The Company is authorized to issue up to 100,000,000500,000,000 shares of common stock.Common Stock, 96,872,725 of which have been issued and are outstanding. The Company is also authorized to issue up to 10,000,000 shares of Preferred Stock, 3,577 of which have been issued and 3,577,370 are outstanding, all of which have been designated as Series A Preferred Stock. To the extent of such authorization, the officers of the CompanyRegistrant have the ability, without seeking stockholder approval, to issue additional shares of common stockCommon Stock in the future for such consideration as they believe to be sufficient. The issuance of additional common stockCommon Stock in the future will reduce the proportionate ownership and voting power of the Company'sRegistrant's current stockholders.
The Company is also authorized to issue up to 5,000,000 shares of preferredcommon stock the rights and preferences of which may be designated in series by the board of directors. To the extent of any authorizations, such designations may be made without stockholder approval. The designation and issuance of a series of preferred stockavailable for sale in the future could create additional securities which may have voting, dividend, liquidation preferencesadversely affect the market price for the Company’s common stock.
Of the 96,872,725 shares of Common Stock outstanding, approximately 83,400,000 shares are freely tradable if held by non-affiliates or other rights thateligible for resale under Rule 144 promulgated under the Securities Act of 1933, as amended, if held by affiliates. Sales of substantial amounts of this Common Stock in the public market could adversely affect the market price for the Registrant's common stock. The approximately 13,500,000 remaining shares will become available for sale under Rule 144 around within one year if held by non-affiliates, and the availability of those shares for sale could also adversely affect the market price for the Registrant's Common Stock. In addition, the Registrant's outstanding shares of Series A Preferred Stock are superior to thoseconvertible into shares of the common stock, whichRegistrant's Common Stock at the rate of 10 shares (subject to certain anti-dilution adjustments) of Common Stock for each one share of Series A Preferred Stock. If the Series A Preferred Stock is converted, and the shares are placed for sale, such sales could effectively deter any takeover attempt ofadversely affect the Company.market price for the Registrant's Common Stock.
Not Applicable. The Company is a "smaller reporting company."
Item 2. Properties.
BlackRidge’s corporate headquarters are located at 322 West Griffith Road, Pocatello, Idaho 83201, where our telephone number is (208) 234-9352. Our facilities consist5390 Kietzke Lane, Reno, NV 89511, phone 1-855-807-8776. This office consists of approximately 3,0007,579 square feet of warehouseoffice and laboratory space and is leased from a third party pursuant to a 62 month lease expiring during January 2023, which provides for rent at the initial rate of $16,674 per month plus reimbursement of the landlord’s costs for property taxes, insurance and common area maintenance, subject to increase on an annual basis.
BlackRidge leases an engineering office at the Marist College Hancock Center, 3399 North Road, Poughkeepsie, NY 12601. This office consists of 200 square feet of office space located inand is leased from a building owned by Big John's Store LLC, a company owned by John Hofman, our president, director and principal stockholder, which is shared with Big John's, a retail store owned by Mr. Hofman. Such space is provided to us under an Idaho Management Agreement with Big John's Store LLCthird party pursuant to which we paya twelve-month operating lease that renews annually. The rent for the facility is a flat monthly amount of $400 and the lease is renewable annually at the option of BlackRidge.
BlackRidge also leases an engineering office at 100 Century Center Court, Suite 403, San Jose, CA 95112. This office is leased from a third party pursuant to a 23 month lease expiring during August 2019, which provides for rent at a rate of $12,500$7,988 per month plus reimbursement of the landlord’s costs for management servicesproperty taxes, insurance and the use of such space. Such agreement is on a month-to-month basis.
Item 3. 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 notliable to the Plaintiff for the $4,500,000 plus interest. During the year, 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 party to any material legal proceedings, and to our knowledge, no such legal proceedings have been threatened against us.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Market for Registrant'sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The Company'sCompany’s common stock is included on the OTCQB under the symbol "GROT."
Until July 24, 2017, the Company'sCompany’s common stock washad no quoted price on the OTCQB as $0.10 bid with no asked price. Such quotations reflect inter-dealerdue to the company not currently being traded. There is currently a limited trading market for shares of our common stock. Management does not expect significant active market to develop in our common stock unless and until we are able to implement our business plan. No assurance can be given that any active market for our common stock will develop or be maintained.
The following table sets forth, for the periods indicated, the high and low closing quotations:
| Closing Bid | |||||||
| High | Low | ||||||
2017 | ||||||||
January 1 – March 31 | - | - | ||||||
April 1 – June 30 | - | - | ||||||
July 1 - September 30 | 4.00 | 0.59 | ||||||
October 1 – December 31 | 0.90 | 0.45 | ||||||
| ||||||||
2018 | ||||||||
January 1 - March 31 | 0.62 | 0.25 | ||||||
April 1 – June 30 | 0.53 | 0.30 | ||||||
July 1- September 30 | 0.55 | 0.20 | ||||||
October 1 – December 31 | 0.46 | 0.18 | ||||||
These prices without retail mark-up, markdown or commissionwere obtained from the finance portal, Yahoo! Finance, and maydo not necessarily representreflect actual transactions.
Holders
At March 29, 2016,30, 2019, there were 31 holdersapproximately 210 shareholders of record of the Company's common stock and 74 holders of the Company’s Series A preferred stock, as reported by the Company's transfer agent. In computing the number of holders of record, each broker-dealer and clearing corporation holding shares on behalf of its customers is counted as a single stockholder.
Dividends
No dividends have ever been paid on the Company's securities, and the Company has no current plans to pay dividends in the foreseeable future.
Equity Compensation Plans
In May 2017, the Board recommended and its shareholders approved the 2017 Stock Incentive Plan (the "2017 Plan"), which became effective immediately. See Note 10 – Share Based Compensation for options issued under this plan.
Under the 2017 Plan, the term of an option grant shall not have in effect any compensation plans under which our equity securities are authorizedexceed ten years from the date of its grant and options generally vest over a five-year period, with vesting on a monthly interval. Under the 2017 Plan, up to 20,000,000 shares of common stock can be reserved for issuance and we do not have any outstanding stock options.to eligible participants. The Company has no other equity compensation plans.
Special Sales Practice Requirements with Regard to "Penny Stocks"
In order to protect investors from patterns of fraud and abuse that have occurred in the market for low priced securities commonly referred to as "penny“penny stocks,"” the SEC has adopted regulations that generally define a "penny stock"“penny stock” to be any equity security having a market price (as defined) less than $5.00 per share, or an exercise price of less than $5.00 per share, subject to certain exceptions. The price of our stock is currently below $5.00 per share and our stock is subject to the "penny stock"“penny stock” regulations. As a result, broker-dealers selling our common stock are subject to additional sales practices when they sell our stock to persons other than established clients and "accredited“accredited investors."” For transactions covered by these rules, before the transaction is executed, the broker-dealer must make a special customer suitability determination, receive the purchaser'spurchaser’s written consent to the transaction and deliver a risk disclosure document relating to the penny stock market. The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative taking the order, current quotations for the securities and, if applicable, the fact that the broker-dealer is the sole market maker and the broker-dealer'sbroker-dealer’s presumed control over the market. Monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Such "penny stock"“penny stock” rules may restrict trading in our common stock and may deter broker-dealers from effecting transactions in our common stock.
Transfer Agent
Issuer Direct Corporation, 1981 Murray Holladay Road, Suite 214,100, Salt Lake City, UT 84121, 84117, Telephone: (801) 274-1088,272-9294, serves as the transfer agent and registrar for our common stock.
Recent Sales of Unregistered Securities
The following contains a list of our sales of unregistered securities not otherwise disclosed by the Company in previous Quarterly Reports on Form 10-Q and /or Current Reports on Form 8-K filings.
The Company has authorized 200 million shares of common stock, $0.0001 par value, and 10 million shares of preferred stock, $0.0001 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 three monthsyear ended December 31, 2015 we did2018, the Company issued an aggregate 1,771,666 shares of the Company’s common stock pursuant to consulting contracts valued at $614,516, or an average of $0.35 per share.
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 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.
We believe that the foregoing transactions were exempt from the registration requirements under exemption 4(2) of the Securities Act of 1933, as amended ("the Act"), based on the following facts: there was no general solicitation, there was a limited number of purchasers, each of whom the Registrant believes was an "accredited investor" (within the meaning of Regulation D under the Securities Act of 1933, as amended) and was sophisticated about business and financial matters, and all shares issued were subject to restriction on transfer, so as to take reasonable steps to assure that the purchaser was not sell any unregistered securities.
Issuer Purchases of Equity Securities
We have not adopted a stock repurchase plan and we did not purchaserepurchase any shares of our equity securities during our 20152018 or 2017 fiscal year.years.
Item 6. Selected Financial Data
Not Applicable. The Company is a "smaller reporting company."
Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read the following discussion in conjunction with our financial statements, which are included elsewhere in this report. The following information contains forward-looking statements. (See "Forward-Looking Statements"“Forward-Looking Statements” and "Item“Item 1A. Risk Factors."”)
BlackRidge Technology International, Inc., formerly known as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, changes in assumptions, future events or otherwise.
BlackRidge develops and markets next generation cyber defense solutions that enables our customers to deliver more secure and resilient business services in today’s rapidly evolving cyber threat environments. Our network, server, IoT and cloud security products are based on March 15, 2004. BrownWick, LLC ("BrownWick"our patented Transport Access Control technology and are designed to isolate, cloak and protect cloud services, enterprise servers and IoT devices; and segment and segregate enterprise Information Technology (“IT”), a wholly owned subsidiary, was formed and Operational Technology (“OT”) networks from cyber-attacks and unauthenticated access. BlackRidge products are used in enterprise and government computing environments, the State of Idaho on June 5, 2005. The principal business of Grote Molenindustrial IoT, critical infrastructure and BrownWick (collectively the "Company") is to distribute electricalother cloud service provider and hand operated grain mills, home kitchen mixers and related accessories for home use.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:
Accounts Receivable
Trade accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts. We determine the allowance for doubtful accounts by identifying potential troubled accounts and by using historical experience and future expectations applied to an aging of accounts. Trade accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded as income when received. We determined that no allowance for doubtful accounts was required at December 31, 20152018 and December 31, 2014.2017.
Inventory
Inventory is stated at the lower of cost or market, with cost determined using primarily average cost method.
Prepaid Expenses
Prepaid expenses consist mainly of payments to vendors made in advance and deposits held on account for the first-in-first-out (FIFO) method. We purchase substantially all inventories from two foreign suppliers, and have been dependent on those suppliers for substantially all inventory purchases since we commenced operations.
Property and Equipment
Property and equipment are carriedstated at cost less accumulated depreciation.depreciation and amortization. Depreciation and amortization is computed using theon a straight-line method based onbasis over the estimated useful lives of the respective assets as follows: office equipment – 3 to 5 years; warehouse equipment – 5 to 10 years; website development – 3 years; and molds – 10 years. or, in the case of leasehold improvements, the remaining lease term, if shorter. When assets are retired or otherwise disposed of, the costassets and related accumulated depreciation are removed, and anythe resulting gaingains or loss is recognizedlosses are recorded as part of other income or expense in operations for the period. The coststatements of operations. Repairs and maintenance and repairs is charged to operationscosts are expensed as incurred. Significant renewals
The estimated useful lives of the property and bettermentsequipment are capitalized.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 cost, lessestimated fair value, net of accumulated amortization. Amortization of definitive lived intangible assets is computed using the straight-line method based on theCosts incurred in obtaining certain patents and intellectual property as well as software development expenses, are capitalized and amortized over their related estimated useful lives, or contractual lives ofusing a straight-line basis consistent with the assets, which range from 10 to 30 years.
