortization
|
|
|
(1,888,807
|
)
|
|
|
(1,432,808
|
)
|
|
|
|
$
|
8,920,360
|
|
|
$
|
7,043,644
|
|
|
Based upon currently launched products, the Company anticipates amortization expense of approximately $480,000 during each of the next five years.
NOTE 5 – NOTES PAYABLE
Short term notes
At December 31, 2018 and 2017, the Company had outstanding short-term debt totaling $45,232 and $50,232, 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 these notes have exceeded their initial maturity dates, they are subject to the default
interest rate of 15% per annum.
The following table summarizes the Company’s short-term notes payable for the years ended December 31, 2018 and 2017:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Beginning Balance
|
|
$
|
50,232
|
|
|
$
|
89,221
|
|
Notes acquired in business acquisition
|
|
|
-
|
|
|
|
208,811
|
|
Repayments – continuing operations
|
|
|
(5,000
|
)
|
|
|
(38,989
|
)
|
Repayments – discontinued operations
|
|
|
-
|
|
|
|
(53,132
|
)
|
Notes divested in disposal of discontinued operations
|
|
|
-
|
|
|
|
(155,679
|
)
|
Ending Balance
|
|
$
|
45,232
|
|
|
$
|
50,232
|
|
Short term notes – related party
On January 31, 2018, the Company’s Chief Technology Officer and significant shareholder invested $500,000 via a one year
note bearing interest at 8% annually. In conjunction with this note, the Company issued 5 year detachable warrants to purchase 1,562,500 shares of the Company’s common stock at $0.50 per share. These warrants were valued at $172,542 using the
Black-Scholes pricing model and were recorded as a discount to the note. The note carries a default rate of 18% for any principal not paid by the maturity date. On September 30, 2018, the note along with interest of $29,712 was converted into
2,118,849 shares of the Company’s common stock at a rate of $0.25 per share. Additionally, as part of the conversion, additional warrants to purchase 437,500 shares of common stock were issued and all warrants related to this note were repriced
to reflect an exercise price of $0.25 per share. The value of these additional warrants and the lowered conversion totaled $58,250 which the Company recorded as a loss on extinguishment of debt.
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 years ended December 31, 2018 and 2017:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Beginning Balance
|
|
$
|
766,658
|
|
|
$
|
1,200,000
|
|
Notes acquired in business acquisition
|
|
|
-
|
|
|
|
136,830
|
|
Repayments – continuing operations
|
|
|
(400,001
|
)
|
|
|
(433,342
|
)
|
Repayments – discontinued operations
|
|
|
-
|
|
|
|
(1,603
|
)
|
Notes divested in disposal of discontinued operations
|
|
|
-
|
|
|
|
(135,227
|
)
|
Ending Balance
|
|
$
|
366,657
|
|
|
$
|
766,658
|
|
Short Term Portion of Long Term Debt
|
|
$
|
366,657
|
|
|
$
|
400,000
|
|
Long Term Debt
|
|
$
|
-
|
|
|
$
|
366,658
|
|
NOTE 6 – CONVERTIBLE NOTES
Short term convertible notes
On January 31, 2018, the Company issued a $100,000 convertible note bearing interest at 8% per annum. The note matures
on February 28, 2019 and is convertible into the Company’s
Series B Preferred Stock at a price of $0.32 per share at the holder’s request. The noteholder was
also granted detachable 5 year warrants to purchase an aggregate of 312,500 shares of the Company’s common stock at an exercise price of $0.32 per share. The Company has determined the note to contain a beneficial conversion feature. The Company
valued the beneficial conversion feature at $88,219 based on the intrinsic per share value of the conversion feature, and the warrants at $46,991 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on
relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $68,021 and $31,969, respectively. At December 31, 2018, the principal balance was still outstanding and
is included on the Company’s consolidated balance sheets net of discounts at $45,938. The Company had accrued interest for this note in the amount of $7,321, which is included in accrued interest on the Company’s consolidated balance sheets.
On February 23, 2018, the Company issued a $1,000,000 convertible note bearing interest at 9% per annum. The note
matures on February 29, 2019 and is convertible, as amended, into the Company’s
Series B Preferred Stock at a price of $0.25 per share at the holder’s request. The noteholder
was also granted detachable 5 year warrants to purchase an aggregate of 3,125,000 shares of the Company’s common stock at an exercise price of $0.32 per share. The Company has determined the note to contain a beneficial conversion feature. The
Company valued the beneficial conversion feature at $417,757 based on the intrinsic per share value of the conversion feature, and the warrants at $540,553 using the Black-Scholes pricing model. The Company has allocated the note proceeds based
on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $417,757 and $350,882, respectively. At December 31, 2018, the principal balance was still outstanding
and is included on the Company’s consolidated balance sheets net of discounts at $791,651. The Company had accrued interest for this note in the amount of $76,685, which is included in accrued interest on the Company’s consolidated balance
sheets.
