NEVADA | 20-1282850 |
(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification No.)
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5390 Kietzke
Lane, Suite 104, Reno, Nevada
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89511
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(Address of principal executive offices)
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(Zip Code)
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Large accelerated filer
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☐
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Accelerated filer
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☐
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Non-accelerated filer
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☒
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Smaller reporting company
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☒
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Emerging growth company
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PAGE
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PART I
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Item 1.
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Business
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4 |
Item 1A.
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Risk Factors
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11 |
Item 1B.
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Unresolved Staff Comments
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25 |
Item 2.
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Properties
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25 |
Item 3.
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Legal Proceedings
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25 |
Item 4.
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Mine Safety Disclosures
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25 |
PART II
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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26 |
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Item 6.
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Selected Financial Data
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28 |
Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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28 |
Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk
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34 |
Item 8.
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Financial Statements and Supplementary Data
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34 |
Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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34 |
Item 9A.
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Controls and Procedures
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34 |
Item 9B.
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Other Information
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35 |
PART III
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37 | |
Item 10.
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Directors, Executive Officers and Corporate Governance
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36 |
Item 11.
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Executive Compensation
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38 |
Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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39 |
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Item 13.
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Certain Relationships and Related Transactions, and Director Independence
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41 |
Item 14.
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Principal Accounting Fees and Services
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41 |
Item 15.
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Exhibits, Financial Statement Schedules
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42 |
Item 16.
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Form 10-K Summary
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42 |
SIGNATURES
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43 |
Part I
Reorganization Agreement
On February 22, 2017, we completed the actions contemplated by the Reorganization Agreement and merged with and into BlackRidge with BlackRidge continuing as the surviving corporation (“Reorganization”). Upon completion of the Agreement, we issued 3,783,791 shares of our newly designated Series A Preferred Stock and 12,825,683 shares of Common Stock to the stockholders of BlackRidge in exchange for all the issued and outstanding shares of Series A Preferred Stock and Common Stock of BlackRidge. Additionally, certain stockholders of the Company returned for cancellation a total of 16,284,330 shares of our Common Stock. Upon the completion of the Reorganization, BlackRidge became a wholly-owned subsidiary of the Company and the Company had a total of 3,783,791 shares of Series A Preferred Stock and 21,790,683 shares of Common Stock outstanding, with the former BlackRidge stockholders owning 3,783,791 shares or 100% of Series A Preferred Stock and 12,825,683 shares or approximately 58.9% of Common Stock. Upon completion of the Reorganization, we also had outstanding warrants entitling the holders to acquire a total of 18,541,579 shares of the Company's Common Stock at an average exercise price of $0.46 per share. The Reorganization resulted in a change of control of the Company. For accounting purposes, BlackRidge will be treated as the acquirer and the historical financial statements of BlackRidge will become the Company's historical financial statements. The acquisition is intended to constitute a tax-free reorganization pursuant to the applicable provisions of the Internal Revenue Code of 1986, as amended.
At the closing of the Reorganization, Robert Graham was appointed as President, and John Bluher was
appointed Chief Financial Officer, Treasurer and Secretary. In addition, Bruce Crane resigned from his position as a director and Robert Graham was appointed as a director of the Company to fill the vacancy created by such resignation. John
Hofman, our remaining director, resigned from such position effective following our compliance with rule 14f-1 promulgated under the Exchange Act, and John Hayes and Robert Lentz were appointed as directors of the Company effective at such time
as Mr. Hofman's resignation became effective.
On March 31, 2017, the Company completed the sale of substantially all assets, other than cash, used in
or connection with the Company's home grain mill and kitchen mixer business to John Hofman and Bruce Crane, former officers and directors of the Company, in consideration for the assumption by such persons of substantially all the liabilities
incurred by the Company in connection with such business. The assets divested consisted of the non-cybersecurity assets of the Company and included accounts receivable, inventory, deposits, property and equipment and intangible assets. The
liabilities divested included the non-cybersecurity liabilities of the Company and included accounts payable and accrued expenses and long and short-term notes payable and accrued interest thereon.
On July 2, 2017, the Company filed Restated Articles with the Secretary of State of Nevada to, among other things, change the Company’s name to BlackRidge Technology International, Inc.
Overview
BlackRidge develops and markets next generation cyber defense solutions that enables our customers to deliver more
secure and resilient business services in today’s rapidly evolving cyber threat environments. Our network, server, IoT and cloud security products are based on our patented Transport Access Control technology and are designed to isolate, cloak
and protect cloud services, enterprise servers and Internet of Things (IoT) devices; and segment and segregate enterprise Information Technology (IT) and Operational Technology (OT) networks from cyber-attacks and unauthenticated access.
BlackRidge products are used in enterprise and government computing environments, the industrial IoT, critical infrastructure and other cloud service provider and network systems.
The general telephone number for BlackRidge is 1-855-807-8776 and our website is www.blackridge.us.
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, 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 cyber defense offers superior performance compared to legacy network security approaches and greatly reduces business 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 and 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 IT or OT
network or a cloud to cloak and protect servers and IoT devices and segment networks, in front of existing security stacks to filter anonymous traffic, or as part of cloud or managed service provider or OEM (as defined below) solutions.
Technology and Products
Our proprietary and patented technology, 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 the trust model in how the Internet operates: the inability to authenticate network traffic 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 IoT.
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 solution enables customers to continue to use their advanced analytical and machine learning tools. This is also important for Industrial Control Systems and IIoT
environments that 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 Operational Technology with IT networks. Organizations tasked with operating and managing factory automation or critical
infrastructure systems can now secure legacy equipment long shelf life and known vulnerabilities.
The BlackRidge solution is available in the following product configurations, with additional platform support and
endpoints under development:
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1U rack-mountable 1GbE or 10GbE network appliance;
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1GbE fanless desktop appliance;
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VMware ESXi™, KVM, and IBM z/VM® virtual appliances;
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Amazon Web Services and Microsoft Azure cloud virtual appliances; and
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Windows and Linux software endpoints; and
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● | IoT endpoints and devices. |
Network and cloud deployments options include deploying in-line as a network protection or segmentation device or logically inline for cloud deployments. BlackRidge’s software and systems are designed to be highly resilient and can be configured for high availability and failover. Deployment risk is addressed by monitoring and verifying security policies during deployment with progressive modes of bridge, monitor and audit, and then enforce policy; and by logging all policy enforcement actions.
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 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.
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 such as Cisco Systems, Inc. and Juniper Networks, Inc to extend the breadth
and depth of our products and partner solutions, and to help ease the complications that organizations face when implementing multi-layered security solutions. Our technology alliances facilitate integrated solution design, accelerate the
implementation time to realize value, provide vertical industry knowledge and credibility, 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 partner’s cloud service or solution, BlackRidge products
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 OEM partners. The initial sales focus and market entry strategy for BlackRidge was the U.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,
I-NET, Marist College, Microsoft, National Instruments, Oracle, PTC, SafeLogic, Splunk, the U.S. Department of Defense, the U.S. Department of Energy, and VMware. Our global channel partners include Atrion, B&D Consulting, LRS IT Solutions,
Network Runners, Nihon Cornet Technology, NTT AT, and Presidio.
Within the commercial markets, BlackRidge sells both direct and through our strategic partners to large
enterprise accounts, and indirect through certain channel partners to specific verticals and international market segments. Our initial market entry strategy for the commercial market is to sell direct in order to establish customer references
with large enterprises 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 expand 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 nine 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 and other agencies.
In 2018 we achieved several significant product milestones with the DOD including 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 within DoD networks.
The BlackRidge OEM and service provider partnership strategy is to make targeted investments to
capitalize on opportunities in specific market segments such as the industrial Internet of Things (IoT), blockchain 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 and Product Management
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 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, 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 where appropriate.
The granted patents focus on the communication of identity tokens at the network layer (6,973,496, 8,346,951), combining identity authentication at different security layers (8,281,127, 8,635,445), insuring the integrity of token authentication (8,572,697, 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 (14/544,987, 15/732,282, 15/998,262), using network identity in a firewall (14/545,988) and making network routing policy decisions using identity (16/350,200).
As of release 4.0, our products use the technology described in patents 6,973,496, 8,346,951, 8,572,697 and 9,973,499 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 Device: US Patent number 6,973,496, Patent Application U.S. Ser. No. 10/094,425. Filed 5 March
2002, Granted 6 December 2005, 1 Claim.
Method for Digital Identity Authentication: US Patent number 8,281,127, Patent Application U.S. Ser. No. 12/658,113. Filed 1
February 2010, Granted 2 October 2012, 20 Claims.
Method for First Packet Authentication: US Patent number 8,346,951, Patent Application U.S. Ser. No. 11/242,637. Filed 30
Sept 2005, Granted 1 January 2013, 25 Claims.
Method for Statistical Object Identification: US Patent number 8,572,697, Patent Application U.S. Ser. No. 13/373,586. Filed
18 November 2011, Granted 29 October 2013, 43 Claims.
Method for Digital Identity Authentication: US Patent number 8,635,445, Patent Application U.S. Ser. No. 13/573,077. Filed 16 August 2012, Divisional application of patent application No. 12/658,113, Granted 21 January 2014, 23 Claims.
Method for Directing Requests to Trusted Resource: 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.
Method for Statistical Object Identification: US Patent number 9,973,499, Patent Application U.S. Ser. No. 14/998,645, filed 16 January 2016, continuation-in-part of Patent 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. 15/998,262, filed 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. 16/350,200, filed 11 October 2018,
continuation-in-part of Patent 10,187,299.
Competition
BlackRidge TAC operates at the Transport Layer to provide a highly scalable, non-interactive authentication protocol that does not rely on signatures, sandboxing, or deep packet inspection of content. This provides key competitive differentiators including high through-put with very low latency, compatibility with existing network and security technologies, address and topology independent, ability to work with encrypted content, and it supports cloud environments with network address translation (NAT).
We compete with other technology research and development, and sales companies for enterprise security spending and for financing from a
limited number of investors that are prepared to invest in such companies. The presence of competing companies in our field of endeavor may impact our ability to raise additional capital to fund our operations or further acquisitions, if
investors perceive that investments in our competitors are more attractive based on the merit of their technologies, or the advanced stage of marketing or development or the price of the investment opportunity. We face competition from many
companies, major universities and research institutions in the United States and abroad. Many of our competitors have substantially greater resources, experience in conducting research, experience in obtaining regulatory approvals for their
products, operating experience, research and development and marketing capabilities, name recognition and production capabilities. We will face competition from companies marketing existing products or developing new products which may render
our technologies (and products) obsolete.
These companies may have numerous competitive advantages, including:
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significantly greater name recognition;
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established distribution networks;
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more advanced technologies and product development;
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additional lines of products, and the ability to offer rebates, higher discounts or incentives; and
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greater experience in conducting research and development, manufacturing, and obtaining regulatory approval for products.
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Our strategy drives the marketing, distribution and public acceptance of any products we may derive from our research and development. Competition with respect to our technologies is and will be based, among other things, on effectiveness, latency, reliability, availability, price, marketing, distribution and patent position. Another important factor will be the timing of market introduction of any new versions of the software or development of new products and cyber security solutions new markets such industrial control systems (ICS) and the Industrial IoT.
Accordingly, the speed with which we can distribute and sell products and the speed to market with new or updated versions of the existing software, complete testing and proof of concept processes and ultimately supply commercial quantities of our products to the market and channels is expected to be an important competitive factor.
Our competitive position will also depend upon our ability to attract and retain qualified personnel, to obtain patent protection or
otherwise develop proprietary products or processes, and to secure sufficient capital resources for the often-substantial period between technological conception and commercial sales.
Government Regulations
BlackRidge exports products in compliance with the International Traffic in Arms Regulations that
control the export and import of defense-related articles and services on the United States Munitions List. BlackRidge is authorized to export and re-export encryption products as described in Part 740-17 (b) (1) of the Export Administration
Regulations EAR and mass market encryption products as described in Part 74215 (b) (1).
Environmental Regulations
We comply with all applicable laws, rules and regulations relating to our business, and at this time, we do not anticipate incurring any
material capital expenditures to comply with any environmental regulations or other requirements. While our products, intended projects and business activities do not currently violate any laws, any regulatory changes that impose additional
restrictions or requirements on us or on our potential customers could adversely affect us by increasing our operating costs or decreasing demand for our products or services, which could have a material adverse effect on our results of
operations.
Cybersecurity Enterprise Risk Management
The BlackRidge cybersecurity Enterprise Risk Management (ERM) is an Office of Information Security (OIS) program comprised of established
policies, procedures and controls. The backbone of the program applies approved techniques to measure cyber risk and respond with controls to mitigate those risks. Measurement of risk is executed by trained cyber security staff. Each risk
is calculated using industry norm values (Severity, Occurrence, Detection) which produces a Risk Priority Number (RPN). The entire portfolio of risks is organized into a four-block configuration visibly denoting actions to Improve, Optimize,
Monitor or Accept each individual risk. The aggregate of risk visualization data is a dynamic representation for review by various corporate constituencies.
Current consumers of BlackRidge aggregated corporate cybersecurity program are Audit / Finance, CVP Internal Audit, CEO, BlackRidge ERM management team and the engineering group. Each entity in turn provides specific feedback relative to the consumption of the data. The feedback is used to normalize the data and subsequently provide inputs to design and implementation of controls to maintain risk at an acceptable corporate level. As controls are applied continually, measurements and reevaluations are taken by the OIS team at various intervals across the spectrum of risk to ensure applied controls are effective and stabilizing to the agreed corporate risk tolerance. The evolution of the OIS ERM program strives for the right balance of control to maintain security, while also providing continuous improvement to the BlackRidge Governance, Risk, Compliance and Security Programs.
Employees of BlackRidge
As of March 29, 2019, we have 49 full time and two part time employees. We also engage a number of independent
contractors as engineers, system architects, or developers. BlackRidge employees are not represented by unions and it considers its relationship with its employees to be good.
Item 1A. Risk Factors
Risk Factors
BlackRidge has had operating losses each year since its inception, and may not achieve or maintain profitability in the future.
We may be unsuccessful in raising additional capital. If we are unable to raise additional financing, we will be under-capitalized and will not be able to execute our business plan as forecast. Such financing difficulties would likely reduce the value of your investment
in the Registrant.
BlackRidge is a recently formed company, with limited operating history. BlackRidge was formed in 2010 and has generated limited revenue. To date, BlackRidge has operated at a loss. Prior to BlackRidge,
management of BlackRidge has not previously worked together in a company. There is, therefore, no guarantee that management will work well together and execute the business plan of BlackRidge successfully.
BlackRidge is likely to lose money for a period of time.
BlackRidge, like many early stage companies, is projected to lose money for several months before it reaches cash-flow break even. Such projections may turn out to be too optimistic and BlackRidge may lose more money or for longer than forecast, hurting the value of an investment.
To the extent that BlackRidge's business plan relies on future access to financing, investors are incurring the risk of future dilution.
The market for raising capital for small public companies is currently challenging and may remain challenging for the indefinite future. Therefore, future financings by the Registrant may either be not possible or only done on terms that are detrimental to existing debt and equity holders of the Company.
Our business plan is dependent on the success of BlackRidge's existing technologies and new technologies which may be developed by
BlackRidge's engineering team.
There is no guarantee that BlackRidge's technologies will achieve wide acceptance at an economically attractive price point or that
BlackRidge's engineering department will develop new technologies which are commercially feasible. BlackRidge's technologies also run the risk of technological obsolescence as they are based on the current architecture of the internet.
Competitors’ technologies may render our technologies obsolete
We face competition from many companies, major universities and research institutions in the United States and abroad. Many of our competitors have substantially greater resources, experience in conducting research, experience in obtaining regulatory approvals for their products, operating experience, research and development and marketing capabilities, name recognition and production capabilities. We will face competition from companies marketing existing products or developing new products which may render our technologies (and products) obsolete.
Real or perceived defects, errors or vulnerabilities in our platform or the failure of our platform to block DDOS attacks, malware or prevent a security breach could harm our reputation and adversely impact our business, financial position and results of operations.
Because the techniques used by computer hackers to access or sabotage networks change frequently and generally are not recognized until launched against a target, there is a risk that an advanced attack could emerge that our platform is unable to detect or prevent. Moreover, as our platform is adopted by an increasing number of enterprises and governments, it is possible that the individuals and organizations behind advanced malware attacks will begin to focus on finding ways to defeat our software. If this happens, our networks, products, subscriptions and services could be targeted by attacks specifically designed to disrupt our business and undermine the perception that our platform is capable of providing superior IT security, which, in turn, could have a serious impact on our reputation as a provider of virtual machine-based security solutions.
If any of our customers becomes infected with malware after adopting our platform, even if our platform has blocked the theft of any of such customer's data, such customer could nevertheless be disappointed with our platform. Furthermore, if any enterprises or governments that are publicly known to use our platform are the subject of an advanced cyber-attack that becomes publicized, our other current or potential customers may look to our competitors for alternatives to our platform. Real or perceived security breaches of our customers' networks could cause disruption or damage to their networks or other negative consequences and could result in negative publicity to us, damage to our reputation, declining sales, increased expenses and customer relations issues.
Furthermore, our software may fail to detect or prevent malware, viruses, worms or similar threats for any number of reasons, including our
failure to enhance and expand our software to reflect industry trends, new technologies and new operating environments. Failure to keep pace with technological changes in the IT security industry and changes in the threat landscape could
adversely affect our ability to protect against security breaches and could cause us to lose customers.
Any real or perceived defects, errors or vulnerabilities in our software, or any other failure of our software to detect an advanced threat, could result in:
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a loss of existing or potential customers or channel partners;
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delayed or lost revenue;
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a delay in attaining, or the failure to attain, market acceptance;
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the expenditure of significant financial and product development resources in efforts to analyze,
correct, eliminate, or work around errors or defects, to address and eliminate vulnerabilities, or to identify and ramp up production with alternative third-party manufacturers;
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an increase in warranty claims, or an increase in the cost of servicing warranty claims, either of
which would adversely affect our gross margins;
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harm to our reputation or brand; and
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litigation, regulatory inquiries, or investigations that may be costly and further harm our
reputation.
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BlackRidge's business plan is, in part, to sell to government contractors, the Department of Defense and other "government" clients as well
as to the commercial marketplace. Mr. Graham, the Company's CEO and co-founder of BlackRidge has past experience in government sales and contracting groups. Mr. Hayes, the Company's CTO and co-founder of BlackRidge, has no prior experience
selling to the government. Government sales have several unique aspects which require a different approach than commercial sales and may have a longer sales cycle. In order to mitigate this risk, we have hired proven professionals with
experience selling to and contracting with the government, including a senior vice president with experience in government sales, and with appropriate security clearances to manage business in a classified environment. We have also appointed
an advisory council with experience in government sales, as well partnered with companies experienced in government contracts, including a retired Army General who headed up Army Cyber Command, and former senior executive from the office of
SecDef who is an expert in supply chain risk management.
Pending patent applications may be denied.
While BlackRidge owns issued U.S. patents on its core technology, there is no guarantee that other applications will result in granted
patents. Furthermore, given the nature of the US Patent Office, the determination of patentability may take several years. Even with its existing patents, enforcing patent rights can be an expensive and time-consuming process, involving years
of litigation and large legal fees.
Fluctuating economic conditions make it difficult to predict revenue for a particular period, and a shortfall in revenue may harm our
operating results.
Our revenue depends significantly on general economic conditions and the demand for products in the IT security market. Economic weakness,
customer financial difficulties, and constrained spending on IT security may result in decreased revenue and earnings. Such factors could make it difficult to accurately forecast our sales and operating results and could negatively affect our
ability to provide accurate forecasts to our contract manufacturers and manage our contract manufacturer relationships and other expenses. In addition, concerns regarding the impact of tight budgetary constraints and the new Trump
Administration on the IT budgets of various agencies of the U.S. government, as well as continued budgetary challenges in the United States and geopolitical turmoil in many parts of the world have and may continue to put pressure on global
economic conditions and overall spending on IT security. Currently, most enterprises and governments have not allocated a fixed portion of their budgets to protect against next-generation advanced cyber-attacks. If we do not succeed in
convincing customers that our platform should be an integral part of their overall approach to IT security and that a fixed portion of their annual IT budgets should be allocated to our platform, general reductions in IT spending by our
customers are likely to have a disproportionate impact on our business, results of operations and financial condition. General economic weakness may also lead to longer collection cycles for payments due from our customers, an increase in
customer bad debt, restructuring initiatives and associated expenses, and impairment of investments.
Uncertainty about future economic conditions also makes it difficult to forecast operating results and to make decisions about future
investments. Future or continued economic weakness for us or our customers, failure of our customers and markets to recover from such weakness, customer financial difficulties, and reductions in spending on IT security could have a material
adverse effect on demand for our platform and consequently on our business, financial condition and results of operations.
Our results of operations are likely to vary significantly from period to period, which could cause the trading price of our common stock to decline.
Our results of operations have varied significantly from period to period, and we expect that following the Reorganization, our results of operations will continue to vary as a result of a number of factors, many of which are outside of our control and may be difficult to predict, including:
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our ability to attract and retain new customers;
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the budgeting cycles, seasonal buying patterns and purchasing practices of customers;
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the timing of shipments of our products and length of our sales cycles;
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changes in customer or reseller requirements or market needs;
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changes in the growth rate of the IT security market, particularly the market for threat protection
solutions like ours that target next-generation advanced cyber-attacks;
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the timing and success of new product and service introductions by us or our competitors or any other
change in the competitive landscape of the IT security market, including consolidation among our customers or competitors;
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the level of awareness of IT security threats, particularly advanced cyber-attacks, and the market
adoption of our software;
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deferral of orders from customers in anticipation of new products or product enhancements announced by
us or our competitors;
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our ability to successfully expand our business domestically and internationally;
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reductions in customer renewal rates for our subscriptions;
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decisions by organizations to purchase IT security solutions from larger, more established security
vendors or from their primary IT equipment vendors;
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changes in our pricing policies or those of our competitors;
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any disruption in, or termination of, our relationship with channel partners;
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decreases in our customers' subscription renewal rates;
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our inability to fulfill our customers' orders due to supply chain delays or events that impact our
manufacturers or their suppliers;
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insolvency or credit difficulties confronting our customers, affecting their ability to purchase or
pay for our products, subscriptions and services, particularly our sole source suppliers, which could disrupt our supply chain;
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the cost and potential outcomes of existing and future litigation;
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seasonality in our business;
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general economic conditions, both domestic and in our foreign markets;
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future accounting pronouncements or changes in our accounting policies or practices;
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the amount and timing of operating costs and capital expenditures related to the expansion of our
business;
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a change in our mix of products, subscriptions and services; and
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increases or decreases in our expenses caused by fluctuations in foreign currency exchange rates.
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greater name recognition, longer operating histories and larger customer bases;
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larger sales and marketing budgets and resources;
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broader distribution and established relationships with channel and distribution partners and
customers;
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greater customer support resources;
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greater resources to make acquisitions;
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lower labor and research and development costs;
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larger and more mature intellectual property portfolios; and
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substantially greater financial, technical and other resources.
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Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales
and revenue are difficult to predict and may vary substantially from period to period, which may cause our results of operations to fluctuate significantly.
Our results of operations may fluctuate, in part, because of the resource intensive nature of our sales efforts, the length and variability of our sales cycle and the short-term difficulty in adjusting our operating expenses. Our results of operations depend in part on sales to large organizations. The length of our sales cycle, from proof of concept to delivery of and payment for our platform, is typically six to twelve months but can be more than a year. To the extent our competitors develop products that our prospective customers view as equivalent to ours, our average sales cycle may increase. Because the length of time required to close a sale varies substantially from customer to customer, it is difficult to predict exactly when, or even if, we will make a sale with a potential customer. As a result, large individual sales have, in some cases, occurred in quarters subsequent to those we anticipated, or have not occurred at all. The loss or delay of one or more large transactions in a quarter could impact our results of operations for that quarter and any future quarters for which revenue from that transaction is delayed. As a result of these factors, it is difficult for us to forecast our revenue accurately in any quarter. Because a substantial portion of our expenses are relatively fixed in the short term, our results of operations will suffer if our revenue falls below our or analysts' expectations in a particular quarter, which could cause the price of our common stock to decline.
If we do not accurately anticipate and respond promptly to changes in our customers' technologies, business plans or security needs, our competitive position and prospects could be harmed.
Many of our customers operate in markets characterized by rapidly changing technologies and business plans, which require them to add
numerous network access points and adapt to increasingly complex IT networks, incorporating a variety of hardware, software applications, operating systems and networking protocols. As their technologies and business plans grow more complex, we
expect these customers to face new and increasingly sophisticated methods of attack. We face significant challenges in ensuring that our platform effectively identifies and responds to these advanced and evolving attacks without disrupting our
customers' network performance. As a result of the continued rapid innovations in the technology industry, including the rapid growth of smart phones, tablets and other devices and the trend of "bring your own device" in enterprises, we expect
the networks of our customers to continue to change rapidly and become more complex.
We have identified a number of new products and enhancements to our platform that we believe are important to our continued success in the
IT security market. There can be no assurance that we will be successful in developing and marketing, on a timely basis, such new products or enhancements, or that our new products or enhancements will adequately address the changing needs of
the marketplace. In addition, some of our new products and enhancements may require us to develop new hardware architectures that involve complex, expensive and time-consuming research and development processes. Although the market expects
rapid introduction of new products and enhancements to respond to new threats, the development of these products and enhancements is difficult and the timetable for commercial release and availability is uncertain, as there can be significant
time lags between initial beta releases and the commercial availability of new products and enhancements. We may experience unanticipated delays in the availability of new products and enhancements to our platform and fail to meet customer
expectations with respect to the timing of such availability. If we do not quickly respond to the rapidly changing and rigorous needs of our customers by developing, releasing and making available on a timely basis new products and enhancements
to our platform that can adequately respond to advanced threats and our customers' needs, our competitive position and business prospects will be harmed. Furthermore, from time to time, we or our competitors may announce new products with
capabilities or technologies that could have the potential to replace or shorten the life cycles of our existing products. There can be no assurance that announcements of new products will not cause customers to defer purchasing our existing
products.
Additionally, the process of developing new technology is expensive, complex and uncertain. The success of new products and enhancements
depends on several factors, including appropriate component costs, timely completion and introduction, differentiation of new products and enhancements from those of our competitors, and market acceptance. To maintain our competitive position,
we must continue to commit significant resources to developing new products or enhancements to our platform before knowing whether these investments will be cost-effective or achieve the intended results. There can be no assurance that we will
successfully identify new product opportunities, develop and bring new products or enhancements to market in a timely manner, or achieve market acceptance of our platform, or that products and technologies developed by others will not render
our platform obsolete or noncompetitive. If we expend significant resources on researching and developing products or enhancements to our platform and such products or enhancements are not successful, our business, financial position and
results of operations may be adversely affected.
If we are unable to sell additional products, licenses, subscriptions and services, as well as renewals of our licenses, subscriptions
and services, to our customers, our future revenue and operating results will be harmed.
Our future success depends, in part, on our ability to expand the deployment of our platform with existing customers by selling them
additional products, subscriptions and services. This may require increasingly sophisticated and costly sales efforts and may not result in additional sales. In addition, the rate at which our customers purchase additional products,
subscriptions and services depends on a number of factors, including the perceived need for additional IT security as well as general economic conditions. If our efforts to sell additional products, subscriptions and services to our customers
are not successful, our business may suffer.
Further, existing customers that purchase our platform have no contractual obligation to renew their subscriptions and support and
maintenance services after the initial contract period, and given our limited operating history, we may not be able to accurately predict our renewal rates. Our customers' renewal rates may decline or fluctuate as a result of a number of
factors, including the level of their satisfaction with our platform, our customer support, customer budgets and the pricing of our platform compared with the products and services offered by our competitors. If our customers renew their
subscriptions, they may renew for shorter contract lengths or on other terms that are less economically beneficial to us. We cannot assure you that our customers will renew their subscriptions, and if our customers do not renew their
subscriptions or renew on less favorable terms, our revenue may grow more slowly than expected, if at all.