Useful life estimates for the licenseCompany’s significant intangible asset classes are as indefinite, and are not amortizing its carrying value.follows:
Useful Life | |
| Patent Costs | 20 years |
| Software Licenses | 7 years |
| Software Development Costs | 15 years |
The Company reviews long-lived assets, including intangibleat 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 impairment when events or changes in circumstances indicate thatassets to be disposed of) is expected to be less than the carrying value. Triggering events, which signal further analysis, consist of a significant decrease in the asset's market value, a substantial change in the use of an asset, a significant physical change in the asset, a significant change in the legal or business climate that could affect the asset, an accumulation of costs significantly in excess of the amount originally expected to acquire or construct the asset, or a history of losses that imply continued loss associated with assets used to generate revenue.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. Revenue generally is recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities.
Revenue recognition for multiple-element arrangements requires judgment to determine if multiple elements exist, whether elements can be accounted for as separate units of accounting, and if so, the fair value for each of the elements.
The Company may enter into arrangements that can include various combinations of software, services, and hardware. Where elements are delivered over different periods of time, and when allowed under U.S. GAAP, revenue is allocated to the respective elements based on their relative selling prices at the inception of the arrangement, and revenue is recognized as each element is delivered. We use a hierarchy to determine the fair value to be used for allocating revenue to elements: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence, and (iii) best estimate of selling price (“ESP”). For software elements, we follow the industry specific software guidance which only allows for the use of VSOE in establishing fair value. Generally, VSOE is the price charged when the deliverable is sold separately or the price established by management for a product that is not be recoverable. No events or changes in circumstances have occurred to indicateyet sold if it is probable that the carrying amountprice will not change before introduction into the marketplace. ESPs are established as best estimates of our long-lived assets may not be recoverable. Therefore, no impairment loss was recognized during the years ended December 31, 2015 and 2014.
Any revenue received that does not yet meet the above recognition standards is fixedrecorded to unearned revenue, and determinable, and collection is reasonably assured.
Income Taxes
We account for income taxes in accordance with FASB ASC Topic 740, Income Taxes, using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
FASB ASC Topic 740, Income Taxes, requires us to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, we must measure the tax position to determine the amount to recognize in our consolidated financial statements. We performed a review of our material tax positions in accordance with recognition and measurement standards established by ASC Topic 740 and concluded we had no unrecognized tax benefit that would affect the effective tax rate if recognized for the years ended December 31, 20152018 and 2014.
We include interest and penalties arising from the underpayment of income taxes, if any, in our consolidated statements of operations in general and administrative expenses. As of December 31, 2015 and December 31, 2014,2018 and 2017, we had no accrued interest or penalties related to uncertain tax positions.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses, notes payable and notes payable.convertible debt. The carrying amount of cash, accounts receivable and accounts payablethese financial instruments approximates fair value because of the short-term nature of these items. The carrying amount of the notes payable approximates fair value because the interest rates on the notes approximate market rates of interest.
Results of Operations
Sales
Total sales including sales to related parties, may fluctuate materially from period to period. At times we derive a significant portion of our revenues from sales to related parties. Each of our two principal stockholders own companies that are significant customers. Our sales for the years ended December 31, 2015 and 2014 were comprised of the following:
| 2015 | 2014 | |||||||
| Sales | $ | 1,446,128 | $ | 1,334,858 | ||||
| Sales to related parties | 81,062 | 68,277 | ||||||
| Total sales | $ | 1,527,190 | $ | 1,403,135 | ||||
Cost of Sales
Cost of salesgoods sold for the year ended December 31, 2015 was $1,111,422,2018 were $16,983 as compared to $995,605 for$10,260 during the year ended December 31, 2014,2017, an increase of $115,817,$6,723 or approximately 12%65%. Our cost of sales consists of the purchase price of our products incurredThis increase was due to our suppliers, plus inbound shipping costs. We do not manufacture our own products. Our costs to purchase products for resale remained relatively constant during 2015. Therefore, the increase in our cost of sales during 2015 was primarily attributed to thean increase in sales volume compared to 2014. Includedcontaining hardware in cost of sales were cost of related party sales of $58,993 and $48,446 for the years ended December 31, 2015 and 2014, respectively. Total cost of sales as a percentage of total sales was approximately 73% for thecurrent year ended December 31, 2015, compared to approximately 71% for the year ended December 31, 2014.
Operating Expenses
Interest Income (Expense)
Other expense includes interest expense on our indebtedness, a significant portion of which is indebtedness to related parties. Total net interest expense – related parties was $10,628$2,635,160 and $14,679$686,990 for the years ended December 31, 20152018 and 2014, respectively. The decrease in interest expense to related parties is due to repayments on both current and long-term debt to related parties in the current year. Total interest expense to non-related parties was $15,009 and $12,597 for the years ended December 31, 2015 and 2014,2017, respectively. The increase in interest expense of $1,948,170 in the current year is attributable primarily to non-related parties isan increase in borrowing coupled with an increase in debt discount amortized as interest.
Loss on extinguishment of debt
During the year ended December 31, 2018, the Company renegotiated the conversion terms and interest rate of a convertible note due to a non-affiliated investor so as to match the terms of a subsequent note granted to the same investor. The Company recognized a loss on extinguishment related to the transaction of $95,804. During the year ended December 31, 2018, the Company also converted notes payable totaling $1,038,000 to the Company’s Chief Technology Officer and significant shareholder and a note payable of $32,000 to one of the Company’s Directors into common stock at a rate matching that of currently offered convertible debt. The Company recognized losses on the conversions of $486,201 and $8,960, respectively. Additionally, during the year ended December 31, 2018, the Company agreed to settle payables of $21,067 for stock valued at $8,800 generating a gain on settlement of $12,267.
During the year ended December 31, 2017, the Company renegotiated the conversion terms of a convertible note due to the increaseCompany’s Chief Technology Officer and significant shareholder. The Company converted the note principal of $3,712,637 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.
Loss on disposal of discontinued operations
On March 31, 2017, the Company completed the sale of substantially all the assets, other than cash, used in debtor connection with the Company's home grain mill and kitchen mixer business to non-related partiesJohn Hofman and Bruce Crane, former officers and directors of the Company, in consideration for the current year.
Loss from discontinued operations
During the year ended December 31, 2017, the Company recognized a loss from discontinued operations of $8,737. This loss was primarily driven by lower than anticipated product sales of the entity that was eventually sold.
Liquidity and Capital Resources
Cash used in investing activities for the year ended December 31, 2015.
For the year ended December 31, 2015, net cash used in financing activities was $21,348, comprised of repayment of notes payable – related parties of $24,500, repayment of long-term debt – related party of $49,734 and repayment of long-term note payable of $20,314, partially offset by proceeds from long-term note payable of $28,700 and proceeds from notes payable of $44,500.
For the year ended December 31, 2017, net cash provided by financing activities was $9,538,718, comprised of proceeds from the issuancesale of common stock of $60,000, partially offset by repayment$8,482,450, preferred stock of $275,000 and warrants exercised of $43,334, proceeds from short term convertible notes payable – related parties of $15,000, repayment of long-term debt$1,250,000 and advances – related party of $42,702 and$115,000, partially offset by the repayment of long-term note payable of $17,708.
Based on our principal stockholders, are unsecured, bear interest at rates ranging from 6% to 8%current business plan, we anticipate that our operating activities will use approximately $900,000 in cash per annum and are generally due on demand. In addition, at December 31, 2015,month over the next twelve months, or $10.8 million. Currently we had short-term notes payable to non-related parties totaling $136,100, which are unsecured, bear interest at rates ranging from 6% to 8% per annum and are due on demand.
In order to remedy this liquidity deficiency, we are actively seeking to raise additional funds through the sale of equity and debt securities, and ultimately plan to generate substantial positive operating cash flows. Our internal sources of funds will consist of cash flows from operations, but not until we begin to realize substantial revenues from sales. If we are unable to raise additional funds in the near term, we may not be able to fully implement our common stock or debt in orderbusiness plan, and it is unlikely that we will be able to meet our obligations. Dependingcontinue as a going concern.
Recent Accounting Pronouncements
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 requirement to pay advance deposits on orders from our suppliers, we estimate we may require $50,000 to $100,000 of additional funding in 2016. No assurances can be given that, if required, such funding will be available to us on acceptable terms or at all.
Company's financial statements upon adoption.
During August 2016, the Financial Accounting Standards Board (the "FASB"(“FASB”) issued Accounting Standards Update ("ASU"(“ASU”) No. 2015-11, "Inventory (Topic 330)2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, Simplifyingwhich addresses eight specific cash flow issues with the Measurementobjective of Inventory." An entity is required to measure inventory withinreducing the scope of this Update at the lower of costexisting diversity in practice in how certain cash receipts and net realizable value. Net realizable value is the estimated selling pricescash payments are presented and classified in the ordinary coursestatement of business, less reasonably predictable costs of completion, disposal and transportation. Other than the change in the subsequent measurement guidance from the lower of cost or market to the lower of cost and net realizable value for inventory within the scope of this Update, there are no other substantive changes to the guidance on measurement of inventory. For public companies, the amendments in this Update arecash flows. The standard is effective for fiscal years beginning after December 15, 2016,2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendmentsCompany is currently in the process of evaluating the impact of this new pronouncement on the Company’s Consolidated Statements of Cash Flows.
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 Update arenew standard requires lessees to be applied prospectivelyput 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 earlier application permitted as ofearly adoption permitted. The Company is currently evaluating the beginning of an interim or annual reporting period. We are currently unable to determine the impact on our consolidated financial statements of the adoption of this new accounting pronouncement.
In May 2014, in addition to several amendments issued during 2016, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)Customers.". ASU 2014-09 amends This pronouncement updated the accounting guidance forrelated 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 replace numerous, industry-specific requirements and converges areas under this topic withcustomers in an amount that reflects the consideration to which an entity expects to be entitled for those of the International Financial Reporting Standards.goods or services. The ASU implementsstandard defines a five-step process for customer contractto achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contractsprocess than are required under existing U.S. GAAP. In accordance with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASUallowed public company guidelines, these updates are effective for the Company for its annual period ending December 2018 and after, and interim periods within those fiscal years. The Company is in the process of evaluating the impact of the pronouncement.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”) which clarified the revenue recognition implementation guidance on principal versus agent considerations and is effective during the same period as ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”) which clarified the revenue recognition guidance regarding the identification of performance obligations and the licensing implementation and is effective during the same period as ASU 2014-09. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”) which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition. ASU 2016-12 is effective during the same period as ASU 2014-09. Based on our preliminary assessment, we do not expect the new standard to have a material impact on the Company’s financial position or results of operations.
In July 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which among other things, these amendments require the measurement of all expected credit losses of financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for periods beginning after December 15, 2016; however,2019, and interim periods within those fiscal years. The Company is in the process of evaluating the impact of the pronouncement.