On February 27, 2018, the Company issued a $1,000,000 convertible note bearing interest at 9% per annum. The note
matures on February 29, 2019 and is convertible, as amended, into the Company’s
Series B Preferred Stock at a price of $0.25 per share at the holder’s
request. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 3,125,000 shares of the Company’s common stock at an exercise price of $0.32 per share. The Company has determined the note to contain a beneficial
conversion feature. The Company valued the beneficial conversion feature at $444,923 based on the intrinsic per share value of the conversion feature, and the warrants at $541,244 using the Black-Scholes pricing model. The Company has allocated
the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $444,923 and $351,173, respectively. At December 31, 2018, the principal
balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at $773,571. The Company had accrued interest for this note in the amount of $75,699, which is included in accrued interest on the
Company’s consolidated balance sheets.
On April 18, 2018, the Company issued a $2,000,000 convertible note bearing interest at 9% per annum. The note matures
on April 18, 2019 and is convertible, as amended, into the Company’s
Series B Preferred Stock at a price of $0.25 per share at the holder’s request. The
noteholder was also granted detachable 5 year warrants to purchase an aggregate of 6,250,000 shares of the Company’s common stock at an exercise price of $0.32 per share. The Company has determined the note to contain a beneficial conversion
feature. The Company valued the beneficial conversion feature at $1,510,980 based on the intrinsic per share value of the conversion feature, and the warrants at $1,073,331 using the Black-Scholes pricing model. The Company has allocated the
note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $1,301,510 and $698,480, respectively. At December 31, 2018, the principal
balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at $51,049. The Company had accrued interest for this note in the amount of $126,740, which is included in accrued interest on the
Company’s consolidated balance sheets.
On May 4, 2018, the Company issued an aggregate $1,500,000 in convertible notes bearing interest at 9% per annum. These
notes mature on May 31, 2019 and are convertible, as amended, into the Company’s
Series B Preferred Stock at a price of $0.25 per share at the holder’s
request. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 4,687,500 shares of the Company’s common stock at an exercise price of $0.25 per share. The Company has determined the note to contain a beneficial
conversion feature. The Company valued the beneficial conversion feature at $1,133,680 based on the intrinsic per share value of the conversion feature, and the warrants at $806,050 using the Black-Scholes pricing model. The Company has
allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $975,685 and $524,305, respectively. At December 31, 2018, the
principal balances were still outstanding and is included on the Company’s consolidated balance sheets net of discounts at an aggregate $15,248. The Company had accrued interest for these notes in the amount of $89,140, which is included in
accrued interest on the Company’s consolidated balance sheets.
On May 9, 2018, the Company issued a $1,028,274 convertible note bearing interest at 9% per annum as replacement for a
$1,000,000 note plus accrued interest of $28,274 (see long term convertible notes section of this note). The note matures on May 31, 2019 and is convertible, as amended, into the Company’s
Series B Preferred Stock at a price of $0.25 per share at the holder’s request. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 3,213,356 shares of the Company’s common
stock at an exercise price of $0.25 per share. The Company has determined the note to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $835,295 based on the intrinsic per share value of the
conversion feature, and the warrants at $538,207 using the Black-Scholes pricing model. The Company has allocated the note proceeds based relative on fair value and has recorded the value of the beneficial conversion feature and warrants as a
discount to the debt in the amount of $674,972 and $353,292, respectively. At December 31, 2018, the principal balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at $11,388. The Company
had accrued interest for this note in the amount of $59,837, which is included in accrued interest on the Company’s consolidated balance sheets.
On July 5, 2018, the Company issued an aggregate $2,000,000 in convertible notes bearing interest at 9% per annum. These
notes mature on July 5, 2019 and is convertible, as amended, into the Company’s
Series B Preferred Stock at a price of $0.25 per share at the holder’s
request. The noteholders were also granted detachable 5 year warrants to purchase an aggregate of 8,000,000 shares of the Company’s common stock at an exercise price of $0.25 per share. The Company has determined the notes to contain a
beneficial conversion feature. The Company valued the beneficial conversion feature at $1,307,658 based on the intrinsic per share value of the conversion feature, and the warrants at $1,354,741 using the Black-Scholes pricing model. The
Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $1,192,302 and $807,658, respectively. At December 31,
2018, the principal balances were still outstanding and are included on the Company’s consolidated balance sheets net of discounts at an aggregate $6,828. The Company had accrued interest for these notes in the amount of $87,781, which is
included in accrued interest on the Company’s consolidated balance sheets.
On July 10, 2018, the Company issued a $32,000 convertible note bearing interest at 9% per annum. This note matures on
July 31, 2019 and is convertible into the Company’s
Series B Preferred Stock at a price of $0.32 per share at the holder’s request. The noteholder was also
granted detachable 5 year warrants to purchase an aggregate of 128,000 shares of the Company’s common stock at an exercise price of $0.25 per share. The Company has determined the note to contain a beneficial conversion feature. The Company
valued the beneficial conversion feature at $15,005 based on the intrinsic per share value of the conversion feature, and the warrants at $21,711 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on
relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $15,005 and $12,935, respectively. At December 31, 2018, the principal balance was still outstanding and
is included on the Company’s consolidated balance sheets net of discounts at an aggregate $10,858. The Company had accrued interest for these notes in the amount of $1,373, which is included in accrued interest on the Company’s consolidated
balance sheets.
