Washington, D.C. 20549
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definition of "large“large accelerated filer," "accelerated filer"” “accelerated filer” and "smaller“smaller reporting company"company” in Rule 12b-2 of the Exchange Act.
Item 1. Financial Statements.
BLACKRIDGE TECHNOLOGY INTERNATIONAL, INC.
BLACKRIDGE TECHNOLOGY INTERNATIONAL, INC.
BLACKRIDGE TECHNOLOGY INTERNATIONAL, INC.
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.
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, during the ninethree months ended September 30, 2018,and as of March 31, 2019, the Company incurred a net loss of $11,841,419$6,370,572, had a working capital deficit of $10,554,381, and inception to date losses are equal to $61,737,795.cash used in operations of $3,200,486 . These factors raise substantial doubt about the ability of the Company to continue as a going concern. In this regard, management is proposing to raise any necessary additional funds not provided by operations through investment capital. There is no assurance that the Company will be successful in raising this additional capital or in achieving profitable operations. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
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 reviews capitalized assets periodically for impairment any time there is a significant change that could lead to impairment, but not less than annually. The Company recorded amortization of $342,107$113,488 and $327,869 related to intangible assets during the nine months ended September 30, 2018 and 2017, respectively. The Company recorded amortization of $88,153 and $164,673$119,130 related to intangible assets during the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively.
On November 2, 2016, the Company entered into settlement agreements with two holders of convertible debt and other payables in which the Company agreed to issue new long-term debt agreements as settlement of amounts due. Pursuant to these agreements, the Company issued two non-interest bearing $600,000 notes payable in 36 equal monthly installments of $16,667 beginning on January 1, 2017 and maturing on December 1, 2019.
On January 31, 2018, the Company issued a $100,000 convertible note bearing interest at 9%8% per annum. The note matures on February 28,January 31, 2019 and is convertible into the Company'sCompany’s Series B Preferred Stock at a price of $0.32 per share at the holder'sholder’s request. The Company has determined the note to contain a beneficial conversion feature valued at $46,991 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 312,500 shares of the Company'sCompany’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 were valued at $46,991 using the Black-Scholes pricing modelmodel. The Company has allocated the note proceeds based on relative fair value and werehas recorded the value of the beneficial conversion feature and warrants as a discount to the note.debt in the amount of $68,021 and $31,969, respectively. At September 30, 2018,March 31, 2019, the principal balance was still outstanding and is included on the Company'sCompany’s consolidated balance sheets net of discounts at $38,828.sheets. The Company had accrued interest for this note in the amount of $5,304,$11,019, which is included in accrued interest on the Company'sCompany’s consolidated balance sheets. The Company is currently in the process of extending this note.
On February 23, 2018, the Company issued a $1,000,000 convertible note bearing interest at 9% per annum. The note matures on February 29,28, 2019 and is convertible, as amended, into the Company'sCompany’s Series B Preferred Stock at a price of $0.25 per share at the holder'sholder’s request. The Company has determined the note to contain a beneficial conversion feature valued at $459,447 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'sCompany’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 were valued at $540,553 using the Black-Scholes pricing modelmodel. The Company has allocated the note proceeds based on relative fair value and werehas recorded the value of the beneficial conversion feature and warrants as a discount to the debt agreement.in the amount of $417,757 and $350,882, respectively. At September 30, 2018,March 31, 2019, the principal balance was still outstanding and is included on the Company'sCompany’s consolidated balance sheets net of discounts at $9,284.sheets. The Company had accrued interest for this note in the amount of $54,000,$108,575, which is included in accrued interest on the Company'sCompany’s consolidated balance sheets. The Company is currently in the process of extending this note.
On February 27, 2018, the Company issued a $1,000,000 convertible note bearing interest at 9% per annum. The note matures on February 29,28, 2019 and is convertible, as amended, into the Company'sCompany’s Series B Preferred Stock at a price of $0.25 per share at the holder'sholder’s request. The Company has determined the note to contain a beneficial conversion feature valued at $458,756 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'sCompany’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 were valued at $541,244 using the Black-Scholes pricing modelmodel. The Company has allocated the note proceeds based on relative fair value and werehas recorded the value of the beneficial conversion feature and warrants as a discount to the note.debt in the amount of $444,923 and $351,173, respectively. At September 30, 2018,March 31, 2019, the principal balance was still outstanding and is included on the Company'sCompany’s consolidated balance sheets net of discounts at $8,625.sheets. The Company had accrued interest for this note in the amount of $53,014,$107,589, which is included in accrued interest on the Company'sCompany’s consolidated balance sheets. The Company is currently in the process of extending this note.
On April 18, 2018, the Company issued a $2,000,000 convertible note bearing interest at 9% per annum. The note matures on April 30,18, 2019 and is convertible, as amended, into the Company'sCompany’s Series B Preferred Stock at a price of $0.25 per share at the holder'sholder’s request. The Company has determined the note to contain a beneficial conversion feature valued at $915,856 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 6,250,000 shares of the company'sCompany’s common stock at an exercise price of $0.25$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 were valued at $1,084,144$1,073,331 using the Black-Scholes pricing modelmodel. The Company has allocated the note proceeds based on relative fair value and werehas recorded the value of the beneficial conversion feature and warrants as a discount to the note. As additional consideration for this note,debt in the Company issued an aggregate 4,670,138 sharesamount of the Company's common stock. Because the value of this stock exceeded the net value after the above discounts, the Company recorded the value of the consideration to additional paid in capital.$1,301,510 and $698,480, respectively. At September 30, 2018,March 31, 2019, the principal balance was still outstanding and is included on the Company'sCompany’s consolidated balance sheets net of discounts at $2,515.$992,886. The Company had accrued interest for this note in the amount of $81,370,$171,123, which is included in accrued interest on the Company'sCompany’s consolidated balance sheets. The Company is currently in the process of extending this note.
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'sCompany’s Series B Preferred Stock at a price of $0.25 per share at the holder'sholder’s request. The Company has determined the notes to contain a beneficial conversion feature valued at $685,856 based on the intrinsic per share value of the conversion feature. This beneficial conversion feature is recorded as a discount to the note. The noteholders werenoteholder was also granted detachable 5 year warrants to purchase an aggregate of 4,687,500 shares of the company'sCompany’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 were valued at $814,144$806,050 using the Black-Scholes pricing modelmodel. The Company has allocated the note proceeds based on relative fair value and werehas recorded the value of the beneficial conversion feature and warrants as a discount to the debt agreements.in the amount of $975,685 and $524,305, respectively. At September 30, 2018,March 31, 2019, the principal balances were still outstanding and is included on the Company'sCompany’s consolidated balance sheets net of discounts at an aggregate $944.$236,391. The Company had accrued interest for these notes in the amount of $55,110,$122,425, which is included in accrued interest on the Company'sCompany’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'sCompany’s Series B Preferred Stock at a price of $0.25 per share at the holder'sholder’s request. The Company has determined the note to contain a beneficial conversion feature valued at $484,684 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 3,213,356 shares of the company'sCompany’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 were valued at $543,590$538,207 using the Black-Scholes pricing modelmodel. The Company has allocated the note proceeds based relative on fair value and werehas recorded the value of the beneficial conversion feature and warrants as a discount to the note.debt in the amount of $674,972 and $353,292, respectively. At September 30, 2018,March 31, 2019, the principal balance was still outstanding and is included on the Company'sCompany’s consolidated balance sheets net of discounts at $755.$164,930. The Company had accrued interest for this note in the amount of $36,511,$82,656, which is included in accrued interest on the Company'sCompany’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'sCompany’s Series B Preferred Stock at a price of $0.25 per share at the holder'sholder’s request. The Company has determined the notes to contain a beneficial conversion feature valued at $612,962 based on the intrinsic per share value of the conversion feature. This beneficial conversion feature is recorded as a discount to the note. The noteholders were also granted detachable 5 year warrants to purchase an aggregate of 8,000,000 shares of the company'sCompany’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 were valued at $1,386,998$1,354,741 using the Black-Scholes pricing modelmodel. The Company has allocated the note proceeds based on relative fair value and werehas recorded the value of the beneficial conversion feature and warrants as a discount to the debt agreements.in the amount of $1,192,302 and $807,658, respectively. At September 30, 2018,March 31, 2019, the principal balances were still outstanding and isare included on the Company'sCompany’s consolidated balance sheets net of discounts at an aggregate $480.$98,659. The Company had accrued interest for these notes in the amount of $42,411,$132,164, which is included in accrued interest on the Company'sCompany’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'sCompany’s Series B Preferred Stock at a price of $0.32 per share at the holder'sholder’s request. The Company has determined the note to contain a beneficial conversion feature valued at $61,220 based on the intrinsic per share value of the conversion feature. This beneficial conversion feature is recorded as a discount to the note. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 800,000 shares of the company'sCompany’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 were valued at $138,770$135,474 using the Black-Scholes pricing modelmodel. The Company has allocated the note proceeds based on relative fair value and werehas recorded the value of the beneficial conversion feature and warrants as a discount to the debt agreements.in the amount of $68,266 and $80,766, respectively. At September 30, 2018,March 31, 2019, the principal balance was still outstanding and is included on the Company'sCompany’s consolidated balance sheets net of discounts at an aggregate $89.$135,377. The Company had accrued interest for these notes in the amount of $647,$12,871, which is included in accrued interest on the Company'sCompany’s consolidated balance sheets.