If we are unable to increase sales of our platform to large organizations while mitigating the risks associated with serving such
customers, our business, financial position and results of operations may suffer.
Our growth strategy is dependent, in part, upon increasing sales of our platform to large enterprises and governments. Sales to large
customers involve risks that may not be present (or that are present to a lesser extent) with sales to smaller entities. These risks include:
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increased purchasing power and leverage held by large customers in negotiating contractual
arrangements with us;
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more stringent or costly requirements imposed upon us in our support service contracts with such
customers, including stricter support response times and penalties for any failure to meet support requirements;
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more complicated implementation processes;
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longer sales cycles and the associated risk that substantial time and resources may be spent on a
potential customer that ultimately elects not to purchase our platform or purchases less than we hoped;
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closer relationships with, and dependence upon, large technology companies who offer competitive
products; and
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more pressure for discounts and write-offs.
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Our current research and development efforts may not produce successful products or enhancements to our platform that result in
significant revenue, cost savings or other benefits in the near future, if at all.
We must continue to dedicate significant financial and other resources to our research and development efforts if we are to maintain our competitive position. However, developing products and enhancements to our platform is expensive and time consuming, and there is no assurance that such activities will result in significant new marketable products or enhancements to our platform, design improvements, cost savings, revenue or other expected benefits. If we spend significant time and effort on research and development and are unable to generate an adequate return on our investment, our business and results of operations may be materially and adversely affected.
We may be unable to protect our intellectual property adequately, which could harm our business, financial condition and results of
operations.
We believe that our intellectual property is an essential asset of our business. We rely on a combination of patent, copyright, trademark
and trade secret laws, as well as confidentiality procedures and contractual provisions, to establish and protect our intellectual property rights in the United States and abroad. The efforts we have taken to protect our intellectual property
may not be sufficient or effective, and our trademarks, copyrights and patents may be held invalid or unenforceable. Any U.S. or other patents issued to us may not be sufficiently broad to protect our proprietary technologies. We may not be
effective in policing unauthorized use of our intellectual property, and even if we do detect violations, litigation may be necessary to enforce our intellectual property rights. Any enforcement efforts we undertake, including litigation, could
be time-consuming and expensive, could divert management's attention and may result in a court determining that our intellectual property rights are unenforceable. If we are not successful in cost-effectively protecting our intellectual
property rights, our business, financial condition and results of operations could be harmed.
Claims by others that we infringe their proprietary technology or other rights could harm our business.
Technology companies frequently enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained. As we face increasing competition and gain an increasingly higher profile, the possibility of intellectual property rights claims against us grows. From time to time, we expect that third parties may assert, claims of infringement of intellectual property rights against us. Third parties may in the future also assert claims against our customers or channel partners, whom our standard license and other agreements obligate us to indemnify against claims that our products infringe the intellectual property rights of third parties. While we intend to increase the size of our patent portfolio, many of our competitors and others may now and in the future have significantly larger and more mature patent portfolios than we have. In addition, future litigation may involve patent holding companies or other patent owners who have no relevant product offerings or revenue and against whom our own patents may therefore provide little or no deterrence or protection. Any claim of intellectual property infringement by a third party, even a claim without merit, could cause us to incur substantial costs defending against such claim, could distract our management from our business and could require us to cease use of such intellectual property. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by the discovery process.
Although third parties may offer a license to their technology or other intellectual property, the terms of any offered license may not be
acceptable, and the failure to obtain a license or the costs associated with any license could cause our business, financial condition and results of operations to be materially and adversely affected. In addition, some licenses may be
non-exclusive, and therefore our competitors may have access to the same technology licensed to us. If a third party does not offer us a license to its technology or other intellectual property on reasonable terms, or at all, we could be
enjoined from continued use of such intellectual property. As a result, we may be required to develop alternative, non-infringing technology, which could require significant time (during which we could be unable to continue to offer our
affected products, subscriptions or services), effort, and expense and may ultimately not be successful. Furthermore, a successful claimant could secure a judgment or we may agree to a settlement that prevents us from distributing certain
products, providing certain subscriptions or performing certain services or that requires us to pay substantial damages, royalties or other fees. Any of these events could harm our business, financial condition and results of operations.
We rely on our management team and other key employees and will need additional personnel to grow our business, and the loss of one or
more key employees or our inability to attract and retain qualified personnel could harm our business.
Our future success is substantially dependent on our ability to attract, retain and motivate the members of our management team and other
key employees throughout our organization. We may not be successful in attracting qualified personnel to fulfill our current or future needs. Our competitors may be successful in recruiting and hiring members of our management team or other key
employees, and it may be difficult for us to find suitable replacements on a timely basis, on competitive terms, or at all. Also, to the extent we hire employees from mature public companies with significant financial resources, we may be
subject to allegations that such employees have been improperly solicited, or that they have divulged proprietary or other confidential information or that their former employers own such employees' inventions or other work product.
In addition, we believe that it is important to establish and maintain a corporate culture that facilitates the maintenance and transfer of
institutional knowledge within our organization and also fosters innovation, teamwork, a passion for customers and a focus on execution. Our Chief Executive Officer and certain other key members of our management and finance teams have only
been working together for a relatively short period of time, and we expect to add additional vice presidents and other members of management in the foreseeable future. If we are not successful in integrating these key employees into our
organization, such failure could delay or hinder our product development efforts and the achievement of our strategic objectives, which could adversely affect our business, financial condition and results of operations.
Most of our employees, including some of our executive officers, work for us on an "at-will" basis, which means they may terminate their
employment with us at any time. We do not maintain key person life insurance policies on any of our key employees. If one or more of our key employees resigns or otherwise ceases to provide us with their service, our business could be harmed.
If we are unable to maintain successful relationships with our channel partners and technology alliance partners, or if our channel
partners or technology alliance partners fail to perform, our ability to market, sell and distribute our platform will be limited, and our business, financial position and results of operations will be harmed.
In addition to our direct sales force, we rely on our indirect channel partners to sell and support our platform. We expect that sales
through channel partners will be a significant percentage of our revenue. We also partner with our technology alliance partners to design go-to-market strategies that combine our platform with products or services provided by our technology
alliance partners.
Our agreements with our channel partners and our technology alliance partners are generally non-exclusive, meaning our partners may offer
customers products from several different companies, including products that compete with ours. If our channel partners do not effectively market and sell our platform, choose to use greater efforts to market and sell their own products or
those of our competitors, or fail to meet the needs of our customers, our ability to grow our business and sell our platform may be adversely affected. Our channel partners and technology alliance partners may cease marketing our platform with
limited or no notice and with little or no penalty, and new channel partners require extensive training and may take several months or more to achieve productivity. The loss of a substantial number of our channel partners, our possible
inability to replace them, or the failure to recruit additional channel partners could materially and adversely affect our results of operations. In addition, sales by channel partners are more likely than direct sales to involve collectability
concerns, particularly in developing markets. Our channel partner structure could also subject us to lawsuits or reputational harm if, for example, a channel partner misrepresents the functionality of our platform to customers or violates
applicable laws or our corporate policies.
Our ability to achieve revenue growth in the future will depend in part on our success in maintaining successful relationships with our
channel partners, and to train our channel partners to independently sell and deploy our platform. If we are unable to maintain our relationships with these channel partners or otherwise develop and expand our indirect sales channel, or if our
channel partners fail to perform, our business, financial position and results of operations could be adversely affected.
U.S. federal, state and local government sales are subject to a number of challenges and risks that may adversely impact our business.
Sales to U.S. federal, state, and local governmental agencies have in the past accounted for, and may in the future account for, a significant portion of our revenue. Sales to such government entities are subject to the following risks:
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selling to governmental agencies can be highly competitive, expensive and time consuming, often
requiring significant upfront time and expense without any assurance that such efforts will generate a sale;
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government certification requirements applicable to our products may change and in doing so restrict
our ability to sell into the U.S. federal government sector until we have attained the revised certification;
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government demand and payment for our products and services may be impacted by public sector budgetary
cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products and services;
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we sell our software to governmental agencies through our indirect channel partners, and these
agencies may have statutory, contractual or other legal rights to terminate contracts with our distributors and resellers for convenience or due to a default, and any such termination may adversely impact our future results of
operations; and
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governments routinely investigate and audit government contractors' administrative processes, and any
unfavorable audit could result in the government refusing to continue buying our platform, which would adversely impact our revenue and results of operations, or institute fines or civil or criminal liability if the audit uncovers
improper or illegal activities.
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Government and department of defense contracts can be changed and altered by the government at any time and therefore may not
be completed as initially indicated or agreed.
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A wide variety of provincial, state, national, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer and other processing of personal data. These data protection and privacy-related laws and regulations are evolving and may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions. Our failure to comply with applicable laws and regulations, or to protect such data, could result in enforcement action against us, including fines, imprisonment of company officials and public censure, claims for damages by customers and other affected individuals, damage to our reputation and loss of goodwill (both in relation to existing customers and prospective customers), any of which could have a material adverse effect on our operations, financial performance and business. Evolving and changing definitions of personal data and personal information within the European Union, the United States, and elsewhere, especially relating to classification of IP addresses, machine identification, location data and other information, may limit or inhibit our ability to operate or expand our business, including limiting technology alliance partners that may involve the sharing of data. Even the perception of privacy concerns, whether or not valid, may harm our reputation and inhibit adoption of our products by current and future customers.
If the general level of DDOS and advanced
cyber-attacks declines, or is perceived by our current or potential customers to have declined, our business could be harmed.
Our business is substantially dependent on enterprises and governments recognizing that DDOS and advanced cyber-attacks are pervasive and
are not effectively prevented by legacy security solutions. High visibility attacks on prominent enterprises and governments have increased market awareness of the problem of DDOS and advanced cyber-attacks and help to provide an impetus for
enterprises and governments to devote resources to protecting against DDOS and advanced cyber-attacks, such as testing our platform, purchasing it, and broadly deploying it within their organizations. If DDOS and advanced cyber-attacks were to
decline, or enterprises or governments perceived that the general level of DDOS and advanced cyber-attacks have declined, our ability to attract new customers and expand our offerings within existing customers could be materially and adversely
affected. A reduction in the threat landscape could increase our sales cycles and harm our business, results of operations and financial condition.
We are exposed to the credit risk of some of our distributors and resellers and to credit exposure in weakened markets, which could
result in material losses.
Most of our sales are on an open credit basis. Although we have programs in place that are designed to monitor and mitigate these risks, we
cannot assure you these programs will be effective in reducing our credit risks, especially as we expand our business internationally. If we are unable to adequately control these risks, our business, results of operations and financial
condition could be harmed.
Our failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new
products could reduce our ability to compete and could harm our business.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges,
including the need to develop new products and enhancements to our platform, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure
additional funds. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests and the per share value of our common stock could decline. Furthermore, if we engage in debt financing,
the holders of debt would have priority over the holders of common stock, and we may be required to accept terms that restrict our ability to incur additional indebtedness. We may also be required to take other actions that would otherwise be
in the interests of the debt holders and force us to maintain specified liquidity or other ratios, any of which could harm our business, results of operations, and financial condition. If we need additional capital and cannot raise it on
acceptable terms, we may not be able to, among other things:
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develop or enhance our products and subscriptions;
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continue to expand our sales and marketing and research and development organizations;
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acquire complementary technologies, products or businesses;
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expand operations, in the United States or internationally;
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hire, train and retain employees; or
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respond to competitive pressures or unanticipated working capital requirements.
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If our products do not effectively interoperate with our customers' IT infrastructure, installations could be delayed or cancelled,
which would harm our business.
Our products must effectively interoperate with our customers' existing or future IT infrastructure, which often has different specifications, utilizes multiple protocol standards, deploys products from multiple vendors, and contains multiple generations of products that have been added over time. As a result, when problems occur in a network, it may be difficult to identify the sources of these problems. If we find errors in the existing software or defects in the hardware used in our customers' infrastructure or problematic network configurations or settings, we may have to modify our software or hardware so that our products will interoperate with our customers' infrastructure. In such cases, our products may be unable to provide significant performance improvements for applications deployed in our customers' infrastructure. These issues could cause longer installation times for our products and could cause order cancellations, either of which would adversely affect our business, results of operations and financial condition. In addition, government and other customers may require our products to comply with certain security or other certifications and standards. If our products are late in achieving or fail to achieve compliance with these certifications and standards, or our competitors achieve compliance with these certifications and standards, we may be disqualified from selling our products to such customers, or may otherwise be at a competitive disadvantage, either of which would harm our business, results of operations, and financial condition.
Failure to comply with governmental laws and regulations could harm our business.
Our business is subject to regulation by various U.S. federal, state, local and foreign governments. In certain jurisdictions, these
regulatory requirements may be more stringent than those in the United States. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement
of profits, fines, damages, civil and criminal penalties, or injunctions. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, results of operations, and financial
condition could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management's attention and resources and an increase in professional fees. Enforcement actions and
sanctions could harm our business, results of operations and financial condition.
Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations which could
negatively impact future tax expense.
In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an "ownership
change" is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. Our existing NOLs may be subject to limitations arising from previous ownership changes, and if we
undergo an ownership change, our ability to utilize NOLs could be further limited by Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382
of the Code. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen
reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. There is also a risk that due to regulatory changes in the tax rates, the value of our NOLs could change substantially. For these
reasons, we may not be able to utilize a material portion of our NOLs, even if we attain profitability.
Risks Related to the Securities Markets and Ownership of Our Common Stock
The price of our common stock may be volatile, and the value of your investment could decline.
Technology stocks have historically experienced high levels of volatility. The trading price of our common stock following the Reorganization may fluctuate substantially, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:
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announcements of new products, services or technologies, commercial relationships, acquisitions or
other events by us or our competitors;
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changes in how customers perceive the effectiveness of our platform in protecting against advanced
cyber-attacks or other reputational harm;
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price and volume fluctuations in the overall stock market from time to time;
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significant volatility in the market price and trading volume of technology companies in general and
of companies in the IT security industry in particular;
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fluctuations in the trading volume of our shares or the size of our public float;
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actual or anticipated changes or fluctuations in our results of operations;
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whether our results of operations meet the expectations of securities analysts or investors;
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actual or anticipated changes in the expectations of investors or securities analysts;
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litigation involving us, our industry, or both;
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regulatory developments in the United States, foreign countries or both;
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general economic conditions and trends;
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major catastrophic events;
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sales of large blocks of our common stock; or
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departures of key personnel.
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Sales of substantial amounts of our common stock in the public markets, or the perception that such sales might occur, could reduce
the price that our common stock might otherwise attain and may dilute your voting power and your ownership interest in us.
We may issue our shares of common stock or securities convertible into our common stock from time to time in connection with a financing,
acquisition or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to decline.
Our securities are illiquid meaning that you may not be able to sell your securities when you wish or for a price you like.
Although the Registrant is a publicly traded company, the current market for its securities is limited and relatively illiquid. Therefore,
you may incur higher trading costs in the form of wider than typical bid-ask spreads and may have difficulty selling a large block of shares in a short period of time.
Our common stock is currently considered a "penny" stock and therefore is subject to limitations on trading.
Stocks that trade below $5.00 per share and are not listed on a major national securities exchange such as the NYSE or NASDAQ, are subject
to restrictions on how broker-dealers may handle such stocks including limitations on solicitation and more onerous record-keeping requirements. As a result, penny stocks tend to have less trading volume and liquidity than stocks which are
not subject to penny stock rules. We do not intend to pay dividends for the foreseeable future.
We have never declared or paid any dividends on our common stock. We intend to retain any earnings to finance the operation and expansion of
our business, and we do not anticipate paying any cash dividends in the future. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases.
We are an "emerging growth company," and we cannot be certain if the reduced disclosure requirements applicable to emerging growth
companies will make our common stock less attractive to investors.
For so long as we remain an "emerging growth company," as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, we may take advantage of certain exemptions from various requirements that are applicable to public companies that are not "emerging growth companies," including not being required to comply with the independent auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We will remain an "emerging growth company" until the earliest of (i) the last day of the fiscal year following the fifth anniversary of the completion of this offering, (ii) the last day of the first fiscal year in which our annual gross revenue is $1 billion or more, (iii) the date on which we have, during the previous rolling three-year period, issued more than $1 billion in non-convertible debt securities or (iv) the date on which we are deemed to be a "large accelerated filer" as defined in the Exchange Act. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile and may decline.
We are obligated to implement and maintain proper and effective internal control over financial reporting. We may not complete our
analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our
common stock.
We are required, pursuant to the Exchange Act, to furnish a report by management on, among other things, the effectiveness of our internal
control over financial reporting. This assessment needs to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting.
We are currently evaluating our internal controls, identifying and remediating deficiencies in those internal controls and documenting the
results of our evaluation, testing and remediation. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material
weaknesses in our internal control over financial reporting that we are unable to remediate before the end of the same fiscal year in which the material weakness is identified, we will be unable to assert that our internal controls are
effective. If we are unable to assert that our internal control over financial reporting is effective, or if our auditors, when required, are unable to attest to management's report on the effectiveness of our internal controls, we could lose
investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline.
As a public company, we will be required to disclose material changes made in our internal control and procedures on a quarterly basis.
However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until the later of the
year following our first annual report required to be filed with the SEC or the date we are no longer an "emerging growth company" as defined in the JOBS Act, if we take advantage of the exemptions contained in the JOBS Act. To comply with the
requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.
If securities or industry analysts do not publish research or reports about our business, or publish inaccurate or unfavorable
research reports about our business, our share price and trading volume could decline.
The trading market for our common stock will, to some extent, depend on the research and reports that securities or industry analysts
publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us should downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or
more of these analysts ceases coverage of our company or fails to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
There may be other risks which the Company has not identified which could negatively affect the value of your investment in the
Company.
While we believe that the risks identified herein are the major risks we face, there are likely other risks which could occur and negatively affect the value of your investment in the company. Therefore, you should only purchase our securities if you are able to afford to lose part or all of the value of your investment.
Our officers, directors and principal stockholders own a large percentage of our issued and outstanding shares and other
stockholders have little or no ability to elect directors or influence corporate matters.
As of December 31, 2018, our officers, directors and principal stockholders were deemed to the beneficial owners of approximately 58% of our
issued and outstanding shares of Common Stock, including Series A Preferred Stock and warrants on an "as converted" basis. As a result, such persons would be able to determine the outcome of any actions taken by us that require stockholder
approval. For example, they would be able to elect all of our directors and control the policies and practices of the Registrant.
We have the ability to issue additional shares of common stock and to issue shares of preferred stock without stockholder approval
The Company is authorized to issue up to 500,000,000 shares of Common Stock, 96,872,725 of which have been issued and are outstanding. The
Company is also authorized to issue up to 10,000,000 shares of Preferred Stock, 3,577 of which have been issued and 3,577,370 are outstanding, all of which have been designated as Series A Preferred Stock. To the extent of such authorization,
the officers of the Registrant have the ability, without seeking stockholder approval, to issue additional shares of Common Stock in the future for such consideration as they believe to be sufficient. The issuance of additional Common Stock in
the future will reduce the proportionate ownership and voting power of the Registrant's current stockholders.
The shares of common stock available for sale in the future could adversely affect the market price for the Company’s common stock.
Of the 96,872,725 shares of Common Stock outstanding, approximately 83,400,000 shares are freely tradable if held by non-affiliates or eligible for resale under Rule 144 promulgated under the Securities Act of 1933, as amended, if held by affiliates. Sales of substantial amounts of this Common Stock in the public market could adversely affect the market price for the Registrant's common stock. The approximately 13,500,000 remaining shares will become available for sale under Rule 144 around within one year if held by non-affiliates, and the availability of those shares for sale could also adversely affect the market price for the Registrant's Common Stock. In addition, the Registrant's outstanding shares of Series A Preferred Stock are convertible into shares of the Registrant's Common Stock at the rate of 10 shares (subject to certain anti-dilution adjustments) of Common Stock for each one share of Series A Preferred Stock. If the Series A Preferred Stock is converted, and the shares are placed for sale, such sales could adversely affect the market price for the Registrant's Common Stock.
Not Applicable.
Item 2. Properties.
BlackRidge’s corporate headquarters are located at 5390 Kietzke Lane, Reno, NV 89511, phone 1-855-807-8776. This office consists of
approximately 7,579 square feet of office and laboratory space and is leased from a third party pursuant to a 62 month lease expiring during January 2023, which provides for rent at the initial rate of $16,674 per month plus reimbursement of
the landlord’s costs for property taxes, insurance and common area maintenance, subject to increase on an annual basis.
BlackRidge leases an engineering office at the Marist College Hancock Center, 3399 North Road, Poughkeepsie, NY 12601. This office consists
of 200 square feet of office space and is leased from a third party pursuant to a twelve-month operating lease that renews annually. The rent for the facility is a flat monthly amount of $400 and the lease is renewable annually at the option
of BlackRidge.
BlackRidge also leases an engineering office at 100 Century Center Court, Suite 403, San Jose, CA 95112. This office is leased from a third
party pursuant to a 23 month lease expiring during August 2019, which provides for rent at a rate of $7,988 per month plus reimbursement of the landlord’s costs for property taxes, insurance and common area maintenance.
Item 3. Legal Proceedings.
On December 2, 2016, AltEnergy Cyber, LLC ("Plaintiff") instituted a legal action in Connecticut against the Company and Robert Zahm. The complaint
alleged that (i) the company improperly extended the maturity date of the Plaintiff's convertible note in the amount of $1,500,000 and (ii) improperly converted the loan into the Company's stock. The Complaint alleges that the Company is liable
to the Plaintiff for the $4,500,000 plus interest. During the year, Robert Zahm was dismissed from the proceedings for lack of personal jurisdiction. On March 29, 2018, the AltEnergy Cyber, LLC’s legal action was dismissed through a motion
for summary judgement.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The Company’s common stock is on the OTCQB under the symbol “BRTI.”
Until July 24, 2017, the Company’s common stock had no quoted price on the OTCQB due to the company not currently being traded. There is currently a limited trading market for shares of our common stock. Management does not expect significant active market to develop in our common
stock unless and until we are able to implement our business plan. No assurance can be given that any active market for our common stock will develop or be maintained.
The following table sets forth, for the periods indicated, the high and low closing quotations:
|
Closing Bid |
|||||||
|
High |
Low |
||||||
2017 |
||||||||
January 1 – March 31 |
- |
- |
||||||
April 1 – June 30 |
- |
- |
||||||
July 1 - September 30 |
4.00 |
0.59 |
||||||
October 1 – December 31 |
0.90 |
0.45 |
||||||
|
||||||||
2018 |
||||||||
January 1 - March 31 |
0.62 |
0.25 |
||||||
April 1 – June 30 |
0.53 |
0.30 |
||||||
July 1- September 30 |
0.55 |
0.20 |
||||||
October 1 – December 31 |
0.46 |
0.18 |
These prices were obtained from the finance portal, Yahoo! Finance, and do not necessarily reflect actual transactions, retail markups,
mark downs or commissions.
Holders
At March 30, 2019, there were approximately 210 shareholders of record of the Company's common stock and 74 holders of the Company’s Series
A preferred stock, as reported by the Company's transfer agent. In computing the number of holders of record, each broker-dealer and clearing corporation holding shares on behalf of its customers is counted as a single stockholder.
Dividends
No dividends have ever been paid on the Company's securities, and the Company has no current plans to pay dividends in the foreseeable
future.
Equity Compensation Plans
In May 2017, the Board recommended and its shareholders approved the 2017 Stock Incentive Plan (the "2017 Plan"), which became effective immediately. See Note 10 – Share Based Compensation for options issued under this plan.
Under the 2017 Plan, the term of an option grant shall not exceed ten years from the date of its grant and options generally vest over a five-year period, with vesting on a monthly interval. Under the 2017 Plan, up to 20,000,000 shares of common stock can be reserved for issuance to eligible participants. The Company has no other equity compensation plans.
Special Sales Practice Requirements with Regard to “Penny Stocks”
In order to protect investors from patterns of fraud and abuse that have occurred in the market for low priced securities commonly referred
to as “penny stocks,” the SEC has adopted regulations that generally define a “penny stock” to be any equity security having a market price (as defined) less than $5.00 per share, or an exercise price of less than $5.00 per share, subject to
certain exceptions. The price of our stock is currently below $5.00 per share and our stock is subject to the “penny stock” regulations. As a result, broker-dealers selling our common stock are subject to additional sales practices when they
sell our stock to persons other than established clients and “accredited investors.” For transactions covered by these rules, before the transaction is executed, the broker-dealer must make a special customer suitability determination, receive
the purchaser’s written consent to the transaction and deliver a risk disclosure document relating to the penny stock market. The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered
representative taking the order, current quotations for the securities and, if applicable, the fact that the broker-dealer is the sole market maker and the broker-dealer’s presumed control over the market. Monthly statements must be sent
disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Such “penny stock” rules may restrict trading in our common stock and may deter broker-dealers from effecting
transactions in our common stock.
Issuer Direct Corporation, 1981 Murray Holladay Road, Suite 100, Salt Lake City, UT 84117, Telephone: (801) 272-9294, serves as the transfer agent and registrar for our common stock.
The following contains a list of our sales of unregistered securities not otherwise disclosed by the Company in previous
Quarterly Reports on Form 10-Q and /or Current Reports on Form 8-K filings.
The Company has authorized 200 million shares of common stock, $0.0001 par value, and 10 million shares of preferred
stock, $0.0001 par value. Each share of the Company’s preferred stock is convertible into 10 shares of common stock, subject to adjustment, has voting rights equal to its common stock equivalent, 7% cumulative dividend rights, and has
liquidation rights that entitle the recipient to the receipt of net assets on a pro-rata basis. The Company has 96,872,725 and 77,063,171 common shares issued and outstanding and 3,577,370 and 3,639,783 preferred shares issued and outstanding
as of December 31, 2018 and 2017, respectively.
During the year ended December 31, 2018, the Company issued an aggregate 1,771,666 shares of the Company’s common stock pursuant to
consulting contracts valued at $614,516, or an average of $0.35 per share.
During the year ended December 31, 2018, the Company received advances of $50,000 from Mag Ventures, a company controlled by Tom Bruderman,
a director and shareholder. These advances along with the previous balance were converted into 460,000 shares of the Company’s common stock at a price of $0.25 per share on November 9, 2018.
During the year ended December 31, 2018, the Company issued an aggregate 661,071 shares of the Company’s common stock valued at $228,800 as
satisfaction of payables in the amount of $241,067. The company recognized gain on settlement of $12,267 in relation to these transactions.
We believe that the foregoing transactions were exempt from the registration requirements under exemption 4(2) of the
Securities Act of 1933, as amended ("the Act"), based on the following facts: there was no general solicitation, there was a limited number of purchasers, each of whom the Registrant believes was an "accredited investor" (within the meaning of
Regulation D under the Securities Act of 1933, as amended) and was sophisticated about business and financial matters, and all shares issued were subject to restriction on transfer, so as to take reasonable steps to assure that the purchaser
was not an underwriter within the meaning of Section 2(11) under the Act.
We have not adopted a stock repurchase plan and we did not repurchase any shares of our equity securities during our 2018 or 2017 fiscal
years.
The following discussion should be read in conjunction with our financial statements, which are included elsewhere in this report. The following information contains forward-looking statements. (See
“Forward-Looking Statements” and “Item 1A. Risk Factors.”)
BlackRidge Technology International, Inc., formerly known as Grote Molen, Inc., (the "Company") was incorporated under the
laws of the State of Nevada in April 2010.
BlackRidge develops and markets next generation cyber defense solutions that enables our customers to deliver more secure and
resilient business services in today’s rapidly evolving cyber threat environments. Our network, server, IoT and cloud security products are based on our patented Transport Access Control technology and are designed to isolate, cloak and protect
cloud services, enterprise servers and IoT devices; and segment and segregate enterprise Information Technology (“IT”) and Operational Technology (“OT”) networks from cyber-attacks and unauthenticated access. BlackRidge products are used in
enterprise and government computing environments, the industrial IoT, critical infrastructure and other cloud service provider and network systems.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in
the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any.