On July 13, 2018, the Company issued a $200,000 in convertible notes bearing interest at 9% per annum. This note matures
on July 31, 2019 and is convertible into the Company’s
Series B Preferred Stock at a price of $0.32 per share at the holder’s request. The noteholder was also
granted detachable 5 year warrants to purchase an aggregate of 800,000 shares of the Company’s common stock at an exercise price of $0.25 per share. The Company has determined the note to contain a beneficial conversion feature. The Company
valued the beneficial conversion feature at $68,266 based on the intrinsic per share value of the conversion feature, and the warrants at $135,474 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on
relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $68,266 and $80,766, respectively. At December 31, 2018, the principal balance was still outstanding and
is included on the Company’s consolidated balance sheets net of discounts at an aggregate $96,693. The Company had accrued interest for these notes in the amount of $8,433, which is included in accrued interest on the Company’s consolidated
balance sheets.
On September 17, 2018, the Company issued an aggregate $3,000,000 in convertible notes bearing interest at 9% per annum. The notes mature on September 17, 2019 and are
convertible into the Company’s
Series B Preferred Stock at a price of $0.25 per share at the holder’s request. The noteholders were also granted detachable 7 year warrants to purchase an aggregate of
12,000,000 shares of the Company’s common stock at an exercise price of $0.25 per share. The Company has determined the notes to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $2,921,170 based on
the intrinsic per share value of the conversion feature, and the warrants at $1,617,415 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial
conversion feature and warrants as a discount to the debt in the amount of $1,949,132 and $1,050,858, respectively. Additionally, as further inducement to write this this note, the Company agreed to grant all of the investor’s existing notes as
well as several other existing noteholders with relationships to the investor the same terms on their existing debt that this debt carries. These new terms were required to write the notes, therefore, the Company has accounted them as a discount
on this note, the value of which is included in the beneficial conversion value. At December 31, 2018, the principal balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at an aggregate
$383. The Company had accrued interest for these notes in the amount of $77,671, which is included in accrued interest on the Company’s consolidated balance sheets.
On December 4, 2018, the Company issued an aggregate $3,000,000 in convertible notes bearing interest at 9% per annum. The notes mature on December 4, 2019 and are
convertible into the Company’s
Series B Preferred Stock at a price of $0.25 per share at the holder’s request. The noteholders were also granted detachable 7 year warrants to purchase an aggregate of
12,000,000 shares of the Company’s common stock at an exercise price of $0.25 per share. As additional consideration for this note, the Company issued an aggregate 4,006,250 shares of the Company’s common stock. The Company has determined the
notes to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $2,248,088 based on the intrinsic per share value of the conversion feature, the warrants at $1,589,454 using the Black-Scholes pricing
model, and the stock at $1,346,000. The Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature, warrants, and stock as a discount to the debt in the amount of
$1,516,302, $803,369 and $680,319, respectively. At December 31, 2018, the principal balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at an aggregate $76. The Company had accrued
interest for these notes in the amount of $19,973, which is included in accrued interest on the Company’s consolidated balance sheets.
On December 19, 2018, the Company issued an aggregate $3,000,000 in convertible notes bearing interest at 9% per annum. The notes mature on December 19, 2019 and are
convertible into the Company’s
Series B Preferred Stock at a price of $0.25 per share at the holder’s request. The noteholders were also granted detachable 7
year warrants to purchase an aggregate of 12,000,000 shares of the Company’s common stock at an exercise price of $0.25 per share. The Company has determined the notes to contain a beneficial conversion feature. The Company valued the beneficial
conversion feature at $555,512 based on the intrinsic per share value of the conversion feature, and the warrants at $1,581,347 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on relative fair value and
has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $555,512 and $1,035,512, respectively. At December 31, 2018, the principal balance was still outstanding and is included on the
Company’s consolidated balance sheets net of discounts at an aggregate $1,445,063. The Company had accrued interest for these notes in the amount of $8,877, which is included in accrued interest on the Company’s consolidated balance sheets.
Short term convertible notes – related party
On October 31, 2013, the Company agreed to convert balances owed to the Company’s corporate counsel 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 December 31, 2018, the principal balance was still outstanding, and
the Company had accrued interest for this note in the amount of $177,419 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, John Hayes, the Company’s Chief Technology Officer, Director and significant shareholder invested
$101,000 via a one year convertible note bearing interest at 12% annually and convertible into 112,223 shares of Series A convertible preferred stock at the rate of $0.90 per share. On September 1, 2017, $237,000 owed to John Hayes was added to
the note. On September 30, 2018, the note along with interest of $89,366 was converted into 1,709,466 shares of the Company’s common stock at a rate of $0.25 per share. Additionally, as further inducement to convert the note, the Company issued
the note holder 5 year warrants to purchase 1,352,000 shares of the Company’s common stock. The Company recognized a loss on extinguishment of debt of $384,200 related to the decrease in conversion price and warrants granted.