In July 2015,2017, the FASB agreed to delay the effective date by one year. The proposed deferral may permit early adoption, but would not allow adoption any earlier than the original effective datehas issued Accounting Standards Update (ASU) No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480);Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the standard.Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities can transition toand Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (ASU 2017-11). Among others, Part I of ASU 2017-11 simplifies the standard either retrospectively or asaccounting for certain financial instruments with down round features, a cumulative-effectprovision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment as of the datecurrent exercise price based on the price of adoption. We are currentlyfuture equity offerings. Current accounting guidance creates cost and complexity for organizations that issue financial instruments with down round features by requiring, on an ongoing basis, fair value measurement of the entire instrument or conversion option. ASU 2017-11 require companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will adjust their basic EPS calculation for the effect of the feature when triggered (i.e., when the exercise price of the related equity-linked financial instrument is adjusted downward because of the down round feature) and will also recognize the effect of the trigger within equity. ASU 2017-11 is effective for periods beginning after December 15, 2018, and interim periods within those fiscal years. The Company is in the process of evaluating the impact of the adoption of ASU 2014-09, including possible transition alternatives, will have on our consolidated financial statements.pronouncement.
Off-Balance Sheet Arrangements
None.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a "smallersmaller reporting company."
Item 8. Financial Statements and Supplementary Data
| Page | |
| Report of Independent Registered Public Accounting Firms | F-2 |
| Consolidated Balance Sheets as of December 31, 2018 and December 31, 2017 | F-4 |
| Consolidated Statements of Operations for the Years Ended December 31, 2018 and 2017 | F-5 |
| Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018 and 2017 | F-6 |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017 | F-7 |
| Notes to Consolidated Financial Statements | F-8 |
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our President and Treasurer who serves as our principal executive and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("the Exchange Act") as of December 31, 2015,2018, the end of the period covered by this report. Based upon that evaluation, our President and Treasurer,we have concluded that our disclosure controls and procedures as of December 31, 20152018 were effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management including our President and Treasurer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined under Exchange Act Rules 13a-15(f). Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. Under the supervision and with the participation of our management, including our principal executive officerCEO and principal financial officer,CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the COSO framework (1992), an integrated framework for the evaluation of internal controls issued by the Committee of Sponsoring Organizations of the Treadway Commission.reporting. Based on our evaluation under that framework, management concluded that our internal control over financial reporting was effective as of December 31, 2015.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the quarteryear ended December 31, 20152018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
The following table indicates the name, age, term of office and position held by each of our officers and directors. The term of office for each officer position is for one year or until his or her successor is duly elected and qualified by the board of directors. The term of office for a director is for one year or until his or her successor is duly elected and qualified by the stockholders.
| Name | Age | Titles |
| Directors and Officers | ||
| Robert Graham | 69 | Chairman, Chief Executive Officer, and President |
| John Bluher | 60 | Chief Financial Officer, Treasurer and Secretary |
| John Hayes | 51 | Chief Technology Officer and Director |
| Robert Lentz | 66 | Director |
| Thomas Bruderman | 49 | Director |
| J. Allen Kosowsky | 70 | Director |
| Robert Zahm | 56 | Director |
| Brent Bunger | 36 | Director |
Name | Age | Term Of Office | Positions Held |
| John B. Hofman | 56 | 2015 | President, Secretary, Treasurer and Director |
| Bruce P. Crane | 69 | 2015 | Vice President and Director |
Robert Grahamis the foundera co-founder of the CompanyBlackRidge and has served as its president, secretary, treasurerChairman and a directorCEO since its inceptioninception. Mr. Graham is a seasoned executive with broad business and entrepreneurial experience in March 2004. From 1987the technology and services industry, from Fortune 500 firms to start-ups. He has an extensive background in venture capital, engineering, marketing, sales, and operations, along with living and working in non-English speaking environments, including Asia, Europe, and the present,Americas. Mr. Hofman has ownedGraham also worked as a technology analyst on the subjects of storage, networking, servers, and operated Big John's Store LLC,services.
John Hayes is a retail store in Pocatello, Idaho specializing in retailing grain mills, small kitchen appliances,co-founder of BlackRidge and other healthy living products. Big John's Store LLC also operates a web-based business which markets the same healthy living products. Mr. Hofman also owns and operates Big John's Mini-Storage LLC, a self-storage business with over 400 units. During the past twenty years, Mr. Hofman has served as its Chief Technology Officer since its inception. Mr. Hayes is a technology entrepreneur who specializes in cyber security, networking, I/O interface design, storage architecture, and communications protocols. He has a proven track record of bringing concepts to market and is able to clearly communicate complex ideas to diverse audiences. Mr. Hayes is skilled at finding creative solutions for technology and business challenges.
Robert Lentz is a Director of BlackRidge and currently the President and CEO of Cyber Security Strategies. Mr. Lentz was the first Deputy Assistant Secretary of Defense for cyber and identity security, in which from November 2007 to October 2009, he led the DoD’s transformation to Network Centric Operations including the establishment of US Cyber Command. Since November 2000, he served as the CISO for the Secretary of Defense overseeing global security post 9-11. He previously worked at the NSA from 1975 to 2000, where he served in the first National Computer Security Center and as Chief of Network Security. Mr. Lentz serves on the board of directors of Creative Technologies LLC and Distribution Direct LLC. Mr. Hofman spends approximately 75% of his available business time (thirty hours per week) working for Grote Molen, Inc. Mr. Hofman graduated from Idaho State University in 1987 with a B.S. degree in Economics.
Mr. Bruderman has extensive financial management and board experience with technology companies which will make him an asset to our board in setting strategy and managing our financial and industry growth plans.
J. Allen Kosowsky, CPA, is a certified public accountant who since 1985 has conducted business through his own advisory firm. The firm provides services that include business and intellectual property valuations, forensic accounting and financial analysis, and alternative dispute resolutions. From January of 2003 to February of 2010, Mr. Kosowsky served as the Chairman of the Board and Chairman of the audit committee for ON2 Technologies LLCInc., a U.S. based video compression software company, which was acquired by Google. On September 17, 2016, Mr. Kosowsky became a National Association of Corporate Directors Fellow.
Mr. Kosowsky has extensive accounting experience and Distribution Direct LLC.financial expertise and training, which qualifies him as an "audit committee financial expert" and makes him a significant asset to our board and Company.
Robert Zahm spent the first 23 years of his professional career with Accenture as a management and technology consultant. Since 2010, he has worked as an independent consultant at Whiz Bang Consulting, where he applies his core areas of expertise in large scale system architecture, high performance computing, capital markets trading and clearing systems, and technology organization optimization. Mr. CraneZahm graduated from Brigham Youngthe University of Michigan with a B.S. degreeBS in businessComputer Engineering, from Lehigh with an MS in 1969.
Mr. Zahm has deep expertise in IT, corporate strategy and management and in the Financial Services market that will be an asset to our board and Company as we develop and expand our enterprise go to market strategies.
Brent Bunger has served as EVP of Ilan Investments since 2009 and has been significantly involved in leading the strategic direction of property and asset management including, policy, initiatives, technology, financing, acquisitions and dispositions. He is actively engaged in the company’s operations, procurement and renovations. Brent was instrumental in the launch of Adara Communities and its vision to become the leader in the multi-family industry. He is committed to improving technology to advance operational efficiency and better adhere to industry best practices. Mr. Bunger previously served as VP of Business Development with Adara and he worked for CharterMac Mortgage Capital in their underwriting division. He graduated with honors from Texas A&M University CC with a BBA in Finance and a minor in Real Estate. He has held a real estate brokerage license in Texas and has been an active Certified Commercial Investment Member (CCIM) since 2007.
Family Relationships
There are no family relationships among our directors, executive officers or persons nominated or chosen to become directors or executive officers.
Board of Directors
Our board of directors consists of twoseven persons, Robert Graham, John B. HofmanHayes, Robert Lentz, Thomas Bruderman, J. Allen Kosowsky, Robert Zahm and Bruce P. Crane. Such personsBrent Bunger. Messrs. Graham and Hayes are not "independent"“independent” within the meaning of Rule 5605(a)(2) of the NASDAQ Marketplace because they are officers and employees of the Company. Messrs. Lentz, Bruderman, Kosowsky, Zahm and Bunger are considered independent.
Our Audit Committee consists of four persons, J. Allen Kosowsky (serving as chair), Robert Zahm, Robert Lentz and Thomas Bruderman. J. Allen Kosowsky holds a CPA license and serves as the committees “financial expert” in addition to being its chair.
Our Compensation Committee consists of three persons, Thomas Bruderman (serving as chair), J. Allen Kosowsky and Robert Zahm.
Our Nominating and Corporate Governance Committee consists of three persons, Robert Zahm (serving as chair), J. Allen Kosowsky, whom is qualified as an Audit Committee Financial Expert, and Robert Lentz.
Code of Ethics
We have not previously adopted a Code of Ethics due to the small number of officers and employees and the size of the Company’s operations. It is anticipated that the new board of directors has not appointed any standing committees, there is no separately designated audit committee and the Company's two non-independent board members perform the functions that would customarily be performed by an audit committee. The board of directors does not have an independent "financial expert" because it does not believe the scope of the Company's activities to date has justified the expenses involved in obtaining such a financial expert. In addition, our securities are not listed on a national exchange and we are not subject to the special corporate governance requirements of any such exchange.
Communications with Directors
Shareholders may communicate with the Board of Directors or any individual director by sending written communications addressed to the Board of Directors, or any individual director, to: Grote Molen,BlackRidge Technology International, Inc., Attention: Corporate Secretary, 322 West Griffith Road, Pocatello, Idaho 83201.5390 Kietzke Lane Suite 100, Reno, NV 89511. All communications will be compiled by the corporate secretary and forwarded to the Board of Directors or any individual director, as appropriate. In order to facilitate a response to any such communication, the Company'sCompany’s Board of Directors suggests, but does not require, that any such submission include the name and contact information of the shareholder submitting the communication.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than 10 percent of a registered class of our equity securities to file reports of securities ownership and changes in such ownership with the SEC. Officers, directors, and greater than ten percent shareholders also are required by rules promulgated by the SEC to furnish us with copies of all Section 16(a) reports they file.
Item 11. Executive Compensation
The following table sets forth certain information regarding the annual compensation paid to our principal executive officer and our vice president in all capacities for the fiscal years ended December 31, 20152018, 2017 and 2014.2016. No other person served as an executive officer of the Company or received total annual compensation from the Company in excess of $100,000.