We consider our critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:
Accounts Receivable
Trade accounts receivable are carried at original invoice amount less an estimate made for doubtful
accounts. We determine the allowance for doubtful accounts by identifying potential troubled accounts and by using historical experience and future expectations applied to an aging of accounts. Trade accounts receivable are written off when
deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded as income when received. We determined that no allowance for doubtful accounts was required at December 31, 2018 and 2017.
Inventory
Inventory is stated at the lower of cost or market, with cost determined using primarily average cost method.
Prepaid Expenses
Prepaid expenses consist mainly of payments to vendors made in advance and deposits held on account for the Company.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed on a straight-line basis over the estimated useful lives of the respective assets or, in the case of leasehold improvements, the remaining lease term, if shorter. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed, and the resulting gains or losses are recorded as part of other income or expense in the statements of operations. Repairs and maintenance costs are expensed as incurred.
The estimated useful lives of the property and equipment are as follows:
Property and Equipment | Estimated Useful Life |
Building improvements | 15 years |
Furniture, fixtures and equipment | 7 years |
Computer equipment | 5 years |
Intangible Assets
Acquired intangible assets are recorded at estimated fair value, net of accumulated amortization. Costs
incurred in obtaining certain patents and intellectual property as well as software development expenses, are capitalized and amortized over their related estimated useful lives, using a straight-line basis consistent with the underlying
expected future cash flows related to the specific intangible asset. Costs to renew or extend the life of intangible assets are capitalized and amortized over the remaining useful life of the asset. Amortization expenses are included as a
component of selling, general and administrative expenses in the consolidated statements of operations. The Company’s continued ability to extend and/or renew the rights associated with these intangible assets may have an impact on future cash
flows.
Useful life estimates for the Company’s significant intangible asset classes are as follows:
Useful Life
|
|
Patent Costs
|
20 years
|
Software Licenses
|
7 years
|
Software Development Costs
|
15 years
|
The Company reviews long-lived assets, at least annually, to determine if impairment has occurred and whether the economic benefit of the
asset (fair value of assets to be used and fair value less disposal cost for assets to be disposed of) is expected to be less than the carrying value. Triggering events, which signal further analysis, consist of a significant decrease in the
asset's market value, a substantial change in the use of an asset, a significant physical change in the asset, a significant change in the legal or business climate that could affect the asset, an accumulation of costs significantly in excess
of the amount originally expected to acquire or construct the asset, or a history of losses that imply continued loss associated with assets used to generate revenue.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. Revenue
generally is recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities.
Revenue recognition for multiple-element arrangements requires judgment to determine if multiple elements exist, whether elements can be accounted for as separate units of
accounting, and if so, the fair value for each of the elements.
The Company may enter into arrangements that can include various combinations of software, services, and hardware. Where elements are delivered over different periods of time,
and when allowed under U.S. GAAP, revenue is allocated to the respective elements based on their relative selling prices at the inception of the arrangement, and revenue is recognized as each element is delivered. We use a hierarchy to determine
the fair value to be used for allocating revenue to elements: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence, and (iii) best estimate of selling price (“ESP”). For software elements, we follow the
industry specific software guidance which only allows for the use of VSOE in establishing fair value. Generally, VSOE is the price charged when the deliverable is sold separately or the price established by management for a product that is not
yet sold if it is probable that the price will not change before introduction into the marketplace. ESPs are established as best estimates of what the selling prices would be if the deliverables were sold regularly on a stand-alone basis. Our
process for determining ESPs requires judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable.
Any revenue received that does not yet meet the above recognition standards is recorded to unearned revenue, and held as a liability until recognition occurs.
Income Taxes
We account for income taxes in accordance with FASB ASC Topic 740, Income Taxes, using the asset
and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their
respective tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
FASB ASC Topic 740, Income Taxes, requires us to determine whether it is more likely than not
that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, we must measure the tax position to determine the amount to recognize in our consolidated
financial statements. We performed a review of our material tax positions in accordance with recognition and measurement standards established by ASC Topic 740 and concluded we had no unrecognized tax benefit that would affect the effective tax
rate if recognized for the years ended December 31, 2018 and 2017.
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 and December 31, 2018 and 2017, we had no accrued interest or penalties related to uncertain tax positions.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses, notes payable
and convertible debt. The carrying amount of these financial instruments approximates fair value because of the short-term nature of these items.
Results of Operations
Sales
Total sales during the year ended December 31, 2018 were $247,869, as compared to net sales during the year ended December 31,
2017 of $81,968. Management believes historical sales to not be indicative of future expectations due to historically limited business operations. We believe that future sales will be significantly increased as we market our new suite of
products.
Cost of Goods Sold
Cost of goods sold for the year ended December 31, 2018 were $16,983 as compared to $10,260 during the year ended December 31, 2017, an increase of $6,723 or 65%. This increase was due to an increase in sales containing hardware in the current year ended December 31, 2018.
Operating Expenses
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 $2,635,160 and $686,990 for the years ended December 31, 2018 and 2017, respectively. The increase in interest expense of $1,948,170 in the current year is attributable primarily to an increase in borrowing coupled with an
increase in debt discount amortized as interest.
Loss on extinguishment of debt
During the year ended December 31, 2018, the Company renegotiated the conversion terms and interest rate of a convertible note
due to a non-affiliated investor so as to match the terms of a subsequent note granted to the same investor. The Company recognized a loss on extinguishment related to the transaction of $95,804. During the year ended December 31, 2018, the
Company also converted notes payable totaling $1,038,000 to the Company’s Chief Technology Officer and significant shareholder and a note payable of $32,000 to one of the Company’s Directors into common stock at a rate matching that of
currently offered convertible debt. The Company recognized losses on the conversions of $486,201 and $8,960, respectively. Additionally, during the year ended December 31, 2018, the Company agreed to settle payables of $21,067 for stock
valued at $8,800 generating a gain on settlement of $12,267.
During the year ended December 31, 2017, the Company renegotiated the conversion terms of a convertible note due to the
Company’s Chief Technology Officer and significant shareholder. The Company converted the note principal of $3,712,637 and accrued interest of $1,665,991 into 10,757,254 shares of the Company’s common stock at a conversion rate of $0.50 per
share. The Company also issued a 5 year warrant to purchase an additional 5,378,627 shares of the Company s common stock at a purchase price of $0.50 per share as further consideration for this conversion. The Company recognized a loss on
extinguishment of debt related to this transaction of $913,238.
Loss on disposal of discontinued operations
On March 31, 2017, the Company completed the sale of substantially all the assets, other than cash, used in 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 year ended December 31, 2017, the Company recognized a loss from discontinued operations of $8,737. This loss was
primarily driven by lower than anticipated product sales of the entity that was eventually sold.
Liquidity and Capital Resources
Cash used in investing activities for the year ended December 31, 2018 was $2,309,377 compared to $1,425,276 for the year
ended December 31, 2017. The increase of $884,101 in the current period is due primarily to an increase in capitalized engineering costs related to the Company's technology development.
For the year ended December 31, 2018, net cash provided by financing activities was $17,233,999, comprised of proceeds from
short term convertible notes of $16,832,000, short term convertible notes from related party of $732,000, and advances from related parties of $75,000, partially offset by the repayment of short-term notes of $5,000 and repayments of long-term
notes of $400,001.
For the year ended December 31, 2017, net cash provided by financing activities was $9,538,718, comprised of proceeds from the
sale of common stock of $8,482,450, preferred stock of $275,000 and warrants exercised of $43,334, proceeds from short term convertible notes of $1,250,000 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 $433,342 and cash outflows from discontinued operations of $54,735.
Based on our current business plan, we anticipate that our operating activities will use approximately $900,000 in cash per
month over the next twelve months, or $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 second quarter of 2019 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.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company's financial statements upon adoption.
During August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, Statement
of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments
are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in
an interim period. The Company is currently in the process of evaluating the impact of this new pronouncement on the Company’s Consolidated Statements of Cash Flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases ("ASU
2016-02"). The guidance in this new standard requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to the current accounting and eliminates the current real
estate-specific provisions for all entities. The guidance also modifies the classification criteria and the accounting for sales-type and direct financing leases for lessors. ASU 2016-02 is effective for fiscal years beginning after December
15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-02.
In May 2014, in addition to several amendments issued during 2016, the FASB issued ASU No. 2014-09, "Revenue from Contracts
with Customers." This pronouncement updated the accounting guidance related to revenue from contracts with customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle is that a company should
recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The standard defines a five-step process to
achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. In accordance with allowed public company guidelines, these updates are
effective for the Company for its annual period ending December 2018 and after, and interim periods within those fiscal years. The Company is in the process of evaluating the impact of the pronouncement.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”) which clarified the revenue recognition implementation guidance on principal versus agent considerations and is effective during the same period as ASU 2014-09. In April
2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”) which clarified the revenue recognition guidance regarding the identification of
performance obligations and the licensing implementation and is effective during the same period as ASU 2014-09. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and
Practical Expedients (“ASU 2016-12”) which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition. ASU 2016-12 is effective during the same period as ASU
2014-09. Based on our preliminary assessment, we do not expect the new standard to have a material impact on the Company’s financial position or results of operations.
In July 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments (“ASU 2016-13”), which among other things, these amendments require the measurement of all expected credit losses of financial assets held at the reporting date based on historical experience, current
conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. In addition, the ASU amends the accounting for credit
losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for periods beginning after December 15, 2019, and interim periods within those fiscal years. The Company is in the
process of evaluating the impact of the pronouncement.
In July 2017, the FASB has issued Accounting Standards Update (ASU) No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480);Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (ASU 2017-11). Among others, Part I of ASU 2017-11 simplifies the accounting for certain financial instruments with down round features, a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price of future equity offerings. Current accounting guidance creates cost and complexity for organizations that issue financial instruments with down round features by requiring, on an ongoing basis, fair value measurement of the entire instrument or conversion option. ASU 2017-11 require companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will adjust their basic EPS calculation for the effect of the feature when triggered (i.e., when the exercise price of the related equity-linked financial instrument is adjusted downward because of the down round feature) and will also recognize the effect of the trigger within equity. ASU 2017-11 is effective for periods beginning after December 15, 2018, and interim periods within those fiscal years. The Company is in the process of evaluating the impact of the pronouncement.
Off-Balance Sheet Arrangements
None.
As a smaller reporting company, we are not required to provide the information required by this item.
Page | |
Report of Independent Registered Public Accounting Firms
|
F-2
|
Consolidated Balance Sheets as of December 31, 2018 and December 31, 2017
|
F-4
|
Consolidated Statements of Operations for the Years Ended December 31, 2018 and 2017
|
F-5
|
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018 and 2017
|
F-6
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017
|
F-7
|
Notes to Consolidated Financial Statements
|
F-8
|
None.
Disclosure Controls and 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 December 31, 2018, the end of the period covered by this report. Based upon that evaluation, we have concluded that our disclosure controls and procedures as of December 31, 2018 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.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined under
Exchange Act Rules 13a-15(f). Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. Under the
supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting. Based on our evaluation under that framework, management
concluded that our internal control over financial reporting was effective as of December 31, 2018.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the year ended December 31, 2018 that has materially affected,
or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
The following table indicates the name, age, term of office and position held by each of our officers and directors. The term of office for each officer position is for one year or until his or her successor is duly elected and qualified by the board of directors. The term of office for a director is for one year or until his or her successor is duly elected and qualified by the stockholders.
Name
|
Age
|
Titles
|
Directors and Officers
|
||
Robert Graham
|
69
|
Chairman, Chief Executive Officer, and President
|
John Bluher
|
60
|
Chief Financial Officer, Treasurer and Secretary
|
John Hayes
|
51
|
Chief Technology Officer and Director
|
Robert Lentz
|
66
|
Director
|
Thomas Bruderman
|
49
|
Director
|
J. Allen Kosowsky
|
70
|
Director
|
Robert Zahm
|
56
|
Director
|
Brent Bunger
|
36
|
Director
|
Robert Graham
is a co-founder of BlackRidge and has served as its Chairman and CEO since its inception. Mr. Graham is a seasoned executive with broad business and entrepreneurial experience
in the technology and services industry, from Fortune 500 firms to start-ups. He has an extensive background in venture capital, engineering, marketing, sales, and operations, along with living and working in non-English speaking environments, including Asia, Europe, and the Americas. Mr. Graham also worked as a technology analyst on the subjects of storage, networking,
servers, and services.
John Hayes is a co-founder of BlackRidge and has served as its
Chief Technology Officer since its inception. Mr. Hayes is a technology entrepreneur who specializes in cyber security, networking, I/O interface design, storage architecture, and communications protocols. He has a proven track record of
bringing concepts to market and is able to clearly communicate complex ideas to diverse audiences. Mr. Hayes is skilled at finding creative solutions for technology and business challenges.
Robert Lentz is a Director of BlackRidge and currently the President and CEO of Cyber Security Strategies. Mr. Lentz was the first Deputy Assistant Secretary of Defense for cyber and identity security, in which from November 2007 to October 2009, he led the DoD’s transformation to Network Centric Operations including the establishment of US Cyber Command. Since November 2000, he served as the CISO for the Secretary of Defense overseeing global security post 9-11. He previously worked at the NSA from 1975 to 2000, where he served in the first National Computer Security Center and as Chief of Network Security. Mr. Lentz serves on the board of directors of multiple high tech companies, advisor to the University of Maryland University College and on the nominating committee to the Cyber Hall of Fame. Robert holds a BA from St. Mary’s College and an MS in national strategy from National Defense University, and attended Harvard Business School.
Mr. Bruderman has extensive financial management and board experience with technology companies which will make him an asset to our board in
setting strategy and managing our financial and industry growth plans.
J. Allen Kosowsky, CPA, is a certified public accountant who
since 1985 has conducted business through his own advisory firm. The firm provides services that include business and intellectual property valuations, forensic accounting and financial analysis, and alternative dispute resolutions. From
January of 2003 to February of 2010, Mr. Kosowsky served as the Chairman of the Board and Chairman of the audit committee for ON2 Technologies Inc., a U.S. based video compression software company, which was acquired by Google. On September 17,
2016, Mr. Kosowsky became a National Association of Corporate Directors Fellow.
Mr. Kosowsky has extensive accounting experience and financial expertise and training, which qualifies him as an "audit committee financial
expert" and makes him a significant asset to our board and Company.
Robert Zahm spent the first 23 years of his professional career
with Accenture as a management and technology consultant. Since 2010, he has worked as an independent consultant at Whiz Bang Consulting, where he applies his core areas of expertise in large scale system architecture, high performance
computing, capital markets trading and clearing systems, and technology organization optimization. Mr. Zahm graduated from the University of Michigan with a BS in Computer Engineering, from Lehigh with an MS in Computer Science, and from the
University of Pittsburgh with an MBA in Accounting.
Mr. Zahm has deep expertise in IT, corporate strategy and management and in the Financial Services market that will be an asset to our board
and Company as we develop and expand our enterprise go to market strategies.
Brent Bunger has served as EVP of Ilan Investments since 2009
and has been significantly involved in leading the strategic direction of property and asset management including, policy, initiatives, technology, financing, acquisitions and dispositions. He is actively engaged in the company’s operations,
procurement and renovations. Brent was instrumental in the launch of Adara Communities and its vision to become the leader in the multi-family industry. He is committed to improving technology to advance operational efficiency and better adhere
to industry best practices. Mr. Bunger previously served as VP of Business Development with Adara and he worked for CharterMac Mortgage Capital in their underwriting division. He graduated with honors from Texas A&M University CC with a BBA
in Finance and a minor in Real Estate. He has held a real estate brokerage license in Texas and has been an active Certified Commercial Investment Member (CCIM) since 2007.
Family Relationships
There are no family relationships among our directors, executive officers or persons nominated or chosen to become directors or executive
officers.
Board of Directors
Our board of directors consists of seven persons, Robert Graham, John Hayes, Robert Lentz, Thomas Bruderman, J. Allen Kosowsky, Robert Zahm
and Brent Bunger. Messrs. Graham and Hayes are not “independent” within the meaning of Rule 5605(a)(2) of the NASDAQ Marketplace because they are officers and employees of the Company. Messrs. Lentz, Bruderman, Kosowsky, Zahm and Bunger are
considered independent.
Our Audit Committee consists of four persons, J. Allen Kosowsky (serving as chair), Robert Zahm, Robert Lentz and Thomas Bruderman. J. Allen Kosowsky holds a CPA license and serves as the committees “financial expert” in addition to being its chair.
Our Compensation Committee consists of three persons, Thomas Bruderman (serving as chair), J. Allen Kosowsky and Robert Zahm.
Our Nominating and Corporate Governance Committee consists of three persons, Robert Zahm (serving as chair), J. Allen Kosowsky, whom is
qualified as an Audit Committee Financial Expert, and Robert Lentz.
Code of Ethics
We have not previously adopted a Code of Ethics due to the small number of officers and employees and the size of
the Company’s operations. It is anticipated that the new board of directors will adopt a Code of Ethics that applies to all of the Company’s directors and executive officers serving in any capacity, including our principal executive officer,
principal financial officer, principal accounting officer or controller or persons performing similar functions.
Communications with Directors
Shareholders may communicate with the Board of Directors or any individual director by sending written communications addressed to the Board of
Directors, or any individual director, to: BlackRidge Technology International, Inc., Attention: Corporate Secretary, 5390 Kietzke Lane Suite 100, Reno, NV 89511. All communications will be compiled by the corporate secretary and forwarded to
the Board of Directors or any individual director, as appropriate. In order to facilitate a response to any such communication, the Company’s Board of Directors suggests, but does not require, that any such submission include the name and
contact information of the shareholder submitting the communication.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than 10 percent of a registered
class of our equity securities to file reports of securities ownership and changes in such ownership with the SEC. Officers, directors, and greater than ten percent shareholders also are required by rules promulgated by the SEC to furnish us
with copies of all Section 16(a) reports they file.
The following table sets forth certain information regarding the annual compensation paid to our principal executive officer and our vice president in all capacities for the fiscal years ended December 31, 2018, 2017 and 2016. No other person served as an executive officer of the Company or received total annual compensation from the Company in excess of $100,000.
Name and principal position
|
Year |
Salary
|
Bonus
|
Equity
Compensation |
All other
compensation
|
Total
|
|||||||||||||||
Robert Graham, CEO and President
|
2018 |
$
|
342,842
|
(1)
|
-
|
-
|
-
|
$
|
342,842
|
||||||||||||
2017 |
$
|
225,000
|
$
|
100,000
|
(2)
|
-
|
-
|
$
|
325,000
|
||||||||||||
2016 |
$
|
225,000
|
-
|
-
|
-
|
$
|
225,000
|
||||||||||||||
John Hayes, CTO | 2018 |
$
|
293,248
|
(3)
|
-
|
-
|
-
|
$
|
293,248
|
||||||||||||
2017 |
$
|
180,000
|
|
$
|
100,000
|
(4)
|
-
|
-
|
$
|
280,000
|
|||||||||||
2016 |
$
|
180,000
|
-
|
-
|
-
|
$
|
180,000
|
||||||||||||||
John Bluher, CFO | 2018 |
$
|
300,000
|
$ | 166,528 |
(5) |
-
|
$
|
30,000
|
(7)
|
$
|
496,528
|
|||||||||
2017 |
$
|
275,000
|
$
|
38,280
|
(5)
|
$
|
900,000
|
(6)
|
$
|
30,000
|
(7)
|
$
|
1,243,280
|
||||||||
2016 |
$
|
13,867
|
-
|
-
|
$
|
108,000
|
(8)
|
$
|
121,867
|
||||||||||||
John B Hofman, Former President(9) | 2018 |
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
2017 |
-
|
-
|
-
|
-
|
-
|
||||||||||||||||
2016 |
-
|
-
|
-
|
$
|
171,573
|
$
|
171,573
|
||||||||||||||
Bruce P. Crane, Former Vice President(10) | 2018 |
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
2017 |
-
|
-
|
-
|
-
|
-
|
||||||||||||||||
2016 |
-
|
-
|
-
|
$
|
6,114
|
$
|
6,114
|
(1)
|
$25,344 of Mr. Graham’s 2018 salary was deferred as of this filing, Mr. Graham accepted $114,583 of
accrued salary paid in the form of 327,381 shares of Company stock
|
(2)
|
Payment of Mr. Graham’s 2017 bonus has been deferred as of this filing
|
(3)
|
$58,906 of Mr. Hayes’ 2018 salary was deferred as of this filing, Mr. Hayes accepted $317,853 of
accrued salary paid in the form of 908,152 shares of Company stock
|
(4)
|
Payment of Mr. Hayes’ 2017 bonus has been deferred as of this filing
|
(5)
|
Represents performance bonuses paid to Mr. Bluher
|
(6)
|
Represents 1,500,000 shares of restricted common stock granted to Mr. Bluher
|
(7)
|
Represents a car allowance and cost of living adjustment of $2,500 per month
|
(8)
|
Represents 1099 payments to Mr. Bluher
|
(9)
|
All Other Compensation consists of: (i) payments made to Big John’s Store LLC, a company managed and
owned by John Hofman, under an Idaho Management Agreement with Big John’s Store LLC for the provision of management services and office and warehouse space in the amount of $150,000 during 2016; (ii) medical insurance premiums in the
amount of $13,823 during 2016; and (iii) contributions to a Health Savings Account for the benefit of Mr. Hofman in the amount of $7,750 during 2016.
|
(10)
|
All Other Compensation consists of: (i) expense reimbursement of $1,800 during 2016 (ii) medical
insurance premiums in the amount of $4,314 during 2016.
|
During the year ended December 31, 2017, the Company paid performance bonuses to our CFO in the amount of $166,528.
During the year ended December 31, 2018, the Company issued options to several employees including its executive team. Mr. Graham, Mr. Hayes, and Mr. Bluher were awarded 2,999,920, 2,356,301 and 1,090,880 options to purchase shares of common stock at $0.25 per share. The options vest at a rate of 25% upon issuance and 1/48th each month until fully vested. The value of the awards to Mr Graham, Mr. Hayes, and Mr Bluher based on a Black Scholes pricing model were $341,549, $268,271 and $124,200 to be recognized over the vesting period of the awards.
We do not have any retirement, pension or profit sharing plans covering our officers or directors, and we are not contemplating implementing any
such plans at this time.
Director Compensation
In fiscal 2017, our nominating and corporate governance committee, as well as our shareholders approved a policy (the “Director Compensation Policy) for the
compensation of non-employee members of our board of directors to attract, retain, and reward individuals and align their financial interest with those of our stockholders. Only non-employee directors are eligible for compensation under this
policy.
The members of our Board of Directors have agreed to delay cash payments earned under the Director Compensation Policy until such time as the Company has a positive EBITDA. Until then, delayed payments may be paid in restricted stock as determined by management and the board.
Initial Award
Under the Director Compensation Policy, when an eligible director initially joins our board of directors, the
eligible director received an initial award of restricted stock units having a value of $30,000.
Annual Awards
Under the Director Compensation Policy, each eligible director shall receive an annual award of $20,000 for their service to the Company.
In addition, the Lead Independent Director and each director servings as committee chair will receive an additional $2,000 to their annual award.
Board Meeting Awards
Under the Director Compensation Policy, each eligible director shall receive $2,000 for their attendance at each
directors meeting that they attend.
Director Compensation Table
The following table presents summary information regarding the compensation paid to our non-employee directors for the year ended December 31, 2018:
Director
|
Board Fees (1)
|
Other ($)
|
Total ($)
|
||||||||||
J. Allen Kosowsky
|
$
|
69,200
|
(2)
|
$
|
-
|
$
|
69,200
|
||||||
Thomas Bruderman
|
$
|
48,450
|
(3)
|
$
|
-
|
$
|
48,450
|
||||||
Robert Lentz
|
$
|
44,450
|
(4)
|
$
|
-
|
$
|
44,450
|
||||||
Robert Zahm
|
$
|
46,450
|
(5)
|
$
|
-
|
$
|
46,450
|
||||||
Brent Bunger
|
$
|
49,984
|
(6)
|
$
|
-
|
$
|
49,984
|
(1)
|
Amounts reported in this column represent the aggregate grant date fair value of restricted stock
issued as payment of amounts owed
|
(2)
|
Amount paid through the issuance of 197,715 restricted shares of the Company’s common stock at $0.35
per share. The common stock has a 6 month vesting period
|
(3)
|
Amount paid through the issuance of 138,429 restricted shares of the Company’s common stock at $0.35
per share. The common stock has a 6 month vesting period
|
(4)
|
Amount paid through the issuance of 127,000 restricted shares of the Company’s common stock at $0.35
per share. The common stock has a 6 month vesting period
|
(5)
|
Amount paid through the issuance of 132,715 restricted shares of the Company’s common stock at $0.35
per share. The common stock has a 6 month vesting period
|
(6)
|
Amount paid through the issuance of 142,810 restricted shares of the Company’s common stock at $0.35
per share. The common stock has a 6 month vesting period
|
The following table sets forth as of March 31, 2019 the number of shares of the Company’s common stock, par value $0.0001, owned of record or beneficially by each person known to be the beneficial owner of 5% or more of the issued and outstanding shares of the Company’s common stock, and by each of the Company’s officers and directors, and by all officers and directors as a group. On such date, there were 96,872,725 issued and outstanding shares of our common stock and 3,577,370 issued and outstanding shares of our Series A preferred stock. To the best of our knowledge, each person named below has sole voting and investment power, subject to community property laws where applicable, with respect to the shares shown unless otherwise indicated.
In computing the number of shares beneficially owned by an individual or entity and the percentage ownership of that person, shares of
common stock subject to options, warrants or other rights held by such person that are currently exercisable or will become exercisable within 60 days of March 31, 2019 are considered outstanding, although these shares are not considered
outstanding for purposes of computing the percentage ownership of any other person.
We know of no arrangements, including pledges, by or among any of the forgoing persons, the operation of which could result in a change of
control of the Company.