On July 6, 2018, the Company issued a $200,000 in convertible notes bearing interest at 9% per annum to John Hayes, the
Company’s Chief Technology Officer, Director and significant shareholder. This note matures on July 31, 2019 and is convertible into the Company’s
Series B
Preferred Stock at a price of $0.32 per share at the holder’s request. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 800,000 shares of the Company’s common stock at an exercise price of $0.25 per share.
The Company has determined the note to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $130,766 based on the intrinsic per share value of the conversion feature, and the warrants at $135,474 using
the Black-Scholes pricing model. The Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $119,224 and
$80,766, respectively. On September 30, 2018, the note along with interest of $4,192 was converted into 816,767 shares of the Company’s common stock at a rate of $0.25 per share. The Company recognized a loss on extinguishment of debt of
$43,750 related to the decrease in conversion price.
On July 10, 2018, the Company issued a $32,000 in convertible notes bearing interest at 9% per annum to J Allen Kosowsky,
a Director and related party. This note matures on July 31, 2019 and is convertible into the Company’s
Series B Preferred Stock at a price of $0.32 per share at the holder’s
request. The Company has determined the note to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $15,005 based on the intrinsic per share value of the conversion feature, and the warrants at
$21,711 using the Black-Scholes pricing model. The Company has allocated the note proceeds based relative on fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of
$15,005 and $12,935, respectively. On September 30, 2018, the note along with interest of $639 was converted into 130,556 shares of the Company’s common stock at a rate of $0.25 per share. The Company recognized a loss on extinguishment of
debt of $8,960 related to the decrease in conversion price.
Long term convertible notes
On December 21, 2017, the Company issued a $150,000 convertible note bearing interest at 8% per annum. The note matures
on December 21, 2019 and is convertible into the Company’s
Series B Preferred Stock at a price of $0.32 per share at the holder’s request. The Company has
determined the note to contain a beneficial conversion feature valued at $69,935 based on the intrinsic per share value of the conversion feature. This beneficial conversion feature is recorded as a discount to the debt agreement. The
noteholder was also granted detachable 5 year warrants to purchase an aggregate of 468,750 shares of the company’s common stock at an exercise price of $0.32 per share. The warrants were valued at $69,935 using the Black-Scholes pricing model
and were recorded as a discount to the note. At December 31, 2018 the principal balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at $39,726. The Company had accrued interest for this
note in the amount of $12,329, which is included in accrued interest on the Company’s consolidated balance sheets.
On December 22, 2017, the Company issued a $1,000,000 convertible note bearing interest at 8% per annum. The note
matures on December 22, 2019 and is convertible into the Company’s
Series B Preferred Stock at a price of $0.32 per share at the holder’s request. The Company
has determined the note to contain a beneficial conversion feature valued at $466,230 based on the intrinsic per share value of the conversion feature. This beneficial conversion feature is recorded as a discount to the debt agreement. The
noteholder was also granted detachable 5 year warrants to purchase an aggregate of 3,125,000 shares of the company’s common stock at an exercise price of $0.32 per share. The warrants were valued at $466,230 using the Black-Scholes pricing model
and were recorded as a discount to the note. On May 9, 2018, this note along with $28,274 was renegotiated into a new short term convertible note and the warrants associated with the original note were cancelled. The newly negotiated note
included an additional warrant benefit valued at $95,804 which was recorded as a loss on extinguishment of debt.
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. On November 9, 2017, the Company converted the note and accrued interest of $1,665,991 into 10,757,254 shares of the Company’s common stock at a conversion rate of $0.50 per share. The Company also issued a 5 year
warrant to purchase an additional 5,378,627 shares of the Company s common stock at a purchase price of $0.50 per share as further consideration for this conversion. The Company recognized a loss on extinguishment of debt related to this
transaction of $913,238.