F - 9
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 March 31, 2019, the principal balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at an aggregate $629. The Company had accrued interest for these notes in the amount of $86,548, 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 March 31, 2019, the principal balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at an aggregate $1,740,779. The Company had accrued interest for these notes in the amount of $75,452, 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'sCompany’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 September 30, 2018 and DecemberMarch 31, 2017,2109, $158,172 of the principal balance was still outstanding, and the Company had accrued interest for this note in the amount of $171,828 and $136,469, respectively,$182,584 which is included in accrued interest – related party on the Company'sCompany’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'sCompany’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'sCompany’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'sCompany’s common stock. The Company recognized a loss on extinguishment of debt of $400,126$384,200 related to the decrease in conversion price and warrants granted.
On July 6, 2018, the Company issued a $200,000 in convertible notesnote bearing interest at 9% per annum to John Hayes, the Company'sCompany’s Chief Technology Officer, Director and significant shareholder. This note matures on July 31, 2019 and is convertible into the Company'sCompany’s Series B Preferred Stock at a price of $0.32 per share at the holder'sholder’s request. The Company has determined the notes to contain a beneficial conversion feature valued at $61,290 based on the intrinsic per share value of the conversion feature. This beneficial conversion feature is recorded as a discount to the note. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 800,000 shares of the company'sCompany’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 were valued at $138,700$135,474 using the Black-Scholes pricing modelmodel. The Company has allocated the note proceeds based on relative fair value and werehas recorded the value of the beneficial conversion feature and warrants as a discount to the debt agreements.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'sCompany’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'sCompany’s Series B Preferred Stock at a price of $0.32 per share at the holder'sholder’s request. The Company has determined the notesnote to contain a beneficial conversion feature. The Company valued the beneficial conversion feature valued at $9,764$15,005 based on the intrinsic per share value of the conversion feature. This beneficial conversion feature, is recorded as a discount toand the note. 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 warrants were valued at $22,226$21,711 using the Black-Scholes pricing modelmodel. The Company has allocated the note proceeds based relative on fair value and werehas recorded the value of the beneficial conversion feature and warrants as a discount to the debt agreements.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'sCompany’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 31,21, 2019 and is convertible into the Company'sCompany’s Series B Preferred Stock at a price of $0.32 per share at the holder'sholder’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'scompany’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 September 30, 2018 and DecemberMarch 31, 2017,2019 the principal balance was still outstanding and is included on the Company'sCompany’s consolidated balance sheets net of discounts at $28,425 and $10,521, respectively.$55,137. The Company had accrued interest for this note in the amount of $9,304 and $329, respectively,$15,288, which is included in accrued interest on the Company'sCompany’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 31,22, 2019 and is convertible into the Company'sCompany’s Series B Preferred Stock at a price of $0.32 per share at the holder'sholder’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'scompany’s common stock at an exercise price of $0.32 per share. The warrants were valued at $466,230 using the Black-Scholes pricing model and were recorded as a discount to the note. On May 9, 2018, this note along with $28,274 was renegotiated into a new short term convertible note and the warrants associated with the original note were cancelled. The newly negotiated note included an additional warrant benefit valued at $95,804 which was recorded as a loss on extinguishment of debt.
Long term convertible notes – related party
During 2011 to 2014, the Company'sCompany’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 Series A preferred stock at the rate of $0.90 per share. On November 9, 2017, the Company converted the note and accrued interest of $1,665,991 into 10,757,254 shares of the Company's common stock at a conversion rate of $0.50 per share. The Company also issued a 5 year warrant to purchase an additional 5,378,627 shares of the Company s common stock at a purchase price of $0.50 per share as further consideration for this conversion. The Company recognized a loss on extinguishment of debt related to this transaction of $913,238.
Convertible debt holders are entitled, at their option, to convert all or part of the principal and accrued interest into shares of the Company'sCompany’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'sCompany’s convertible notes payable for the ninethree months ended September 30, 2018March 31, 2019 and the year ended December 31, 2017:2018:
| | | September 30, 2018 | | | December 31, 2017 | | | March 31, 2019 | | | December 31, 2018 | |
| Beginning Balance | | $ | 601,576 | | | $ | 3,996,810 | | |
| Beginning Balance, net of discounts | | | $ | 3,471,644 | | | $ | 601,576 | |
| Proceeds from issuance of convertible notes, net of issuance discounts | | | 6,148 | | | | 146,669 | | | | - | | | | 1,903,438 | |
| Proceeds from issuance of convertible notes – related party | | | - | | | | 237,000 | | |
| Repayments | | | - | | | | (100,000 | ) | | | (25,000 | ) | | | - | |
| Restructuring of debt | | | (112,017 | ) | | | - | | | | - | | | | (112,017 | ) |
| Conversion of notes payable into common stock | | | (570,000 | ) | | | (3,712,638 | ) | | | - | | | | (570,000 | ) |
| Amortization of discounts | | | 347,480 | | | | 33,735 | | | | 2,262,546 | | | | 1,648,647 | |
| Ending Balance | | $ | 273,187 | | | $ | 601,576 | | |
| Ending Balance, net of discounts | | | $ | 5,709,190 | | | $ | 3,471,644 | |
| Convertible notes, short term | | $ | 11,860,274 | | | $ | - | | | $ | 17,860,274 | | | $ | 17,860,274 | |
| Convertible notes, short term – related party | | | $ | 158,172 | | | $ | 183,172 | |
| Convertible notes, long term | | $ | 150,000 | | | $ | 1,150,000 | | | $ | 150,000 | | | $ | 150,000 | |
| Convertible notes, short term – related party | | $ | 183,172 | | | $ | 521,172 | | |
| Debt discounts | | $ | (11,920,259 | ) | | $ | 1,069,596 | | | $ | 12,459,256 | | | $ | 14,721,802 | |
The following table summarizes the Company’s short term convertible notes payable as of March 31, 2019:
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(s) currently in default. The Company is currently working with noteholder(s) to extend the note(s)
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases approximately 7,579 square feet of office space under a 62 month operating lease which expires duringin 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'sCompany’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 $230,211$75,122 and $136,134$74,737 for the ninethree months ended September 30,March 31, 2019 and 2018, and 2017, respectively.
As of September 30, 2018,March 31, 2019, future minimum lease payments are as follows:
Year Ending December 31, | | | | | | |
| 2018 (three months) | | $ | 74,364 | | |
| 2019 | | | 259,851 | | |
| 2021 | | | 209,559 | | |
| 2019 (nine months) | | | $ | 184,729 | |
| 2020 | | | | 209,559 | |
| 2021 | | | 214,107 | | | | 214,107 | |
| 2022 | | | 218,654 | | | | 218,654 | |
| 2023 and thereafter | | | 18,569 | | | | 18,569 | |
| Total minimum lease payments | | $ | 995,104 | | | $ | 845,618 | |
On August 1, 2017, the Company entered into a 36 month lease of computer equipment. The lease carries a monthly payment of $2,871 with the option to purchase the equipment at its fair market value at the end of the lease.