Name and Principal Position | Year | Salary | Bonus | Stock Awards | Option Awards | Non-Equity Incentive Plan Compensation | All Other Compensation | Total | |||||||||||||||||||||
| John B. Hofman | 2015 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 174,695 | $ | 174,695 | ||||||||||||||
| President(1) | 2014 | $ | 600 | - | - | - | - | $ | 156,005 | $ | 156,605 | ||||||||||||||||||
| Bruce P. Crane | 2015 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 5,076 | $ | 5,076 | ||||||||||||||
| Vice President(2) | 2014 | $ | 600 | - | - | - | - | $ | 8,673 | $ | 9,273 | ||||||||||||||||||
| Name and principal position | Year | Salary | Bonus | Equity Compensation | All other compensation | Total | |||||||||||||||
| Robert Graham, CEO and President | 2018 | $ | 342,842 | (1) | - | - | - | $ | 342,842 | ||||||||||||
| 2017 | $ | 225,000 | $ | 100,000 | (2) | - | - | $ | 325,000 | ||||||||||||
| 2016 | $ | 225,000 | - | - | - | $ | 225,000 | ||||||||||||||
| John Hayes, CTO | 2018 | $ | 293,248 | (3) | - | - | - | $ | 293,248 | ||||||||||||
| 2017 | $ | 180,000 | | $ | 100,000 | (4) | - | - | $ | 280,000 | |||||||||||
| 2016 | $ | 180,000 | - | - | - | $ | 180,000 | ||||||||||||||
| John Bluher, CFO | 2018 | $ | 300,000 | $ | 166,528 | (5) | - | $ | 30,000 | (7) | $ | 496,528 | |||||||||
| 2017 | $ | 275,000 | $ | 38,280 | (5) | $ | 900,000 | (6) | $ | 30,000 | (7) | $ | 1,243,280 | ||||||||
| 2016 | $ | 13,867 | - | - | $ | 108,000 | (8) | $ | 121,867 | ||||||||||||
| John B Hofman, Former President(9) | 2018 | - | - | - | - | - | |||||||||||||||
| 2017 | - | - | - | - | - | ||||||||||||||||
| 2016 | - | - | - | $ | 171,573 | $ | 171,573 | ||||||||||||||
| Bruce P. Crane, Former Vice President(10) | 2018 | - | - | - | - | - | |||||||||||||||
| 2017 | - | - | - | - | - | ||||||||||||||||
| 2016 | - | - | - | $ | 6,114 | $ | 6,114 | ||||||||||||||
(1) | |
(2) | Payment of Mr. Graham’s 2017 bonus has been deferred as of this filing |
(3) | $58,906 of Mr. Hayes’ 2018 salary was deferred as of this filing, Mr. Hayes accepted $317,853 of accrued salary paid in the form of 908,152 shares of Company stock |
(4) | Payment of Mr. Hayes’ 2017 bonus has been deferred as of this filing |
(5) | Represents performance bonuses paid to Mr. Bluher |
(6) | Represents 1,500,000 shares of restricted common stock granted to Mr. Bluher |
(7) | Represents a car allowance and cost of living adjustment of $2,500 per month |
(8) | Represents 1099 payments to Mr. Bluher |
(9) | All Other Compensation consists of: (i) payments made to Big |
(10) | All Other Compensation consists of: (i) expense reimbursement of $1,800 during |
During the year ended December 31, 2017, the Company paid performance bonuses to our officers or directors anyCFO in the amount of $166,528.
During the year ended December 31, 2018, the Company issued options to several employees including its executive team. Mr. Graham, Mr. Hayes, and Mr. Bluher were awarded 2,999,920, 2,356,301 and 1,090,880 options to purchase shares of common stock at $0.25 per share. The options stockvest at a rate of 25% upon issuance and 1/48th each month until fully vested. The value of the awards or other formsto Mr Graham, Mr. Hayes, and Mr Bluher based on a Black Scholes pricing model were $341,549, $268,271 and $124,200 to be recognized over the vesting period of equity compensation.
We do not have any retirement, pension or profit sharing plans covering our officers or directors, and we are not contemplating implementing any such plans at this time.
Director Compensation
In fiscal 2017, our President, Secretarynominating and Treasurer, and Bruce Crane,corporate governance committee, as well as our Vice President, are our only employees. We did not pay our officers any salary during 2015. During 2014, we paid eachshareholders approved a policy (the “Director Compensation Policy) for the compensation of non-employee members of our officersboard of directors to attract, retain, and reward individuals and align their financial interest with those of our stockholders. Only non-employee directors are eligible for compensation under this policy.
The members of our Board of Directors have agreed to delay cash payments earned under the Director Compensation Policy until such time as the Company has a salarypositive EBITDA. Until then, delayed payments may be paid in restricted stock as determined by management and the board.
Initial Award
Under the Director Compensation Policy, when an eligible director initially joins our board of $600. We may pay salaries indirectors, the future oneligible director received an initial award of restricted stock units having a discretionary basisvalue of $30,000.
Annual Awards
Under the Director Compensation Policy, each eligible director shall receive an annual award of $20,000 for their service to the Company. In addition, the Lead Independent Director and each director servings as committee chair will receive an additional $2,000 to their annual award.
Board Meeting Awards
Under the Director Compensation Policy, each eligible director shall receive $2,000 for their attendance at each directors meeting that they attend.
Director Compensation Table
The following table presents summary information regarding the compensation paid to our financial position and income tax situation allow. However, we pay a management fee to Big John's Store LLC, a company owned by John B. Hofman,non-employee directors for the provision of management services and office and warehouse space, which payments totaled $150,000 and $132,000 during our 2015 and 2014 fiscal years. We also pay Bruce Crane $150 per month for expense reimbursement. In August 2009, we also began paying the premiums for such persons' medical and dental insurance, which amounted to $16,045 for Mr. Hofman and $0 for Mr. Crane during our 2015 fiscal year and $17,455 for Mr. Hofman and $6,873 for Mr. Crane during our 2014 fiscal year. In 2015 and 2014, we also made contributions to the Health Savings Account of Mr. Hofman in the amount of $8,650 and $6,550, respectively, which were the maximum contributions permitted for such years. We plan to continue to pay such medical insurance premiums and to make annual contributions to such Health Savings Accounts in the future. We also reimburse our officers for reasonable costs and expenses incurred by them in connection with our business. We have not entered into an employment agreement with any of our officers.ended December 31, 2018:
Director | Board Fees (1) | Other ($) | Total ($) | ||||||||||
| J. Allen Kosowsky | $ | 69,200 | (2) | $ | - | $ | 69,200 | ||||||
| Thomas Bruderman | $ | 48,450 | (3) | $ | - | $ | 48,450 | ||||||
| Robert Lentz | $ | 44,450 | (4) | $ | - | $ | 44,450 | ||||||
| Robert Zahm | $ | 46,450 | (5) | $ | - | $ | 46,450 | ||||||
| Brent Bunger | $ | 49,984 | (6) | $ | - | $ | 49,984 | ||||||
(1) | Amounts reported in this column represent the aggregate grant date fair value of restricted stock issued as payment of amounts owed |
(2) | Amount paid through the issuance of 197,715 restricted shares of the Company’s common stock at $0.35 per share. The common stock has a 6 month vesting period |
(3) | Amount paid through the issuance of 138,429 restricted shares of the Company’s common stock at $0.35 per share. The common stock has a 6 month vesting period |
(4) | Amount paid through the issuance of 127,000 restricted shares of the Company’s common stock at $0.35 per share. The common stock has a 6 month vesting period |
(5) | Amount paid through the issuance of 132,715 restricted shares of the Company’s common stock at $0.35 per share. The common stock has a 6 month vesting period |
(6) | Amount paid through the issuance of 142,810 restricted shares of the Company’s common stock at $0.35 per share. The common stock has a 6 month vesting period |
The following table sets forth as of March 30, 201631, 2019 the number of shares of the Company'sCompany’s common stock, par value $0.001,$0.0001, owned of record or beneficially by each person known to be the beneficial owner of 5% or more of the issued and outstanding shares of the Company'sCompany’s common stock, and by each of the Company'sCompany’s officers and directors, and by all officers and directors as a group. On such date, there were 22,200,00096,872,725 issued and outstanding shares of our common stock and 3,577,370 issued and outstanding shares of our Series A preferred stock. The Company does not have anyTo the best of our knowledge, each person named below has sole voting and investment power, subject to community property laws where applicable, with respect to the shares shown unless otherwise indicated.
In computing the number of shares beneficially owned by an individual or entity and the percentage ownership of that person, shares of common stock subject to options, warrants or convertible securitiesother rights held by such person that are currently exercisable or will become exercisable within 60 days of March 31, 2019 are considered outstanding, and nonealthough these shares are not considered outstanding for purposes of computing the percentage ownership of any other person.
We know of no arrangements, including pledges, by or among any of the share figures listedforgoing persons, the operation of which could result in a change of control of the following table consist of securities that may be acquired by the holder within sixty days.Company.
Name and Address of Beneficial Owner(1) | Number of Shares of Common Stock | Amount of Number of Share Equivalents(2) | Total Beneficial Ownership | Percentage of Class | ||||||||||||
| Principal Stockholders | ||||||||||||||||
AltEnergy Cyber, LLC(3) 137 Rowayton Ave Norwalk, CT 06853 | - | 11,759,538 | (4) | 11,759,538 | 10.83 | % | ||||||||||
Conyers Investments, LLC(5) Phillips Point East #1001 777 S. Flagler Drive West Palm Beach, FL 33401 | 6,313,006 | 704,178 | (6) | 7,017,184 | 7.19 | % | ||||||||||
Chowdary Yalamanchili(7) 4420 FM 1960 West, Suite 224 Houston, TX 77068 | 5,000,000 | 45,900,162 | (8) | 50,900,162 | 35.65 | % | ||||||||||
Officers and Directors(15) | ||||||||||||||||
| John Hayes | 23,504,845 | 12,214,724 | (9) | 35,719,569 | 32.74 | % | ||||||||||
| Robert Graham | 4,873,097 | 2,084,488 | (10) | 6,957,585 | 7.03 | % | ||||||||||
| John Bluher | 1,500,000 | 363,627 | (16) | - | * | % | ||||||||||
| Robert Lentz | 613,074 | - | 613,074 | * | % | |||||||||||
Thomas Bruderman(11) | 965,096 | 6,558,694 | (12) | 7,523,790 | 7.27 | % | ||||||||||
| Robert Zahm | 229,382 | 8,421,085 | (13) | 8,650,467 | 8.22 | % | ||||||||||
| J. Allen Kosowsky | 732,508 | 480,786 | (14) | 1,213,294 | * | % | ||||||||||
| Brent Bunger | 142,810 | 156,250 | (6) | 299,060 | * | % | ||||||||||
| All Officers and Directors As Group (8 Persons) | 32,560,812 | 28,130,620 | 60,691,432 | 64.87 | % | |||||||||||
| Title of Class | Beneficial Owner (1) | Amount | Percentage Ownership | ||||||
Officers and Directors | |||||||||
| Common Stock | John B. Hofman | 8,000,000 | 36.0 | % | |||||
| Common Stock | Bruce P. Crane | 10,000,000 | 45.0 | % | |||||
| Common Stock | All Executive Officers And Directors as a Group (2 Persons) | 18,000,000 | 81.0 | % | |||||
(1) | The address for each named executive officer and director is the same address as the Company |
(2) | Represents number of commons shares |
(3) | Russ Stidolph is the Managing Member of AltEnergy Cyber, LLC |
(4) | Represents 6,844,234 shares of common stock issuable upon conversion of 402,602 shares of preferred stock and 4,915,304 shares of common stock issuable upon exercise of warrants |
(5) | Christopher Uzpen is the Managing Member of Conyers Investments, LLC |
(6) | Represents shares of common stock issuable upon exercise of warrants |
(7) | Includes shares owned |
(8) | Represents 45,900,162 shares of common stock issuable upon exercise of warrants |
(9) | Represents 710,005 shares of common stock issuable upon conversion of 41,765 shares of preferred stock and |
(10) | Represents 1,084,515 shares of common stock issuable upon conversion of 63,795 shares of preferred stock, and 999,973 shares of common stock issuable upon exercise of options |
(11) | Includes shares owned by Mr. Bruderman and Mag Ventures, LLC of which Mr. Bruderman is the Managing Member |
(12) | Represents 5,363,007 shares |
(13) | Represents 8,254,418 shares of common stock issuable upon conversion of 485,554 shares of preferred stock and 166,667 shares of common stock issuable upon exercise of warrants |
(14) | Represents 141,678 shares of common stock issuable upon conversion of 8,334 shares of preferred stock and 339,108 shares of common stock issuable upon exercise of warrants |
(15) | Addresses of Directors and Officers is the Company address |
| (16) | Represents shares of common stock issuable upon exercise of options |
Unless otherwise indicated, the terms of the following transactions during our 2018 fiscal year ended December 31, 2018, between related parties were not determined as a result of arm'sarm’s length negotiations.