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 years ended December 31, 2018 and 2017:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Beginning Balance
|
|
$
|
601,576
|
|
|
$
|
3,996,810
|
|
Proceeds from issuance of convertible notes, net of issuance discounts
|
|
|
1,903,438
|
|
|
|
146,669
|
|
Proceeds from issuance of convertible notes – related party
|
|
|
-
|
|
|
|
237,000
|
|
Repayments
|
|
|
-
|
|
|
|
(100,000
|
)
|
Conversion of notes payable into common stock
|
|
|
(570,000
|
)
|
|
|
(3,712,638
|
)
|
Debt restructured
|
|
|
(112,017
|
)
|
|
|
-
|
|
Amortization of discounts
|
|
|
1,648,647
|
|
|
|
33,735
|
|
Ending Balance
|
|
$
|
3,471,644
|
|
|
$
|
601,576
|
|
Convertible notes, short term
|
|
$
|
17,860,274
|
|
|
$
|
1,150,000
|
|
Convertible notes, short term – related party
|
|
$
|
183,172
|
|
|
$
|
521,172
|
|
convertible notes, long term
|
|
$
|
150,000
|
|
|
$
|
-
|
|
Debt discounts
|
|
$
|
14,721,802
|
|
|
$
|
1,069,596
|
|
The following table summarizes the Company’s
convertible notes payable as of December 31, 2018:
Note(s) Date
|
Maturity Date
|
|
Interest
|
|
|
Principal
|
|
1/31/2018
|
1/31/2019
|
|
|
8
|
%
|
|
$
|
100,000
|
|
2/23/2018
|
2/28/2019
|
|
|
9
|
%
|
|
|
1,000,000
|
|
2/27/2018
|
2/28/2019
|
|
|
9
|
%
|
|
|
1,000,000
|
|
4/18/2018
|
4/18/2019
|
|
|
9
|
%
|
|
|
2,000,000
|
|
5/4/2018
|
5/31/2019
|
|
|
9
|
%
|
|
|
1,500,000
|
|
5/9/2018
|
5/31/2019
|
|
|
9
|
%
|
|
|
1,028,274
|
|
7/5/2018
|
7/5/2019
|
|
|
9
|
%
|
|
|
2,000,000
|
|
7/10/2018
|
7/10/2019
|
|
|
9
|
%
|
|
|
32,000
|
|
7/13/2018
|
7/13/2019
|
|
|
9
|
%
|
|
|
200,000
|
|
9/17
/2018
|
9/17/2019
|
|
|
9
|
%
|
|
|
3,000,000
|
|
12/4/2018
|
12/4/2019
|
|
|
9
|
%
|
|
|
3,000,000
|
|
12/19/2018
|
12/19/2019
|
|
|
9
|
%
|
|
|
3,000,000
|
|
|
|
|
|
|
|
|
$
|
17,860,274
|
|
NOTE 7 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases approximately 7,579 square feet of office space under a 62 month operating lease which
expires during April 2023. 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 office space under a 23 month operating lease which expires during August 2019. 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 to May 2019, 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 $287,649 and $186,640 for the years ended December 31, 2018 and 2017, respectively.
As of December 31, 2018, future minimum lease payments are as follows:
Year Ending December 31,
|
|
|
|
2019
|
|
$
|
259,851
|
|
2020
|
|
|
209,559
|
|
2021
|
|
|
214,107
|
|
2022
|
|
|
218,654
|
|
2023
|
|
|
18,569
|
|
2024 and thereafter
|
|
|
-
|
|
Total minimum lease payments
|
|
$
|
920,740
|
|
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 had a balance due under this
agreement of $37,500 December 31, 2017. In 2018, the Company reached its capital funding threshold under the agreement and reclassified the entire $37,500 liability to a payable.
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. During the year ended December 31, 2017, Robert Zahm was dismissed from the proceedings for lack of personal jurisdiction.
On March 29, 2018, the AltEnergy
Cyber, LLC’s legal action was dismissed through a motion for summary judgement.
NOTE 8 ‑ RELATED PARTY TRANSACTIONS
During the years ended December 31, 2018 and 2017, the Company incurred interest expense on notes to related parties in
the aggregate amount of $525,785 and $604,145, respectively (see Note 6 – Convertible Notes).
Accounts payable related party
At December 31, 2018 and December 31, 2017, the Company had a balance in related party accounts payable of $9,690 and $68,060,
respectively, which consisted of the following:
|
|
|
|
December 31,
|
|
|
December 31,
|
|
Party Name:
|
Relationship:
|
Nature of transactions:
|
|
2018
|
|
|
2017
|
|
John Bluher
|
Chief Financial Officer
|
Expense reimbursement
|
|
$
|
4,465
|
|
|
$
|
-
|
|
John Hayes
|
Chief Technology Officer
|
Expense reimbursement
|
|
|
5,225
|
|
|
|
55,254
|
|
Robert Graham
|
Chairman and Chief Executive Officer
|
Expense reimbursement
|
|
|
-
|
|
|
|
6,806
|
|
Robert Graham
|
Chairman and Chief Executive Officer
|
Rent
|
|
|
-
|
|
|
|
6,000
|
|
|
|
|
|
$
|
9,690
|
|
|
$
|
68,060
|
|
Advances from related party
During the year ended December 31, 2018, the Company received advances of $50,000 from Mag Ventures, a company controlled
by Tom Bruderman, a director and shareholder. These advances along with the previous balance were converted into 460,000 shares of the Company’s common stock at a price of $0.25 per share on November 9, 2018.
During the year ended December 31, 2018, the Company received advances of $25,000 from J. Allen Kosowsky, a
director and shareholder. These advances were converted into 78,125 shares of the Company’s common stock at a price of $0.32 per share on September 13, 2018.
At December 31, 2018 and December 31, 2017, the Company had a balance in related party advances of $0 and $65,000, respectively,
which consisted of the following:
|
|
|
December 31,
|
|
|
December 31,
|
|
Party Name:
|
Relationship:
|
|
2018
|
|
|
2017
|
|
Thomas Bruderman
|
Director and significant shareholder
|
|
$
|
-
|
|
|
$
|
65,000
|
|
Related Party Notes
During the year ended December 31, 2018, the Company issued notes and converted notes to related parties, see Note 5 –
Notes Payable, and Note 6 – Convertible Notes for full disclosure.