Restricted Stock Commitments
The Company has committed to settling a significant portion of its current accounts payable balances through the future issuance of restricted stock units. While the terms of these agreements have not yet been formalized with employees and outside contractors, they could have a potentially dilutive effect to current shareholders.
Contingent Liability
On October 15, 2011, the Company entered into an agreement with a consultant by which the consultant'sconsultant’s invoices for the previous four months would be accrued as a liability to be paid out upon (a) the Company'sCompany’s successful raising of $10,000,000 in capital funding, or (b) the Company reaching total revenues of $10,000,000. The Company hashad a balance due under this agreement of $37,500 at September 30, 2018 and December 31, 2017, respectively.
Legal Proceedings
On December 2, 2016, AltEnergy Cyber, LLC ("Plaintiff") instituted a legal action in Connecticut against2017. In 2018, the Company reached its capital funding threshold under the agreement and Robert Zahm. The complaint alleged that (i)reclassified 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 liableentire $37,500 liability to the Plaintiff for $4,500,000 plus interest. This litigation is still ongoing. 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. As of the date of this filing, the appeal period has expired and it is the Company's belief that this matter is fully resolved through the dismissal.payable.
NOTE 7 ‑ RELATED PARTY TRANSACTIONS
During the ninethree months ended September 30, 2018,March 31, 2019, the Company incurred interest expense on notes to related parties in the aggregate amount of $126,619$4,935 (see Note 4 – Short term notes – related party & Note 5 – Convertible Notes).
Accounts payable related party
At September 30, 2018March 31, 2019 and December 31, 2017,2018, the Company had a balance in related party accounts payable of $56,649$12,992 and $68,060,$9,690, respectively, which consisted of the following:
| | | | | September 30, | | | December 31, | |
Party Name: | Relationship: | Nature of transactions: | | 2018 | | | 2017 | |
John Hayes | Chief Technology Officer | Expense reimbursement | | $ | 53,149 | | | $ | 55,254 | |
Robert Graham | Chairman and Chief Executive Officer | Expense reimbursement | | | - | | | | 6,806 | |
Robert Graham | Chairman and Chief Executive Officer | Rent | | | 3,500 | | | | 6,000 | |
| | | | | $ | 56,649 | | | $ | 68,060 | |
Advances related party
During the nine months ended September 30, 2018, the Company received advances of $50,000 from Mag Ventures, a company controlled by Tom Bruderman, a director and shareholder. These advances are included in Advances – related party on the Company's balance sheet.
During the nine months ended September 30, 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 September 30, 2018 and December 31, 2017, the Company had a balance in related party advances of $115,000 and $65,000, respectively, which consisted of the following:
| | | | September 30, | | | December 31, | |
Party Name: | Relationship: | | 2018 | | | 2017 | |
J Allen Kosowsky | Director | | $ | - | | | $ | - | |
Thomas Bruderman | Director and significant shareholder | | | 115,000 | | | | 65,000 | |
| | | | $ | 115,000 | | | $ | 65,000 | |
| | | | | March 31, | | | December 31, | |
| Party Name: | Relationship: | Nature of transactions: | | 2019 | | | 2018 | |
| John Bluher | Chief Financial Officer | Expense reimbursement | | $ | 75 | | | $ | 4,465 | |
| John Hayes | Chief Technology Officer | Expense reimbursement | | | 12,917 | | | | 5,225 | |
| | | | | $ | 12,992 | | | $ | 9,690 | |
Related Party Notes
On JanuaryDuring the year ended December 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.
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 $400,126 related to the decrease in conversion price and warrants granted.
On July 6, 2018, the Company issued $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 Company has determined theconverted notes to contain a beneficial conversion feature valued at $61,290 based on the intrinsic per share value of the conversion feature. This beneficial conversion feature is recorded as a discount to the note. The noteholder was also granted detachablerelated parties, see Note 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 warrants were valued at $138,700 using the Black-Scholes pricing model– Notes Payable, and were recorded as a discount to the debt agreements. 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.Note 6 – Convertible Notes for full disclosure.
On July 10, 2018, the Company issued $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 notes to contain a beneficial conversion feature valued at $9,764 based on the intrinsic per share value of the conversion feature. This beneficial conversion feature is recorded as a discount to the note. 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 warrants were valued at $22,226 using the Black-Scholes pricing model and were recorded as a discount to the debt agreements. 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.F - 15
NOTE 8 ‑ STOCKHOLDERS'STOCKHOLDERS’ EQUITY
The Company is authorized to issue 200 million shares of common stock, par value $0.001 per share, and 10 million shares of preferred stock, par value $0.001 per share. Each share of the Company'sCompany’s preferred stock was originally 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 recipientholder to the receipt of net assets of the Company on a pro-rata basis. The Company has 91,107,627 and 77,063,171had 96,872,725 common shares issued and outstanding and 3,594,610 and 3,639,7833,577,370 Series A preferred shares issued and outstanding as of September 30, 2018March 31, 2019 and December 31, 2017, respectively.
2018. The Company did not issue any equity shares or declare any dividends during the three months ended March 31, 2019
During the nine months ended September 30, 2018, the Company issued an aggregate 1,049,166 shares of the Company's common stock pursuant to consulting contracts valued at $533,670, or an average of $0.51 per share.
During the nine months ended September 30, 2018, the Company converted an aggregate 45,173 shares of the Company's Series A preferred stock into 535,565 shares of the Company's common stock after receiving conversion exercises from multiple preferred stockholders.
On March 30, 2018, a contractor rescinded a provision in its contract for common stock payments, and returned 300,000 shares previously issued to it during 2017. The Company retired the returned shares and recaptured the original $240,000 expensed when the shares were issued.
On June 11, 2018, the Company issued 300,000 shares of the Company's common stock valued at $120,000 as a signing bonus to an employee.
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 7 – 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 Note 7 – Related Party Transactions).
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 Note 7 – Related Party Transactions).
NOTE 9 – SHARE BASED COMPENSATION
During the yearthree months ended DecemberMarch 31, 2017,2019, the Company issued 128,000 5-year options to purchase 5,570,000 shares of common stock to employees and directors under the 2017 Stock Incentive Plan. The options were valued at $1,557,089 using the Black-Scholes pricing model. During the nine months ended September 30, 2018, the Company issued 5-year options to purchase 4,740,200 shares of common stock to an employee under the 2017 Stock Incentive Plan and cancelled 277,173 unvested options. The issued options were valued at $1,127,292$13,637 using the Black-Scholes pricing model. As of September 30, 2018,March 31, 2019, the total unrecognized expense for unvested share based compensation was $1,835,557.is $1,794,439. The 2017 Stock Incentive Plan allows for a maximum 25,000,000 shares to be issued, of which 14,966,9737,925,574 shares remain available for issuance as of September 30, 2018.March 31, 2019. The Company recognized stock option expense during the three months ended March 31, 2019 and 2018 of $218,855 and $101,413, respectively.