Name and
Address of Beneficial Owner(1)
|
Number of
Shares of
Common
Stock
|
Amount of
Number of
Share
Equivalents(2)
|
Total
Beneficial Ownership
|
Percentage of
Class
|
||||||||||||
Principal Stockholders
|
||||||||||||||||
AltEnergy Cyber, LLC(3)
137 Rowayton Ave
Norwalk, CT 06853
|
-
|
11,759,538
|
(4)
|
11,759,538
|
10.83
|
%
|
||||||||||
Conyers Investments, LLC(5)
Phillips Point East #1001
777 S. Flagler Drive
West Palm Beach, FL 33401
|
6,313,006
|
704,178
|
(6)
|
7,017,184
|
7.19
|
%
|
||||||||||
Chowdary Yalamanchili(7)
4420 FM 1960 West, Suite 224
Houston, TX 77068
|
5,000,000
|
45,900,162
|
(8)
|
50,900,162
|
35.65
|
%
|
||||||||||
Officers and Directors(15)
|
||||||||||||||||
John Hayes
|
23,504,845
|
12,214,724
|
(9)
|
35,719,569
|
32.74
|
%
|
||||||||||
Robert Graham
|
4,873,097
|
2,084,488
|
(10)
|
6,957,585
|
7.03 |
%
|
||||||||||
John Bluher
|
1,500,000
|
363,627 |
(16) |
-
|
*
|
%
|
||||||||||
Robert Lentz
|
613,074
|
-
|
613,074
|
*
|
%
|
|||||||||||
Thomas Bruderman(11)
|
965,096
|
6,558,694
|
(12)
|
7,523,790
|
7.27
|
%
|
||||||||||
Robert Zahm
|
229,382
|
8,421,085
|
(13)
|
8,650,467
|
8.22
|
%
|
||||||||||
J. Allen Kosowsky
|
732,508
|
480,786
|
(14)
|
1,213,294
|
*
|
%
|
||||||||||
Brent Bunger
|
142,810
|
156,250
|
(6)
|
299,060
|
*
|
%
|
||||||||||
All Officers and Directors As Group (8 Persons)
|
32,560,812
|
28,130,620
|
60,691,432
|
64.87 |
%
|
(1)
|
The address for each named executive officer and director is the same address as the Company
|
(2)
|
Represents number of commons shares issuable upon exercise of warrants, options, and conversion of
preferred stock
|
(3)
|
Russ Stidolph is the Managing Member of AltEnergy Cyber, LLC
|
(4)
|
Represents 6,844,234 shares of common stock issuable upon conversion of 402,602 shares of preferred
stock and 4,915,304 shares of common stock issuable upon exercise of warrants
|
(5)
|
Christopher Uzpen is the Managing Member of Conyers Investments, LLC
|
(6)
|
Represents shares of common stock issuable upon exercise of warrants
|
(7)
|
Includes shares owned by Mr Yalamanchili, CNC Investments, LLC, and Ilan Investments, LLC of which Mr
Yalamanchili is the Managing Member
|
(8)
|
Represents 45,900,162 shares of common stock issuable upon exercise of warrants
|
(9)
|
Represents 710,005 shares of common stock issuable upon conversion of 41,765 shares of preferred stock
and 11,504,719 of common stock issuable upon exercise of warrants and options
|
(10)
|
Represents 1,084,515 shares of common stock issuable upon conversion of 63,795 shares of preferred
stock, and 999,973 shares of common stock issuable upon exercise of options
|
(11)
|
Includes shares owned by Mr. Bruderman and Mag Ventures, LLC of which Mr. Bruderman is the Managing
Member
|
(12)
|
Represents 5,363,007 shares of common stock issuable upon conversion of 315,471 shares of preferred
stock and 1,195,687 shares of common stock issuable upon exercise of warrants
|
(13)
|
Represents 8,254,418 shares of common stock issuable upon conversion of 485,554 shares of preferred
stock and 166,667 shares of common stock issuable upon exercise of warrants
|
(14)
|
Represents 141,678 shares of common stock issuable upon conversion of 8,334 shares of preferred stock
and 339,108 shares of common stock issuable upon exercise of warrants
|
(15)
|
Addresses of Directors and Officers is the Company address
|
(16) | Represents shares of common stock issuable upon exercise of options |
Unless otherwise indicated, the terms of the following transactions during our 2018 fiscal year ended December 31, 2018, between related parties were not determined
as a result of arm’s length negotiations.
During the year ended December 31, 2018, the Company received advances of $50,000 from Mag Ventures, a company controlled by Tom Bruderman,
a director and shareholder. These advances along with the previous balance were converted into 460,000 shares of the Company’s common stock at a price of $0.25 per share on November 9, 2018.
During the year ended December 31, 2018, the Company received advances of $25,000 from J. Allen Kosowsky, a director and shareholder. These
advances were converted into 78,125 shares of the Company’s common stock at a price of $0.32 per share on September 13, 2018.
Director Independence
Our board of directors consists of seven persons, Robert Graham, John Hayes, Robert Lentz Thomas Bruderman, J. Allen Kosowsky, Robert Zahm and Brent Bunger. Messrs. Graham and Hayes are not
“independent” within the meaning of Rule 5605(a)(2) of the NASDAQ Marketplace because they are officers and employees of the Company. Messrs. Lentz, Bruderman, Kosowsky, Zahm and Bunger are considered independent.
Indemnification
Our articles of incorporation provide that to the fullest extent permitted by Nevada law, now or hereafter in force, no director of the Company shall be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director. In addition, Section 78.037 of the Nevada corporation law, Article Fourteenth of our articles of incorporation, and Section VII of our bylaws generally provide for indemnification of our directors and officers in a variety of circumstances, which may include liabilities under the Securities Act of 1933, as amended. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission (the “SEC,” the “Commission” or the “Securities and Exchange Commission”) such indemnification is contrary to public policy as expressed in the Securities Act and, therefore, is unenforceable.
Item 14. Principal Accounting Fees and Services
Haynie & Company served as the Company’s independent registered public accounting firm for the fiscal years ended December 31, 2018 and 2017. Haynie & Company was appointed on January 1, 2018 to audit our 2017 year
end.
During the fiscal years ended December 31, 2018 and 2017, fees for services provided were as follows:
Year Ended
|
||||||||
December 31,
|
||||||||
2018
|
2017
|
|||||||
Audit Fees
|
$
|
56,000
|
$
|
104,312
|
||||
Audit-Related Fees
|
-
|
-
|
||||||
Tax Fees
|
-
|
-
|
||||||
All Other Fees
|
-
|
-
|
||||||
|
||||||||
Total
|
$
|
56,000
|
$
|
104,312
|
“Audit Fees” consisted of fees billed for services rendered for the audit of the Company’s annual financial statements, review of financial
statements included in the Company’s quarterly reports on Form 10-Q, and other services normally provided in connection with statutory and regulatory filings. “Audit-Related Fees” consisted of fees billed for due diligence procedures in
connection with acquisitions and divestitures and consultation regarding financial accounting and reporting matters. “Tax Fees” consisted of fees billed for tax payment planning and tax preparation services. “All Other Fees” consisted of fees
billed for services in connection with legal matters and technical accounting research.
The Company’s Board of Directors functions as its audit committee. It is the policy of the Company for all work performed by our principal
accountant to be approved in advance by the Board of Directors. All of the services described above in this Item 14 were approved in advance by our Board of Directors.
Item 15. Exhibits, Financial Statement Schedules
The following documents are included as exhibits to this report.
(a) Exhibits
Exhibit
Number
|
Title of Document
|
|
3.1
|
||
3.2
|
||
4.1
|
||
4.2
|
||
10.1
|
||
10.2
|
||
10.3
|
||
10.4
|
||
10.5
|
||
10.6
|
||
10.7
|
||
10.8
|
||
10.9
|
||
31.1
|
||
31.2
|
||
32.1
|
||
32.2
|
||
101 INS
|
XBRL Instance Document**
|
|
101 SCH
|
XBRL Schema Document **
|
|
101 CAL
|
XBRL Calculation Linkbase Document **
|
|
101 DEF
|
XBRL Definition Linkbase Document **
|
|
101 LAB
|
XBRL Labels Linkbase Document **
|
|
101 PRE
|
XBRL Presentation Linkbase Document **
|
(1) Incorporated by reference to
the Company’s June 30, 2017 Report on Form 10-Q filed August 14, 2017.
|
(2) Incorporated by
reference to Exhibit Numbers 3.1 and 3.2 of the Company's registration statement on Form 10 filed with the SEC on May 14, 2010.
|
(3) Incorporated by
reference to the Company's September 30, 2016 Report on Form 10-Q filed November 14, 2016.
|
(4) Incorporated by
reference to the current report on Form 8-K filed with the SEC on September 7, 2016 and amended on Form 8-K filed with the SEC on February 24, 2017.
|
(5) Incorporated by
reference to the Company's March 31, 2017 Report on Form 10-Q filed May 15, 2017.
|
(6)Incorporated by reference to the Company’s December 31, 2017 Report on Form 10-K filed April
2, 2018
|
(7) Incorporated by
reference to the Company's March 31, 2018 Report on Form 10-Q filed May 15, 2018.
|
(8) Incorporated by
reference to the Company's June 30, 2018 Report on Form 10-Q filed August 14, 2018.
|
* Filed herewith
** The XBRL related information in Exhibit 101 shall not be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly
set forth by specific reference in such filing or document.
Item 16. Form 10-K Summary
The registrant opts out of providing a Form 10-K summary.
BlackRidge Technology International, Inc.
|
|
Dated: April 12, 2019
|
By /s/ Robert Graham
|
Robert Graham
|
|
Chief Executive Officer and President
|
Dated: April 12, 2019
|
By /s/ Robert Graham
|
Robert Graham
|
|
Executive Officer and President
|
|
Dated: April 12, 2019
|
By /s/ John Bluher
|
Bluher
|
|
Chief Financial Officer
|
|
Dated: April 12, 2019
|
By /s/ J. Allen Kosowsky
|
J. Allen Kosowsky
|
|
Director
|
|
Dated: April 12, 2019
|
By /s/ Thomas Bruderman
|
Thomas Bruderman
|
|
Director
|
|
Dated: April 12, 2019
|
By /s/ Robert Zahm
|
Robert Zahm
|
|
Director
|
|
Dated: April 12, 2019
|
By /s/ Robert Lentz
|
Robert Lentz | |
Director | |
Dated: April 12, 2019
|
By /s/ Brent Bunger |
Brent Bunger | |
Director |
Page | |
Report of Independent Registered Public Accounting Firms
|
F-2
|
Consolidated Balance Sheets as of December 31, 2018 and December 31, 2017
|
F-3
|
Consolidated Statements of Operations for the Years Ended December 31, 2018 and 2017
|
F-4
|
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018 and 2017
|
F-5
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017
|
F-6
|
Notes to Consolidated Financial Statements
|
F-7
|
Haynie & Company
|
Salt Lake City, Utah
April 12, 2019
We have served as the Company’s auditor since 2018.
|
|
December 31, |
December 31, |
||||||
|
2018 |
2017 |
||||||
|
||||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash |
$ |
4,693,950 |
$ |
421,869 |
||||
Accounts receivable |
102,292 |
217,380 |
||||||
Inventory |
56,003 |
40,408 |
||||||
Prepaid expenses |
122,713 |
361,642 |
||||||
Total Current Assets |
4,974,958 |
1,041,299 |
||||||
|
||||||||
Property and equipment, net |
78,821 |
87,628 |
||||||
Intangible assets, net |
8,920,360 |
7,043,644 |
||||||
Total Assets |
$ |
13,974,139 |
$ |
8,172,571 |
||||
|
||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
||||||||
Current Liabilities |
||||||||
Accounts payable and accrued expenses |
$ |
2,089,322 |
$ |
2,633,610 |
||||
Accounts payable and accrued expenses – related party |
9,690 |
68,060 |
||||||
Accrued interest |
714,187 |
59,545 |
||||||
Accrued interest – related party |
177,419 |
180,066 |
||||||
Advances – related party |
- |
65,000 |
||||||
Wages payable |
1,928,639 |
2,133,210 |
||||||
Deferred revenue |
3,535 |
8,760 |
||||||
Short-term notes payable |
45,232 |
50,232 |
||||||
Current portion of long term debt |
366,657 |
400,000 |
||||||
Convertible notes, short term, net of discounts |
3,248,746 |
- |
||||||
Convertible notes, long term, net of discounts, current portion |
39,726 |
- |
||||||
Convertible notes, short term – related party |
183,172 |
521,172 |
||||||
Total Current Liabilities |
8,806,325 |
6,119,655 |
||||||
|
||||||||
Noncurrent Liabilities |
||||||||
Contingent liability |
- |
37,500 |
||||||
Notes payable |
- |
366,658 |
||||||
Convertible notes, long term, net of discounts |
- |
80,404 |
||||||
Total Liabilities |
8,806,325 |
6,604,217 |
||||||
|
||||||||
Stockholders' Equity |
||||||||
Preferred Stock, Par Value $0.001, 10,000,000 shares authorized; 3,577,370 and 3,639,783 issued and outstanding at December 31, 2018 and 2017, respectively |
3,577 |
3,640 |
||||||
Common Stock, Par Value $0.001, 500,000,000 shares authorized; 96,872,725 and 77,063,171 issued and outstanding at December 31, 2018 and 2017, respectively |
96,873 |
77,063 |
||||||
Additional paid-in capital |
72,114,707 |
51,384,027 |
||||||
Accumulated deficit |
(67,047,343 |
) |
(49,896,376 |
) |
||||
Total Stockholders' Equity |
5,167,814 |
1,568,354 |
||||||
Total Liabilities and Stockholders' Equity |
$ |
13,974,139 |
$ |
8,172,571 |
See accompanying notes to the consolidated financial statements.
|
For the Year Ended
December 31,
|
|||||||
|
2018 |
2017 |
||||||
|
||||||||
Revenues |
$ |
247,869 |
$ |
81,968 |
||||
Cost of Goods Sold |
16,983 |
10,260 |
||||||
Gross Profit |
230,886 |
70,708 |
||||||
|
||||||||
Operating Expenses: |
||||||||
Engineering |
109,133 |
304,605 |
||||||
Sales and marketing |
16,631 |
21,888 |
||||||
General and administrative |
14,042,231 |
12,996,967 |
||||||
Total operating expenses |
14,167,995 |
13,323,460 |
||||||
|
||||||||
Loss From Operations |
(13,937,109 |
) |
(13,251,752 |
) |
||||
|
||||||||
Other Income (Expense) |
||||||||
Loss on extinguishment of debt |
(578,698 |
) |
(913,238 |
) |
||||
Interest expense |
(2,513,897 |
) |
(82,845 |
) |
||||
Interest expense – related party |
(121,263 |
) |
(604,145 |
) |
||||
Total other income (expense) |
(3,213,858 |
) |
(1,600,228 |
) |
||||
|
||||||||
Net Loss Before Income Taxes |
(17,150,967 |
) |
(14,851,980 |
) |
||||
|
||||||||
Income Tax |
- |
- |
||||||
|
||||||||
Net Loss From Continuing Operations |
(17,150,967 |
) |
(14,851,980 |
) |
||||
|
||||||||
Discontinued Operations |
||||||||
Loss on disposal of discontinued operations |
- |
(484,927 |
) |
|||||
Loss from discontinued operations |
- |
(8,737 |
) |
|||||
Loss on discontinued operations |
- |
(493,664 |
) |
|||||
|
||||||||
Net Loss |
$ |
(17,150,967 |
) |
$ |
(15,345,644 |
) |
||
|
||||||||
Loss From Continuing Operations per Common Share - Basic and Diluted |
$ |
(0.20 |
) |
$ |
(0.37 |
) |
||
Loss From Discontinued Operations per Common Share - Basic and Diluted |
$ |
- |
$ |
(0.01 |
) |
|||
Weighted Average Shares Outstanding - Basic and Diluted |
84,154,829 |
40,212,024 |
See accompanying notes to the consolidated financial statements.
|
Shares Outstanding - Preferred |
Preferred Stock |
Shares
Outstanding - Common
|
Common Stock |
Additional
Paid-in
Capital
|
Subscriptions
Payable
|
Accumulated
Deficit
|
Total
Stockholders’
Deficit
|
||||||||||||||||||||||||
Balance as of December 31, 2016 |
3,671,316 |
$ |
3,671 |
13,325,681 |
$ |
13,326 |
$ |
20,287,638 |
$ |
135,000 |
$ |
(34,550,732 |
) |
$ |
(14,111,097 |
) |
||||||||||||||||
|
||||||||||||||||||||||||||||||||
Common share conversion |
50,000 |
50 |
(500,000 |
) |
(500 |
) |
450 |
- |
- |
- |
||||||||||||||||||||||
Preferred share conversion |
(144,035 |
) |
(144 |
) |
1,586,862 |
1,587 |
(1,443 |
) |
- |
- |
- |
|||||||||||||||||||||
Issuance of preferred stock |
62,502 |
63 |
- |
- |
374,937 |
(100,000 |
) |
- |
275,000 |
|||||||||||||||||||||||
Issuance of common stock |
- |
- |
18,289,121 |
18,289 |
8,499,161 |
(35,000 |
) |
- |
8,842,450 |
|||||||||||||||||||||||
Issuance of restricted common stock in settlement of wages payable |
- |
- |
22,064,105 |
22,064 |
13,216,389 |
- |
- |
13,238,453 |
||||||||||||||||||||||||
Issuance of restricted common stock in settlement of accounts payable |
- |
- |
396,726 |
396 |
237,639 |
- |
- |
238,035 |
||||||||||||||||||||||||
Issuance of stock in conjunction with contracts |
- |
- |
1,122,866 |
1,123 |
691,247 |
- |
- |
692,370 |
||||||||||||||||||||||||
Issuance of stock for warrant exercise |
- |
- |
1,055,556 |
1,056 |
42,278 |
- |
- |
43,334 |
||||||||||||||||||||||||
Issuance of stock for debt conversion |
- |
- |
10,757,254 |
10,757 |
5,367,871 |
- |
- |
5,378,628 |
||||||||||||||||||||||||
Business acquisition |
- |
- |
8,965,000 |
8,965 |
485,551 |
- |
- |
494,516 |
||||||||||||||||||||||||
Issuance of warrants in conjunction with debt conversion |
- |
- |
- |
- |
913,238 |
- |
- |
913,238 |
||||||||||||||||||||||||
Beneficial conversion feature on convertible debt |
- |
- |
- |
- |
536,165 |
- |
- |
536,165 |
||||||||||||||||||||||||
Issuance of warrants in conjunction with debt |
- |
- |
- |
- |
567,166 |
- |
- |
567,166 |
||||||||||||||||||||||||
Issuance of warrants in conjunction with advances |
- |
- |
- |
- |
27,945 |
- |
- |
27,945 |
||||||||||||||||||||||||
Issuance of warrants in conjunction with contracts |
- |
- |
- |
- |
27,695 |
- |
- |
27,695 |
||||||||||||||||||||||||
Share based compensation |
- |
- |
- |
- |
110,100 |
- |
- |
110,100 |
||||||||||||||||||||||||
Net loss |
- |
- |
- |
- |
- |
- |
(15,345,644 |
) |
(15,345,644 |
) |
||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Balance as of December 31, 2017 |
3,639,783 |
$ |
3,640 |
77,063,171 |
$ |
77,063 |
$ |
51,384,027 |
$ |
- |
$ |
(49,896,376 |
) |
$ |
1,568,354 |
|||||||||||||||||
|
||||||||||||||||||||||||||||||||
Preferred stock converted to common stock |
(62,413 |
) |
(63 |
) |
789,048 |
789 |
(726 |
) |
- |
- |
- |
|||||||||||||||||||||
Issuance of common stock for advances |
- |
- |
538,125 |
538 |
139,462 |
- |
- |
140,000 |
||||||||||||||||||||||||
Issuance of common stock for wages payable |
- |
- |
2,935,818 |
2,936 |
1,024,600 |
- |
- |
1,027,536 |
||||||||||||||||||||||||
Issuance of common stock for accounts payable |
- |
- |
661,071 |
661 |
240,405 |
- |
- |
241,066 |
||||||||||||||||||||||||
Issuance of common stock in conjunction with contracts |
- |
- |
1,771,666 |
1,772 |
612,774 |
- |
- |
614,546 |
||||||||||||||||||||||||
Warrant repricing |
- |
- |
- |
- |
100,306 |
- |
- |
100,306 |
||||||||||||||||||||||||
Issuance of common stock for debt conversions |
- |
- |
4,775,638 |
4,776 |
1,189,134 |
- |
- |
1,193,910 |
||||||||||||||||||||||||
Common stock surrendered to Company |
- |
- |
(338,200 |
) |
(338 |
) |
338 |
- |
- |
- |
||||||||||||||||||||||
Issuance of common stock as loan incentive |
- |
- |
8,676,388 |
8,676 |
(8,676 |
) |
- |
- |
- |
|||||||||||||||||||||||
Beneficial conversion feature on convertible debt |
- |
- |
- |
- |
9,040,852 |
- |
- |
9,040,852 |
||||||||||||||||||||||||
Issuance of warrants and stock in conjunction with debt agreements |
- |
- |
- |
- |
6,432,543 |
- |
- |
6,432,543 |
||||||||||||||||||||||||
Issuance of Options in conjunction with contracts |
- |
- |
- |
- |
109,669 |
- |
- |
109,669 |
||||||||||||||||||||||||
Extinguishment of debt |
- |
- |
- |
- |
578,698 |
- |
- |
578,698 |
||||||||||||||||||||||||
Employee stock option plan |
- |
- |
- |
- |
1,271,301 |
- |
- |
1,271,301 |
||||||||||||||||||||||||
Net loss |
- |
- |
- |
- |
- |
- |
(17,150,967 |
) |
(17,150,967 |
) |
||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Balance as of December 31, 2018 |
3,577,370 |
3,577 |
96,872,725 |
96,873 |
72,114,707 |
- |
(67,047,343 |
) |
5,167,814 |
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Year Ended
December 31,
|
|||||||
|
2018 |
2017 |
||||||
Cash Flows From Operating Activities |
||||||||
Net loss |
$ |
(17,150,967 |
) |
$ |
(15,345,644 |
) |
||
Net loss from discontinued operations |
- |
493,664 |
||||||
Net loss from continuing operations |
(17,150,967 |
) |
(14,851,980 |
) |
||||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
464,806 |
443,811 |
||||||
Amortization of debt discounts |
1,821,189 |
33,735 |
||||||
Common stock issued in conjunction with contracts |
614,546 |
692,370 |
||||||
Share based compensation |
1,271,301 |
110,100 |
||||||
Warrant repricing |
100,306 |
- |
||||||
Warrants issued in conjunction with advances |
- |
27,945 |
||||||
Warrants issued in conjunction with contracts |
109,669 |
27,695 |
||||||
Loss on extinguishment |
578,698 |
913,238 |
||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
115,088 |
(205,380 |
) |
|||||
Inventory |
(15,595 |
) |
(40,408 |
) |
||||
Prepaid expenses |
238,929 |
(260,688 |
) |
|||||
Accounts payable and accrued expenses |
(241,897 |
) |
833,372 |
|||||
Accounts payable and accrued expenses – related party |
(58,370 |
) |
(564,665 |
) |
||||
Accrued interest |
682,916 |
6,657 |
||||||
Accrued interest – related party |
121,263 |
604,145 |
||||||
Deferred revenue |
(5,225 |
) |
(11,228 |
) |
||||
Wages payable |
700,802 |
4,447,647 |
||||||
Net Cash Used in Operating Activities, Continuing Operations |
(10,652,541 |
) |
(7,793,634 |
) |
||||
Net Cash Provided by Operating Activities, Discontinued Operations |
- |
45,028 |
||||||
Net Cash Used in Operating Activities |
(10,652,541 |
) |
(7,748,806 |
) |
||||
|
||||||||
Cash Flows From Investing Activities |
||||||||
Proceeds from business acquisition |
- |
10,559 |
||||||
Purchase of property and equipment |
- |
(88,418 |
) |
|||||
Purchases of intangible assets |
(2,309,377 |
) |
(1,347,417 |
) |
||||
Net Cash Used in Investing Activities, Continuing Operations |
(2,309,377 |
) |
(1,425,276 |
) |
||||
Net Cash Used in Investing Activities, Discontinued Operations |
- |
- |
||||||
Net Cash Used in Investing Activities |
(2,309,377 |
) |
(1,425,276 |
) |
||||
|
||||||||
Cash Flows From Financing Activities |
||||||||
Proceeds from sale of common stock |
- |
8,482,450 |
||||||
Proceeds from sale of preferred stock |
- |
275,000 |
||||||
Proceeds from warrant exercise |
- |
43,334 |
||||||
Proceeds from short term notes – related party |
732,000 |
- |
||||||
Proceeds from issuance of short term convertible notes |
16,832,000 |
1,250,000 |
||||||
Proceeds from advances – related party |
75,000 |
115,000 |
||||||
Repayments of short term notes |
(5,000 |
) |
(38,989 |
) |
||||
Repayments of short term convertible notes |
- |
(100,000 |
) |
|||||
Repayments on long term debt |
(400,001 |
) |
(433,342 |
) |
||||
Net Cash Provided by Financing Activities, Continuing Operations |
17,233,999 |
9,593,453 |
||||||
Net Cash Used in Financing Activities, Discontinued Operations |
- |
(54,735 |
) |
|||||
Net Cash Provided by Financing Activities |
17,233,999 |
9,538,718 |
||||||
|
||||||||
Net Increase In Cash |
4,272,081 |
364,836 |
||||||
Cash, Beginning of Period |
421,869 |
57,033 |
||||||
Cash, End of Period |
$ |
4,693,950 |
$ |
421,869 |
||||
|
||||||||
Non-Cash Investing and Financing Activities |
||||||||
Wages payable included in capitalized intangible assets |
$ |
23,338 |
$ |
215,705 |
||||
Wages payable settled with common stock |
$ |
1,027,536 |
$ |
13,238,453 |
||||
Accounts payable settled with common stock |
$ |
241,066 |
$ |
238,035 |
||||
Common stock converted to preferred stock |
$ |
- |
$ |
500 |
||||
Preferred stock converted to common stock |
$ |
789 |
$ |
- |
||||
Common stock issued for debt and interest conversion |
$ |
1,193,910 |
$ |
5,378,628 |
||||
Common stock issued for advances |
$ |
140,000 |
$ |
140,000 |
||||
Business acquisition |
$ |
- |
$ |
483,957 |
||||
Warrants and stock issued in conjunction with debt agreements |
$ |
6,432,54 |
$ |
567,166 |
||||
Beneficial conversion feature on convertible debt |
$ |
9,040,852 |
$ |
536,165 |
||||
Warrants issued and expensed in conjunction with advances |
$ |
- |
$ |
27,945 |
||||
|
||||||||
Supplemental Disclosure of Cash Flow Information: |
||||||||
Cash paid for interest |
$ |
9,792 |
$ |
16,654 |
||||
Cash paid for income taxes |
$ |
- |
$ |
- |
See accompanying notes to the consolidated financial statements.
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization – BlackRidge Technology International, Inc. (the "Company" or, “we”, “us”, “our” and similar terminology) was incorporated under the laws of the State of Nevada on March 15, 2004 under the name “Grote Molen, Inc.” The Company develops and markets next generation cyber defense solutions that stop cyber-attacks and block unauthenticated access. The Company’s network and server security products are based on patented Transport
Access Control technology (the “Blackridge Technology”) and are designed to isolate, cloak and protect servers and cloud services and segment networks for regulatory compliance. The Company’s products are used in enterprise and government
computing environments, the industrial “internet of things” and other cloud service provider and network systems.
On September 6, 2016, the Company entered into an agreement and plan of reorganization with BlackRidge Technology
International, Inc., a Delaware corporation, and Grote Merger Co., a Delaware corporation providing for the Company’s acquisition of BlackRidge in exchange for a controlling number of shares of the Company’s preferred and common stock pursuant to
the merger of Grote Merger Co. with and into BlackRidge, with BlackRidge continuing as the surviving corporation. The transaction contemplated in the agreement closed on February 22, 2017.
On July 2, 2017, the Company filed a Certificate to Accompany Restated Articles or Amended and Restated Articles with the
Secretary of State of Nevada to, among other things, change the Company’s name to BlackRidge Technology International, Inc.
On September 22, 2017, the Company formed a new business subsidiary called BlackRidge Secure Blockchain, Inc. to pursue
new market opportunities for securing blockchain applications. On August 31, 2018, the Company filed for the dissolution of Blackridge Secure Blockchain Inc. after determining it would not be utilized.
On October 13, 2017, the Company formed a new business subsidiary called BlackRidge Secure Services, Inc. to work with
partners on Secure Supervisory Control and Data Acquisition Systems (“SCADA”) infrastructure and to design and deliver secure systems using BlackRidge Technology products for use by the utilities industry.
Principles of Consolidation - The Company and its subsidiaries consist of the following entities, which have been consolidated in the accompanying financial statements:
BlackRidge Technology International, Inc.
BlackRidge Technology Holding, Inc.
BlackRidge Technology, Inc.
BlackRidge Technology Government, Inc.
BlackRidge Secure Services, Inc.
All intercompany balances have been eliminated in consolidation.
Fair Value of Financial Instruments - The
Company's financial instruments consist of cash, accounts receivable, prepaid expenses, accounts payable, accrued expenses, notes payable and convertible debt. The carrying amount of these financial instruments approximates fair value because of
the short-term nature of these items.
Use of Estimates - The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimated by management.