NOTE 9 ‑ STOCK
HOLDERS’ EQUITY
The Company has authorized 200 million shares of common stock, $0.001 par value, and 10 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 96,872,725 and 77,063,171 common shares issued and outstanding and 3,577,370 and 3,639,783 preferred shares issued and outstanding as of December
31, 2018 and 2017, respectively.
During the year ended December 31, 2018, the Company issued an aggregate 1,771,666 shares of the Company’s common stock
pursuant to consulting contracts valued at $614,546, or an average of $0.35 per share.
During the year ended December 31, 2018, the Company converted an aggregate 62,413 shares of the Company’s Series A
preferred stock into 789,048 shares of the Company’s common stock after receiving conversion exercises from multiple preferred stockholders.
On June 13, 2018, the Company converted a $25,000 advance from related party and Director J Allen Kosowsky into 78,125,
shares of the Company’s common stock at a price of $0.32 per share (see Note 8 – Related Party Transactions).
On September 30, 2018, the Company issued an aggregate 2,935,818 shares of the Company’s common stock to satisfy
$1,027,535 in wages payable at the rate of $0.35 per share. The stock contains a 6 month non-forfeitable vesting restriction.
On September 30, 2018, The Company converted notes payable and interest valued at an aggregate $1,161,271 and due to the
Company’s Chief Technology Officer and Director, John Hayes, into 4,645,082 shares of the Company’s common stock at a price of $0.25 per share (see additional information in Note 5 – Notes Payable and Note 6 – Convertible Notes).
On September 30, 2018, The Company converted notes payable and interest valued at $32,639 and due to the Company’s
Director, J Allen Kosowsky, into 130,556 shares of the Company’s common stock at a price of $0.25 per share (see additional information in Note 5 – Notes Payable and Note 6 – Convertible Notes).
On November 9, 2018, the Company converted a $115,000 advance from Mag Ventures, a company controlled by Tom Bruderman, a
director and shareholder, into 460,000, shares of the Company’s common stock at a price of $0.25 per share (see Note 8 – Related Party Transactions).
During the year ended December 31, 2018, the Company accepted the return of 338,200 shares of its common stock. Upon
receipt, the shares were retired to the treasury.
During the year ended December 31, 2018, the Company issued an aggregate 661,071 shares of the Company’s common stock
valued at $228,800 as satisfaction of payables in the amount of $241,067. The company recognized gain on settlement of $12,267 in relation to these transactions.
On February 22, 2017, we completed the actions contemplated by the Reorganization Agreement (see Note 13 – Business
Acquisition and Note 14 – Discontinued Operations) 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.
Between August 29, 2017 and November 16, 2017, the Company converted an aggregate 144,035 shares of the Company's
preferred stock into 1,568,862 shares of the Company's common stock after receiving conversion exercises from preferred stockholders.
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 an aggregate 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.
On October 31, 2017, the Company issued 55,556 shares of the Company's common stock in connection with the exercise of a
warrant to purchase shares at $0.60 per share. The Company received $33,334 in proceeds for the warrant exercise.
On November 9, 2017, the Company issued 10,757,254 shares of the Company's common stock for the conversion of a note
payable and accrued interest totaling $5,378,628. The Company also issued 5 year warrants to purchase an additional 5,378,627 shares of the Company's common stock at a price of $0.50. These warrants were valued at $913,238 which was recorded as
a loss on extinguishment of debt.
On November 9, 2017, the Company issued an aggregate 388,726 shares of the Company's common stock to satisfy $233,235 in
accrued accounts payable at a per share price of $0.60. The stock contains a 10 month restriction on transfers and/or sales.
On October 1, 2017, the Company issued 50,000 shares of the Company's common stock valued at $22,500 or $0.45 per share,
along with warrants to purchase 100,000 shares of the Company's common stock at a price of $0.60 per share pursuant to a consulting contract.
Between December 1, 2017 and December 17, 2017, the Company issued an aggregate 610,126 shares of the company's common
stock valued at $438,500 or an average of $0.72 pursuant to several consulting contracts.
On December 15, 2017, the Company issued 225,000 shares of the Company's common stock and 5 year warrants to purchase
56,250 shares of the Company's common stock at an exercise price per share of $0.32 to an investor for aggregate proceeds of $90,000. The warrants were valued at $8,365 using the Black-Scholes pricing model.
NOTE 10 – SHARE BASED COMPENSATION
During the year ended December 31, 2018, the Company issued 10,390,741 5-year options to purchase common stock to
employees and directors under the 2017 Stock Incentive Plan. The options were valued at $1,522,580 using the Black-Scholes pricing model. As of December 31, 2018, the total unrecognized expense for unvested share based compensation is
$2,000,971. The 2017 Stock Incentive Plan allows for a maximum 25,000,000 shares to be issued, of which 8,053,574 shares remain available for issuance as of December 31, 2018. The company recognized stock option expense during the years ended
December 31, 2018 and 2017 of $1,271,301 and $110,100, respectively.