The fair values at the commitment date for the options were based upon the following management assumptions as of September 30, 2018:March 31, 2019:
| | | Commitment Date | |
| Expected dividends | | | 0 | % |
| Expected term | | 5 years | |
| Risk free rate | | | 1.73 – 2.802.49 | % |
| Volatility | | | 48.46 | % |
The activity of options granted to during the nineyear ended December 31, 2018 and three months ended September 30, 2018March 31, 2019 is as follows:
| | | Employee and Director
Options Outstanding | | | Weighted Average Exercise Price | | Weighted Average Remaining
Life | | Weighted Average Grant Date Fair Value | |
| 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 | |
| Granted | | | 128,000 | | | $ | 0.25 | | 5 years | | $ | 0.10 | |
| Exercised | | | - | | | | | | | | | | |
| Expired | | | - | | | | | | | | | | |
| Forfeited | | | - | | | | | | | | | | |
| Ending Balance – March 31, 2019 | | | 17,074,426 | | | $ | 0.43 | | 4.11 years | | $ | 0.20 | |
| Exercisable options | | | 7,378,830 | | | $ | 0.46 | | 4.11 years | | $ | 0.22 | |
| | | Employee and Director Options Outstanding | | | Weighted Average Exercise Price | | Weighted Average Remaining Life | | Weighted Average Grant Date Fair Value | | Intrinsic Value | |
| Beginning Balance – December 31, 2017 | | | 5,570,000 | | | $ | 0.60 | | 5 years | | $ | 0.28 | | | |
| Granted | | | 4,740,200 | | | $ | 0.60 | | 5 years | | $ | 0.24 | | | |
| Exercised | | | - | | | | | | | | | | | | |
| Cancelled | | | (277,173 | ) | | $ | 0.60 | | 4.33 years | | $ | 0.28 | | | |
| Ending Balance – September 30, 2018 | | | 10,033,027 | | | $ | 0.60 | | 3.76 years | | $ | 0.26 | | | $ | - | |
| Exercisable options | | | 3,127,420 | | | $ | 0.60 | | 3.76 years | | $ | 0.26 | | | $ | - | |
The Company’s outstanding employee options at March 31, 2019 are as follows:
| Options Outstanding | | Option Exercisable | |
Exercise Price Range
| | Number
Outstanding | | Weighted Average
Remaining
Contractual Life (in
years) | | Weighted Average
Exercise Price | | Number
Exercisable | | Weighted
Average
Exercise Price | | Intrinsic Value | |
| $ | 0.25 - $0.60 | | | | 17,074,426 | | | | 4.11 | | | $ | 0.43 | | | | 7,378,830 | | | $ | 0.46 | | | $ | - | |
The weighted average fair value per option issued during the ninethree months ended September 30, 2018 and the year ended DecemberMarch 31, 20172019 was $0.23 and $0.28, respectively.$0.11.
The following table summarizes non-vested option activity during the ninethree months ended September 30,March 31, 2019 and the year ended December 31, 2018:
| | | Non-Vested Options | | | Weighted Average Grant Date Fair Value | | | Non-Vested Options | | | Weighted Average Grant Date Fair Value | |
| Beginning Balance – December 31, 2017 | | | 5,177,042 | | | $ | 0.28 | | |
| Balance – December 31, 2017 | | | | 5,589,463 | | | $ | 0.28 | |
| Granted | | | 4,740,200 | | | $ | 0.10 | | | | 10,390,741 | | | $ | 0.16 | |
| Vested | | | (3,127,420 | ) | | | | | | | (4,911,501 | ) | | | | |
| Expired | | | | (57,827 | ) | | | | |
| Forfeited | | | (277,173 | ) | | | | | | | (349,048 | ) | | | | |
| Ending Balance – September 30, 2018 | | | 6,905,607 | | | $ | 0.25 | | |
| Ending Balance – December 31, 2018 | | | | 10,661,828 | | | $ | 0.19 | |
| Granted | | | | 128,000 | | | $ | 0.11 | |
| Vested | | | | (1,094,233 | ) | | | | |
| Expired | | | | - | | | | | |
| Forfeited | | | | - | | | | | |
| Ending Balance – March 31, 2019 | | | | 9,695,595 | | | $ | 0.19 | |
NOTE 10 – BUSINESS ACQUISITIONWARRANTS
On September 6, 2016,During the three months ended March 31, 2109, the Company and BlackRidge Technology International, Inc., a Delaware corporation entered into an Agreement and Plan of Reorganization (the "Reorganization Agreement") originally dated as of September 6, 2016, and amended on February 22, 2017issued 150,000 five year warrants to update the number of common shares, warrants, and options granted and outstanding as of the closing date.
On February 22, 2017, we, through our wholly-owned subsidiary, completed the actions contemplated by the Reorganization Agreement pursuant to which our wholly-owned subsidiary merged with and into BlackRidge Technology International, Inc. ("BlackRidge-DE") with BlackRidge-DE continuing as the surviving corporation ("Reorganization"). Upon completion of the Reorganization, we issued 3,783,791 shares of our newly designated Series A preferred stock and 12,825,683 shares of common stock to the stockholders of BlackRidge-DE in exchange for all the issued and outstanding shares of Series A Preferred Stock and common stock of BlackRidge. Additionally, certain stockholders of BlackRidge returned for cancellation a total of 16,284,330 shares of our common stock. Upon the completion of the Reorganization, BlackRidge-DE 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-DE 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'spurchase common stock at an average exercisea price of $0.46$0.25 per share. The Reorganization resultedwarrants vest ratably over a twelve month period. The Company valued the new warrants at $15,685 using the Black Scholes pricing model, $3,921 of which is included in a changeselling, general and administrative expense on the Company’s statement of controlprofit and loss for the three months ended March 31, 2019.
The fair values at the commitment date for the warrants were based upon the following management assumptions as of March 31, 2019:
| | Commitment Date | |
| Expected dividends | | | 0 | % |
| Expected term | | 5 years | |
| Risk free rate | | | 2.62 | % |
| Volatility | | | 48.46 | % |
The activity of warrants granted to during the Company. For accounting purposes, BlackRidge-DE was treated as the acquirerthree months ended March 31, 2019 and the historical financial statements of BlackRidge-DE became the Company's historical financial statements. year ended December 31, 2018 is as follows:
| | | Warrants Outstanding | | | Weighted Average Exercise Price | | Weighted Average Remaining Life | | Weighted Average Grant Date Fair Value | |
| 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 | |
| Granted | | | 150,000 | | | $ | 0.25 | | 5 years | | $ | 0.10 | |
| Exercised | | | - | | | | | | | | | | |
| Expired | | | - | | | | | | | | | | |
| Forfeited | | | - | | | | | | | | | | |
| Ending Balance – March 31, 2019 | | | 109,886,992 | | | $ | 0.32 | | 5.21 years | | $ | 0.12 | |
| Exercisable options | | | 109,771,492 | | | $ | 0.32 | | 5.21 years | | $ | 0.12 | |
The acquisition is intended to constitute a tax-free reorganization pursuant to the applicable provisions of the Internal Revenue Code of 1986,Company’s outstanding warrants at March 31, 2019 are as amended.follows:
| Warrants Outstanding | | Warrants Exercisable | |
Exercise Price Range
| | Number
Outstanding | | Weighted Average
Remaining
Contractual Life (in
years) | | Weighted Average
Exercise Price | | Number
Exercisable | | Weighted
Average
Exercise Price | | Intrinsic Value | |
| $ | 0.01 - $0.70 | | | | 109,886,992 | | | | 5.21 | | | $ | 0.32 | | | | 109,771,492 | | | $ | 0.32 | | | $ | 80,841 | |
NOTE 11 – DISCONTINUED OPERATIONSEARNINGS (LOSS) PER SHARE
OnNet 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 three months ended March 31, 2017,2019 and the year ended December 31, 2018, 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 completedhas the salefollowing common stock equivalents as 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 $8,737.2019 and December 31, 2018:
The following table shows the value of assets and liabilities divested:
| | | As of March 31, 2019 | | | As of December 31, 2018 | |
| Warrants (exercise price $0.01 - $0.70/share) | | | 109,886,992 | | | | 109,736,992 | |
| Options (exercise price $0.25 - $0.66/share) | | | 20,436,601 | | | | 20,436,601 | |
| | | | 130,323,593 | | | | 130,173,593 | |
Assets | | | |
| Accounts receivable | | $ | 40,044 | |
| Deposits and prepaid expenses | | | 90,559 | |
| Inventory | | | 1,157,555 | |
| Property and equipment | | | 117,254 | |
| Intangible assets | | | 62,820 | |
| Total Assets | | | 1,468,232 | |
| | | | | |
Liabilities | | | | |
| Accounts payable and accrued expenses | | | 692,399 | |
| Notes payable – short term | | | 64,000 | |
| Notes payable – short term, related party | | | 91,679 | |
| Line of credit | | | 135,227 | |
| Total Liabilities | | | 983,305 | |
| | | | | |
| Loss on disposal | | $ | 484,927 | |
NOTE 12 - SUBSEQUENT EVENTS
We have evaluated all events that occurred after the balance sheet date through the date when our financial statements were issued to determine if they must be reported. Management has determined that there were no additional reportable subsequent events to be disclosed.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.
General
BlackRidge Technology International, Inc., formerly known as Grote Molen, Inc., ("we," "us," "our," the "Company" or "BlackRidge") was incorporated under the laws of the State of Nevada on March 15, 2004.On February 22, 2017, Grote Merger Co., our wholly-owned subsidiary, merged with and into BlackRidge Technology International, Inc. ("BlackRidge-DE") with BlackRidge-DE continuing as the surviving corporation.