Significant customers are those which represent more than 10% of the Company’s revenue for each period presented, or the Company’s accounts
receivable balance as of each respective balance sheet date. For each significant customer, revenue as a percentage of total revenue and accounts receivable as a percentage of total net accounts receivable are as follows:
|
Revenue
|
Accounts Receivable
|
||||||||||||||
Year Ended December 31,
|
December 31,
|
|||||||||||||||
Customers
|
2018
|
2017
|
2018
|
2017
|
||||||||||||
Customer A
|
77
|
%
|
-
|
%
|
-
|
%
|
-
|
%
|
||||||||
Customer B
|
10
|
%
|
12
|
%
|
-
|
%
|
15
|
%
|
||||||||
Customer C
|
4
|
%
|
41
|
%
|
-
|
%
|
-
|
%
|
||||||||
Customer D
|
-
|
%
|
34
|
%
|
-
|
%
|
-
|
%
|
Cash and Cash Equivalents - The Company
considers all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts - Accounts receivable represents trade obligations from customers that are subject to normal trade collection terms and are recorded at the invoiced amount, net of any allowance for doubtful accounts, and do not typically
bear interest. The Company assesses the collectability of the accounts by taking into consideration the aging of accounts receivable, changes in customer credit worthiness, general market and economic conditions, and historical experience. Bad
debt expenses are recorded as part of selling, general and administrative expenses in the consolidated statements of operations. The Company writes off the receivable balance against the allowance when management determines a balance is
uncollectible. The Company also reviews its customer discounts and an accrual is made for discounts earned but not yet utilized at each period end. The Company does not believe there to be any question as to the collectability of its receivables
as of December 31, 2018 and 2017 and has, therefore, not created an allowance as of this date.
Inventory - Inventory is valued at the lower of cost or market value. Product-related inventories are primarily maintained using the average cost method. When market value is determined to be less than cost, the Company records an allowance for obsolescence. The company’s inventory assets December 31, 2018 and 2017 consisted primarily of hardware appliances valued as follows:
|
As of
December 31,
2018
|
As of
December 31,
2017
|
||||||
Inventory
|
$
|
391,658
|
$
|
376,063
|
||||
Less: allowance for obsolescence
|
(335,655
|
)
|
(335,655
|
)
|
||||
|
$
|
56,003
|
$
|
40,408
|
Revenue Recognition - We account for product
revenue in accordance with Accounting Standards Codification 605, Revenue Recognition, and all related interpretations. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable, and collectability is probable. Revenue generally is recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities.
Revenue recognition for multiple-element arrangements requires judgment to determine if multiple elements exist, whether
elements can be accounted for as separate units of accounting, and if so, the fair value for each of the elements.
The Company may enter into arrangements that can include various combinations of software, services, and hardware. Where elements are delivered over different periods of time, and when allowed under U.S. GAAP, revenue is allocated to the respective elements based on their relative selling prices at the inception of the arrangement, and revenue is recognized as each element is delivered. We use a hierarchy to determine the fair value to be used for allocating revenue to elements: (i) vendor-specific objective evidence of fair value ("VSOE"), (ii) third-party evidence, and (iii) best estimate of selling price ("ESP"). For software elements, we follow the industry specific software guidance which only allows for the use of VSOE in establishing fair value. Generally, VSOE is the price charged when the deliverable is sold separately, or the price established by management for a product that is not yet sold if it is probable that the price will not change before introduction into the marketplace. ESPs are established as best estimates of what the selling prices would be if the deliverables were sold regularly on a stand-alone basis. Our process for determining ESPs requires judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable.
Any revenue received that does not yet meet the above recognition standards is recorded to unearned revenue and held as a
liability until recognition occurs.
Property and Equipment - Property
and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed on a straight-line basis over the estimated useful lives of the respective assets or, in the case of leasehold
improvements, the remaining lease term, if shorter. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed, and the resulting gains or losses are recorded as part of other income or expense
in the statements of operations. Repairs and maintenance costs are expensed as incurred.
The estimated useful lives of the property and equipment are as follows:
Property and Equipment |
Estimated Useful Life
|
Building improvements
|
15 years
|
Furniture, fixtures and equipment
|
7 years
|
Computer equipment
|
5 years
|
|
Useful Life |
Patent Costs | 20 years |
Software Licenses | 7 years |
Software Development Costs | 15 years |
Impairment of Long-Lived Assets - The Company
reviews long-lived assets, at least annually, to determine if impairment has occurred and whether the economic benefit of the asset (fair value of assets to be used and fair value less disposal cost for assets to be disposed of) is expected to be
less than the carrying value. Triggering events, which signal further analysis, consist of a significant decrease in the asset's market value, a substantial change in the use of an asset, a significant physical change in the asset, a significant
change in the legal or business climate that could affect the asset, an accumulation of costs significantly in excess of the amount originally expected to acquire or construct the asset, or a history of losses that imply continued loss associated
with assets used to generate revenue.
Earnings (Loss) Per Share – The basic computation of loss per share is based on the weighted average number of shares outstanding during the period presented in accordance with ASC 260, "Earnings Per Share”. The
computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the period plus the common stock equivalents which would arise from the exercise of stock options and warrants outstanding using
the treasury stock method and the average market price per share during the period. Common stock equivalents are not included in the diluted earnings per share calculation when their effect is antidilutive.
Income Taxes - Income taxes are provided in
accordance with ASC 740 Accounting for Income Taxes. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carry forwards. Deferred tax expense (benefit) results
from the net change during the year of deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of all of the deferred tax
assets will be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Provision for income taxes consists of federal and state income taxes in the United States. Due to uncertainty as to the
realization of benefits from our deferred tax assets, including net operating loss carry-forwards and other tax credits, we have a full valuation allowance reserved against such assets. We expect to maintain this full valuation allowance at least
in the near term.
Share-Based Payments and Stock-Based Compensation – Share-based compensation awards, including stock options and restricted stock awards, are recorded at estimated fair value on the applicable award’s grant date, based on estimated number of awards that are expected to vest.
The grant date fair value is amortized on a straight-line basis over the time in which the awards are expected to vest, or immediately if no vesting is required. Share-based compensation awards issued to non-employees for services are recorded at
either the fair value of the services rendered or the fair value of the share-based payments whichever is more readily determinable. The fair value of restricted stock awards is based on the fair value of the stock underlying the awards on the
grant date as there is no exercise price.
Recently Enacted Accounting Standards - From
time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective,
will not have a material impact on the Company’s financial statements upon adoption.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases (“ASU
2016-02”). The guidance in this new standard requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to the current accounting and eliminates the current real
estate-specific provisions for all entities. The guidance also modifies the classification criteria and the accounting for sales-type and direct financing leases for lessors. ASU 2016-02 is effective for fiscal years beginning after December 15,
2018, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-02.
In May 2014, in addition to several amendments issued during 2016, the FASB issued ASU No. 2014-09, “Revenue from
Contracts with Customers.” This pronouncement updated the accounting guidance related to revenue from contracts with customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle is that a
company should recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The standard defines a five-step
process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. These updates are effective for
the Company for its annual period ending December 31, 2019, and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of ASU 2014-09.
NOTE 2 –GOING CONCERN
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2018 and 2017:
|
As of
December 31,
2018
|
As of
December 31,
2017
|
Estimated
Useful
Life
|
||||||
Building improvements |
55,390 |
55,390 |
15 years |
||||||
Furniture, fixtures and equipment |
26,101 |
26,101 |
7 years |
||||||
Computer equipment |
6,926 |
8,927 |
5 years |
||||||
Less: accumulated depreciation |
(9,596 |
) |
(790 |
) |
|
||||
|
$ |
78,821 |
$ |
87,628 |
|
The Company records depreciation expense on a straight-line basis over the estimated life of the related asset. The Company recorded depreciation expense of $8,807 and $790 during the years ended December 31, 2018 and 2017.
NOTE 4 – INTANGIBLE ASSETS
In accordance with ASC 350-40, ASC 350-50, and ASC 985-20, during the years ended December 31, 2018 and
2017, the Company capitalized $2,332,715 and $1,563,122, respectively, towards the development of software, intellectual property, and patent expenses.
The Company amortizes these costs over their related useful lives (approximately 7 to 20 years), using a
straight-line basis. Fair value is determined through various valuation techniques, including market and income approaches as considered necessary. The Company recorded amortization of $455,999 and $443,021 related to intangible assets during
years ended December 31, 2018 and 2017, respectively.
Intangible assets consisted of the following at December 31, 2018 and 2017:
|
As of
December 31,
2018
|
As of
December 31,
2017
|
Estimated Useful Life |
||||||
Patent Costs |
542,846 |
397,417 |
15 years |
||||||
Software Licenses |
58,260 |
58,260 |
7 years |
||||||
Software Development Costs |
10,208,061 |
8,020,775 |
5 years |
||||||
Less: accumulated amortization |
(1,888,807 |
) |
(1,432,808 |
) |
|
||||
|
$ |
8,920,360 |
$ |
7,043,644 |
|
Based upon currently launched products, the Company anticipates amortization expense of approximately $480,000 during each of the next five years.
NOTE 5 – NOTES PAYABLE
Short term notes
At December 31, 2018 and 2017, the Company had outstanding short-term debt totaling $45,232 and $50,232, respectively. These notes bear interest at the rates of between 10% and 12% annually and have maturity dates ranging from January 1, 2012 through December 31, 2014. As these notes have exceeded their initial maturity dates, they are subject to the default interest rate of 15% per annum.
The following table summarizes the Company’s short-term notes payable for the years ended December 31, 2018 and 2017:
December 31,
2018
|
December 31,
2017
|
|||||||
Beginning Balance
|
$
|
50,232
|
$
|
89,221
|
||||
Notes acquired in business acquisition
|
-
|
208,811
|
||||||
Repayments – continuing operations
|
(5,000
|
)
|
(38,989
|
)
|
||||
Repayments – discontinued operations
|
-
|
(53,132
|
)
|
|||||
Notes divested in disposal of discontinued operations
|
-
|
(155,679
|
)
|
|||||
Ending Balance
|
$
|
45,232
|
$
|
50,232
|
Short term notes – related party
On January 31, 2018, the Company’s Chief Technology Officer and significant shareholder invested $500,000 via a one year
note bearing interest at 8% annually. In conjunction with this note, the Company issued 5 year detachable warrants to purchase 1,562,500 shares of the Company’s common stock at $0.50 per share. These warrants were valued at $172,542 using the
Black-Scholes pricing model and were recorded as a discount to the note. The note carries a default rate of 18% for any principal not paid by the maturity date. On September 30, 2018, the note along with interest of $29,712 was converted into
2,118,849 shares of the Company’s common stock at a rate of $0.25 per share. Additionally, as part of the conversion, additional warrants to purchase 437,500 shares of common stock were issued and all warrants related to this note were repriced
to reflect an exercise price of $0.25 per share. The value of these additional warrants and the lowered conversion totaled $58,250 which the Company recorded as a loss on extinguishment of debt.
Long term notes
On November 2, 2016 the Company entered into settlement agreements with two holders of convertible debt and other
payables in which the Company agreed to issue new long-term debt agreements as settlement of amounts due. Pursuant to these agreements, the Company issued two non-interest bearing $600,000 notes payable in 36 equal installments of 16,667
beginning on January 1, 2017 and Maturing on December 1, 2019.
The following table summarizes the Company’s long-term notes payable for the years ended December 31, 2018 and 2017:
|
December 31,
2018
|
December 31,
2017
|
||||||
Beginning Balance |
$ |
766,658 |
$ |
1,200,000 |
||||
Notes acquired in business acquisition |
- |
136,830 |
||||||
Repayments – continuing operations |
(400,001 |
) |
(433,342 |
) |
||||
Repayments – discontinued operations |
- |
(1,603 |
) |
|||||
Notes divested in disposal of discontinued operations |
- |
(135,227 |
) |
|||||
Ending Balance |
$ |
366,657 |
$ |
766,658 |
||||
Short Term Portion of Long Term Debt |
$ |
366,657 |
$ |
400,000 |
||||
Long Term Debt |
$ |
- |
$ |
366,658 |
NOTE 6 – CONVERTIBLE NOTES
Short term convertible notes
On January 31, 2018, the Company issued a $100,000 convertible note bearing interest at 8% per annum. The note matures on February 28, 2019 and is convertible into the Company’s Series B Preferred Stock at a price of $0.32 per share at the holder’s request. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 312,500 shares of the Company’s common stock at an exercise price of $0.32 per share. The Company has determined the note to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $88,219 based on the intrinsic per share value of the conversion feature, and the warrants at $46,991 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $68,021 and $31,969, respectively. At December 31, 2018, the principal balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at $45,938. The Company had accrued interest for this note in the amount of $7,321, which is included in accrued interest on the Company’s consolidated balance sheets.
On February 23, 2018, the Company issued a $1,000,000 convertible note bearing interest at 9% per annum. The note
matures on February 29, 2019 and is convertible, as amended, into the Company’s Series B Preferred Stock at a price of $0.25 per share at the holder’s request. The noteholder
was also granted detachable 5 year warrants to purchase an aggregate of 3,125,000 shares of the Company’s common stock at an exercise price of $0.32 per share. The Company has determined the note to contain a beneficial conversion feature. The
Company valued the beneficial conversion feature at $417,757 based on the intrinsic per share value of the conversion feature, and the warrants at $540,553 using the Black-Scholes pricing model. The Company has allocated the note proceeds based
on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $417,757 and $350,882, respectively. At December 31, 2018, the principal balance was still outstanding
and is included on the Company’s consolidated balance sheets net of discounts at $791,651. The Company had accrued interest for this note in the amount of $76,685, which is included in accrued interest on the Company’s consolidated balance
sheets.
On February 27, 2018, the Company issued a $1,000,000 convertible note bearing interest at 9% per annum. The note
matures on February 29, 2019 and is convertible, as amended, into the Company’s Series B Preferred Stock at a price of $0.25 per share at the holder’s
request. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 3,125,000 shares of the Company’s common stock at an exercise price of $0.32 per share. The Company has determined the note to contain a beneficial
conversion feature. The Company valued the beneficial conversion feature at $444,923 based on the intrinsic per share value of the conversion feature, and the warrants at $541,244 using the Black-Scholes pricing model. The Company has allocated
the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $444,923 and $351,173, respectively. At December 31, 2018, the principal
balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at $773,571. The Company had accrued interest for this note in the amount of $75,699, which is included in accrued interest on the
Company’s consolidated balance sheets.
On April 18, 2018, the Company issued a $2,000,000 convertible note bearing interest at 9% per annum. The note matures
on April 18, 2019 and is convertible, as amended, into the Company’s Series B Preferred Stock at a price of $0.25 per share at the holder’s request. The
noteholder was also granted detachable 5 year warrants to purchase an aggregate of 6,250,000 shares of the Company’s common stock at an exercise price of $0.32 per share. The Company has determined the note to contain a beneficial conversion
feature. The Company valued the beneficial conversion feature at $1,510,980 based on the intrinsic per share value of the conversion feature, and the warrants at $1,073,331 using the Black-Scholes pricing model. The Company has allocated the
note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $1,301,510 and $698,480, respectively. At December 31, 2018, the principal
balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at $51,049. The Company had accrued interest for this note in the amount of $126,740, which is included in accrued interest on the
Company’s consolidated balance sheets.
On May 4, 2018, the Company issued an aggregate $1,500,000 in convertible notes bearing interest at 9% per annum. These
notes mature on May 31, 2019 and are convertible, as amended, into the Company’s Series B Preferred Stock at a price of $0.25 per share at the holder’s
request. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 4,687,500 shares of the Company’s common stock at an exercise price of $0.25 per share. The Company has determined the note to contain a beneficial
conversion feature. The Company valued the beneficial conversion feature at $1,133,680 based on the intrinsic per share value of the conversion feature, and the warrants at $806,050 using the Black-Scholes pricing model. The Company has
allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $975,685 and $524,305, respectively. At December 31, 2018, the
principal balances were still outstanding and is included on the Company’s consolidated balance sheets net of discounts at an aggregate $15,248. The Company had accrued interest for these notes in the amount of $89,140, which is included in
accrued interest on the Company’s consolidated balance sheets.
On May 9, 2018, the Company issued a $1,028,274 convertible note bearing interest at 9% per annum as replacement for a $1,000,000 note plus accrued interest of $28,274 (see long term convertible notes section of this note). The note matures on May 31, 2019 and is convertible, as amended, into the Company’s Series B Preferred Stock at a price of $0.25 per share at the holder’s request. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 3,213,356 shares of the Company’s common stock at an exercise price of $0.25 per share. The Company has determined the note to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $835,295 based on the intrinsic per share value of the conversion feature, and the warrants at $538,207 using the Black-Scholes pricing model. The Company has allocated the note proceeds based relative on fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $674,972 and $353,292, respectively. At December 31, 2018, the principal balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at $11,388. The Company had accrued interest for this note in the amount of $59,837, which is included in accrued interest on the Company’s consolidated balance sheets.
On July 5, 2018, the Company issued an aggregate $2,000,000 in convertible notes bearing interest at 9% per annum. These
notes mature on July 5, 2019 and is convertible, as amended, into the Company’s Series B Preferred Stock at a price of $0.25 per share at the holder’s
request. The noteholders were also granted detachable 5 year warrants to purchase an aggregate of 8,000,000 shares of the Company’s common stock at an exercise price of $0.25 per share. The Company has determined the notes to contain a
beneficial conversion feature. The Company valued the beneficial conversion feature at $1,307,658 based on the intrinsic per share value of the conversion feature, and the warrants at $1,354,741 using the Black-Scholes pricing model. The
Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $1,192,302 and $807,658, respectively. At December 31,
2018, the principal balances were still outstanding and are included on the Company’s consolidated balance sheets net of discounts at an aggregate $6,828. The Company had accrued interest for these notes in the amount of $87,781, which is
included in accrued interest on the Company’s consolidated balance sheets.
On July 10, 2018, the Company issued a $32,000 convertible note bearing interest at 9% per annum. This note matures on
July 31, 2019 and is convertible into the Company’s Series B Preferred Stock at a price of $0.32 per share at the holder’s request. The noteholder was also
granted detachable 5 year warrants to purchase an aggregate of 128,000 shares of the Company’s common stock at an exercise price of $0.25 per share. The Company has determined the note to contain a beneficial conversion feature. The Company
valued the beneficial conversion feature at $15,005 based on the intrinsic per share value of the conversion feature, and the warrants at $21,711 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on
relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $15,005 and $12,935, respectively. At December 31, 2018, the principal balance was still outstanding and
is included on the Company’s consolidated balance sheets net of discounts at an aggregate $10,858. The Company had accrued interest for these notes in the amount of $1,373, which is included in accrued interest on the Company’s consolidated
balance sheets.
On July 13, 2018, the Company issued a $200,000 in convertible notes bearing interest at 9% per annum. This note matures
on July 31, 2019 and is convertible into the Company’s Series B Preferred Stock at a price of $0.32 per share at the holder’s request. The noteholder was also
granted detachable 5 year warrants to purchase an aggregate of 800,000 shares of the Company’s common stock at an exercise price of $0.25 per share. The Company has determined the note to contain a beneficial conversion feature. The Company
valued the beneficial conversion feature at $68,266 based on the intrinsic per share value of the conversion feature, and the warrants at $135,474 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on
relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $68,266 and $80,766, respectively. At December 31, 2018, the principal balance was still outstanding and
is included on the Company’s consolidated balance sheets net of discounts at an aggregate $96,693. The Company had accrued interest for these notes in the amount of $8,433, which is included in accrued interest on the Company’s consolidated
balance sheets.
On September 17, 2018, the Company issued an aggregate $3,000,000 in convertible notes bearing interest at 9% per annum. The notes mature on September 17, 2019 and are
convertible into the Company’s Series B Preferred Stock at a price of $0.25 per share at the holder’s request. The noteholders were also granted detachable 7 year warrants to purchase an aggregate of
12,000,000 shares of the Company’s common stock at an exercise price of $0.25 per share. The Company has determined the notes to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $2,921,170 based on
the intrinsic per share value of the conversion feature, and the warrants at $1,617,415 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial
conversion feature and warrants as a discount to the debt in the amount of $1,949,132 and $1,050,858, respectively. Additionally, as further inducement to write this this note, the Company agreed to grant all of the investor’s existing notes as
well as several other existing noteholders with relationships to the investor the same terms on their existing debt that this debt carries. These new terms were required to write the notes, therefore, the Company has accounted them as a discount
on this note, the value of which is included in the beneficial conversion value. At December 31, 2018, the principal balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at an aggregate
$383. The Company had accrued interest for these notes in the amount of $77,671, which is included in accrued interest on the Company’s consolidated balance sheets.
On December 4, 2018, the Company issued an aggregate $3,000,000 in convertible notes bearing interest at 9% per annum. The notes mature on December 4, 2019 and are
convertible into the Company’s Series B Preferred Stock at a price of $0.25 per share at the holder’s request. The noteholders were also granted detachable 7 year warrants to purchase an aggregate of
12,000,000 shares of the Company’s common stock at an exercise price of $0.25 per share. As additional consideration for this note, the Company issued an aggregate 4,006,250 shares of the Company’s common stock. The Company has determined the
notes to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $2,248,088 based on the intrinsic per share value of the conversion feature, the warrants at $1,589,454 using the Black-Scholes pricing
model, and the stock at $1,346,000. The Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature, warrants, and stock as a discount to the debt in the amount of
$1,516,302, $803,369 and $680,319, respectively. At December 31, 2018, the principal balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at an aggregate $76. The Company had accrued
interest for these notes in the amount of $19,973, which is included in accrued interest on the Company’s consolidated balance sheets.
On December 19, 2018, the Company issued an aggregate $3,000,000 in convertible notes bearing interest at 9% per annum. The notes mature on December 19, 2019 and are
convertible into the Company’s Series B Preferred Stock at a price of $0.25 per share at the holder’s request. The noteholders were also granted detachable 7
year warrants to purchase an aggregate of 12,000,000 shares of the Company’s common stock at an exercise price of $0.25 per share. The Company has determined the notes to contain a beneficial conversion feature. The Company valued the beneficial
conversion feature at $555,512 based on the intrinsic per share value of the conversion feature, and the warrants at $1,581,347 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on relative fair value and
has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $555,512 and $1,035,512, respectively. At December 31, 2018, the principal balance was still outstanding and is included on the
Company’s consolidated balance sheets net of discounts at an aggregate $1,445,063. The Company had accrued interest for these notes in the amount of $8,877, which is included in accrued interest on the Company’s consolidated balance sheets.
Short term convertible notes – related party
On October 31, 2013, the Company agreed to convert balances owed to the Company’s corporate counsel in the amount of
$183,172 into a 42 month convertible note bearing interest at 12% annually and convertible into 203,525 shares of convertible preferred stock at the rate of $0.90 per share. At December 31, 2018, the principal balance was still outstanding, and
the Company had accrued interest for this note in the amount of $177,419 which is included in accrued interest – related party on the Company’s consolidated balance sheets. The note carries a default rate of 18% for any principal not paid by the
maturity date.
On November 30, 2015, John Hayes, the Company’s Chief Technology Officer, Director and significant shareholder invested
$101,000 via a one year convertible note bearing interest at 12% annually and convertible into 112,223 shares of Series A convertible preferred stock at the rate of $0.90 per share. On September 1, 2017, $237,000 owed to John Hayes was added to
the note. On September 30, 2018, the note along with interest of $89,366 was converted into 1,709,466 shares of the Company’s common stock at a rate of $0.25 per share. Additionally, as further inducement to convert the note, the Company issued
the note holder 5 year warrants to purchase 1,352,000 shares of the Company’s common stock. The Company recognized a loss on extinguishment of debt of $384,200 related to the decrease in conversion price and warrants granted.
On July 6, 2018, the Company issued a $200,000 in convertible notes bearing interest at 9% per annum to John Hayes, the Company’s Chief Technology Officer, Director and significant shareholder. This note matures on July 31, 2019 and is convertible into the Company’s Series B Preferred Stock at a price of $0.32 per share at the holder’s request. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 800,000 shares of the Company’s common stock at an exercise price of $0.25 per share. The Company has determined the note to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $130,766 based on the intrinsic per share value of the conversion feature, and the warrants at $135,474 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $119,224 and $80,766, respectively. On September 30, 2018, the note along with interest of $4,192 was converted into 816,767 shares of the Company’s common stock at a rate of $0.25 per share. The Company recognized a loss on extinguishment of debt of $43,750 related to the decrease in conversion price.
On July 10, 2018, the Company issued a $32,000 in convertible notes bearing interest at 9% per annum to J Allen Kosowsky,
a Director and related party. This note matures on July 31, 2019 and is convertible into the Company’s Series B Preferred Stock at a price of $0.32 per share at the holder’s
request. The Company has determined the note to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $15,005 based on the intrinsic per share value of the conversion feature, and the warrants at
$21,711 using the Black-Scholes pricing model. The Company has allocated the note proceeds based relative on fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of
$15,005 and $12,935, respectively. On September 30, 2018, the note along with interest of $639 was converted into 130,556 shares of the Company’s common stock at a rate of $0.25 per share. The Company recognized a loss on extinguishment of
debt of $8,960 related to the decrease in conversion price.
Long term convertible notes
On December 21, 2017, the Company issued a $150,000 convertible note bearing interest at 8% per annum. The note matures
on December 21, 2019 and is convertible into the Company’s Series B Preferred Stock at a price of $0.32 per share at the holder’s request. The Company has
determined the note to contain a beneficial conversion feature valued at $69,935 based on the intrinsic per share value of the conversion feature. This beneficial conversion feature is recorded as a discount to the debt agreement. The
noteholder was also granted detachable 5 year warrants to purchase an aggregate of 468,750 shares of the company’s common stock at an exercise price of $0.32 per share. The warrants were valued at $69,935 using the Black-Scholes pricing model
and were recorded as a discount to the note. At December 31, 2018 the principal balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at $39,726. The Company had accrued interest for this
note in the amount of $12,329, which is included in accrued interest on the Company’s consolidated balance sheets.
On December 22, 2017, the Company issued a $1,000,000 convertible note bearing interest at 8% per annum. The note
matures on December 22, 2019 and is convertible into the Company’s Series B Preferred Stock at a price of $0.32 per share at the holder’s request. The Company
has determined the note to contain a beneficial conversion feature valued at $466,230 based on the intrinsic per share value of the conversion feature. This beneficial conversion feature is recorded as a discount to the debt agreement. The
noteholder was also granted detachable 5 year warrants to purchase an aggregate of 3,125,000 shares of the company’s common stock at an exercise price of $0.32 per share. The warrants were valued at $466,230 using the Black-Scholes pricing model
and were recorded as a discount to the note. On May 9, 2018, this note along with $28,274 was renegotiated into a new short term convertible note and the warrants associated with the original note were cancelled. The newly negotiated note
included an additional warrant benefit valued at $95,804 which was recorded as a loss on extinguishment of debt.
Long term convertible notes – related party
During 2011 to 2014, the Company’s Chief Technology Officer and significant shareholder of the Company loaned a total of
$2,673,200 to the Company. On October 1, 2014, all prior notes including accrued interest were combined into a single $3,712,637 convertible note bearing interest at 12% annually and convertible into 4,125,154 shares of preferred stock at the
rate of $0.90 per share. On November 9, 2017, the Company converted the note and accrued interest of $1,665,991 into 10,757,254 shares of the Company’s common stock at a conversion rate of $0.50 per share. The Company also issued a 5 year
warrant to purchase an additional 5,378,627 shares of the Company s common stock at a purchase price of $0.50 per share as further consideration for this conversion. The Company recognized a loss on extinguishment of debt related to this
transaction of $913,238.
Convertible debt holders are entitled, at their option, to convert all or part of the principal and accrued interest into
shares of the Company’s common stock at the conversion prices and terms discussed above. The Company has determined that any embedded conversion options do not possess a beneficial conversion feature, and therefore has not separately accounted
for their value.