The fair values at the commitment
date
for the
options
were based upon the following management assumptions as of December 31, 2018:
|
Commitment Date
|
|
Expected dividends
|
|
0
|
%
|
Expected term
|
|
5 years
|
|
Risk free rate
|
|
1.
91
– 2.
9
6
|
%
|
Volatility
|
|
48.24 – 52.49
|
%
|
The activity of options granted to during the year ended December 31, 2018 is as follows:
|
|
Employee and
Director Options Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining Life
|
|
Weighted
Average Grant
Date Fair Value
|
|
Beginning Balance – December 31, 2016
|
|
|
-
|
|
|
|
|
|
|
|
|
Granted
|
|
|
6,962,560
|
|
|
$
|
0.60
|
|
5 years
|
|
$
|
0.28
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Balance – December 31, 2017
|
|
|
6,962,560
|
|
|
$
|
0.60
|
|
4.65 years
|
|
$
|
0.28
|
|
Granted
|
|
|
10,390,741
|
|
|
$
|
0.33
|
|
5 years
|
|
$
|
0.1
6
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(
57,827
|
)
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(
349,048
|
)
|
|
|
|
|
|
|
|
|
|
Ending Balance – December 31, 2018
|
|
|
16,946,426
|
|
|
$
|
0.43
|
|
4
.3
2
years
|
|
$
|
0.2
0
|
|
Exercisable options
|
|
|
6,284,597
|
|
|
$
|
0.
46
|
|
4.32
years
|
|
$
|
0.2
2
|
|
The Company’s outstanding employee options at December 31, 2018 are as follows:
Options Outstanding
|
|
Option Exercisable
|
|
Exercise Price Range
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual Life
(in years)
|
|
Weighted Average
Exercise Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise Price
|
|
Intrinsic Value
|
|
$
|
0.25 - $0.60
|
|
|
|
16,946,426
|
|
|
|
4.32
|
|
|
$
|
0.43
|
|
|
|
6,284,597
|
|
|
$
|
0.46
|
|
|
$
|
-
|
|
The weighted average fair value per option issued during the year ended December 31, 2018 was $0.16.
The following table summarizes non-vested option activity during the year ended December 31, 2018:
|
|
Non-Vested
Options
|
|
|
Weighted
Average
Grant Date Fair Value
|
|
Beginning Balance – December 31, 2016
|
|
|
-
|
|
|
|
|
Granted
|
|
|
6,962,560
|
|
|
$
|
0.28
|
|
Vested
|
|
|
(1,373,097
|
)
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
Balance – December 31, 2017
|
|
|
5,589,463
|
|
|
$
|
0.28
|
|
Granted
|
|
|
10,390,741
|
|
|
$
|
0.16
|
|
Vested
|
|
|
(
4,911,501
|
)
|
|
|
|
|
Expired
|
|
|
(57,827
|
)
|
|
|
|
|
Forfeited
|
|
|
(
349,048
|
)
|
|
|
|
|
Ending Balance – December 31, 2018
|
|
|
10,661,828
|
|
|
$
|
0.
19
|
|
NOTE 11 – WARRANTS
During the year ended December 31, 2018, the Company issued an aggregate 71,355,856 warrants to purchase common stock in
conjunction with convertible debt agreements and cancelled an aggregate 4,687,500 warrants in conjunction with debt settlements and extinguishment (see note 6 - convertible notes). The company also agreed to cancel and re- issue 2,400,000
warrants at new terms in conjunction with a private stock and warrant sale. In order to facilitate this transaction, the Company agreed to cancel 2,400,000 warrants to purchase stock at $0.70 per share, and reissue the repriced warrants at
1,200,000 warrants to purchase common stock at $0.25 per share, and 1,200,000 warrants to purchase common stock at $0.50. The Company valued the new warrants at $100,306 using the Black Scholes pricing model, which is included in selling,
general and administrative expense on the Company’s 2018 statement of profit and loss.
The fair values at the commitment
date
for the
warrants
were based upon the following management assumptions as of December 31, 2018:
|
Commitment Date
|
|
Expected dividends
|
0
|
%
|
Expected term
|
5 - 7
years
|
|
Risk free rate
|
2.52 – 3.05
|
%
|
Volatility
|
48.24 – 51.35
|
%
|
The activity of warrants granted to during the year ended December 31, 2018 is as follows:
|
|
Warrants
Outstanding
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining Life
|
|
Weighted
Average Grant
Date Fair Value
|
|
Beginning Balance – December 31, 2016
|
|
|
16,029,605
|
|
|
|
2.54 years
|
|
|
0.00
|
|
Granted
|
|
|
28,094,587
|
|
|
|
5 years
|
|
|
0.21
|
|
Exercised
|
|
|
(1,055,556
|
)
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
Balance – December 31, 2017
|
|
|
43,068,636
|
|
|
$
|
0.45
|
|
4.69 years
|
|
$
|
0.08
|
|
Granted
|
|
|
73,755,856
|
|
|
$
|
0.26
|
|
6.68 years
|
|
$
|
0.14
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(7,087,500
|
)
|
|
|
|
|
|
|
|
|
|
Ending Balance – December 31, 2018
|
|
|
109,736,992
|
|
|
$
|
0.32
|
|
5.46 years
|
|
$
|
0.12
|
|
Exercisable options
|
|
|
109,736,992
|
|
|
$
|
0.32
|
|
5.46 years
|
|
$
|
0.12
|
|
The Company’s outstanding warrants at December 31, 2018 are as follows:
Warrants Outstanding
|
|
Warrants Exercisable
|
|
Exercise Price Range
|
|
Number
Outstanding
|
|
Weighted Average
Remaining
Contractual Life (in
years)
|
|
Weighted Average
Exercise Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise Price
|
|
Intrinsic Value
|
|
$
|
0.01 - $0.70
|
|
|
|
109,736,992
|
|
|
|
5.46
|
|
|
$
|
0.32
|
|
|
|
109,736,992
|
|
|
$
|
0.32
|
|
|
$
|
1,299,223
|
|
NOTE 12 – EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares
of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive
securities outstanding during each period.