We develop and market next generation cyber defense solutions that stop cyber-attacks and block unauthenticated access. Our network and server security products are based on our patented Transport Access Control technology and are designed to isolate, cloak and protect servers and cloud services and segment networks for regulatory compliance. BlackRidge products are used in enterprise and government computing environments, the industrial Internet of Things ("IoT"), and other cloud service provider and network systems.
Business
The Company develops, markets and supports a family of products that provide a next generation cyber security solution for protecting enterprise networks and cloud services.services, and more recently, healthcare, industrial controls and critical infrastructure systems. With our patented technology, network connected devices and server resources located in the enterprise and datacenters, factory and hospital floors, and cloud systems are better protected, less expensive to protect, and less vulnerable to compromise from cyber-attacks and insider threats. We believe that our identity-based approach to network and cloud securitycyber defense offers superior performance compared to legacy network security approaches and greatly reduces the total cost of ownershipbusiness risk and operational costs for organizations by eliminating malicious and unwanted traffic from their networks and systems.
BlackRidge and our partners sell network security products provide advanced capabilities comparedand solutions based on our proprietary BlackRidge Transport Access Control (TAC) software. BlackRidge “TAC” provides high throughput and low latency network security that operates pre-session, in real time, before other security defenses engage. BlackRidge products can be deployed inside an Information Technology (“IT”) or Operational Technology (“OT”) network or a cloud to advanced firewallscloak and protect servers and IoT devices and segment networks, in applications suchfront of existing security stacks to filter anonymous traffic, or as part of cloud or managed service provider or OEM (as defined below) solutions.
The Company believes its technology is first to market with an authenticated identity-based approach of addressing this implicit trust problem in networks, that is now commonly called “zero trust” network segmentationenvironments. BlackRidge TAC authenticates identity before allowing a network connection to proceed to ensure that only identified and isolating cloud services. BlackRidge also cloaks protectedauthorized users are allowed to establish network resources from network mapping, reconnaissance and other forms of unauthorized access and attacks which cannot be blocked by advanced firewalls or malware detection systems.connections.
Products
Our proprietary and patented technology, BlackRidge Transport Access Control ("TAC"),TAC, authenticates user or device identity and applies security policies across networks and cloud services before application sessions are established. Underlying BlackRidge TAC is our patented First Packet Authentication™ which conveys and authenticates identity in the "first packet" of a TCP network session request. This fundamental invention addresses a security gapthe trust model in how the Internet operates: the inability to authenticate network traffic sources.sources and network connections. Without authentication, unidentified and unauthorized users and devices can scan, probe and access networks and cloud services. This implicit trust security gap is exploited in all cyber-attacks through the process of network scanning and reconnaissance, and it has been further exposed and magnified by cloud services, mobile connectivity, and the Internet of Things.
The Company's technology is first to market with this approach of enforcing security policy based on cryptographically secured identity on every TCP/IP session.
Our products are protected by multiple U.S. Patents including "First Packet Authentication," "Concealing a Network Connected Device," "Digital Identity Authentication," and "Statistical Object Identification."
ProductsIoT.
BlackRidge products provide advanced identity-based cyber defense capabilities compared to advanced firewalls and VPNs in applications such as network segmentation, software defined networks, and protecting cloud services, IoT, and critical infrastructure devices. BlackRidge conceals network resources from network mapping, reconnaissance and other forms of unauthorized access and attacks which cannot be blocked by advanced firewalls or malware detection systems. This significantly reduces their cyber-attack surface which is the ability for their systems to be found and attacked. Furthermore, unlike VPN and tunneling technologies that encrypt network traffic, our partners sell network security productssolution enables customers to continue to use their advanced analytical and solutions based on our proprietary BlackRidge TAC software. BlackRidge TAC provides high throughputmachine learning tools. This is also important for Industrial Control Systems and low latency network securityIIoT environments that operates pre-session, in real time, before other security defenses engage.need to deploy advanced IoT analytics tools to support digital transformation and automation initiatives such as condition-based monitoring.
For Industrial IoT and critical infrastructure environments, BlackRidge products effectively let organizations establish end-to-end trust by transporting authenticated identity through the stack – across already installed sensors to clouds and IoT analytics servers – cost effectively and with minimal latency added to the network. This ability to add security to legacy or brownfield environments addresses the risk of the increasing attack surface from the convergence of OT with IT networks. Organizations tasked with operating and managing factory automation or critical infrastructure systems can be deployed inside a network or a cloud to cloaknow secure legacy equipment long shelf life and protect servers and segment networks, in front of existing security stacks to filter anonymous traffic, or as part of service provider or OEM (as defined below) solution.known vulnerabilities.
The BlackRidge solution is available in the following product configurations, with additional platform support and endpointendpoints under development:
| · | 1U rack-mountable 1GbE or 10GbE network applianceappliance; |
| | |
| · | 1GbE fanless desktop applianceappliance; |
| | |
| · | VMware ESXi™ virtual appliance |
| |
· | IBM z Systems™ LPAR, KVM, and IBM z/VM® software appliancesvirtual appliances; |
| | |
| · | Amazon Web Services appliancesand Microsoft Azure cloud virtual appliances; |
| | |
| · | Windows and Linux software endpoints; and |
| |
| · | IoT endpoints and devices. |
BlackRidge products are priced and licensed per gateway appliance or gatewayendpoint device, and on the total number of user and device identities supported in an implementation. Enterprise and OEM licensing along withWe offer annual subscription pricing areat a preferred rate with perpetual, enterprise site and Original Equipment Manufacturer (“OEM”) licensing also available. BlackRidge appliancesgateways can support up to 100,000 identities and 4,000,000 sessions, providing a highly scalable enterprise solution that operates with low latency and high throughput compared to current network security devices.
Network and cloud deployments options include deploying in-line as a Layer 2 transparent bridgenetwork protection or segmentation device or logically inline as a Layer 3 gateway for cloud deployments. BlackRidgeBlackRidge’s software and systems are designed to be highly resilient and can be configured for high availability and failover. SecurityDeployment risk is addressed by monitoring and verifying security policies can be verified during deployment with progressive modes of bridge, monitor and audit, and then enforce policy.policy; and by logging all policy enforcement actions.
1
Our products are protected by multiple U.S. Patents including "First Packet Authentication," "Concealing a Network Connected Device," "Digital Identity Authentication," and "Statistical Object Identification," and "Method for Directing Requests to Trusted Resources."
Support and Maintenance
BlackRidge offers standard and premium support to our end-customers and channel partners, where our channel partners typically deliver the initial or level one support and we provide the advanced or level two and level three product support. The support for our end customers includes annual contracts for ongoing maintenance services for both hardware and software to receive software upgrades, bug fixes, and repairs. End customers typically purchase these services for a one year or longer term at the time of the initial product sale and typically renew for successive one year or longer periods.
Professional Services.Services
Professional services are primarily delivered through our channel partners and include experts who plan, design, and deploy effective security solutions tailored to our end-customers' specific requirements. These services include solution design and planning, configuration, and installation. Our education services provide online and classroom-style training and are also primarily delivered through our internal team.
Technology Alliance Partners
BlackRidge participates in an ecosystem of technology alliance partners to extend the breadth and depth of our products and partner solutions. By helping to ease the complications that organizations face when implementing multi-layered security solutions, our technology alliances facilitate integrated solution design, accelerate the time to realize value, and enhance our role as a strategic security partner.
Markets, Customers and Distribution Channels
The BlackRidge network security and adaptive cyber defense solution is broadly applicable to virtually all enterprise, government and industrial control, and critical infrastructure or utility market segments. Whether deployed directly in a customer's environment or embedded as part of partnerpartner’s cloud service or solution, BlackRidge providesproducts provide a new level of cyber defense not available in the market today.