During the Company, pursuant to a 6.97% promissory note with an aggregate principal balance of $2,943, which matured and was paid in full in February 2016. As of December 31, 2015, we were also indebted to Mr. Crane in the principal amount of $3,500 pursuant to a demand note bearing interest at 6% per annum and in the aggregate amount of $939 pursuant to non-interest bearing advances with no formal repayment terms.
During the year ended December 31, 20152018, the Company received advances of $25,000 from J. Allen Kosowsky, a director and 2014, respectively. Sales to these related parties areshareholder. These advances were converted into 78,125 shares of the Company’s common stock at a price of $0.32 per share on the same terms as sales to unrelated third parties.
Director Independence
Our board of directors consists of twoseven persons, Robert Graham, John B. HofmanHayes, Robert Lentz Thomas Bruderman, J. Allen Kosowsky, Robert Zahm and Bruce P. Crane. Such personsBrent Bunger. Messrs. Graham and Hayes are not "independent"“independent” within the meaning of Rule 5605(a)(2) of the NASDAQ Marketplace because they are officers and employees of the Company.
Indemnification
Our articles of incorporation provide that to the fullest extent permitted by Nevada law, now or hereafter in force, no director of the Company shall be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director. In addition, Section 78.037 of the Nevada corporation law, Article Fourteenth of our articles of incorporation, and Section VII of our bylaws generally provide for indemnification of our directors and officers in a variety of circumstances, which may include liabilities under the Securities Act of 1933, as amended. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission (the “SEC,” the “Commission” or the “Securities and Exchange Commission”) such indemnification is contrary to public policy as expressed in the Securities Act and, therefore, is unenforceable.
Item 14. Principal Accounting Fees and Services
Haynie & Hardy, P.C.Company served as the Company'sCompany’s independent registered public accounting firm for the fiscal years ended December 31, 20152018 and 2014.
During the fiscal years ended December 31, 20152018 and 2014,2017, fees for services provided by Pritchett, Siler & Hardy, P.C. were as follows:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2015 | 2014 | |||||||
 | | |||||||
| Audit Fees | $ | 22,800 | $ | 23,000 | ||||
| Audit-Related Fees | - | - | ||||||
| Tax Fees | - | - | ||||||
| All Other Fees | - | - | ||||||
| Total | $ | 22,800 | $ | 23,000 | ||||
| Year Ended | ||||||||
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Audit Fees | $ | 56,000 | $ | 104,312 | ||||
| Audit-Related Fees | - | - | ||||||
| Tax Fees | - | - | ||||||
| All Other Fees | - | - | ||||||
| Total | $ | 56,000 | $ | 104,312 | ||||
“Audit Fees"Fees” consisted of fees billed for services rendered for the audit of the Company'sCompany’s annual financial statements, review of financial statements included in the Company'sCompany’s quarterly reports on Form 10-Q, and other services normally provided in connection with statutory and regulatory filings. "Audit-Related Fees"“Audit-Related Fees” consisted of fees billed for due diligence procedures in connection with acquisitions and divestitures and consultation regarding financial accounting and reporting matters. "Tax Fees"“Tax Fees” consisted of fees billed for tax payment planning and tax preparation services. "All“All Other Fees"Fees” consisted of fees billed for services in connection with legal matters and technical accounting research.
The Company'sCompany’s Board of Directors functions as its audit committee. It is the policy of the Company for all work performed by our principal accountant to be approved in advance by the Board of Directors. All of the services described above in this Item 14 were approved in advance by our Board of Directors.
Item 15. Exhibits, Financial Statement Schedules
The following documents are included as exhibits to this report.
(a) Exhibits
Exhibit Number | Title of Document | |
| 3.1 | ||
| 3.2 | ||
| 4.1 | ||
| 4.2 | ||
| 10.1 | ||
| 10.2 | ||
| 10.3 | ||
| 10.4 | ||
| 10.5 | ||
| 10.6 | ||
| 10.7 | ||
| 10.8 | ||
| 10.9 | ||
| 31.1 | ||
| 31.2 | ||
| 32.1 | ||
| 32.2 | ||
| 101 INS | XBRL Instance Document** | |
| 101 SCH | XBRL Schema Document ** | |
| 101 CAL | XBRL Calculation Linkbase Document ** | |
| 101 DEF | XBRL Definition Linkbase Document ** | |
| 101 LAB | XBRL Labels Linkbase Document ** | |
| 101 PRE | XBRL Presentation Linkbase Document ** |
Exhibit Number | SEC Reference Number | Title of Document | Location | |||
| 3.1 | 3 | Articles of Incorporation | Incorporated byReference(1) | |||
| 3.2 | 3 | Bylaws | Incorporated by Reference(1) | |||
| 10.1 | 10 | Promissory Note from the Company to Bruce Crane dated December 23, 2005 | Incorporated by Reference(1) | |||
| 10.2 | 10 | Promissory Note from the Company to Bruce Crane dated December 1, 2007 | Incorporated by Reference(1) | |||
| 10.3 | 10 | Promissory Note from the Company to John Hofman dated September 12, 2005 | Incorporated by Reference(1) | |||
| 10.4 | 10 | Promissory Note from the Company to John Hofman dated June 11, 2008 | Incorporated by Reference(1) | |||
| 10.5 | 10 | Exclusive Manufacturing Agreement with Korean Manufacturer dated July 7, 2010 | Incorporated by Reference(2) | |||
| 10.6 | 10 | Form of Authorized Dealer Agreement entered into with customers purchasing over $500 of product per year | Incorporated by Reference(2) | |||
| 10.7 | 10 | Authorized Dealer Agreement with Big John's LLC dated May 10, 2006 | Incorporated by Reference(2) | |||
| 10.8 | 10 | Authorized Dealer Agreement with Kitchen Kneads dated August 29, 2005 | Incorporated by Reference(2) | |||
| 10.9 | 10 | Promissory Note from the Company to John Hofman dated October 7, 2010 | Incorporated by Reference(3) | |||
| 10.10 | 10 | Promissory Note from the Company to John Hofman dated December 27, 2010 | Incorporated by Reference(3) |
| 10.11 | 10 | Promissory Note dated March 22, 2011 | Incorporated by Reference(4) | |||
| 10.12 | 10 | Amendment to Promissory Note from the Company to Bruce Crane dated as of June 1, 2011 | Incorporated by Reference(5) | |||
| 10.13 | 10 | Promissory Note dated July 21, 2011 | Incorporated by Reference(6) | |||
| 10.14 | 10 | Promissory Note dated February 27, 2012 | Incorporated by Reference(7) | |||
| 10.15 | 10 | Promissory Note dated September 19, 2012 | Incorporated by Reference(8) | |||
| 10.16 | 10 | Promissory Note dated March 26, 2013 | Incorporated by Reference(9) | |||
| 10.17 | 10 | Promissory Note dated April 12, 2013 | Incorporated by Reference(10) | |||
| 10.18 | 10 | Promissory Note dated August 6, 2013 | Incorporated by Reference(11) | |||
| 10.19 | 10 | Promissory Note dated November 8, 2013 | Incorporated by Reference(12) | |||
| 10.20 | 10 | Promissory Note dated April 18, 2014 | Incorporated by Reference(13) | |||
| 10.21 | 10 | Promissory Note dated May 27, 2014 | Incorporated by Reference(13) | |||
| 10.22 | 10 | Promissory Note dated July 31, 2014 | Incorporated by Reference(14) | |||
| 10.23 | 10 | Promissory Note dated August 12, 2014 | Incorporated by Reference(14) | |||
| 10.24 | 10 | Line of Credit Promissory Note dated May 27, 2014 | Incorporated by Reference(14) | |||
| 10.25 | 10 | License Agreement with Messerschmidt Hausgerate GmbH dated June 20, 2012 | Incorporated by Reference(15) | |||
| 10.26 | 10 | Promissory Note dated October 9, 2014 | Incorporated by Reference(15) | |||
| 10.27 | 10 | Idaho Management Agreement between Big John's Store LLC and Brownwick, LLC dated as of October 31, 2014 | Incorporated by Reference(15) | |||
| 10.28 | 10 | Promissory Note dated February 16, 2015, 2014 | Incorporated by Reference(16) | |||
| 10.29 | 10 | Promissory Note dated March 27, 2015 | Incorporated by Reference(16) | |||
| 10.30 | 10 | Promissory Note dated May 12, 2015 | Incorporated by Reference(17) | |||
| 10.31 | 10 | Promissory Note dated August 6, 2015 | Incorporated by Reference(18) | |||
| 10.32 | 10 | Promissory Note dated August 13, 2015 | Incorporated by Reference(18) | |||
| 10.33 | 10 | Promissory Note dated November 16, 2015 | This Filing | |||
| 21.1 | 21 | Schedule of the Registrant's Subsidiaries | This Filing | |||
| 31.1 | 31 | Section 302 Certification of Chief Executive and Chief Financial Officer | This Filing | |||
| 32.1 | 32 | Section 1350 Certification of Chief Executive and Chief Financial Office | This Filing | |||
| 101.ins | 101 | XBRL.Instance | ||||
| 101.xsd | 101 | XBRL.Schema | ||||
| 101.cal | 101 | XBRL.Calculation | ||||
| 101.def | 101 | XBRL.Definition | ||||
| 101.lab | 101 | XBRL.Label | ||||
| 101.pre | 101 | XBRL.Presentation |
(1) Incorporated by reference to the Company’s June 30, 2017 Report on Form 10-Q filed August 14, 2017. | |
(2) Incorporated by reference to Exhibit Numbers 3.1 and 3.2 of the Company's registration statement on Form 10 filed with the SEC on May 14, 2010. | |
(3) Incorporated by reference to the Company's | |
(4) Incorporated by reference to the | |
(5) Incorporated by reference to the Company's March 31, | |
| (6)Incorporated by reference to the Company’s December 31, 2017 Report on Form 10-K filed April 2, 2018 | |
(7) Incorporated by reference to the Company's March 31, 2018 Report on Form 10-Q filed May 15, 2018. | |
(8) Incorporated by reference to the Company's June 30, | |
*Filed herewith
** The XBRL related information in Exhibit 101 shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
Item 16. Form 10-K Summary
The registrant opts out of providing a Form 10-K summary.