The following table summarizes the Company’s convertible notes payable for the years ended December 31, 2018 and 2017:
|
December 31,
2018
|
December 31,
2017
|
||||||
Beginning Balance |
$ |
601,576 |
$ |
3,996,810 |
||||
Proceeds from issuance of convertible notes, net of issuance discounts |
1,903,438 |
146,669 |
||||||
Proceeds from issuance of convertible notes – related party |
- |
237,000 |
||||||
Repayments |
- |
(100,000 |
) |
|||||
Conversion of notes payable into common stock |
(570,000 |
) |
(3,712,638 |
) |
||||
Debt restructured |
(112,017 |
) |
- |
|||||
Amortization of discounts |
1,648,647 |
33,735 |
||||||
Ending Balance |
$ |
3,471,644 |
$ |
601,576 |
||||
Convertible notes, short term |
$ |
17,860,274 |
$ |
1,150,000 |
||||
Convertible notes, short term – related party |
$ |
183,172 |
$ |
521,172 |
||||
convertible notes, long term |
$ |
150,000 |
$ |
- |
||||
Debt discounts |
$ |
14,721,802 |
$ |
1,069,596 |
The following table summarizes the Company’s
convertible notes payable as of December 31, 2018:
Note(s) Date
|
Maturity Date
|
Interest
|
Principal
|
||||||
1/31/2018
|
1/31/2019
|
8
|
%
|
$
|
100,000
|
||||
2/23/2018
|
2/28/2019
|
9
|
%
|
1,000,000
|
|||||
2/27/2018
|
2/28/2019
|
9
|
%
|
1,000,000
|
|||||
4/18/2018
|
4/18/2019
|
9
|
%
|
2,000,000
|
|||||
5/4/2018
|
5/31/2019
|
9
|
%
|
1,500,000
|
|||||
5/9/2018
|
5/31/2019
|
9
|
%
|
1,028,274
|
|||||
7/5/2018
|
7/5/2019
|
9
|
%
|
2,000,000
|
|||||
7/10/2018
|
7/10/2019
|
9
|
%
|
32,000
|
|||||
7/13/2018
|
7/13/2019
|
9
|
%
|
200,000
|
|||||
9/17/2018
|
9/17/2019
|
9
|
%
|
3,000,000
|
|||||
12/4/2018
|
12/4/2019
|
9
|
%
|
3,000,000
|
|||||
12/19/2018
|
12/19/2019
|
9
|
%
|
3,000,000
|
|||||
$
|
17,860,274
|
NOTE 7 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases approximately 7,579 square feet of office space under a 62 month operating lease which
expires during April 2023. The amounts reflected in the table below are for the aggregate future minimum lease payments under the non-cancelable facility operating leases. Under lease agreements that contain escalating rent provisions, lease
expense is recorded on a straight-line basis over the lease term.
The Company also leases office space under a 23 month operating lease which expires during August 2019. The
amounts reflected in the table below are for the aggregate future minimum lease payments under the non-cancelable facility operating leases. Under lease agreements that contain escalating rent provisions, lease expense is recorded on a
straight-line basis over the lease term.
The Company also leases approximately 202 square feet of office space under a 12 month operating lease
which originally expired in 2016. The lease was renewed to May 2019, and is renewable at the Company’s option annually at a flat monthly amount of $400. The amounts reflected in the table below are for the aggregate future minimum lease
payments under the non-cancelable facility operating leases.
Rent expense was $287,649 and $186,640 for the years ended December 31, 2018 and 2017, respectively.
As of December 31, 2018, future minimum lease payments are as follows:
Year Ending December 31, |
||||
2019 |
$ |
259,851 |
||
2020 |
209,559 |
|||
2021 |
214,107 |
|||
2022 |
218,654 |
|||
2023 |
18,569 |
|||
2024 and thereafter |
- |
|||
Total minimum lease payments |
$ |
920,740 |
On August 1, 2017, the Company entered into a 36 month lease of computer equipment. The lease carries a monthly payment of
$2,871 with the option to purchase the equipment at its fair market value at the end of the lease.
Restricted Stock Commitments
The Company has committed to settling a significant portion of its current accounts payable balances
through the future issuance of restricted stock units. While the terms of these agreements have not yet been formalized with employees and outside contractors, they could have a potentially dilutive effect to current shareholders.
Contingent Liability
On October 15, 2011, the Company entered into an agreement with a consultant by which the consultant’s invoices for the
previous four months would be accrued as a liability to be paid out upon (a) the Company’s successful raising of $10,000,000 in capital funding, or (b) the Company reaching total revenues of $10,000,000. The Company had a balance due under this
agreement of $37,500 December 31, 2017. In 2018, the Company reached its capital funding threshold under the agreement and reclassified the entire $37,500 liability to a payable.
Legal Proceedings
On December 2, 2016, AltEnergy Cyber, LLC ("Plaintiff") instituted a legal action in Connecticut against the Company and Robert Zahm. The complaint alleged that (i) the Company improperly extended the maturity date of the Plaintiff’s convertible note in the amount of $1,500,000 and (ii) improperly converted the loan into the Company’s stock. The Complaint alleges that the Company is liable to the Plaintiff for $4,500,000 plus interest. During the year ended December 31, 2017, Robert Zahm was dismissed from the proceedings for lack of personal jurisdiction.
On March 29, 2018, the AltEnergy
Cyber, LLC’s legal action was dismissed through a motion for summary judgement.
NOTE 8 ‑ RELATED PARTY TRANSACTIONS
During the years ended December 31, 2018 and 2017, the Company incurred interest expense on notes to related parties in
the aggregate amount of $525,785 and $604,145, respectively (see Note 6 – Convertible Notes).
Accounts payable related party
At December 31, 2018 and December 31, 2017, the Company had a balance in related party accounts payable of $9,690 and $68,060,
respectively, which consisted of the following:
|
|
|
December 31, |
December 31, |
||||||
Party Name: |
Relationship: |
Nature of transactions: |
2018 |
2017 |
||||||
John Bluher |
Chief Financial Officer |
Expense reimbursement |
$ |
4,465 |
$ |
- |
||||
John Hayes |
Chief Technology Officer |
Expense reimbursement |
5,225 |
55,254 |
||||||
Robert Graham |
Chairman and Chief Executive Officer |
Expense reimbursement |
- |
6,806 |
||||||
Robert Graham |
Chairman and Chief Executive Officer |
Rent |
- |
6,000 |
||||||
|
|
|
$ |
9,690 |
$ |
68,060 |
Advances from related party
During the year ended December 31, 2018, the Company received advances of $50,000 from Mag Ventures, a company controlled
by Tom Bruderman, a director and shareholder. These advances along with the previous balance were converted into 460,000 shares of the Company’s common stock at a price of $0.25 per share on November 9, 2018.
During the year ended December 31, 2018, the Company received advances of $25,000 from J. Allen Kosowsky, a
director and shareholder. These advances were converted into 78,125 shares of the Company’s common stock at a price of $0.32 per share on September 13, 2018.
At December 31, 2018 and December 31, 2017, the Company had a balance in related party advances of $0 and $65,000, respectively,
which consisted of the following:
December 31,
|
December 31,
|
||||||||
Party Name:
|
Relationship:
|
2018
|
2017
|
||||||
Thomas Bruderman
|
Director and significant shareholder
|
$
|
-
|
$
|
65,000
|
During the year ended December 31, 2018, the Company issued notes and converted notes to related parties, see Note 5 – Notes Payable, and Note 6 – Convertible Notes for full disclosure.
NOTE 9 ‑ STOCKHOLDERS’ EQUITY
The Company has authorized 200 million shares of common stock, $0.001 par value, and 10 million shares of preferred
stock, $0.001 par value. Each share of the Company’s preferred stock is convertible into 10 shares of common stock, subject to adjustment, has voting rights equal to its common stock equivalent, 7% cumulative dividend rights, and has liquidation
rights that entitle the recipient to the receipt of net assets on a pro-rata basis. The Company has 96,872,725 and 77,063,171 common shares issued and outstanding and 3,577,370 and 3,639,783 preferred shares issued and outstanding as of December
31, 2018 and 2017, respectively.
During the year ended December 31, 2018, the Company issued an aggregate 1,771,666 shares of the Company’s common stock
pursuant to consulting contracts valued at $614,546, or an average of $0.35 per share.
During the year ended December 31, 2018, the Company converted an aggregate 62,413 shares of the Company’s Series A
preferred stock into 789,048 shares of the Company’s common stock after receiving conversion exercises from multiple preferred stockholders.
On June 13, 2018, the Company converted a $25,000 advance from related party and Director J Allen Kosowsky into 78,125,
shares of the Company’s common stock at a price of $0.32 per share (see Note 8 – Related Party Transactions).
On September 30, 2018, the Company issued an aggregate 2,935,818 shares of the Company’s common stock to satisfy
$1,027,535 in wages payable at the rate of $0.35 per share. The stock contains a 6 month non-forfeitable vesting restriction.
On September 30, 2018, The Company converted notes payable and interest valued at an aggregate $1,161,271 and due to the
Company’s Chief Technology Officer and Director, John Hayes, into 4,645,082 shares of the Company’s common stock at a price of $0.25 per share (see additional information in Note 5 – Notes Payable and Note 6 – Convertible Notes).
On September 30, 2018, The Company converted notes payable and interest valued at $32,639 and due to the Company’s
Director, J Allen Kosowsky, into 130,556 shares of the Company’s common stock at a price of $0.25 per share (see additional information in Note 5 – Notes Payable and Note 6 – Convertible Notes).
On November 9, 2018, the Company converted a $115,000 advance from Mag Ventures, a company controlled by Tom Bruderman, a
director and shareholder, into 460,000, shares of the Company’s common stock at a price of $0.25 per share (see Note 8 – Related Party Transactions).
During the year ended December 31, 2018, the Company accepted the return of 338,200 shares of its common stock. Upon
receipt, the shares were retired to the treasury.
During the year ended December 31, 2018, the Company issued an aggregate 661,071 shares of the Company’s common stock
valued at $228,800 as satisfaction of payables in the amount of $241,067. The company recognized gain on settlement of $12,267 in relation to these transactions.
Between January 13, 2017 and February 27, 2017, the Company issued 62,502 shares of the Company's preferred stock along
with 5 year warrants to purchase 625,000 shares of the Company's common stock at an exercise price per share of $0.70 to several investors for aggregate proceeds of $375,000, or $0.60 per share. The warrants were valued at $104,765 using the
Black-Scholes pricing model.
Between February 27, 2017 and August 29, 2017, the Company issued 10,364,121 shares of the Company's common stock and 5
year warrants to purchase 6,755,291 shares of the Company's common stock at an average exercise price per share of $0.51 to several investors for aggregate proceeds of $4,666,453. The warrants were valued at $1,248,536 using the Black-Scholes
pricing model. The Company paid consultant and business development fees of $89,000 related to these issuances.
On February 2, 2017, the Company issued warrants to purchase 166,667 shares of the Company's common stock at an exercise
price of $0.60 per share in conjunction with a debt agreement. The warrants were valued at $31,002 using the Black-Scholes pricing model and were recorded as a discount to the debt agreement.
Between February 9, 2017 and March 6, 2017, the Company issued warrants to purchase 150,001 shares of the Company's
common stock at an exercise price per share of $0.60 to several parties in conjunction with short term notes and advances. The warrants were valued at $27,945 using the Black-Scholes pricing model and were recorded to additional paid in capital.
On March 31, 2017, the Company issued 1,000,000 shares of the Company's common stock in connection with the exercise of a
warrant to purchase shares at $0.01 per share. The Company received $10,000 in proceeds for the warrant exercise.
Between August 29, 2017 and November 16, 2017, the Company converted an aggregate 144,035 shares of the Company's
preferred stock into 1,568,862 shares of the Company's common stock after receiving conversion exercises from preferred stockholders.
Between August 31, 2017 and September 25, 2017, the Company issued 7,700,000 shares of the Company's common stock and 5
year warrants to purchase 7,700,000 shares of the Company's common stock at an exercise price per share of $0.50 to several investors for aggregate proceeds of $3,850,000. The warrants were valued at $1,800,288 using the Black-Scholes pricing
model.
On September 11, 2017, the Company issued an aggregate 22,064,105 shares of the Company's common stock to satisfy
$13,238,453 in wages payable at a per share price of $0.60. The stock contains a 10 month restriction on transfers and/or sales.
Between September 11, 2017 and September 27, 2017, the Company issued an aggregate 462,740 shares of the Company's common
stock as settlement of contracts valued at $231,370 at a per share price of $0.50.
On October 31, 2017, the Company issued 55,556 shares of the Company's common stock in connection with the exercise of a
warrant to purchase shares at $0.60 per share. The Company received $33,334 in proceeds for the warrant exercise.
On November 9, 2017, the Company issued 10,757,254 shares of the Company's common stock for the conversion of a note
payable and accrued interest totaling $5,378,628. The Company also issued 5 year warrants to purchase an additional 5,378,627 shares of the Company's common stock at a price of $0.50. These warrants were valued at $913,238 which was recorded as
a loss on extinguishment of debt.
On November 9, 2017, the Company issued an aggregate 388,726 shares of the Company's common stock to satisfy $233,235 in
accrued accounts payable at a per share price of $0.60. The stock contains a 10 month restriction on transfers and/or sales.
On October 1, 2017, the Company issued 50,000 shares of the Company's common stock valued at $22,500 or $0.45 per share,
along with warrants to purchase 100,000 shares of the Company's common stock at a price of $0.60 per share pursuant to a consulting contract.
Between December 1, 2017 and December 17, 2017, the Company issued an aggregate 610,126 shares of the company's common
stock valued at $438,500 or an average of $0.72 pursuant to several consulting contracts.
On December 15, 2017, the Company issued 225,000 shares of the Company's common stock and 5 year warrants to purchase
56,250 shares of the Company's common stock at an exercise price per share of $0.32 to an investor for aggregate proceeds of $90,000. The warrants were valued at $8,365 using the Black-Scholes pricing model.
NOTE 10 – SHARE BASED COMPENSATION
During the year ended December 31, 2018, the Company issued 10,390,741 5-year options to purchase common stock to
employees and directors under the 2017 Stock Incentive Plan. The options were valued at $1,522,580 using the Black-Scholes pricing model. As of December 31, 2018, the total unrecognized expense for unvested share based compensation is
$2,000,971. The 2017 Stock Incentive Plan allows for a maximum 25,000,000 shares to be issued, of which 8,053,574 shares remain available for issuance as of December 31, 2018. The company recognized stock option expense during the years ended
December 31, 2018 and 2017 of $1,271,301 and $110,100, respectively.
The fair values at the commitment date for the options were based upon the following management assumptions as of December 31, 2018:
|
Commitment Date
|
|
|
Expected dividends
|
|
0
|
%
|
Expected term
|
|
5 years
|
|
Risk free rate
|
|
1.91 – 2.96
|
%
|
Volatility
|
48.24 – 52.49
|
%
|
Employee and
Director Options Outstanding
|
Weighted
Average
Exercise Price
|
Weighted
Average
Remaining Life
|
Weighted
Average Grant
Date Fair Value
|
||||||||||
Beginning Balance – December 31, 2016
|
-
|
||||||||||||
Granted
|
6,962,560
|
$
|
0.60
|
5 years
|
$
|
0.28
|
|||||||
Exercised
|
-
|
||||||||||||
Expired
|
-
|
||||||||||||
Forfeited
|
-
|
||||||||||||
Balance – December 31, 2017
|
6,962,560
|
$
|
0.60
|
4.65 years
|
$
|
0.28
|
|||||||
Granted
|
10,390,741
|
$
|
0.33
|
5 years
|
$
|
0.16
|
|||||||
Exercised
|
-
|
||||||||||||
Expired
|
(57,827
|
)
|
|||||||||||
Forfeited
|
(349,048
|
)
|
|||||||||||
Ending Balance – December 31, 2018
|
16,946,426
|
$
|
0.43
|
4.32 years
|
$
|
0.20
|
|||||||
Exercisable options
|
6,284,597
|
$
|
0.46
|
4.32 years
|
$
|
0.22
|
The Company’s outstanding employee options at December 31, 2018 are as follows:
Options Outstanding |
Option Exercisable |
|||||||||||||||||||||||||
|
Number |
Weighted
Average
Remaining
Contractual Life
(in years)
|
Weighted Average |
Number |
Weighted |
Intrinsic Value |
||||||||||||||||||||
$ |
0.25 - $0.60 |
16,946,426 |
4.32 |
$ |
0.43 |
6,284,597 |
$ |
0.46 |
$ |
- |
The weighted average fair value per option issued during the year ended December 31, 2018 was $0.16.
The following table summarizes non-vested option activity during the year ended December 31, 2018:
Non-Vested
Options
|
Weighted
Average
Grant Date Fair Value
|
|||||||
Beginning Balance – December 31, 2016
|
-
|
|||||||
Granted
|
6,962,560
|
$
|
0.28
|
|||||
Vested
|
(1,373,097
|
)
|
||||||
Expired
|
-
|
|||||||
Forfeited
|
-
|
|||||||
Balance – December 31, 2017
|
5,589,463
|
$
|
0.28
|
|||||
Granted
|
10,390,741
|
$
|
0.16
|
|||||
Vested
|
(4,911,501
|
)
|
||||||
Expired
|
(57,827
|
)
|
||||||
Forfeited
|
(349,048
|
)
|
||||||
Ending Balance – December 31, 2018
|
10,661,828
|
$
|
0.19
|
NOTE 11 – WARRANTS
During the year ended December 31, 2018, the Company issued an aggregate 71,355,856 warrants to purchase common stock in conjunction with convertible debt agreements and cancelled an aggregate 4,687,500 warrants in conjunction with debt settlements and extinguishment (see note 6 - convertible notes). The company also agreed to cancel and re- issue 2,400,000 warrants at new terms in conjunction with a private stock and warrant sale. In order to facilitate this transaction, the Company agreed to cancel 2,400,000 warrants to purchase stock at $0.70 per share, and reissue the repriced warrants at 1,200,000 warrants to purchase common stock at $0.25 per share, and 1,200,000 warrants to purchase common stock at $0.50. The Company valued the new warrants at $100,306 using the Black Scholes pricing model, which is included in selling, general and administrative expense on the Company’s 2018 statement of profit and loss.
The fair values at the commitment date for the warrants were based upon the following management assumptions as of December 31, 2018:
|
Commitment Date
|
|
Expected dividends
|
0
|
%
|
Expected term
|
5 - 7 years
|
|
Risk free rate
|
2.52 – 3.05
|
%
|
Volatility
|
48.24 – 51.35
|
%
|
The activity of warrants granted to during the year ended December 31, 2018 is as follows:
Warrants
Outstanding
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining Life
|
Weighted
Average Grant
Date Fair Value
|
||||||||||
Beginning Balance – December 31, 2016
|
16,029,605
|
2.54 years
|
0.00
|
||||||||||
Granted
|
28,094,587
|
5 years
|
0.21
|
||||||||||
Exercised
|
(1,055,556
|
)
|
|||||||||||
Expired
|
-
|
||||||||||||
Forfeited
|
-
|
||||||||||||
Balance – December 31, 2017
|
43,068,636
|
$
|
0.45
|
4.69 years
|
$
|
0.08
|
|||||||
Granted
|
73,755,856
|
$
|
0.26
|
6.68 years
|
$
|
0.14
|
|||||||
Exercised
|
-
|
||||||||||||
Expired
|
-
|
||||||||||||
Forfeited
|
(7,087,500
|
)
|
|||||||||||
Ending Balance – December 31, 2018
|
109,736,992
|
$
|
0.32
|
5.46 years
|
$
|
0.12
|
|||||||
Exercisable options
|
109,736,992
|
$
|
0.32
|
5.46 years
|
$
|
0.12
|
Warrants Outstanding
|
Warrants Exercisable
|
|||||||||||||||||||||||||
Exercise Price Range |
Number
Outstanding |
Weighted Average
Remaining Contractual Life (in years) |
Weighted Average
Exercise Price |
Number
Exercisable |
Weighted
Average Exercise Price |
Intrinsic Value
|
||||||||||||||||||||
$
|
0.01 - $0.70
|
109,736,992
|
5.46
|
$
|
0.32
|
109,736,992
|
$
|
0.32
|
$
|
1,299,223
|
NOTE 12 – EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares
of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive
securities outstanding during each period.
Since the Company reflected a net loss for the years ended December 31, 2018 and 2017, respectively, the effect of considering any common stock equivalents, if exercisable, would have been anti-dilutive. Therefore, a separate computation of diluted earnings (loss) per share is not presented.
The Company has the following common stock equivalents as of December 31, 2018 and 2017:
As of
December 31,
2018
|
As of
December 31,
2017
|
|||||||
Warrants (exercise price $0.01 - $0.70/share)
|
109,736,992
|
43,068,636
|
||||||
Options (exercise price $0.25 - $0.66/share)
|
20,436,601
|
9,352,435
|
||||||
130,173,293
|
52,421,071
|
NOTE 13 – BUSINESS ACQUISITION
On September 6, 2016, the Company and BlackRidge entered into an Agreement and Plan of Reorganization (the
“Reorganization Agreement”) originally dated as of September 6, 2016, and amended on February 22, 2017 to update the number of common shares, warrants, and options granted and outstanding as of the closing date.
On February 22, 2017, we completed the actions contemplated by the Reorganization Agreement and merged with and into
BlackRidge with BlackRidge continuing as the surviving corporation (“Reorganization”). Upon completion of the Agreement, we issued 3,783,791 shares of our newly designated Series A Preferred Stock and 12,825,683 shares of Common Stock to the
stockholders of BlackRidge in exchange for all the issued and outstanding shares of Series A Preferred Stock and Common Stock of BlackRidge. Additionally, certain stockholders of BlackRidge returned for cancellation a total of 16,284,330
shares of our Common Stock. Upon the completion of the Reorganization, BlackRidge became a wholly-owned subsidiary of the Company and the Company had a total of 3,783,791 shares of Series A Preferred Stock and 21,790,683 shares of Common Stock
outstanding, with the former BlackRidge stockholders owning 3,783,791 shares or 100% of Series A Preferred Stock and 12,825,683 shares or approximately 58.9% of Common Stock. Upon completion of the Reorganization, we also had outstanding
warrants entitling the holders to acquire a total of 18,541,579 shares of the Company’s Common Stock at an average exercise price of $0.46 per share. The Reorganization resulted in a change of control of the Company. For accounting purposes,
BlackRidge was treated as the acquirer and the historical financial statements of BlackRidge became the Company’s historical financial statements. The acquisition is intended to constitute a tax-free reorganization pursuant to the applicable
provisions of the Internal Revenue Code of 1986, as amended.
NOTE 14 – DISCONTINUED OPERATIONS
On March 31, 2017, the Company completed the sale of substantially all the assets, other than cash, used in or
connection with the Company's home grain mill and kitchen mixer business to John Hofman and Bruce Crane, former officers and directors of the Company, in consideration for the assumption by such persons of substantially all the liabilities
incurred by the Company in connection with such business. The assets divested consisted of the non-cybersecurity assets of the Company and included accounts receivable, inventory, deposits, property and equipment and intangible assets. The
liabilities divested included the non-cybersecurity liabilities of the Company and included accounts payable and accrued expenses and long and short-term notes payable and accrued interest thereon. Upon completion of the divestiture, the
Company recognized a $484,927 loss on disposal. Additionally, during the period from February 22, 2017 through March 31, 2017, the Company incurred a loss from discontinued operations of $8,737.
The following table shows the value of assets and liabilities divested:
Assets
|
||||
Accounts receivable
|
$
|
40,044
|
||
Deposits and prepaid expenses
|
90,559
|
|||
Inventory
|
1,157,555
|
|||
Property and equipment
|
117,254
|
|||
Intangible assets
|
62,820
|
|||
Total Assets
|
1,468,232
|
|||
Liabilities
|
||||
Accounts payable and accrued expenses
|
692,399
|
|||
Notes payable – short term
|
64,000
|
|||
Notes payable – short term, related party
|
91,679
|
|||
Line of credit
|
135,227
|
|||
Total Liabilities
|
983,305
|
|||
Loss on disposal
|
$
|
484,927
|
NOTE 15 – INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due. Deferred taxes relate to differences between the basis of assets and liabilities for financial and income tax reporting which will be either taxable or deductible when the assets or liabilities are recovered or settled.
At December 31, 2018 and 2017, the Company had net operating loss (“NOL”) carry-forwards for Federal income
tax purposes approximating $51,417,242 and $34,394,555 respectively. At December 31, 2018 and 2017, the Company’s NOL carry-forwards for state income purposes are approximating $59,104,026 and $26,508,562, respectively. These losses are
available for future years and expire through 2037. The Federal NOL generated for the tax year ended 12/31/2018 of $11,491,743 will not expire due to NOLs having an indefinite life as enacted
in the 2017 Tax Cuts and Jobs Act.
The deferred tax asset at December 31, 2018 and 2017 is summarized as follows:
December 31,
2018
|
December 31,
2017
|
|||||||
Net operating loss & credit carry forwards
|
$
|
11,878,168
|
$
|
7,897,392
|
||||
Inventory obsolescence reserve
|
72,645
|
77,993
|
||||||
Accrued wages, related party
|
990,408
|
1,216,954
|
||||||
Accrued interest – convertible debt, related party
|
270,904
|
290,845
|
||||||
Depreciation and amortization
|
(508,882
|
)
|
(125,749
|
)
|
||||
Other tax adjustments
|
4,119
|
3,566
|
||||||
Deferred Revenue
|
(4,363
|
)
|
(4,625
|
)
|
||||
Valuation allowance
|
(12,702,998
|
)
|
(9,356,375
|
)
|
||||
|
$
|
-
|
$
|
-
|
The following table displays a reconciliation from the U.S. statutory rate to the effective tax rate and the provision for
(benefit from) income taxes for the years ended December 31, 2018 and 2017, respectively:
|
2018 |
2017 |
||||||
Tax (expense)/benefit at the US statutory rate of 21% |
$ |
(3,346,623 |
) |
$ |
2,390,872 |
|||
Change in valuation allowance |
3,346,623 |
(2,390,872 |
) |
|||||
|
$ |
- |
$ |
- |
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes.” This standard requires the Company to provide a net
deferred tax asset or liability equal to the expected future tax benefit or expense of temporary reporting differences between book and tax accounting and any available operating loss or tax credit carryforwards.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
During the years ended December 31, 2018 and 2017, the Company recognized no interest and penalties. The Company had no accruals for interest and penalties at December 31, 2018 and 2017.
The tax years 2019, 2018, 2017, and 2016 remain open to examination for federal income tax purposes and by the other major taxing jurisdictions to
which the Company is subject.
NOTE 16 - SUBSEQUENT EVENTS
We have evaluated all events that occurred after the balance sheet date through the date when our financial statements were issued to determine if
they must be reported. Management has determined that other than those listed below, there were no additional reportable subsequent events to be disclosed.