BlackRidge markets and sells its products to government and commercial users through multiple channels, including direct sales, integrator and reseller channel partners, cloud and managed service providers, and through strategic original equipment manufacturer ("OEM") partners to both government and commercial users.OEM partners. The initial sales focus and market entry strategy for BlackRidge was the USU.S. Department of Defense, which is a key leverage point for the company's current commercial, government, and international sales efforts. Our customers and strategic technology partners include Cisco, Federal Resources, healthcare providers such as ImagineMed, IBM, Ciena, Crimson Logic,I-NET, Marist College, Microsoft, National Instruments, Oracle, PTC, SafeLogic, Splunk, the USU.S. Department of Defense, the USU.S. Department of Energy, Marist College,and VMware. Our global channel partners include Atrion, B&D Consulting, LRS IT Solutions, Network Runners, Nihon Cornet Technology, SplunkNTT AT, and healthcare providers.Presidio.
Within the commercial markets, BlackRidge sells both directdirectly and through our strategic partners to large enterprise accounts, and indirectly through certain channel partners to specific verticals and international market segments. Our initial market entry strategy for the commercial market is to sell directly in order to establish customer references with large enterprises in North America that have high security and compliance requirements. These include more complex regulated enterprises such as Financial Services, Healthcare, Insurance, Manufacturing and Utility companies. Our channel partners are recruited to assist with expandingexpand enterprise sales, commercializing specific vertical markets, and penetrating the international markets. Revenue from commercial sales includes subscription and perpetual product licensing fees, installation services, and annual support based on a standard price list.
In the government markets, BlackRidge sells its standard commercial products through a wholly owned subsidiary, BlackRidge Technology Government, to government resellers, integrators and contractors who resell to the Department of Defense (DOD) and civilian agencies. BlackRidge’s government revenue is net of government discounts, contracting fees, and channel and service partner discounts. BlackRidge has been involved with the DOD for over sixnine years, including our initial product development funding which was provided by the U.S. DOD. The BlackRidge products have been designed for several large DOD programs and they have been extensively tested and validated for use by the Defense Information Systems Agency ("DISA") labs. The timing of(DISA) labs and other agencies.
In 2018, we achieved several significant product milestones with the DOD adoptionincluding receiving Federal Information Processing Standard 140-2 (FIPS 140-2) certification, and our TAC gateway was certified and added to the Department of Defense Information Network Approved Products List (DoDIN APL). This DoDIN APL designation identifies products that have completed interoperability and cyber security certification via a rigorous testing process, and it allows the DoD both domestic and abroad to purchase and operate BlackRidge products depends on approval of budgets and final product testing approvals from DISA. BlackRidge Government revenue is net of government discounts, contracting fees, and channel and service partner discounts.
The BlackRidge OEM and service provider partnership strategy is to make targeted investments to capitalize on opportunities in specific market segments such as the industrial IoT, blockchain networks, and cloud solution providers. For these markets and our partners, BlackRidge TAC can be deployed as an integrated or embedded capability in the partners' equipment and vertical market solutions and sold and supported by our partner. BlackRidge provides unique, integrated identity-based cyber defense for these OEM products or service offerings that provides their end user customer with a competitive market advantage in the face of today's advanced cyber threats. Revenue from OEM offerings flows from embedded product licensing fees and support fees and add-on product sales that are somewhat unique to each OEM offering.
Marketing
Our marketing is focused on building our brand reputation and market awareness for our company and our unique technology capabilities and platform, driving customer demand and building a strong sales pipeline, and working with our channel and OEM partners.partners to facilitate their sales efforts. Our marketing team consists of corporate marketing, product marketing and product management, digital marketing operations, and corporate communications. Marketing and product management activities include sales training and enablement, market and customer requirements, competitive market analysis, content creation for marketing programs, demand generation programs including digital marketing programs and trade shows and conferences, product launch activities, managing our corporate and investor website, social media, trade shows and conferences, and press and analyst relations.
Research and Development
We continue to enhance our BlackRidge TAC software, the core software used in the BlackRidge products. This software is responsible for the TAC token generation, token validation, the token cache, packet processing and the insertion of TAC tokens into TCP connection requests. The TAC software has been developed domestically within the U.S. using only U.S. citizens. This software includes implementations of granted and pending patents owned by BlackRidge.
We continue to pursue research and development to improve our existing products. These improvements include making our products easier to manage, easier to deploy in large numbers, incorporating feedback from customers and partners for new market segments such as industrial IoT, and improvements in our integrations with 3rd party products that communicate with BlackRidge products.
Our product development efforts release software with new features from time to time. When a new feature is significant enough, we produce a major software release. In between major software releases, there may be one or more minor software releases that also introduce less significant new features.
Intellectual Property
BlackRidge focuses on developing patent protection for products it develops and for products and features that are anticipated. We constantly perfect and file new applications. We continue to develop our products; we will continue to file additional patent applications where appropriate.
The granted patents focus on the communication of identity tokens at the network layer (6,973,496, 8,346,951), combining Identityidentity authentication at different security layers (8,281,127, 8,635,445), insuring the integrity of token authentication (8,572,697)(8,572,697, 9,973,499) and using identity to select amongst a set of trusted resources (9,118,644). The pending applications focus on extending the above protections (13/987,747, 14/(14/544,987, 14/998,645)15/732,282, 15/998,262), using network identity in a firewall (14/545,988), and making network routing policy decisions using identity (14/999,317) and detecting tampering of hardware and software systems (13/199,050)(16/350,200).
As of release 3.0,4.0, our products use the technology described in patents 6,973,496, 8,346,951, 8,572,697 and 8,572,6979,973,499 as well as technology described in some of our pending applications. As we continue to add products and features, we will be incorporating technology described in additional patents and applications. All patents and completed applications are assigned to BlackRidge Technology Holdings, Inc.
Granted Patents
Concealing a Network Connected DeviceDevice: US Patent number 6,973,496, Patent Application U.S. Ser. No. 10/094,425. Filed 5 March 2002, Granted 6 December 2005, 1 Claim.
Method for Digital Identity AuthenticationAuthentication: US Patent number 8,281,127, Patent Application U.S. Ser. No. 12/658,113. Filed 1 February 2010, Granted 2 October 2012, 20 Claims.
Method for First Packet AuthenticationAuthentication: US Patent number 8,346,951, Patent Application U.S. Ser. No. 11/242,637. Filed 30 Sept 2005, Granted 1 January 2013, 25 Claims.
Method for Statistical Object IdentificationIdentification: US Patent number 8,572,697, Patent Application U.S. Ser. No. 13/373,586. Filed 18 November 2011, Granted 29 October 2013, 43 Claims.
Method for Digital Identity AuthenticationAuthentication: US Patent number 8,635,445, Patent Application U.S. Ser. No. 13/573,077. Filed 16 August 2012, Divisional application of patent application No. 12/658,113, Granted 21 January 2014, 23 Claims.
Method for Directing Requests to Trusted ResourcesResource: US Patent number 9,118,644, Patent Application U.S. Ser. No. 13/573,238. Filed 30 August 2012, continuation-in-part of Patent 6,973,496 and Patent 8,572,697, Granted 25 August 2015, 27 Claims.
Published Pending Applications
Method for Statistical Object IdentificationIdentification: US Patent number 9,973,499, Patent Application U.S. Ser. No. 13/987,747,14/998,645, filed 27 August 2013,16 January 2016, continuation-in-part of Patent 8,572,697.8,572,697, Granted 15 May 2018, 14 Claims.
Method for Using Authenticated Requests to Select Network Routes: US Patent number 10,187,299, Patent Application U.S. Ser. No. 14/999,317, filed 22 April 2016, Granted 22 January 2019, 6 Claims.
Unpublished Pending Applications
U.S. Patent Applications are typically published by the patent office 18 months after filing.
Method for Network Security Using Statistical Object Identification Patent Application U.S. Ser. No. 14/544,987, filed 11 March 2015, continuation-in-part of Patent 8,572,697.
Method for Attribution Security System Patent Application U.S. Ser. No. 14/545,988, filed 13 July 2015.
Secure Time Communication System Patent Application U.S. Ser. No. 15/530,714, filed 16 February 2017.
Method for Statistical Object Generation Patent Application U.S. Ser. No. 15/732,282, filed 17 October 2017.
Secure Time Communication System Patent Application U.S. Ser. No. 15/932,843, filed 4 May 2018, continuation-in-part of application 15/530,714.Method for Statistical Object Identification Patent Application U.S. Ser. No.