| Dated: | By /s/ |
| Dated: | By /s/ |
| President | |
| Dated: | By /s/ |
| Chief Financial Officer | |
| Dated: April 12, 2019 | By /s/ J. Allen Kosowsky |
| J. Allen Kosowsky | |
| Director | |
| Dated: April 12, 2019 | By /s/ Thomas Bruderman |
| Thomas Bruderman | |
| Director | |
| Dated: April 12, 2019 | By /s/ Robert Zahm |
| Robert Zahm | |
| Director | |
| Dated: April 12, 2019 | By /s/ Robert Lentz |
| Robert Lentz | |
| Director | |
| Dated: April 12, 2019 | By /s/ Brent Bunger |
| Brent Bunger | |
| Director |
| Page | |
| Report of Independent Registered Public Accounting | F-2 |
| Consolidated Balance Sheets as of December 31, | F-3 |
| Consolidated Statements of Operations for the Years Ended December 31, | F-4 |
| Consolidated Statements of | F-5 |
| Consolidated Statements of Cash Flows for the Years Ended December 31, | F-6 |
| Notes to Consolidated Financial Statements | F-7 |
| Haynie & Company |
Salt Lake City, Utah April 12, 2019 We have served as the Company’s auditor since 2018. |
| December 31, | December 31, | ||||||
| 2018 | 2017 | ||||||
| ||||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash | $ | 4,693,950 | $ | 421,869 | ||||
Accounts receivable | 102,292 | 217,380 | ||||||
Inventory | 56,003 | 40,408 | ||||||
Prepaid expenses | 122,713 | 361,642 | ||||||
Total Current Assets | 4,974,958 | 1,041,299 | ||||||
| ||||||||
Property and equipment, net | 78,821 | 87,628 | ||||||
Intangible assets, net | 8,920,360 | 7,043,644 | ||||||
Total Assets | $ | 13,974,139 | $ | 8,172,571 | ||||
| ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current Liabilities | ||||||||
Accounts payable and accrued expenses | $ | 2,089,322 | $ | 2,633,610 | ||||
Accounts payable and accrued expenses – related party | 9,690 | 68,060 | ||||||
Accrued interest | 714,187 | 59,545 | ||||||
Accrued interest – related party | 177,419 | 180,066 | ||||||
Advances – related party | - | 65,000 | ||||||
Wages payable | 1,928,639 | 2,133,210 | ||||||
Deferred revenue | 3,535 | 8,760 | ||||||
Short-term notes payable | 45,232 | 50,232 | ||||||
Current portion of long term debt | 366,657 | 400,000 | ||||||
Convertible notes, short term, net of discounts | 3,248,746 | - | ||||||
Convertible notes, long term, net of discounts, current portion | 39,726 | - | ||||||
Convertible notes, short term – related party | 183,172 | 521,172 | ||||||
Total Current Liabilities | 8,806,325 | 6,119,655 | ||||||
| ||||||||
Noncurrent Liabilities | ||||||||
Contingent liability | - | 37,500 | ||||||
Notes payable | - | 366,658 | ||||||
Convertible notes, long term, net of discounts | - | 80,404 | ||||||
Total Liabilities | 8,806,325 | 6,604,217 | ||||||
| ||||||||
Stockholders' Equity | ||||||||
Preferred Stock, Par Value $0.001, 10,000,000 shares authorized; 3,577,370 and 3,639,783 issued and outstanding at December 31, 2018 and 2017, respectively | 3,577 | 3,640 | ||||||
Common Stock, Par Value $0.001, 500,000,000 shares authorized; 96,872,725 and 77,063,171 issued and outstanding at December 31, 2018 and 2017, respectively | 96,873 | 77,063 | ||||||
Additional paid-in capital | 72,114,707 | 51,384,027 | ||||||
Accumulated deficit | (67,047,343 | ) | (49,896,376 | ) | ||||
Total Stockholders' Equity | 5,167,814 | 1,568,354 | ||||||
Total Liabilities and Stockholders' Equity | $ | 13,974,139 | $ | 8,172,571 | ||||
See accompanying notes to the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Grote Molen, Inc. and Subsidiary as of December 31, 2015 and 2014 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
| For the Year Ended December 31, | |||||||
| 2018 | 2017 | ||||||
| ||||||||
Revenues | $ | 247,869 | $ | 81,968 | ||||
Cost of Goods Sold | 16,983 | 10,260 | ||||||
Gross Profit | 230,886 | 70,708 | ||||||
| ||||||||
Operating Expenses: | ||||||||
Engineering | 109,133 | 304,605 | ||||||
Sales and marketing | 16,631 | 21,888 | ||||||
General and administrative | 14,042,231 | 12,996,967 | ||||||
Total operating expenses | 14,167,995 | 13,323,460 | ||||||
| ||||||||
Loss From Operations | (13,937,109 | ) | (13,251,752 | ) | ||||
| ||||||||
Other Income (Expense) | ||||||||
Loss on extinguishment of debt | (578,698 | ) | (913,238 | ) | ||||
Interest expense | (2,513,897 | ) | (82,845 | ) | ||||
Interest expense – related party | (121,263 | ) | (604,145 | ) | ||||
Total other income (expense) | (3,213,858 | ) | (1,600,228 | ) | ||||
| ||||||||
Net Loss Before Income Taxes | (17,150,967 | ) | (14,851,980 | ) | ||||
| ||||||||
Income Tax | - | - | ||||||
| ||||||||
Net Loss From Continuing Operations | (17,150,967 | ) | (14,851,980 | ) | ||||
| ||||||||
Discontinued Operations | ||||||||
Loss on disposal of discontinued operations | - | (484,927 | ) | |||||
Loss from discontinued operations | - | (8,737 | ) | |||||
Loss on discontinued operations | - | (493,664 | ) | |||||
| ||||||||
Net Loss | $ | (17,150,967 | ) | $ | (15,345,644 | ) | ||
| ||||||||
Loss From Continuing Operations per Common Share - Basic and Diluted | $ | (0.20 | ) | $ | (0.37 | ) | ||
Loss From Discontinued Operations per Common Share - Basic and Diluted | $ | - | $ | (0.01 | ) | |||
Weighted Average Shares Outstanding - Basic and Diluted | 84,154,829 | 40,212,024 | ||||||
See accompanying notes to the consolidated financial statements.
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 9,251 | $ | 60,808 | ||||
| Accounts receivable | 27,565 | 45,217 | ||||||
| Accounts receivable -- related parties | 11,365 | 13,141 | ||||||
| Inventories | 708,893 | 328,160 | ||||||
| Deposits | 64,685 | 382,295 | ||||||
| Prepaid expenses | 356 | 6,935 | ||||||
| Total current assets | 822,115 | 836,556 | ||||||
| Property and equipment, net | 139,688 | 156,652 | ||||||
| Intangible assets, net | 63,068 | 64,120 | ||||||
| Total assets | $ | 1,024,871 | $ | 1,057,328 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 74,970 | $ | 51,021 | ||||
| Accrued interest payable – related parties | 53,507 | 44,936 | ||||||
| Accrued interest payable | 22,686 | 14,195 | ||||||
| Current portion of long-term debt – related party | 2,943 | 45,774 | ||||||
| Notes payable – related parties | 130,127 | 154,627 | ||||||
| Notes payable | 136,100 | 91,600 | ||||||
| Total current liabilities | 420,333 | 402,153 | ||||||
| Long-term debt: | ||||||||
| Note payable | 145,139 | 136,753 | ||||||
| Long-term debt – related party | - | 6,903 | ||||||
| Total long-term debt | 145,139 | 143,656 | ||||||
| Total liabilities | 565,472 | 545,809 | ||||||
| Stockholders' equity: | ||||||||
| Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares issued and outstanding | - | - | ||||||
| Common stock, $.001 par value, 100,000,000 shares authorized, 22,200,000 shares issued and outstanding | 22,200 | 22,200 | ||||||
| Additional paid-in capital | 147,800 | 147,800 | ||||||
| Retained earnings | 289,399 | 341,519 | ||||||
| Total stockholders' equity | 459,399 | 511,519 | ||||||
| Total liabilities and stockholders' equity | $ | 1,024,871 | $ | 1,057,328 | ||||
| Shares Outstanding - Preferred | Preferred Stock | Shares Outstanding - Common | Common Stock | Additional Paid-in Capital | Subscriptions Payable | Accumulated Deficit | Total Stockholders’ Deficit | ||||||||||||||||||||||||
Balance as of December 31, 2016 | 3,671,316 | $ | 3,671 | 13,325,681 | $ | 13,326 | $ | 20,287,638 | $ | 135,000 | $ | (34,550,732 | ) | $ | (14,111,097 | ) | ||||||||||||||||
| ||||||||||||||||||||||||||||||||
Common share conversion | 50,000 | 50 | (500,000 | ) | (500 | ) | 450 | - | - | - | ||||||||||||||||||||||
Preferred share conversion | (144,035 | ) | (144 | ) | 1,586,862 | 1,587 | (1,443 | ) | - | - | - | |||||||||||||||||||||
Issuance of preferred stock | 62,502 | 63 | - | - | 374,937 | (100,000 | ) | - | 275,000 | |||||||||||||||||||||||
Issuance of common stock | - | - | 18,289,121 | 18,289 | 8,499,161 | (35,000 | ) | - | 8,842,450 | |||||||||||||||||||||||
Issuance of restricted common stock in settlement of wages payable | - | - | 22,064,105 | 22,064 | 13,216,389 | - | - | 13,238,453 | ||||||||||||||||||||||||
Issuance of restricted common stock in settlement of accounts payable | - | - | 396,726 | 396 | 237,639 | - | - | 238,035 | ||||||||||||||||||||||||
Issuance of stock in conjunction with contracts | - | - | 1,122,866 | 1,123 | 691,247 | - | - | 692,370 | ||||||||||||||||||||||||
Issuance of stock for warrant exercise | - | - | 1,055,556 | 1,056 | 42,278 | - | - | 43,334 | ||||||||||||||||||||||||
Issuance of stock for debt conversion | - | - | 10,757,254 | 10,757 | 5,367,871 | - | - | 5,378,628 | ||||||||||||||||||||||||
Business acquisition | - | - | 8,965,000 | 8,965 | 485,551 | - | - | 494,516 | ||||||||||||||||||||||||
Issuance of warrants in conjunction with debt conversion | - | - | - | - | 913,238 | - | - | 913,238 | ||||||||||||||||||||||||
Beneficial conversion feature on convertible debt | - | - | - | - | 536,165 | - | - | 536,165 | ||||||||||||||||||||||||
Issuance of warrants in conjunction with debt | - | - | - | - | 567,166 | - | - | 567,166 | ||||||||||||||||||||||||
Issuance of warrants in conjunction with advances | - | - | - | - | 27,945 | - | - | 27,945 | ||||||||||||||||||||||||
Issuance of warrants in conjunction with contracts | - | - | - | - | 27,695 | - | - | 27,695 | ||||||||||||||||||||||||
Share based compensation | - | - | - | - | 110,100 | - | - | 110,100 | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (15,345,644 | ) | (15,345,644 | ) | ||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
Balance as of December 31, 2017 | 3,639,783 | $ | 3,640 | 77,063,171 | $ | 77,063 | $ | 51,384,027 | $ | - | $ | (49,896,376 | ) | $ | 1,568,354 | |||||||||||||||||
| ||||||||||||||||||||||||||||||||
Preferred stock converted to common stock | (62,413 | ) | (63 | ) | 789,048 | 789 | (726 | ) | - | - | - | |||||||||||||||||||||
Issuance of common stock for advances | - | - | 538,125 | 538 | 139,462 | - | - | 140,000 | ||||||||||||||||||||||||
Issuance of common stock for wages payable | - | - | 2,935,818 | 2,936 | 1,024,600 | - | - | 1,027,536 | ||||||||||||||||||||||||