Notes Payable
1.
|
All issued and outstanding membership interests of Brownwick, LLC (“Brownwick”), an Idaho limited liability company
and a wholly owned subsidiary of Seller.
|
2.
|
The assets summarized in the table below. The table reflects the value of the acquired assets as of March 31,
2017. The table sets forth values for the assets of Seller and Brownwick on a consolidated basis.
|
3.
|
Detailed schedules of the assets being acquired are attached hereto as Schedule I.
|
|
March 31
2017 |
|||
ASSETS
|
||||
Current assets:
|
||||
Accounts receivable
|
$
|
32,201
|
||
Accounts receivable – related parties
|
7,843
|
|||
Inventories
|
1,157,555
|
|||
Deposits
|
90,000
|
|||
Prepaid expenses
|
559
|
|||
Total current assets
|
1,288,158
|
|||
Property and equipment, net
|
117,254
|
|||
Intangible assets, net
|
62,820
|
|||
|
||||
Total assets
|
$
|
1,468,232
|
1.
|
The liabilities summarized in the table below. The table reflects the value of the assumed liabilities as of March 31, 2017. The
table sets forth values for the liabilities of Seller and Brownwick, LLC on a consolidated basis.
|
2.
|
Detailed schedules of the liabilities being acquired are attached hereto as Schedule I.
|
|
March 31,
2017 |
|||
|
||||
LIABILITIES
|
||||
Current liabilities:
|
||||
Accounts payable and accrued expenses
|
$
|
625,689
|
||
Accounts payable – related parties
|
29,200
|
|||
Accrued interest payable – related parties
|
24,400
|
|||
Accrued interest payable
|
13,111
|
|||
Notes payable – related parties
|
91,679
|
|||
Notes payable
|
64,000
|
|||
Total current liabilities
|
848,079
|
|||
|
||||
Long-term debt:
|
||||
Note payable
|
135,227
|
|||
Total long-term debt
|
135,227
|
|||
|
||||
Total liabilities
|
983,306
|
$
|
1,000,000
|
December __, 2018
|
a.
|
Events of
Default. “Event of Default,” wherever used herein, means any one of the following events:
|
i.
|
default in the payment of the principal of this Note at its maturity or any interest payment; or
|
ii.
|
the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in
respect of the Obligor in an involuntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Obligor a bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Obligor under any applicable federal or state law, or appointing a custodian, receiver, liquidator, assignee,
trustee, sequestrator or other similar official of the Obligor or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such
other decree or order unstayed and in effect for a period of 60 consecutive days; or
|
iii.
|
the commencement by The Obligor of a voluntary case or proceeding under any applicable federal
or state bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of The Obligor
in an involuntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by
it of a petition or answer or consent seeking reorganization or relief under any applicable federal or state law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver,
liquidator, assignee, trustee, sequestrator or similar official of The Obligor or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its
inability to pay its debts generally as they become due, or the taking of corporate action by The Obligor in furtherance of any such action; or
|
iv.
|
The dissolution of The Obligor; or
|
v.
|
Any representation or warranty made to the Holder by The Obligor pursuant to this Note is false
or misleading in any material respect; or
|
vi.
|
The Obligor fails to observe or perform any material covenant or agreement made by the Obligor
to the Holder pursuant to this Note.
|
b.
|
Acceleration of
Maturity. If any Event of Default occurs and is continuing, then and in every such case the Holder may declare the principal on this Note to be due and payable immediately, by a notice in writing to the Obligor, and upon
any such declaration such principal shall become immediately due and payable.
|
c.
|
Payment of
Expenses. If any part of the Aggregate Balance is not paid when due, or if the Obligor fails to perform any obligation required hereunder, the Obligor shall pay any and all reasonable costs of collection or enforcement of
all outstanding obligations under this Note incurred by the Holder, including reasonable attorneys’ fees and expenses.
|
a.
|
This Note may be amended only by a writing signed by the Obligor and the Holder. All covenants
and agreements in this Note by the Obligor shall bind its successors and assigns.
|
b.
|
In case any provision in this Note shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Specifically, if the interest rate on this Note is deemed to exceed some statutory maximum, the interest rate will be reduced
to the legal maximum.
|
c.
|
The Obligor shall pay any stamp, transfer or other taxes or regulatory fees that may be imposed
on any transaction contemplated by this Note.
|
d.
|
This Note shall be governed by and construed in accordance with the laws of the State of Nevada
without regard to the principles of conflicts of laws thereof.
|
e.
|
This Note constitute the full and entire understanding between the Obligor and the Holder with
respect to the subject matter hereof and thereof.
|
f.
|
This Note is binding on the Obligor, and the Obligor, and all sureties, guarantors and endorsers
hereby waive presentment, demand, notice and protest and any defense by reason of an extension of time for payment or other indulgences. Failure of, or delay by, the Holder to assert any right herein shall not be deemed to be a waiver
thereof, nor shall any such failure or delay on any one or more occasions be deemed to prohibit or waive the same or any other right on any future occasion.
|
1. |
I have reviewed this report on Form 10-K of BlackRidge Technology International, Inc.;
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
|
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
|
Date: April 12, 2019
|
/s/ Robert Graham
|
Robert Graham
|
|
Chief Executive Officer and President
|
1. |
I have reviewed this report on Form 10-K of BlackRidge Technology International, Inc.;
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
|
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
|
Date: April 12, 2019
|
/s/ John Bluher
|
John Bluher
|
|
|
Chief Financial Officer |
April 12, 2019
|
/s/ Robert Graham
|
Robert Graham
|
|
Chief Executive Officer and President
|
April 12, 2019
|
/s/ John Bluher
|
John Bluher
|
|
Chief Financial Officer
|
Consolidated Balance Sheets - Parenthetical - $ / shares |
Dec. 31, 2018 |
Dec. 31, 2017 |
---|---|---|
Details | ||
Preferred Stock, Par or Stated Value Per Share | $ 0.001 | $ 0.001 |
Preferred Stock, Shares Authorized | 10,000,000 | 10,000,000 |
Preferred Stock, Shares Issued | 3,577,370 | 3,639,783 |
Preferred Stock, Shares Outstanding | 3,577,370 | 3,639,783 |
Common Stock, Par or Stated Value Per Share | $ 0.001 | $ 0.001 |
Common Stock, Shares Authorized | 500,000,000 | 500,000,000 |
Common Stock, Shares, Issued | 96,872,725 | 77,063,171 |
Common Stock, Shares, Outstanding | 96,872,725 | 77,063,171 |
Note 1 - Summary of Signicant Accounting Policies |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Notes | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 1 - Summary of Signicant Accounting Policies | NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization BlackRidge Technology International, Inc. (the "Company" or, we, us, our and similar terminology) was incorporated under the laws of the State of Nevada on March 15, 2004 under the name Grote Molen, Inc. The Company develops and markets next generation cyber defense solutions that stop cyber-attacks and block unauthenticated access. The Companys network and server security products are based on patented Transport Access Control technology (the Blackridge Technology) and are designed to isolate, cloak and protect servers and cloud services and segment networks for regulatory compliance. The Companys products are used in enterprise and government computing environments, the industrial internet of things and other cloud service provider and network systems
On September 6, 2016, the Company entered into an agreement and plan of reorganization with BlackRidge Technology International, Inc., a Delaware corporation, and Grote Merger Co., a Delaware corporation providing for the Companys acquisition of BlackRidge in exchange for a controlling number of shares of the Companys preferred and common stock pursuant to the merger of Grote Merger Co. with and into BlackRidge, with BlackRidge continuing as the surviving corporation. The transaction contemplated in the agreement closed on February 22, 2017.
On July 2, 2017, the Company filed a Certificate to Accompany Restated Articles or Amended and Restated Articles with the Secretary of State of Nevada to, among other things, change the Companys name to BlackRidge Technology International, Inc.
On September 22, 2017, the Company formed a new business subsidiary called BlackRidge Secure Blockchain, Inc. to pursue new market opportunities for securing blockchain applications. On August 31, 2018, the Company filed for the dissolution of Blackridge Secure Blockchain Inc. after determining it would not be utilized.
On October 13, 2017, the Company formed a new business subsidiary called BlackRidge Secure Services, Inc. to work with partners on Secure Supervisory Control and Data Acquisition Systems (SCADA) infrastructure and to design and deliver secure systems using BlackRidge Technology products for use by the utilities industry.
Principles of Consolidation - The Company and its subsidiaries consist of the following entities, which have been consolidated in the accompanying financial statements:
BlackRidge Technology International, Inc. BlackRidge Technology Holding, Inc. BlackRidge Technology, Inc. BlackRidge Technology Government, Inc. BlackRidge Secure Services, Inc.
All intercompany balances have been eliminated in consolidation.
Fair Value of Financial Instruments - The Company's financial instruments consist of cash, accounts receivable, prepaid expenses, accounts payable, accrued expenses, notes payable and convertible debt. The carrying amount of these financial instruments approximates fair value because of the short-term nature of these items.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimated by management.
Concentrations - Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The cash balance at times may exceed federally insured limits. Management believes the financial risk associated with these balances is minimal and has not experienced any losses to date. At December 31, 2018 and 2017, the Company had cash balances in excess of FDIC insured limits of $4,110,236 and $169,751.
Significant customers are those which represent more than 10% of the Companys revenue for each period presented, or the Companys accounts receivable balance as of each respective balance sheet date. For each significant customer, revenue as a percentage of total revenue and accounts receivable as a percentage of total net accounts receivable are as follows:
Cash and Cash Equivalents - The Company considers all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts - Accounts receivable represents trade obligations from customers that are subject to normal trade collection terms and are recorded at the invoiced amount, net of any allowance for doubtful accounts, and do not typically bear interest. The Company assesses the collectability of the accounts by taking into consideration the aging of accounts receivable, changes in customer credit worthiness, general market and economic conditions, and historical experience. Bad debt expenses are recorded as part of selling, general and administrative expenses in the consolidated statements of operations. The Company writes off the receivable balance against the allowance when management determines a balance is uncollectible. The Company also reviews its customer discounts and an accrual is made for discounts earned but not yet utilized at each period end. The Company does not believe there to be any question as to the collectability of its receivables as of December 31, 2018 and 2017 and has, therefore, not created an allowance as of this date.
Inventory - Inventory is valued at the lower of cost or market value. Product-related inventories are primarily maintained using the average cost method. When market value is determined to be less than cost, the Company records an allowance for obsolescence. The companys inventory assets December 31, 2018 and 2017 consisted primarily of hardware appliances valued as follows:
Revenue Recognition - We account for product revenue in accordance with Accounting Standards Codification 605, Revenue Recognition, and all related interpretations. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. Revenue generally is recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities.
Revenue recognition for multiple-element arrangements requires judgment to determine if multiple elements exist, whether elements can be accounted for as separate units of accounting, and if so, the fair value for each of the elements.
The Company may enter into arrangements that can include various combinations of software, services, and hardware. Where elements are delivered over different periods of time, and when allowed under U.S. GAAP, revenue is allocated to the respective elements based on their relative selling prices at the inception of the arrangement, and revenue is recognized as each element is delivered. We use a hierarchy to determine the fair value to be used for allocating revenue to elements: (i) vendor-specific objective evidence of fair value ("VSOE"), (ii) third-party evidence, and (iii) best estimate of selling price ("ESP"). For software elements, we follow the industry specific software guidance which only allows for the use of VSOE in establishing fair value. Generally, VSOE is the price charged when the deliverable is sold separately, or the price established by management for a product that is not yet sold if it is probable that the price will not change before introduction into the marketplace. ESPs are established as best estimates of what the selling prices would be if the deliverables were sold regularly on a stand-alone basis. Our process for determining ESPs requires judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable.
Any revenue received that does not yet meet the above recognition standards is recorded to unearned revenue and held as a liability until recognition occurs.
Property and Equipment - Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed on a straight-line basis over the estimated useful lives of the respective assets or, in the case of leasehold improvements, the remaining lease term, if shorter. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed, and the resulting gains or losses are recorded as part of other income or expense in the statements of operations. Repairs and maintenance costs are expensed as incurred.
The estimated useful lives of the property and equipment are as follows:
Intangible Assets - Acquired intangible assets are recorded at estimated fair value, net of accumulated amortization. Costs incurred in obtaining certain patents and intellectual property as well as software development expenses, are capitalized and amortized over their related estimated useful lives, using a straight-line basis consistent with the underlying expected future cash flows related to the specific intangible asset. Costs to renew or extend the life of intangible assets are capitalized and amortized over the remaining useful life of the asset. Amortization expenses are included as a component of selling, general and administrative expenses in the consolidated statements of operations. The Company's continued ability to extend and/or renew the rights associated with these intangible assets may have an impact on future cash flows.
Useful life estimates for the Company's significant intangible asset classes are as follows:
Impairment of Long-Lived Assets - The Company reviews long-lived assets, at least annually, to determine if impairment has occurred and whether the economic benefit of the asset (fair value of assets to be used and fair value less disposal cost for assets to be disposed of) is expected to be less than the carrying value. Triggering events, which signal further analysis, consist of a significant decrease in the asset's market value, a substantial change in the use of an asset, a significant physical change in the asset, a significant change in the legal or business climate that could affect the asset, an accumulation of costs significantly in excess of the amount originally expected to acquire or construct the asset, or a history of losses that imply continued loss associated with assets used to generate revenue.
Earnings (Loss) Per Share The basic computation of loss per share is based on the weighted average number of shares outstanding during the period presented in accordance with ASC 260, "Earnings Per Share. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the period plus the common stock equivalents which would arise from the exercise of stock options and warrants outstanding using the treasury stock method and the average market price per share during the period. Common stock equivalents are not included in the diluted earnings per share calculation when their effect is antidilutive.
Income Taxes - Income taxes are provided in accordance with ASC 740 Accounting for Income Taxes. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carry forwards. Deferred tax expense (benefit) results from the net change during the year of deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of all of the deferred tax assets will be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Provision for income taxes consists of federal and state income taxes in the United States. Due to uncertainty as to the realization of benefits from our deferred tax assets, including net operating loss carry-forwards and other tax credits, we have a full valuation allowance reserved against such assets. We expect to maintain this full valuation allowance at least in the near term.
Share-Based Payments and Stock-Based Compensation Share-based compensation awards, including stock options and restricted stock awards, are recorded at estimated fair value on the applicable awards grant date, based on estimated number of awards that are expected to vest. The grant date fair value is amortized on a straight-line basis over the time in which the awards are expected to vest, or immediately if no vesting is required. Share-based compensation awards issued to non-employees for services are recorded at either the fair value of the services rendered or the fair value of the share-based payments whichever is more readily determinable. The fair value of restricted stock awards is based on the fair value of the stock underlying the awards on the grant date as there is no exercise price.
Recently Enacted Accounting Standards - From time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Companys financial statements upon adoption.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases (ASU 2016-02). The guidance in this new standard requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to the current accounting and eliminates the current real estate-specific provisions for all entities. The guidance also modifies the classification criteria and the accounting for sales-type and direct financing leases for lessors. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-02.
In May 2014, in addition to several amendments issued during 2016, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This pronouncement updated the accounting guidance related to revenue from contracts with customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle is that a company should recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The standard defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. These updates are effective for the Company for its annual period ending December 31, 2019, and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of ASU 2014-09. |
Note 2 - Going Concern |
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Note 2 - Going Concern | NOTE 2 GOING CONCERN
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, during the year ended December 31, 2018 the Company incurred a net loss of $17,150,967 and inception to date losses are equal to $67,047,343. These factors raise substantial doubt about the ability of the Company to continue as a going concern. In this regard, management is proposing to raise any necessary additional funds not provided by operations through investment capital. There is no assurance that the Company will be successful in raising this additional capital or in achieving profitable operations. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. |
Note 3 - Property and Equipment |
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Note 3 - Property and Equipment | NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2018 and 2017:
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Note 4 - Intangible Assets | NOTE 4 INTANGIBLE ASSETS
In accordance with ASC 350-40, ASC 350-50, and ASC 985-20, during the years ended December 31, 2018 and 2017, the Company capitalized $2,332,715 and $1,563,122, respectively, towards the development of software, intellectual property, and patent expenses.
The Company amortizes these costs over their related useful lives (approximately 7 to 20 years), using a straight-line basis. Fair value is determined through various valuation techniques, including market and income approaches as considered necessary. The Company recorded amortization of $455,999 and $443,021 related to intangible assets during years ended December 31, 2018 and 2017, respectively.
Intangible assets consisted of the following at December 31, 2018 and 2017:
Based upon currently launched products, the Company anticipates amortization expense of approximately $480,000 during each of the next five years.
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Note 5 - Notes Payable |
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Note 5 - Notes Payable | NOTE 5 NOTES PAYABLE
Short term notes
At December 31, 2018 and 2017, the Company had outstanding short-term debt totaling $45,232 and $50,232, respectively. These notes bear interest at the rates of between 10% and 12% annually and have maturity dates ranging from January 1, 2012 through December 31, 2014. As these notes have exceeded their initial maturity dates, they are subject to the default interest rate of 15% per annum.
The following table summarizes the Companys short-term notes payable for the years ended December 31, 2018 and 2017:
Short term notes related party
On January 31, 2018, the Companys 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 Companys 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 Companys common stock at a rate of $0.25 per share. Additionally, as part of the conversion, additional warrants to purchase 437,500 shares of common stock were issued and all warrants related to this note were repriced to reflect an exercise price of $0.25 per share. The value of these additional warrants and the lowered conversion totaled $58,250 which the Company recorded as a loss on extinguishment of debt.
Long term notes
On November 2, 2016 the Company entered into settlement agreements with two holders of convertible debt and other payables in which the Company agreed to issue new long-term debt agreements as settlement of amounts due. Pursuant to these agreements, the Company issued two non-interest bearing $600,000 notes payable in 36 equal installments of 16,667 beginning on January 1, 2017 and Maturing on December 1, 2019.
The following table summarizes the Companys long-term notes payable for the years ended December 31, 2018 and 2017:
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Note 6 - Convertible Notes | NOTE 6 CONVERTIBLE NOTES
Short term convertible notes
On January 31, 2018, the Company issued a $100,000 convertible note bearing interest at 8% per annum. The note matures on February 28, 2019 and is convertible into the Companys Series B Preferred Stock at a price of $0.32 per share at the holders request. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 312,500 shares of the Companys common stock at an exercise price of $0.32 per share. The Company has determined the note to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $88,219 based on the intrinsic per share value of the conversion feature, and the warrants at $46,991 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $68,021 and $31,969, respectively. At December 31, 2018, the principal balance was still outstanding and is included on the Companys consolidated balance sheets net of discounts at $45,938. The Company had accrued interest for this note in the amount of $7,321, which is included in accrued interest on the Companys consolidated balance sheets.
On February 23, 2018, the Company issued a $1,000,000 convertible note bearing interest at 9% per annum. The note matures on February 29, 2019 and is convertible, as amended, into the Companys Series B Preferred Stock at a price of $0.25 per share at the holders request. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 3,125,000 shares of the Companys common stock at an exercise price of $0.32 per share. The Company has determined the note to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $417,757 based on the intrinsic per share value of the conversion feature, and the warrants at $540,553 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $417,757 and $350,882, respectively. At December 31, 2018, the principal balance was still outstanding and is included on the Companys consolidated balance sheets net of discounts at $791,651. The Company had accrued interest for this note in the amount of $76,685, which is included in accrued interest on the Companys consolidated balance sheets.
On February 27, 2018, the Company issued a $1,000,000 convertible note bearing interest at 9% per annum. The note matures on February 29, 2019 and is convertible, as amended, into the Companys Series B Preferred Stock at a price of $0.25 per share at the holders request. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 3,125,000 shares of the Companys common stock at an exercise price of $0.32 per share. The Company has determined the note to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $444,923 based on the intrinsic per share value of the conversion feature, and the warrants at $541,244 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $444,923 and $351,173, respectively. At December 31, 2018, the principal balance was still outstanding and is included on the Companys consolidated balance sheets net of discounts at $773,571. The Company had accrued interest for this note in the amount of $75,699, which is included in accrued interest on the Companys consolidated balance sheets.
On April 18, 2018, the Company issued a $2,000,000 convertible note bearing interest at 9% per annum. The note matures on April 18, 2019 and is convertible, as amended, into the Companys Series B Preferred Stock at a price of $0.25 per share at the holders request. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 6,250,000 shares of the Companys common stock at an exercise price of $0.32 per share. The Company has determined the note to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $1,510,980 based on the intrinsic per share value of the conversion feature, and the warrants at $1,073,331 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $1,301,510 and $698,480, respectively. At December 31, 2018, the principal balance was still outstanding and is included on the Companys consolidated balance sheets net of discounts at $51,049. The Company had accrued interest for this note in the amount of $126,740, which is included in accrued interest on the Companys consolidated balance sheets.
On May 4, 2018, the Company issued an aggregate $1,500,000 in convertible notes bearing interest at 9% per annum. These notes mature on May 31, 2019 and are convertible, as amended, into the Companys Series B Preferred Stock at a price of $0.25 per share at the holders request. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 4,687,500 shares of the Companys common stock at an exercise price of $0.25 per share. The Company has determined the note to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $1,133,680 based on the intrinsic per share value of the conversion feature, and the warrants at $806,050 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $975,685 and $524,305, respectively. At December 31, 2018, the principal balances were still outstanding and is included on the Companys consolidated balance sheets net of discounts at an aggregate $15,248. The Company had accrued interest for these notes in the amount of $89,140, which is included in accrued interest on the Companys 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 Companys Series B Preferred Stock at a price of $0.25 per share at the holders request. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 3,213,356 shares of the Companys common stock at an exercise price of $0.25 per share. The Company has determined the note to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $835,295 based on the intrinsic per share value of the conversion feature, and the warrants at $538,207 using the Black-Scholes pricing model. The Company has allocated the note proceeds based relative on fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $674,972 and $353,292, respectively. At December 31, 2018, the principal balance was still outstanding and is included on the Companys consolidated balance sheets net of discounts at $11,388. The Company had accrued interest for this note in the amount of $59,837, which is included in accrued interest on the Companys 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 Companys Series B Preferred Stock at a price of $0.25 per share at the holders request. The noteholders were also granted detachable 5 year warrants to purchase an aggregate of 8,000,000 shares of the Companys common stock at an exercise price of $0.25 per share. The Company has determined the notes to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $1,307,658 based on the intrinsic per share value of the conversion feature, and the warrants at $1,354,741 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $1,192,302 and $807,658, respectively. At December 31, 2018, the principal balances were still outstanding and are included on the Companys consolidated balance sheets net of discounts at an aggregate $6,828. The Company had accrued interest for these notes in the amount of $87,781, which is included in accrued interest on the Companys consolidated balance sheets.
On July 10, 2018, the Company issued a $32,000 convertible note bearing interest at 9% per annum. This note matures on July 31, 2019 and is convertible into the Companys Series B Preferred Stock at a price of $0.32 per share at the holders request. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 128,000 shares of the Companys common stock at an exercise price of $0.25 per share. The Company has determined the note to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $15,005 based on the intrinsic per share value of the conversion feature, and the warrants at $21,711 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $15,005 and $12,935, respectively. At December 31, 2018, the principal balance was still outstanding and is included on the Companys consolidated balance sheets net of discounts at an aggregate $10,858. The Company had accrued interest for these notes in the amount of $1,373, which is included in accrued interest on the Companys 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 Companys Series B Preferred Stock at a price of $0.32 per share at the holders request. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 800,000 shares of the Companys common stock at an exercise price of $0.25 per share. The Company has determined the note to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $68,266 based on the intrinsic per share value of the conversion feature, and the warrants at $135,474 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $68,266 and $80,766, respectively. At December 31, 2018, the principal balance was still outstanding and is included on the Companys consolidated balance sheets net of discounts at an aggregate $96,693. The Company had accrued interest for these notes in the amount of $8,433, which is included in accrued interest on the Companys consolidated balance sheets.
On September 17, 2018, the Company issued an aggregate $3,000,000 in convertible notes bearing interest at 9% per annum. The notes mature on September 17, 2019 and are convertible into the Companys Series B Preferred Stock at a price of $0.25 per share at the holders request. The noteholders were also granted detachable 7 year warrants to purchase an aggregate of 12,000,000 shares of the Companys common stock at an exercise price of $0.25 per share. The Company has determined the notes to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $2,921,170 based on the intrinsic per share value of the conversion feature, and the warrants at $1,617,415 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $1,949,132 and $1,050,858, respectively. Additionally, as further inducement to write this this note, the Company agreed to grant all of the investors existing notes as well as several other existing noteholders with relationships to the investor the same terms on their existing debt that this debt carries. These new terms were required to write the notes, therefore, the Company has accounted them as a discount on this note, the value of which is included in the beneficial conversion value. At December 31, 2018, the principal balance was still outstanding and is included on the Companys consolidated balance sheets net of discounts at an aggregate $383. The Company had accrued interest for these notes in the amount of $77,671, which is included in accrued interest on the Companys consolidated balance sheets.
On December 4, 2018, the Company issued an aggregate $3,000,000 in convertible notes bearing interest at 9% per annum. The notes mature on December 4, 2019 and are convertible into the Companys Series B Preferred Stock at a price of $0.25 per share at the holders request. The noteholders were also granted detachable 7 year warrants to purchase an aggregate of 12,000,000 shares of the Companys 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 Companys common stock. The Company has determined the notes to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $2,248,088 based on the intrinsic per share value of the conversion feature, the warrants at $1,589,454 using the Black-Scholes pricing model, and the stock at $1,346,000. The Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature, warrants, and stock as a discount to the debt in the amount of $1,516,302, $803,369 and $680,319, respectively. At December 31, 2018, the principal balance was still outstanding and is included on the Companys consolidated balance sheets net of discounts at an aggregate $76. The Company had accrued interest for these notes in the amount of $19,973, which is included in accrued interest on the Companys 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 Companys Series B Preferred Stock at a price of $0.25 per share at the holders request. The noteholders were also granted detachable 7 year warrants to purchase an aggregate of 12,000,000 shares of the Companys common stock at an exercise price of $0.25 per share. The Company has determined the notes to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $555,512 based on the intrinsic per share value of the conversion feature, and the warrants at $1,581,347 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $555,512 and $1,035,512, respectively. At December 31, 2018, the principal balance was still outstanding and is included on the Companys consolidated balance sheets net of discounts at an aggregate $1,445,063. The Company had accrued interest for these notes in the amount of $8,877, which is included in accrued interest on the Companys consolidated balance sheets.
Short term convertible notes related party
On October 31, 2013, the Company agreed to convert balances owed to the Companys corporate counsel in the amount of $183,172 into a 42 month convertible note bearing interest at 12% annually and convertible into 203,525 shares of convertible preferred stock at the rate of $0.90 per share. At December 31, 2018, the principal balance was still outstanding, and the Company had accrued interest for this note in the amount of $177,419 which is included in accrued interest related party on the Companys 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 Companys 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 Companys 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 Companys common stock. The Company recognized a loss on extinguishment of debt of $384,200 related to the decrease in conversion price and warrants granted.
On July 6, 2018, the Company issued a $200,000 in convertible notes bearing interest at 9% per annum to John Hayes, the Companys Chief Technology Officer, Director and significant shareholder. This note matures on July 31, 2019 and is convertible into the Companys Series B Preferred Stock at a price of $0.32 per share at the holders request. The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 800,000 shares of the Companys common stock at an exercise price of $0.25 per share. The Company has determined the note to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $130,766 based on the intrinsic per share value of the conversion feature, and the warrants at $135,474 using the Black-Scholes pricing model. The Company has allocated the note proceeds based on relative fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $119,224 and $80,766, respectively. On September 30, 2018, the note along with interest of $4,192 was converted into 816,767 shares of the Companys 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 Companys Series B Preferred Stock at a price of $0.32 per share at the holders request. The Company has determined the note to contain a beneficial conversion feature. The Company valued the beneficial conversion feature at $15,005 based on the intrinsic per share value of the conversion feature, and the warrants at $21,711 using the Black-Scholes pricing model. The Company has allocated the note proceeds based relative on fair value and has recorded the value of the beneficial conversion feature and warrants as a discount to the debt in the amount of $15,005 and $12,935, respectively. On September 30, 2018, the note along with interest of $639 was converted into 130,556 shares of the Companys common stock at a rate of $0.25 per share. The Company recognized a loss on extinguishment of debt of $8,960 related to the decrease in conversion price.
Long term convertible notes
On December 21, 2017, the Company issued a $150,000 convertible note bearing interest at 8% per annum. The note matures on December 21, 2019 and is convertible into the Companys Series B Preferred Stock at a price of $0.32 per share at the holders 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 companys common stock at an exercise price of $0.32 per share. The warrants were valued at $69,935 using the Black-Scholes pricing model and were recorded as a discount to the note. At December 31, 2018 the principal balance was still outstanding and is included on the Companys consolidated balance sheets net of discounts at $39,726. The Company had accrued interest for this note in the amount of $12,329, which is included in accrued interest on the Companys consolidated balance sheets.