14/998,645,15/998,262, filed
16 January 2016,24 July 2018, continuation-in-part of Patent 8,572,697.
Method for Using Authenticated Requests to Select Network Routes Patent Application U.S. Ser. No. 14/999,317,16/350,200, filed 22 April 2016.
Secure Cloud Computing System Patent Application U.S. Ser. No. pending, filed 6 August 2016,11 October 2018, continuation-in-part of Patent Applications U.S. Ser. No. 13/199,050 and 13/999,757.10,187,299.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:
Accounts Receivable
Trade accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts. We determine the allowance for doubtful accounts by identifying potential troubled accounts and by using historical experience and future expectations applied to an aging of accounts. Trade accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded as income when received. We determined that no allowance for doubtful accounts was required at September 30, 2018March 31, 2019 and December 31, 2017.2018.
Intangible Assets
Acquired intangible assets are recorded at estimated fair value, net of accumulated amortization. Costs incurred in obtaining certain patents and intellectual property as well as software development expenses, are capitalized and amortized over their related estimated useful lives, using a straight-line basis consistent with the underlying expected future cash flows related to the specific intangible asset. Costs to renew or extend the life of intangible assets are capitalized and amortized over the remaining useful life of the asset. Amortization expenses are included as a component of selling, general and administrative expenses in the consolidated statements of operations. The Company'sCompany’s continued ability to extend and/or renew the rights associated with these intangible assets may have an impact on future cash flows.
Useful life estimates for the Company'sCompany’s significant intangible asset classes are as follows:
| | Useful Life |
| Patent Costs | 20 years |
| Software Licenses | 7 years |
| Software Development Costs | 15 years |
Impairment of Long-Lived Assets
The Company reviews long-lived assets, at least annually, to determine if impairment has occurred and whether the economic benefit of the asset (fair value of assets to be used and fair value less disposal cost for assets to be disposed of) is expected to be less than the carrying value. Triggering events, which signal further analysis, consist of a significant decrease in the asset's market value, a substantial change in the use of an asset, a significant physical change in the asset, a significant change in the legal or business climate that could affect the asset, an accumulation of costs significantly in excess of the amount originally expected to acquire or construct the asset, or a history of losses that imply continued loss associated with assets used to generate revenue.
Revenue Recognition
Revenue is recognized when the following criteria are met:
| · | Identification of the contract, or contracts, with a customer |
| | |
| · | Identification of the performance obligations in the contract |
| | |
| · | Determination of the transaction price |
| | |
| · | Allocation of the transaction price to the performance obligations in the contract |
| | |
| · | Recognition of revenue when, or as, we satisfy performance obligation |
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"(“VSOE”), (ii) third-party evidence, and (iii) best estimate of selling price ("ESP"(“ESP”). For software elements, we follow the industry specific software guidance which only allows for the use of VSOE in establishing fair value. Generally, VSOE is the price charged when the deliverable is sold separately or the price established by management for a product that is not yet sold if it is probable that the price will not change before introduction into the marketplace. ESPs are established as best estimates of what the selling prices would be if the deliverables were sold regularly on a stand-alone basis. Our process for determining ESPs requires judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable.
Any revenue received that does not yet meet the above recognition standards is recorded to unearned revenue, and held as a liability until recognition occurs.
Income Taxes
We account for income taxes in accordance with FASB ASC Topic 740, Income Taxes, using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
FASB ASC Topic 740, Income Taxes, requires us to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, we must measure the tax position to determine the amount to recognize in our consolidated financial statements. We performed a review of our material tax positions in accordance with recognition and measurement standards established by ASC Topic 740 and concluded we had no unrecognized tax benefit that would affect the effective tax rate if recognized for the ninethree months ended September 30, 2018March 31, 2019 and 2017.2018.
We include interest and penalties arising from the underpayment of income taxes, if any, in our consolidated statements of operations in general and administrative expenses. As of September 30, 2018March 31, 2019 and December 31, 2017,2018, we had no accrued interest or penalties related to uncertain tax positions.
Fair Value of Financial Instruments
The Company'sCompany’s financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses, notes payable and convertible debt. The carrying amount of these financial instruments approximates fair value because of the short-term nature of these items.
Results of Operations
Three Months Ended September 30, 2018March 31, 2019 Compared to the Three Months Ended September 30, 2017March 31, 2018
Sales
Total sales during the three months ended September 30, 2018March 31, 2019 were $74,102,$123,676, as compared to sales during the three months ended September 30, 2017March 31, 2018 of $4,304,$3,188, an increase of $69,798$120,488 or approximately 1,622%3.78%. This increase was primarily due to two contracts added during the current period. Management believes historical sales not to be indicative of future expectations due to our historically limited business operations. We believe that future sales will be significantly increased as we market oura new suite of products.
Operating Expenses
Our selling, general and administrative expenses were $3,878,915 for the three months ended September 30, 2018, compared to $4,985,557 for the three months ended September 30, 2017, a decrease of $1,106,642, or approximately 22%. The decrease in selling, general and administrative expenses in the current period is primarily attributable to an approximate $846,000 decrease in wage expense, an approximate $908,000 decrease in professional fees, partially offset by an approximate $182,000 increase in non-cash expenses related to stock issuances for consulting contracts, an approximate $317,000 increase in depreciation and amortization and an increase of approximately $500,000 in employee stock share based compensation and an approximate $511,000 increase in non-cash expenses from loss on extinguishment of debt.
Interest Income (Expense)
Other expense includes interest expense on our indebtedness, a portion of which is indebtedness to related parties. Total net interest expense was $643,925 and $176,031 for the three months ended September 30, 2018 and 2017, respectively. The increase in interest expense of $467,984 in the current year is attributable primarily to an increase in debt financing during the current quarter.
Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
Sales
Total sales during the nine months ended September 30, 2018 were $144,116, as compared to sales during the nine months ended September 30, 2017 of $42,006, an increase of $102,110, or approximately 243%. This increase was primarily due to two contracts addedcontract during the current period. Management believes historical sales not to be indicative of future expectations due to our historically limited business operations. We believe that future sales will be significantly increased as we market our new suite of products.
Operating Expenses
Our selling, general and administrative expenses were $10,344,719$3,804,729 for the ninethree months ended September 30, 2018,March 31, 2019, compared to $10,150,104$3,098,437 for the ninethree months ended September 30, 2017,March 31, 2018, an increase of $194,615,$706,292, or approximately 2%23%. The increase in selling, general and administrative expenses in the current period is primarily attributable to approximate increases of $55,000 in engineering expense, $67,000 in sales and marketing expense, $164,000 in wage expenses, $117,000 in stock based compensation, $147,000 in public relations expense, and $113,000 in professional fees, partially offset by an approximate $182,000 increase indecrease of $124,000 non-cash expenses related to stock issuances for consulting contracts, an increase of approximately $709,000 in employee stock share based compensation and an approximate $510,000 increase in depreciation and amortization, and an increase of approximately $58,000 in warrants issued for contracts, partially offset by an approximate $1,408,000 decrease in professional fees, and an approximate $279,000 decrease in wages and salaries.contracts.
Interest Income (Expense)
Other expense includes interest expense on our indebtedness, a portion of which is indebtedness to related parties. Total net interest expense was $1,025,333$2,689,519 and $583,130$139,479 for the ninethree months ended September 30,March 31, 2019 and 2018, and 2017, respectively. The increase in interest expense of $442,203$2,550,040 in the current year is attributable primarily to an increase in the amortization of debt discounts and an increase in overall debt financing during the current year.
Loss on disposal of discontinued operations
On March 31, 2017,quarter as compared to the Company completed the sale of substantially all the assets, other than cash, used in or connection with the Company's home grain mill and kitchen mixer business to John Hofman and Bruce Crane, former officers and directors of the Company, in consideration for the assumption by such persons of substantially all the liabilities incurred by the Company in connection with such business. The assets divested consisted of the non-cybersecurity assets of the Company and included accounts receivable, inventory, deposits, property and equipment and intangible assets. The liabilities divested included the non-cybersecurity liabilities of the Company and included accounts payable and accrued expenses and long and short-term notes payable and accrued interest thereon. Upon completion of the divestiture, the Company recognized a $484,927 non-cash loss on disposal.