Issuance of common stock for accounts payable | - | - | 661,071 | 661 | 240,405 | - | - | 241,066 | ||||||||||||||||||||||||
Issuance of common stock in conjunction with contracts | - | - | 1,771,666 | 1,772 | 612,774 | - | - | 614,546 | ||||||||||||||||||||||||
Warrant repricing | - | - | - | - | 100,306 | - | - | 100,306 | ||||||||||||||||||||||||
Issuance of common stock for debt conversions | - | - | 4,775,638 | 4,776 | 1,189,134 | - | - | 1,193,910 | ||||||||||||||||||||||||
Common stock surrendered to Company | - | - | (338,200 | ) | (338 | ) | 338 | - | - | - | ||||||||||||||||||||||
Issuance of common stock as loan incentive | - | - | 8,676,388 | 8,676 | (8,676 | ) | - | - | - | |||||||||||||||||||||||
Beneficial conversion feature on convertible debt | - | - | - | - | 9,040,852 | - | - | 9,040,852 | ||||||||||||||||||||||||
Issuance of warrants and stock in conjunction with debt agreements | - | - | - | - | 6,432,543 | - | - | 6,432,543 | ||||||||||||||||||||||||
Issuance of Options in conjunction with contracts | - | - | - | - | 109,669 | - | - | 109,669 | ||||||||||||||||||||||||
Extinguishment of debt | - | - | - | - | 578,698 | - | - | 578,698 | ||||||||||||||||||||||||
Employee stock option plan | - | - | - | - | 1,271,301 | - | - | 1,271,301 | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (17,150,967 | ) | (17,150,967 | ) | ||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
Balance as of December 31, 2018 | 3,577,370 | 3,577 | 96,872,725 | 96,873 | 72,114,707 | - | (67,047,343 | ) | 5,167,814 | |||||||||||||||||||||||
See accompanying notes to consolidated financial statements
| Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Revenues: | ||||||||
| Sales | $ | 1,446,128 | $ | 1,334,858 | ||||
| Sales to related parties | 81,062 | 68,277 | ||||||
| Total revenues | 1,527,190 | 1,403,135 | ||||||
| Cost of revenues: | ||||||||
| Cost of sales | 1,052,429 | 947,159 | ||||||
| Cost of related party sales | 58,993 | 48,446 | ||||||
| Total cost of revenues | 1,111,422 | 995,605 | ||||||
| Gross profit | 415,768 | 407,530 | ||||||
| Operating costs and expenses: | ||||||||
| Selling, general and administrative | 304,095 | 276,371 | ||||||
| Management fees to related parties | 151,800 | 133,800 | ||||||
| Depreciation and amortization | 18,016 | 6,763 | ||||||
| Total operating costs and expenses | 473,911 | 416,934 | ||||||
| Loss from operations | (58,143 | ) | (9,404 | ) | ||||
| Other expense: | ||||||||
| Interest expense – related parties | 10,628 | 14,679 | ||||||
| Interest expense | 15,009 | 12,597 | ||||||
| Total other expense | 25,637 | 27,276 | ||||||
| Loss before income taxes | (83,780 | ) | (36,680 | ) | ||||
| Income tax (provision) benefit | 31,660 | (5,896 | ) | |||||
| Net loss | $ | (52,120 | ) | $ | (42,576 | ) | ||
| Net loss per common share - | ||||||||
| Basic and diluted | $ | (0.00 | ) | $ | (0.00 | ) | ||
| Weighted average common shares outstanding - | ||||||||
| Basic and diluted | 22,200,000 | 21,868,494 | ||||||
GROTE MOLEN, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 | ||||||||||||||||||||||||||||
Additional Paid-In Capital | Retained Earnings | Total | ||||||||||||||||||||||||||
| Preferred Stock | Common Stock | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||
| Balance, December 31, 2013 | - | $ | - | 21,000,000 | $ | 21,000 | $ | 89,000 | $ | 384,095 | $ | 494,095 | ||||||||||||||||
| Issuance of common shares for cash | - | - | 1,200,000 | 1,200 | 58,800 | - | 60,000 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (42,576 | ) | (42,576 | ) | |||||||||||||||||||
| Balance, December 31, 2014 | - | - | 22,200,000 | 22,200 | 147,800 | 341,519 | 511,519 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (52,120 | ) | (52,120 | ) | |||||||||||||||||||
| Balance, December 31, 2015 | - | $ | - | 22,200,000 | $ | 22,200 | $ | 147,800 | $ | 289,399 | $ | 459,399 | ||||||||||||||||
| Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Net loss | $ | (52,120 | ) | $ | (42,576 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 18,016 | 6,763 | ||||||
| Interest added to note payable principal | - | 2,531 | ||||||
| (Increase) decrease in: | ||||||||
| Accounts receivable | 17,652 | (1,172 | ) | |||||
| Accounts receivable -- related parties | 1,776 | (3,294 | ) | |||||
| Inventories | (380,733 | ) | (39,641 | ) | ||||
| Deposits | 317,610 | (178,660 | ) | |||||
| Prepaid expenses | 6,579 | 38,198 | ||||||
| Increase (decrease) in: | ||||||||
| Accounts payable and accrued expenses | 23,949 | (20,263 | ) | |||||
| Accrued interest payable – related parties | 8,571 | 9,382 | ||||||
| Accrued interest payable | 8,491 | 5,774 | ||||||
| Net cash used in operating activities | (30,209 | ) | (222,958 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Acquisition of property and equipment | - | (1,423 | ) | |||||
| Net cash used in investing activities | - | (1,423 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from long-term note payable | 28,700 | 151,930 | ||||||
| Proceeds from issuance of notes payable – related parties | - | 50,000 | ||||||
| Proceeds from issuance of notes payable | 44,500 | 19,600 | ||||||
| Proceeds from issuance of common stock | - | 60,000 | ||||||
| Repayment of notes payable – related parties | (24,500 | ) | (15,000 | ) | ||||
| Repayment of long-term note payable | (20,314 | ) | (17,708 | ) | ||||
| Repayment of long-term debt – related party | (49,734 | ) | (42,702 | ) | ||||
| Net cash provided by (used in) financing activities | (21,348 | ) | 206,120 | |||||
| Net decrease in cash | (51,557 | ) | (18,261 | ) | ||||
| Cash, beginning of year | 60,808 | 79,069 | ||||||
| Cash, end of year | $ | 9,251 | $ | 60,808 | ||||
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | |||||||
| 2018 | 2017 | ||||||
Cash Flows From Operating Activities | ||||||||
Net loss | $ | (17,150,967 | ) | $ | (15,345,644 | ) | ||
Net loss from discontinued operations | - | 493,664 | ||||||
Net loss from continuing operations | (17,150,967 | ) | (14,851,980 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 464,806 | 443,811 | ||||||
Amortization of debt discounts | 1,821,189 | 33,735 | ||||||
Common stock issued in conjunction with contracts | 614,546 | 692,370 | ||||||
Share based compensation | 1,271,301 | 110,100 | ||||||
Warrant repricing | 100,306 | - | ||||||
Warrants issued in conjunction with advances | - | 27,945 | ||||||
Warrants issued in conjunction with contracts | 109,669 | 27,695 | ||||||
Loss on extinguishment | 578,698 | 913,238 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 115,088 | (205,380 | ) | |||||
Inventory | (15,595 | ) | (40,408 | ) | ||||
Prepaid expenses | 238,929 | (260,688 | ) | |||||
Accounts payable and accrued expenses | (241,897 | ) | 833,372 | |||||
Accounts payable and accrued expenses – related party | (58,370 | ) | (564,665 | ) | ||||
Accrued interest | 682,916 | 6,657 | ||||||
Accrued interest – related party | 121,263 | 604,145 | ||||||
Deferred revenue | (5,225 | ) | (11,228 | ) | ||||
Wages payable | 700,802 | 4,447,647 | ||||||
Net Cash Used in Operating Activities, Continuing Operations | (10,652,541 | ) | (7,793,634 | ) | ||||
Net Cash Provided by Operating Activities, Discontinued Operations | - | 45,028 | ||||||
Net Cash Used in Operating Activities | (10,652,541 | ) | (7,748,806 | ) | ||||
| ||||||||
Cash Flows From Investing Activities | ||||||||
Proceeds from business acquisition | - | 10,559 | ||||||
Purchase of property and equipment | - | (88,418 | ) | |||||
Purchases of intangible assets | (2,309,377 | ) | (1,347,417 | ) | ||||
Net Cash Used in Investing Activities, Continuing Operations | (2,309,377 | ) | (1,425,276 | ) | ||||
Net Cash Used in Investing Activities, Discontinued Operations | - | - | ||||||
Net Cash Used in Investing Activities | (2,309,377 | ) | (1,425,276 | ) | ||||
| ||||||||
Cash Flows From Financing Activities | ||||||||
Proceeds from sale of common stock | - | 8,482,450 | ||||||
Proceeds from sale of preferred stock | - | 275,000 | ||||||
Proceeds from warrant exercise | - | 43,334 | ||||||
Proceeds from short term notes – related party | 732,000 | - | ||||||
Proceeds from issuance of short term convertible notes | 16,832,000 | 1,250,000 | ||||||
Proceeds from advances – related party | 75,000 | 115,000 | ||||||
Repayments of short term notes | (5,000 | ) | (38,989 | ) | ||||
Repayments of short term convertible notes | - | (100,000 | ) | |||||
Repayments on long term debt | (400,001 | ) | (433,342 | ) | ||||
Net Cash Provided by Financing Activities, Continuing Operations | 17,233,999 | 9,593,453 | ||||||
Net Cash Used in Financing Activities, Discontinued Operations | - | (54,735 | ) | |||||
Net Cash Provided by Financing Activities | 17,233,999 | 9,538,718 | ||||||
| ||||||||
Net Increase In Cash | 4,272,081 | 364,836 | ||||||
Cash, Beginning of Period | 421,869 | 57,033 | ||||||
Cash, End of Period | $ | 4,693,950 | $ | 421,869 | ||||
| ||||||||
Non-Cash Investing and Financing Activities | ||||||||
Wages payable included in capitalized intangible assets | $ | 23,338 | $ | 215,705 | ||||
Wages payable settled with common stock | $ | 1,027,536 | $ | 13,238,453 | ||||
Accounts payable settled with common stock | $ | 241,066 | $ | 238,035 | ||||
Common stock converted to preferred stock | $ | - | $ | 500 | ||||
Preferred stock converted to common stock | $ | 789 | $ | - | ||||
Common stock issued for debt and interest conversion | $ | 1,193,910 | $ | 5,378,628 | ||||
Common stock issued for advances | $ | 140,000 | $ | 140,000 | ||||
Business acquisition | $ | - | $ | 483,957 | ||||
Warrants and stock issued in conjunction with debt agreements | $ | 6,432,54 | $ | 567,166 | ||||
Beneficial conversion feature on convertible debt | $ | 9,040,852 | $ | 536,165 | ||||
Warrants issued and expensed in conjunction with advances | $ | - | $ | 27,945 | ||||
| ||||||||
Supplemental Disclosure of Cash Flow Information: | ||||||||
Cash paid for interest | $ | 9,792 | $ | 16,654 | ||||
Cash paid for income taxes | $ | - | $ | - | ||||
See accompanying notes to the consolidated financial statements.