Since the Company reflected a net loss for the years ended December 31, 2018 and 2017, respectively, the
effect of considering any common stock equivalents, if exercisable, would have been anti-dilutive. Therefore, a separate computation of diluted earnings (loss) per share is not presented.
The Company has the following common stock equivalents as of December 31, 2018 and 2017:
|
|
As of
December 31,
2018
|
|
|
As of
December 31,
2017
|
|
Warrants (exercise price $0.01
- $0.70
/share)
|
|
|
109,736,992
|
|
|
|
43,068,636
|
|
Options (exercise price $0.25 - $0.66/share)
|
|
|
20,436,601
|
|
|
|
9,352,435
|
|
|
|
|
130,173,293
|
|
|
|
52,421,071
|
|
NOTE 13 – 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 14 – 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 15 – INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist
of taxes currently due. Deferred taxes relate to differences between the basis of assets and liabilities for financial and income tax reporting which will be either taxable or deductible when the assets or liabilities are recovered or settled.
At December 31, 2018 and 2017, the Company had net operating loss (“NOL”) carry-forwards for Federal income
tax purposes approximating $51,417,242 and $34,394,555 respectively. At December 31, 2018 and 2017, the Company’s NOL carry-forwards for state income purposes are approximating $59,104,026 and $26,508,562, respectively. These losses are
available for future years and expire through 2037.
The Federal NOL generated for the tax year ended 12/31/2018 of $11,491,743 will not expire due to NOLs having an indefinite life as enacted
in the 2017 Tax Cuts and Jobs Act.
The deferred tax asset at December 31, 2018 and 2017 is summarized as follows:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Net operating loss & credit carry forwards
|
|
$
|
11,878,168
|
|
|
$
|
7,897,392
|
|
Inventory obsolescence reserve
|
|
|
72,645
|
|
|
|
77,993
|
|
Accrued wages, related party
|
|
|
990,408
|
|
|
|
1,216,954
|
|
Accrued interest – convertible debt, related party
|
|
|
270,904
|
|
|
|
290,845
|
|
Depreciation and amortization
|
|
|
(508,882
|
)
|
|
|
(125,749
|
)
|
Other tax adjustments
|
|
|
4,119
|
|
|
|
3,566
|
|
Deferred Revenue
|
|
|
(4,363
|
)
|
|
|
(4,625
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(12,702,998
|
)
|
|
|
(9,356,375
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has taken a 100% valuation allowance against the deferred asset attributable to the NOL carry-forwards and other temporary differences of
approximately $12,702,998 and $9,356,375 at December 31, 2018 and 2017, respectively, due to the uncertainty of realizing the future tax benefits. The decrease and increase in valuation allowances for the years ended December 31, 2018 and 2017
of approximately $3,346,623 and ($2,390,872), respectively, are primarily attributable to the Company’s net operating loss during the years then ended, and true ups for state NOLs.
The following table displays a reconciliation from the U.S. statutory rate to the effective tax rate and the provision for
(benefit from) income taxes for the years ended December 31, 2018 and 2017, respectively:
|
|
2018
|
|
|
2017
|
|
Tax (expense)/benefit at the US statutory rate of 21%
|
|
$
|
(3,346,623
|
)
|
|
$
|
2,390,872
|
|
Change in valuation allowance
|
|
|
3,346,623
|
|
|
|
(2,390,872
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes.” This standard requires the Company to provide a net
deferred tax asset or liability equal to the expected future tax benefit or expense of temporary reporting differences between book and tax accounting and any available operating loss or tax credit carryforwards.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
During the years ended December 31, 2018 and 2017, the Company recognized no interest and penalties. The Company had no accruals for interest and penalties at December 31, 2018 and 2017.
The tax years 2019, 2018, 2017, and 2016 remain open to examination for federal income tax purposes and by the other major taxing jurisdictions to
which the Company is subject.
NOTE 16 - 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 those listed below, there were no additional reportable subsequent events to be disclosed.
Notes Payable
In February 2019, the convertible notes issued on February 23, 2018 and February 27, 2018 for $1,000,000 reached their initial maturity date. The Company is currently in the process of
extending the maturity date of these notes.
F-25