Loss from discontinued operations
During the period from February 22, 2017 through March 31, 2017, the Company recognized a loss from discontinued operations of $8,737. This loss was primarily driven by lower than anticipated product sales of the entity that was eventually sold.prior year.
Liquidity and Capital Resources
At September 30, 2018,March 31, 2019, we had total current assets of $2,708,718,$1,114,377, including cash of $2,360,045,$673,880, and current liabilities of $5,906,234,$11,668,758, resulting in working capital deficit of $3,197,516.$10,554,381. Our current assets and working capital included receivables of $168,521,$220,456, inventory of $56,003$66,003 and prepaid expenses of $124,149.$154,038.
In addition, as September 30, 2018,March 31, 2019, we had a total stockholders' equitydeficit of $5,159,231.$979,982. As we have worked toward our acquisition and new product launches, we have primarily financed recent operations, the development of technologies, and the payment of expenses through the issuance of our debt, common stock, preferred stock and warrants.
For the ninethree months ended September 30, 2018,March 31, 2019, net cash used in operating activities was $7,712,392,$3,200,486, as a result of our net loss from continued operations of $11,841,419$6,370,572 and increases in accounts receivable of $118,164, inventory of $15,595,$10,000, and decreasesprepaid expenses of $31,325, partially offset by non-cash expenses totaling $2,604,688 and increases in deferred revenueaccounts payable and accrued expenses of $3,822,$81,589, accounts payable and accrued expenses – related party of $11,411, partially offset by non-cash expenses totaling $2,683,899, and increases in$3,302, accrued interest of $380,104,$413,890, accrued interest -– related party of $115,722,$4,935, deferred revenue of $2,529 and wages payable of $736,108, and a decrease in accounts receivable of $48,859 and prepaid expenses of $237,493.$218,642.
By comparison, for the ninethree months ended September 30, 2017,March 31, 2018, net cash used in operating activities was $5,268,597,$2,141,765, as a result of our net loss from continued operations of $11,185,150$3,234,778 and increases in inventory of $26,068,$1,172, prepaid expenses of $195,534,$34,416, and decreases in deferred revenue of $9,197,$3,187, accounts payable and accrued expenses – related party of $325,058,$39,881, partially offset by non-cash expenses totaling $643,499,$404,366, and increases in accounts payable and accrued expenses of $251,492,$301,518, accrued interest of $1,035,$42,303, accrued interest - related party of $509,792,$38,497, wages payable of $4,527,900, loss from discontinued operation$283,530, and a decrease in accounts receivable of $493,664 and cash flows from discontinued operations of $45,028.$101,455.
Cash used in investing activities for the ninethree months ended September 30, 2018March 31, 2019 was $1,683,431$694,584 compared to $925,373$554,666 for the ninethree months ended September 30, 2017.March 31, 2018. The increase in the current period is due primarily to an increase in capitalized engineering costs related to the Company'sCompany’s technology development.
7
development as well as an approximate $79,000 in purchases of property and equipment.
For the ninethree months ended September 30,March 31, 2019, net cash used in financing activities was $125,000, comprised of repayments of short term notes of $25,000 and repayments of long-term notes of $100,000.
For the three months ended March 31, 2018, net cash provided by financing activities was $11,333,999,$2,575,000, comprised of proceeds from the sale short term notes – related party of $732,000,$500,000, short term notes of $10,832,000$2,100,000 and advances – related party of $75,000, partially offset by repayments of short term notes of $5,000 andthe repayments of long-term notes of $300,001.
For the nine months ended September 30, 2017, net cash provided by financing activities was $8,365,385, comprised of proceeds from the sale of common stock of $8,392,451, preferred stock of $275,000 and warrants exercised of $10,000, proceeds from short term notes of $100,000 and advances – related party of $115,000, partially offset by the repayment of short-term notes of $38,989, repayments of short-term convertible notes of $100,000, repayments of long-term notes of $333,342 and cash outflows from discontinued operations of $54,735.$100,000.
Based on our current business plan, we anticipate that our operating activities will use approximately $500,000$900,000 in cash per month over the next twelve months, or $6$10.8 million. Currently we do not have enough cash on hand to fully implement our business plan, and will require additional funds within the next year. We believe that our operations will not begin to generate significant cash flows until the fourth quarter of 20182019 when we expect to begin new product contracts.
In order to remedy this liquidity deficiency, we are actively seeking to raise additional funds through the sale of equity and debt securities, and ultimately plan to generate substantial positive operating cash flows. Our internal sources of funds will consist of cash flows from operations, but not until we begin to realize substantial revenues from sales. If we are unable to raise additional funds in the near term, we may not be able to fully implement our business plan, and it is unlikely that we will be able to continue as a going concern.
Off-balance Sheet Arrangements
None.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not required.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls over Procedures
Under the supervision and with the participation of our management, 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 September 30, 2018,March 31, 2019, the end of the period covered by this report. Based upon that evaluation, we have concluded that our disclosure controls and procedures as of September 30, 2018March 31, 2019 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 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.
Changes in Internal Control over Financial Reporting
Limitations on the Effectiveness of Internal Controls
Readers are cautioned that our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our control have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On December 2, 2016, AltEnergy Cyber, LLC ("Plaintiff") instituted a legal action in Connecticut against the Company and Robert Zahm. The complaint alleged that (i) the company improperly extended the maturity date of the Plaintiff's convertible note in the amount of $1,500,000 and (ii) improperly converted the loan into the Company's stock. The Complaint alleges that the Company is liable to the Plaintiff for the $4,500,000 plus interest. This litigation is still ongoing. 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. As of the date of this filing, the appeal period has expired and it is the Company's belief that this matter is fully resolved through the dismissal.NoneItem 1A. Risk Factors
Not required.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the nine months ended September 30, 2018, the Company issued an aggregate 1,049,166 shares of the Company's common stock pursuant to consulting contracts valued at $533,670, or an average of $0.51 per share.None
During the nine months ended September 30, 2018, the Company converted an aggregate 45,173 shares of the Company's preferred stock into 535,565 shares of the Company's common stock after receiving conversion exercises from multiple preferred stockholders.
On March 30, 2018, a contractor rescinded a provision in its contract for common stock payments, and returned 300,000 shares previously issued to them during 2017. The Company retired the returned shares and recaptured the original $240,000 expensed when the shares were issued.
On June 11, 2018, the Company issued 300,000 shares of the Company's stock valued at $120,000 as a signing bonus to an employee.
On June 13, 2018, the Company converted an $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 7 – 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 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 Note 7 – Related Party Transactions).
On September 30, 2018, The Company converted notes 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 Note 7 – Related Party Transactions).
We believe that the foregoing transactions were exempt from the registration requirements under Section 4(a)(2) of the Securities Act of 1933, as amended ("the Act") and Rule 506(b) of Regulation D, 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 an underwriter within the meaning of Section 2(11) under the Act.
We believe the foregoing transaction was exempt from the registration requirements under Section 3(a)(9) of the Act. No commission or other remuneration is paid or given directly or indirectly for such exchange other than the surrender and cancellation of the Company's preferred stock.
Item 3. Defaults upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
The following exhibits are filed as part of this report:
Identification of Exhibit
| Exhibit No. | Description |
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| 31.1 | Section 302 Certification of Chief Executive Officer * |
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| 31.2 | Section 302 Certification of Chief Financial Officer * |
| | |
| 32.1 | Section 1350 Certification of Chief Executive Officer * |
| | |
| 32.2 | Section 1350 Certification of Chief Financial Officer * |
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| 101 INS | XBRL Instance Document* |
| |
| 101 SCH | XBRL Schema Document* |
| |
| 101 CAL | XBRL Calculation Linkbase Document* |
| |
| 101 LAB | XBRL Labels Linkbase Document* |
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| 101 PRE | XBRL Presentation Linkbase Document* |
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| 101 DEF | XBRL Definition Linkbase Document* |
* Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BLACKRIDGE TECHNOLOGY INTERNATIONAL, INC.
| Date: | NovemberMay 14, 20182019
| | By: | /s/ Robert Graham |
| | | | Robert Graham, Chief Executive Officer and President |
| Date: | NovemberMay 14, 20182019
| | By: | /s/ John Bluher |
| | | | John Bluher, Chief Financial Officer |