F -6
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNICANTSIGNIFICANT ACCOUNTING POLICIES
Organization
On September 6, 2016, the Company entered into an agreement and plan of reorganization with BlackRidge Technology International, Inc., a wholly owned subsidiary, was formedDelaware 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 IdahoNevada 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 June 5, 2005. The principal business of Grote MolenSecure Supervisory Control and BrownWick (collectivelyData Acquisition Systems (“SCADA”) infrastructure and to design and deliver secure systems using BlackRidge Technology products for use by the "Company") is to distribute grain mills and related accessories for home use.
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.
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, | |||||||||||||||
Customers | 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Customer A | 77 | % | - | % | - | % | - | % | ||||||||
| Customer B | 10 | % | 12 | % | - | % | 15 | % | ||||||||
| Customer C | 4 | % | 41 | % | - | % | - | % | ||||||||
| Customer D | - | % | 34 | % | - | % | - | % | ||||||||
Cash and 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 Company has not heldinvoiced amount, net of any short-term investments considered to be cash equivalents.
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 cost determined using primarilyAccounting Standards Codification 605, Revenue Recognition, and all related interpretations. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the first-in-first-out (FIFO) method.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 purchase substantially all inventories from two foreign suppliers,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 have been dependent(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 those suppliersa stand-alone basis. Our process for substantially all inventory purchases since we commenced operations.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 pay advanced deposits toward the purchase of inventories from our principal suppliers. Such advanced payments are recordedunearned revenue and held as deposits, a current asset in the accompanying consolidated financial statements.
Property and Equipment
The estimated useful lives of the property and bettermentsequipment are capitalized.as follows:
| Property and Equipment | Estimated Useful Life |
| Building improvements | 15 years |
| Furniture, fixtures and equipment | 7 years |
| Computer equipment | 5 years |
| 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 2014, these costs amounted to $33,084 and $36,479, respectively.
Earnings (Loss) Per Share
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 Estimates in the Preparation of Financial Statements
| 2015 | 2014 | |||||||
| Trade accounts receivable – related parties | $ | 6,365 | $ | 8,141 | ||||
| Employee advances | 5,000 | 5,000 | ||||||
| Total accounts receivable - related parties | 11,365 | 13,141 | ||||||
| Trade accounts receivable | 27,565 | 45,217 | ||||||
| $ | 38,930 | $ | 58,358 | |||||
| 2015 | 2014 | |||||||
| Office equipment | $ | 4,335 | $ | 4,335 | ||||
| Warehouse equipment | 16,927 | 16,927 | ||||||
| Website development | 2,000 | 2,000 | ||||||
| Molds | 150,615 | 150,615 | ||||||
| 173,877 | 173,877 | |||||||
| Accumulated depreciation | (34,189 | ) | (17,225 | ) | ||||
| $ | 139,688 | $ | 156,652 | |||||
| 2015 | 2014 | |||||||
| License – definite lived | $ | 10,500 | $ | 10,500 | ||||
| License – indefinite lived | 62,720 | 62,720 | ||||||
| Patent | 100 | 100 | ||||||
| 73,320 | 73,320 | |||||||
| Accumulated amortization | (10,252 | ) | (9,200 | ) | ||||
| $ | 63,068 | $ | 64,120 | |||||
| 2015 | 2014 | |||||||
| Note payable to a stockholder, due on demand, with interest at 6% per annum | $ | 30,000 | $ | 30,000 | ||||
| Note payable to a stockholder, due on demand, with interest at 6% per annum | 3,500 | 3,500 | ||||||
| Note payable to a stockholder, due on demand, with interest at 6% per annum | 38,000 | 38,000 | ||||||
| Note payable to a stockholder, due on demand, with interest at 6% per annum | 10,000 | 10,000 | ||||||
| Note payable to a stockholder, due on demand, with interest at 6% per annum | 5,000 | 5,000 | ||||||
| Note payable to a stockholder, due on demand, with interest at 8% per annum | 9,000 | 9,000 | ||||||
| Note payable to a stockholder, due on demand, with interest at 8% per annum | 15,000 | 15,000 | ||||||
| Note payable to a stockholder, due on demand, with interest at 8% per annum | 10,500 | 35,000 | ||||||
| Non-interest bearing advances from stockholders, with no formal repayment terms | 9,127 | 9,127 | ||||||
| Total | $ | 130,127 | $ | 154,627 | ||||
| 2015 | 2014 | |||||||
| Note payable to a stockholder, due in monthly installments of $4,000 through February 2016, with interest at 6.97 % per annum | $ | 2,943 | $ | 52,677 | ||||
| Less current portion | (2,943 | ) | (45,774 | ) | ||||
| Long-term portion | $ | - | $ | 6,903 | ||||
| 2015 | 2014 | |||||||
| Note payable, due on demand, with interest at 8% per annum | $ | 15,000 | $ | 15,000 | ||||
| Note payable, due on demand, with interest at 8% per annum | 20,000 | 20,000 | ||||||
| Note payable, due on demand, with interest at 8% per annum | 5,000 | 5,000 | ||||||
| Note payable, due on demand, with interest at 8% per annum | 7,000 | 7,000 | ||||||
| Note payable, due on demand, with interest at 6% per annum | 15,000 | 15,000 | ||||||
| Note payable, due on demand, with interest at 6% per annum | 10,000 | 10,000 | ||||||
| Note payable, due on demand, with interest at 6% per annum | 4,000 | 4,000 | ||||||
| Note payable, due on demand, with interest at 6% per annum | 5,600 | 5,600 | ||||||
| Note payable, due on demand, with interest at 6% per annum | 10,000 | 10,000 | ||||||
| Note payable, due on demand, with interest at 6% per annum | 10,000 | - | ||||||
| Note payable, due on demand, with interest at 6% per annum | 10,000 | - | ||||||
| Note payable, due on demand, with interest at 6% per annum | 10,000 | - | ||||||
| Note payable, due on demand, with interest at 6% per annum | 2,500 | - | ||||||
| Note payable, due on demand, with interest at 6% per annum | 9,000 | - | ||||||
| Note payable, due on demand, with interest at 6% per annum | 3,000 | - | ||||||
| Total | $ | 136,100 | $ | 91,600 | ||||
| 2015 | 2014 | |||||||
| Federal benefit at statutory rate | $ | 28,485 | $ | 12,471 | ||||
| State income tax, net of federal benefit | 4,655 | 2,583 | ||||||
| Other | 8,410 | (6,969 | ) | |||||
| Redetermination of prior year taxes | - | (8,017 | ) | |||||
| Change in valuation allowance | (9,890 | ) | (5,964 | ) | ||||
| Income tax (provision) benefit | $ | 31,660 | $ | (5,896 | ) | |||
| 2015 | 2014 | |||||||
| Current assets: | ||||||||
| Related party interest expense | $ | 22,259 | $ | 15,279 | ||||
| Charitable contributions | 3,817 | 2,907 | ||||||
| Net operating loss carryforward | 27,695 | - | ||||||
| Long-term liability – depreciation and amortization | (26,782 | ) | (1,087 | ) | ||||
| 26,989 | 17,099 | |||||||
| Valuation allowance | (26,989 | ) | (17,099 | ) | ||||
| $ | - | $ | - | |||||
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 carryforwardscarry-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 approximately $67,000 availableawards that are expected to offset future taxable income through 2025.
Recently Enacted Accounting Standards - From time to time, new accounting pronouncements are issued by FASB that are adopted by the tax position to determine the amount to recognize in our consolidated financial statements. We performed a review of our material tax positions in accordance with recognition and measurement standards established by ASC Topic 740 and concluded we had no unrecognized tax benefit that would affect the effective tax rate if recognized for the years ended December 31, 2015 and 2014.
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 manage our day-to-day business activities and to provide business space. Historically we have paid monthly management fees in varying amounts to this related party pursuant to prior agreements approved by the stockholders of the Company. The agreement isput most leases on a month-to-month basis and can be cancelled at any time by the vote of management. The agreement was amended and restatedtheir balance sheets but recognize expenses on October 31, 2014 to increase the fee to $12,500 effective November 1, 2014. Also included in management fees are monthly payments of $150 to another major stockholder of the Company for expense reimbursement. Management fees to related parties totaled $151,800 and $133,800 for the years ended December 31, 2015 and 2014, respectively.
In May 2014, in addition to several amendments issued during 2016, includingthe 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 amendments in this Update are to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We areCompany is currently unable to determineevaluating the impact on our consolidated financial statements of the adoption of ASU 2014-09.
NOTE 2 –GOING CONCERN
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 accounting pronouncement.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 FASBCompany’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 ASU 2014-09, "Revenue from Contractsa 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 Customers (Topic 606)". ASU 2014-09 amends the guidanceoption 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 revenue recognitionthe previous four months would be accrued as a liability to replace numerous, industry-specific requirements and converges areasbe 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 topic with thoseagreement of $37,500 December 31, 2017. In 2018, the International Financial Reporting Standards.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 ASU implements a five-step process for customer contract revenue recognitioncomplaint alleged that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding(i) the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions includeCompany improperly extended the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016; however, in July 2015, the FASB agreed to delay the effective date by one year. The proposed deferral may permit early adoption, but would not allow adoption any earlier than the original effectivematurity date of the standard. Entities can transitionPlaintiff’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 standard either retrospectivelyPlaintiff 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 | ||||
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 ‑ STOCKHOLDERS’ 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.
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 cumulative-effect adjustmentdiscount 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 – 2.96 | % | |
| Volatility | 48.24 – 52.49 | % | |
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 | $ | 0.16 | |||||||
| Exercised | - | ||||||||||||
| Expired | (57,827 | ) | |||||||||||
| Forfeited | (349,048 | ) | |||||||||||
| Ending Balance – December 31, 2018 | 16,946,426 | $ | 0.43 | 4.32 years | $ | 0.20 | |||||||
| Exercisable options | 6,284,597 | $ | 0.46 | 4.32 years | $ | 0.22 | |||||||
The Company’s outstanding employee options at December 31, 2018 are as follows:
Options Outstanding | Option Exercisable | |||||||||||||||||||||||||
| Number | Weighted Average Remaining Contractual Life (in years) | Weighted Average | Number | Weighted | 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 | |||||||
| 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 dateclosing 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 adoption. We are currently assessing the impactAgreement, we issued 3,783,791 shares of our newly designated Series A Preferred Stock and 12,825,683 shares of Common Stock to the adoptionstockholders of ASU 2014-09, including possible transition alternatives, will have onBlackRidge 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 consolidatedCommon 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.
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 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 12 –16 - SUBSEQUENT EVENTS
We have evaluated all events occurringthat occurred after the date of our accompanying balance sheetssheet date through the date thewhen our financial statements were issued. We have identifiedissued 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