On December 22, 2017, the Company issued a $1,000,000 convertible note bearing interest at 8% per annum. The note matures on December 22, 2019 and is convertible into the Companys Series B Preferred Stock at a price of $0.32 per share at the holders 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 companys 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 Companys Chief Technology Officer and significant shareholder of the Company loaned a total of $2,673,200 to the Company. On October 1, 2014, all prior notes including accrued interest were combined into a single $3,712,637 convertible note bearing interest at 12% annually and convertible into 4,125,154 shares of preferred stock at the rate of $0.90 per share. On November 9, 2017, the Company converted the note and accrued interest of $1,665,991 into 10,757,254 shares of the Companys 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 Companys 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 Companys convertible notes payable for the years ended December 31, 2018 and 2017:
The following table summarizes the Companys convertible notes payable as of December 31, 2018:
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Note 7 - Commitments and Contingencies |
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Note 7 - Commitments and Contingencies | NOTE 7 COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases approximately 7,579 square feet of office space under a 62 month operating lease which expires during April 2023. The amounts reflected in the table below are for the aggregate future minimum lease payments under the non-cancelable facility operating leases. Under lease agreements that contain escalating rent provisions, lease expense is recorded on a straight-line basis over the lease term.
The Company also leases office space under a 23 month operating lease which expires during August 2019. The amounts reflected in the table below are for the aggregate future minimum lease payments under the non-cancelable facility operating leases. Under lease agreements that contain escalating rent provisions, lease expense is recorded on a straight-line basis over the lease term.
The Company also leases approximately 202 square feet of office space under a 12 month operating lease which originally expired in 2016. The lease was renewed to May 2019, and is renewable at the Companys option annually at a flat monthly amount of $400. The amounts reflected in the table below are for the aggregate future minimum lease payments under the non-cancelable facility operating leases
Rent expense was $287,649 and $186,640 for the years ended December 31, 2018 and 2017, respectively.
As of December 31, 2018, future minimum lease payments are as follows:
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 consultants invoices for the previous four months would be accrued as a liability to be paid out upon (a) the Companys successful raising of $10,000,000 in capital funding, or (b) the Company reaching total revenues of $10,000,000. The Company had a balance due under this agreement of $37,500 December 31, 2017. In 2018, the Company reached its capital funding threshold under the agreement and reclassified the entire $37,500 liability to a payable.
Legal Proceedings
On December 2, 2016, AltEnergy Cyber, LLC ("Plaintiff") instituted a legal action in Connecticut against the Company and Robert Zahm. The complaint alleged that (i) the Company improperly extended the maturity date of the Plaintiffs convertible note in the amount of $1,500,000 and (ii) improperly converted the loan into the Companys stock. The Complaint alleges that the Company is liable to the Plaintiff for $4,500,000 plus interest. During the year ended December 31, 2017, Robert Zahm was dismissed from the proceedings for lack of personal jurisdiction. On March 29, 2018, the AltEnergy Cyber, LLCs legal action was dismissed through a motion for summary judgement. |
Note 8 - Related Party Transactions |
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Note 8 - Related Party Transactions | NOTE 8 - RELATED PARTY TRANSACTIONS
During the years ended December 31, 2018 and 2017, the Company incurred interest expense on notes to related parties in the aggregate amount of $525,785 and $604,145, respectively (see Note 6 Convertible Notes).
Accounts payable related party
At December 31, 2018 and December 31, 2017, the Company had a balance in related party accounts payable of $9,690 and $68,060, respectively, which consisted of the following:
Advances from related party
During the year ended December 31, 2018, the Company received advances of $50,000 from Mag Ventures, a company controlled by Tom Bruderman, a director and shareholder. These advances along with the previous balance were converted into 460,000 shares of the Companys common stock at a price of $0.25 per share on November 9, 2018.
During the year ended December 31, 2018, the Company received advances of $25,000 from J. Allen Kosowsky, a director and shareholder. These advances were converted into 78,125 shares of the Companys common stock at a price of $0.32 per share on September 13, 2018.
At December 31, 2018 and December 31, 2017, the Company had a balance in related party advances of $0 and $65,000, respectively, which consisted of the following:
Related Party Notes
During the year ended December 31, 2018, the Company issued notes and converted notes to related parties, see Note 5 Notes Payable, and Note 6 Convertible Notes for full disclosure. |
Note 9 - Stockholders' Equity |
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Note 9 - Stockholders' Equity | NOTE 9 - STOCKHOLDERS EQUITY
The Company has authorized 200 million shares of common stock, $0.001 par value, and 10 million shares of preferred stock, $0.001 par value. Each share of the Companys preferred stock is convertible into 10 shares of common stock, subject to adjustment, has voting rights equal to its common stock equivalent, 7% cumulative dividend rights, and has liquidation rights that entitle the recipient to the receipt of net assets on a pro-rata basis. The Company has 96,872,725 and 77,063,171 common shares issued and outstanding and 3,577,370 and 3,639,783 preferred shares issued and outstanding as of December 31, 2018 and 2017, respectively.
During the year ended December 31, 2018, the Company issued an aggregate 1,771,666 shares of the Companys common stock pursuant to consulting contracts valued at $614,546, or an average of $0.35 per share.
During the year ended December 31, 2018, the Company converted an aggregate 62,413 shares of the Companys Series A preferred stock into 789,048 shares of the Companys common stock after receiving conversion exercises from multiple preferred stockholders.
On June 13, 2018, the Company converted a $25,000 advance from related party and Director J Allen Kosowsky into 78,125, shares of the Companys common stock at a price of $0.32 per share (see Note 8 Related Party Transactions).
On September 30, 2018, the Company issued an aggregate 2,935,818 shares of the Companys 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 Companys Chief Technology Officer and Director, John Hayes, into 4,645,082 shares of the Companys common stock at a price of $0.25 per share (see additional information in Note 5 Notes Payable and Note 6 Convertible Notes).
On September 30, 2018, The Company converted notes payable and interest valued at $32,639 and due to the Companys Director, J Allen Kosowsky, into 130,556 shares of the Companys common stock at a price of $0.25 per share (see additional information in Note 5 Notes Payable and Note 6 Convertible Notes).
On November 9, 2018, the Company converted a $115,000 advance from Mag Ventures, a company controlled by Tom Bruderman, a director and shareholder, into 460,000, shares of the Companys common stock at a price of $0.25 per share (see Note 8 Related Party Transactions).
During the year ended December 31, 2018, the Company accepted the return of 338,200 shares of its common stock. Upon receipt, the shares were retired to the treasury.
During the year ended December 31, 2018, the Company issued an aggregate 661,071 shares of the Companys common stock valued at $228,800 as satisfaction of payables in the amount of $241,067. The company recognized gain on settlement of $12,267 in relation to these transactions.
On February 22, 2017, we completed the actions contemplated by the Reorganization Agreement (see Note 13 Business Acquisition and Note 14 Discontinued Operations) and merged with and into BlackRidge with BlackRidge continuing as the surviving corporation. Upon completion of the Agreement, the Company issued 3,783,791 shares of its newly designated Series A Preferred Stock and 12,825,683 shares of common stock to the stockholders of BlackRidge in exchange for all the issued and outstanding shares of Series A Preferred Stock and Common Stock of BlackRidge. Because BlackRidge continues as the surviving entity, the net effect from this transaction on the outstanding stock of the Company was the addition of 8,965,000 shares of common stock held by the investors of the Company at the time of the acquisition.
Between January 13, 2017 and February 27, 2017, the Company issued 62,502 shares of the Company's preferred stock along with 5 year warrants to purchase 625,000 shares of the Company's common stock at an exercise price per share of $0.70 to several investors for aggregate proceeds of $375,000, or $0.60 per share. The warrants were valued at $104,765 using the Black-Scholes pricing model.
Between February 27, 2017 and August 29, 2017, the Company issued 10,364,121 shares of the Company's common stock and 5 year warrants to purchase 6,755,291 shares of the Company's common stock at an average exercise price per share of $0.51 to several investors for aggregate proceeds of $4,666,453. The warrants were valued at $1,248,536 using the Black-Scholes pricing model. The Company paid consultant and business development fees of $89,000 related to these issuances.
On February 2, 2017, the Company issued warrants to purchase 166,667 shares of the Company's common stock at an exercise price of $0.60 per share in conjunction with a debt agreement. The warrants were valued at $31,002 using the Black-Scholes pricing model and were recorded as a discount to the debt agreement.
Between February 9, 2017 and March 6, 2017, the Company issued warrants to purchase 150,001 shares of the Company's common stock at an exercise price per share of $0.60 to several parties in conjunction with short term notes and advances. The warrants were valued at $27,945 using the Black-Scholes pricing model and were recorded to additional paid in capital.
On March 31, 2017, the Company issued 1,000,000 shares of the Company's common stock in connection with the exercise of a warrant to purchase shares at $0.01 per share. The Company received $10,000 in proceeds for the warrant exercise.
Between August 29, 2017 and November 16, 2017, the Company converted an aggregate 144,035 shares of the Company's preferred stock into 1,568,862 shares of the Company's common stock after receiving conversion exercises from preferred stockholders.
Between August 31, 2017 and September 25, 2017, the Company issued 7,700,000 shares of the Company's common stock and 5 year warrants to purchase 7,700,000 shares of the Company's common stock at an exercise price per share of $0.50 to several investors for aggregate proceeds of $3,850,000. The warrants were valued at $1,800,288 using the Black-Scholes pricing model.
On September 11, 2017, the Company issued an aggregate 22,064,105 shares of the Company's common stock to satisfy $13,238,453 in wages payable at a per share price of $0.60. The stock contains a 10 month restriction on transfers and/or sales.
Between September 11, 2017 and September 27, 2017, the Company issued an aggregate 462,740 shares of the Company's common stock as settlement of contracts valued at $231,370 at a per share price of $0.50.
On October 31, 2017, the Company issued 55,556 shares of the Company's common stock in connection with the exercise of a warrant to purchase shares at $0.60 per share. The Company received $33,334 in proceeds for the warrant exercise.
On November 9, 2017, the Company issued 10,757,254 shares of the Company's common stock for the conversion of a note payable and accrued interest totaling $5,378,628. The Company also issued 5 year warrants to purchase an additional 5,378,627 shares of the Company's common stock at a price of $0.50. These warrants were valued at $913,238 which was recorded as a loss on extinguishment of debt.
On November 9, 2017, the Company issued an aggregate 388,726 shares of the Company's common stock to satisfy $233,235 in accrued accounts payable at a per share price of $0.60. The stock contains a 10 month restriction on transfers and/or sales.
On October 1, 2017, the Company issued 50,000 shares of the Company's common stock valued at $22,500 or $0.45 per share, along with warrants to purchase 100,000 shares of the Company's common stock at a price of $0.60 per share pursuant to a consulting contract.
Between December 1, 2017 and December 17, 2017, the Company issued an aggregate 610,126 shares of the company's common stock valued at $438,500 or an average of $0.72 pursuant to several consulting contracts.
On December 15, 2017, the Company issued 225,000 shares of the Company's common stock and 5 year warrants to purchase 56,250 shares of the Company's common stock at an exercise price per share of $0.32 to an investor for aggregate proceeds of $90,000. The warrants were valued at $8,365 using the Black-Scholes pricing model. |
Note 10 - Share Based Compensation |
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Note 10 - Share Based Compensation | NOTE 10 SHARE BASED COMPENSATION
During the year ended December 31, 2018, the Company issued 10,390,741 5-year options to purchase common stock to employees and directors under the 2017 Stock Incentive Plan. The options were valued at $1,522,580 using the Black-Scholes pricing model. As of December 31, 2018, the total unrecognized expense for unvested share based compensation is $2,000,971. The 2017 Stock Incentive Plan allows for a maximum 25,000,000 shares to be issued, of which 8,053,574 shares remain available for issuance as of December 31, 2018. The company recognized stock option expense during the years ended December 31, 2018 and 2017 of $1,271,301 and $110,100, respectively.
The fair values at the commitment date for the options were based upon the following management assumptions as of December 31, 2018:
The activity of options granted to during the year ended December 31, 2018 is as follows:
The Companys outstanding employee options at December 31, 2018 are as follows:
The weighted average fair value per option issued during the year ended December 31, 2018 was $0.16.
The following table summarizes non-vested option activity during the year ended December 31, 2018:
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NOTE 11 - WARRANTS |
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NOTE 11 - WARRANTS | NOTE 11 WARRANTS
During the year ended December 31, 2018, the Company issued an aggregate 71,355,856 warrants to purchase common stock in conjunction with convertible debt agreements and cancelled an aggregate 4,687,500 warrants in conjunction with debt settlements and extinguishment (see note 6 - convertible notes). The company also agreed to cancel and re- issue 2,400,000 warrants at new terms in conjunction with a private stock and warrant sale. In order to facilitate this transaction, the Company agreed to cancel 2,400,000 warrants to purchase stock at $0.70 per share, and reissue the repriced warrants at 1,200,000 warrants to purchase common stock at $0.25 per share, and 1,200,000 warrants to purchase common stock at $0.50. The Company valued the new warrants at $100,306 using the Black Scholes pricing model, which is included in selling, general and administrative expense on the Companys 2018 statement of profit and loss
The fair values at the commitment date for the warrants were based upon the following management assumptions as of December 31, 2018:
The activity of warrants granted to during the year ended December 31, 2018 is as follows:
The Companys outstanding warrants at December 31, 2018 are as follows:
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NOTE 12 - EARNINGS (LOSS) PER SHARE |
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Notes | |||||||||||||||||||||||||
NOTE 12 - EARNINGS (LOSS) PER SHARE | NOTE 12 EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period.
Since the Company reflected a net loss for the years ended December 31, 2018 and 2017, respectively, the effect of considering any common stock equivalents, if exercisable, would have been anti-dilutive. Therefore, a separate computation of diluted earnings (loss) per share is not presented.
The Company has the following common stock equivalents as of December 31, 2018 and 2017:
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Note 13 - Business Acquisition |
12 Months Ended |
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Dec. 31, 2018 | |
Notes | |
Note 13 - Business Acquisition | NOTE 13 BUSINESS ACQUISITION
On September 6, 2016, the Company and BlackRidge entered into an Agreement and Plan of Reorganization (the Reorganization Agreement) originally dated as of September 6, 2016, and amended on February 22, 2017 to update the number of common shares, warrants, and options granted and outstanding as of the closing date.
On February 22, 2017, we completed the actions contemplated by the Reorganization Agreement and merged with and into BlackRidge with BlackRidge continuing as the surviving corporation (Reorganization). Upon completion of the Agreement, we issued 3,783,791 shares of our newly designated Series A Preferred Stock and 12,825,683 shares of Common Stock to the stockholders of BlackRidge in exchange for all the issued and outstanding shares of Series A Preferred Stock and Common Stock of BlackRidge. Additionally, certain stockholders of BlackRidge returned for cancellation a total of 16,284,330 shares of our Common Stock. Upon the completion of the Reorganization, BlackRidge became a wholly-owned subsidiary of the Company and the Company had a total of 3,783,791 shares of Series A Preferred Stock and 21,790,683 shares of Common Stock outstanding, with the former BlackRidge stockholders owning 3,783,791 shares or 100% of Series A Preferred Stock and 12,825,683 shares or approximately 58.9% of Common Stock. Upon completion of the Reorganization, we also had outstanding warrants entitling the holders to acquire a total of 18,541,579 shares of the Companys Common Stock at an average exercise price of $0.46 per share. The Reorganization resulted in a change of control of the Company. For accounting purposes, BlackRidge was treated as the acquirer and the historical financial statements of BlackRidge became the Companys historical financial statements. The acquisition is intended to constitute a tax-free reorganization pursuant to the applicable provisions of the Internal Revenue Code of 1986, as amended. |
Note 14 - Discontinued Operations |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
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Notes | |||||||||||||||||||||||||||||||||||||||||||||||||
Note 14 - Discontinued Operations | NOTE 14 DISCONTINUED OPERATIONS
On March 31, 2017, the Company completed the sale of substantially all the assets, other than cash, used in or connection with the Company's home grain mill and kitchen mixer business to John Hofman and Bruce Crane, former officers and directors of the Company, in consideration for the assumption by such persons of substantially all the liabilities incurred by the Company in connection with such business. The assets divested consisted of the non-cybersecurity assets of the Company and included accounts receivable, inventory, deposits, property and equipment and intangible assets. The liabilities divested included the non-cybersecurity liabilities of the Company and included accounts payable and accrued expenses and long and short-term notes payable and accrued interest thereon. Upon completion of the divestiture, the Company recognized a $484,927 loss on disposal. Additionally, during the period from February 22, 2017 through March 31, 2017, the Company incurred a loss from discontinued operations of $8,737.
The following table shows the value of assets and liabilities divested:
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Note 15 - Income Taxes |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Note 15 - Income Taxes | NOTE 15 INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due. Deferred taxes relate to differences between the basis of assets and liabilities for financial and income tax reporting which will be either taxable or deductible when the assets or liabilities are recovered or settled.
At December 31, 2018 and 2017, the Company had net operating loss (NOL) carry-forwards for Federal income tax purposes approximating $51,417,242 and $34,394,555 respectively. At December 31, 2018 and 2017, the Companys NOL carry-forwards for state income purposes are approximating $59,104,026 and $26,508,562, respectively. These losses are available for future years and expire through 2037. The Federal NOL generated for the tax year ended 12/31/2018 of $11,491,743 will not expire due to NOLs having an indefinite life as enacted in the 2017 Tax Cuts and Jobs Act.
The deferred tax asset at December 31, 2018 and 2017 is summarized as follows:
The Company has taken a 100% valuation allowance against the deferred asset attributable to the NOL carry-forwards and other temporary differences of approximately $12,702,998 and $9,356,375 at December 31, 2018 and 2017, respectively, due to the uncertainty of realizing the future tax benefits. The decrease and increase in valuation allowances for the years ended December 31, 2018 and 2017 of approximately $3,346,623 and ($2,390,872), respectively, are primarily attributable to the Companys net operating loss during the years then ended, and true ups for state NOLs .
The following table displays a reconciliation from the U.S. statutory rate to the effective tax rate and the provision for (benefit from) income taxes for the years ended December 31, 2018 and 2017, respectively:
The Company accounts for income taxes in accordance with ASC 740, Income Taxes. This standard requires the Company to provide a net deferred tax asset or liability equal to the expected future tax benefit or expense of temporary reporting differences between book and tax accounting and any available operating loss or tax credit carryforwards.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the years ended December 31, 2018 and 2017, the Company recognized no interest and penalties. The Company had no accruals for interest and penalties at December 31, 2018 and 2017.
The tax years 2019, 2018, 2017, and 2016 remain open to examination for federal income tax purposes and by the other major taxing jurisdictions to which the Company is subject. |
Note 16 - Subsequent Events |
12 Months Ended |
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Dec. 31, 2018 | |
Notes | |
Note 16 - Subsequent Events | NOTE 16 - SUBSEQUENT EVENTS
We have evaluated all events that occurred after the balance sheet date through the date when our financial statements were issued to determine if they must be reported. Management has determined that other than those listed below, there were no additional reportable subsequent events to be disclosed.
Notes Payable
In February 2019, the convertible notes issued on February 23, 2018 and February 27, 2018 for $1,000,000 reached their initial maturity date. The Company is currently in the process of extending the maturity date of these notes.
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Note 1 - Summary of Signicant Accounting Policies: Principles of Consolidation (Policies) |
12 Months Ended |
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Dec. 31, 2018 | |
Policies | |
Principles of Consolidation | Principles of Consolidation - The Company and its subsidiaries consist of the following entities, which have been consolidated in the accompanying financial statements:
BlackRidge Technology International, Inc. BlackRidge Technology Holding, Inc. BlackRidge Technology, Inc. BlackRidge Technology Government, Inc. BlackRidge Secure Services, Inc.
All intercompany balances have been eliminated in consolidation. |
Note 1 - Summary of Signicant Accounting Policies: Fair Value of Financial Instruments, Policy (Policies) |
12 Months Ended |
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Dec. 31, 2018 | |
Policies | |
Fair Value of Financial Instruments, Policy | Fair Value of Financial Instruments - The Company's financial instruments consist of cash, accounts receivable, prepaid expenses, accounts payable, accrued expenses, notes payable and convertible debt. The carrying amount of these financial instruments approximates fair value because of the short-term nature of these items. |
Note 1 - Summary of Signicant Accounting Policies: Use of Estimates (Policies) |
12 Months Ended |
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Dec. 31, 2018 | |
Policies | |
Use of Estimates | Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimated by management. |
Note 1 - Summary of Signicant Accounting Policies: Concentrations (Policies) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Policies | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Concentrations | Concentrations - Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The cash balance at times may exceed federally insured limits. Management believes the financial risk associated with these balances is minimal and has not experienced any losses to date. At December 31, 2018 and 2017, the Company had cash balances in excess of FDIC insured limits of $4,110,236 and $169,751.
Significant customers are those which represent more than 10% of the Companys revenue for each period presented, or the Companys accounts receivable balance as of each respective balance sheet date. For each significant customer, revenue as a percentage of total revenue and accounts receivable as a percentage of total net accounts receivable are as follows:
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Note 1 - Summary of Signicant Accounting Policies: Cash and Cash Equivalents (Policies) |
12 Months Ended |
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Dec. 31, 2018 | |
Policies | |
Cash and Cash Equivalents | Cash and Cash Equivalents - The Company considers all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents. |
Note 1 - Summary of Signicant Accounting Policies: Accounts Receivable and Allowance for Doubtful Accounts (Policies) |
12 Months Ended |
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Dec. 31, 2018 | |
Policies | |
Accounts Receivable and Allowance for Doubtful Accounts | Accounts Receivable and Allowance for Doubtful Accounts - Accounts receivable represents trade obligations from customers that are subject to normal trade collection terms and are recorded at the invoiced amount, net of any allowance for doubtful accounts, and do not typically bear interest. The Company assesses the collectability of the accounts by taking into consideration the aging of accounts receivable, changes in customer credit worthiness, general market and economic conditions, and historical experience. Bad debt expenses are recorded as part of selling, general and administrative expenses in the consolidated statements of operations. The Company writes off the receivable balance against the allowance when management determines a balance is uncollectible. The Company also reviews its customer discounts and an accrual is made for discounts earned but not yet utilized at each period end. The Company does not believe there to be any question as to the collectability of its receivables as of December 31, 2018 and 2017 and has, therefore, not created an allowance as of this date. |
Note 1 - Summary of Signicant Accounting Policies: Inventory, Policy (Policies) |
12 Months Ended | ||||||||||||||||||||||||||||
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Policies | |||||||||||||||||||||||||||||
Inventory, Policy | Inventory - Inventory is valued at the lower of cost or market value. Product-related inventories are primarily maintained using the average cost method. When market value is determined to be less than cost, the Company records an allowance for obsolescence. The companys inventory assets December 31, 2018 and 2017 consisted primarily of hardware appliances valued as follows:
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Note 1 - Summary of Signicant Accounting Policies: Revenue Recognition, Policy (Policies) |
12 Months Ended |
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Dec. 31, 2018 | |
Policies | |
Revenue Recognition, Policy | Revenue Recognition - We account for product revenue in accordance with Accounting Standards Codification 605, Revenue Recognition, and all related interpretations. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. Revenue generally is recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities.
Revenue recognition for multiple-element arrangements requires judgment to determine if multiple elements exist, whether elements can be accounted for as separate units of accounting, and if so, the fair value for each of the elements.
The Company may enter into arrangements that can include various combinations of software, services, and hardware. Where elements are delivered over different periods of time, and when allowed under U.S. GAAP, revenue is allocated to the respective elements based on their relative selling prices at the inception of the arrangement, and revenue is recognized as each element is delivered. We use a hierarchy to determine the fair value to be used for allocating revenue to elements: (i) vendor-specific objective evidence of fair value ("VSOE"), (ii) third-party evidence, and (iii) best estimate of selling price ("ESP"). For software elements, we follow the industry specific software guidance which only allows for the use of VSOE in establishing fair value. Generally, VSOE is the price charged when the deliverable is sold separately, or the price established by management for a product that is not yet sold if it is probable that the price will not change before introduction into the marketplace. ESPs are established as best estimates of what the selling prices would be if the deliverables were sold regularly on a stand-alone basis. Our process for determining ESPs requires judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable.
Any revenue received that does not yet meet the above recognition standards is recorded to unearned revenue and held as a liability until recognition occurs. |
Note 1 - Summary of Signicant Accounting Policies: Property, Plant and Equipment, Policy (Policies) |
12 Months Ended | |||||||||||||||
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Dec. 31, 2018 | ||||||||||||||||
Policies | ||||||||||||||||
Property, Plant and Equipment, Policy | Property and Equipment - Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed on a straight-line basis over the estimated useful lives of the respective assets or, in the case of leasehold improvements, the remaining lease term, if shorter. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed, and the resulting gains or losses are recorded as part of other income or expense in the statements of operations. Repairs and maintenance costs are expensed as incurred.
The estimated useful lives of the property and equipment are as follows:
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Note 1 - Summary of Signicant Accounting Policies: Intangible Assets, Finite-Lived, Policy (Policies) |
12 Months Ended | ||||||||
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Dec. 31, 2018 | |||||||||
Policies | |||||||||
Intangible Assets, Finite-Lived, Policy | Intangible Assets - Acquired intangible assets are recorded at estimated fair value, net of accumulated amortization. Costs incurred in obtaining certain patents and intellectual property as well as software development expenses, are capitalized and amortized over their related estimated useful lives, using a straight-line basis consistent with the underlying expected future cash flows related to the specific intangible asset. Costs to renew or extend the life of intangible assets are capitalized and amortized over the remaining useful life of the asset. Amortization expenses are included as a component of selling, general and administrative expenses in the consolidated statements of operations. The Company's continued ability to extend and/or renew the rights associated with these intangible assets may have an impact on future cash flows.
Useful life estimates for the Company's significant intangible asset classes are as follows:
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Note 1 - Summary of Signicant Accounting Policies: Impairment or Disposal of Long-Lived Assets, Policy (Policies) |
12 Months Ended |
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Dec. 31, 2018 | |
Policies | |
Impairment or Disposal of Long-Lived Assets, Policy | 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. |
Note 1 - Summary of Signicant Accounting Policies: Earnings Per Share (Policies) |
12 Months Ended |
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Dec. 31, 2018 | |
Policies | |
Earnings Per Share | Earnings (Loss) Per Share The basic computation of loss per share is based on the weighted average number of shares outstanding during the period presented in accordance with ASC 260, "Earnings Per Share. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the period plus the common stock equivalents which would arise from the exercise of stock options and warrants outstanding using the treasury stock method and the average market price per share during the period. Common stock equivalents are not included in the diluted earnings per share calculation when their effect is antidilutive. |
Note 1 - Summary of Signicant Accounting Policies: Income Tax, Policy (Policies) |
12 Months Ended |
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Dec. 31, 2018 | |
Policies | |
Income Tax, Policy | Income Taxes - Income taxes are provided in accordance with ASC 740 Accounting for Income Taxes. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carry forwards. Deferred tax expense (benefit) results from the net change during the year of deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of all of the deferred tax assets will be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Provision for income taxes consists of federal and state income taxes in the United States. Due to uncertainty as to the realization of benefits from our deferred tax assets, including net operating loss carry-forwards and other tax credits, we have a full valuation allowance reserved against such assets. We expect to maintain this full valuation allowance at least in the near term. |
Note 1 - Summary of Signicant Accounting Policies: Share-Based Payment and Stock-Based Compensation, Policy (Policies) |
12 Months Ended |
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Dec. 31, 2018 | |
Policies | |
Share-Based Payment and Stock-Based Compensation, Policy | Share-Based Payments and Stock-Based Compensation Share-based compensation awards, including stock options and restricted stock awards, are recorded at estimated fair value on the applicable awards grant date, based on estimated number of awards that are expected to vest. The grant date fair value is amortized on a straight-line basis over the time in which the awards are expected to vest, or immediately if no vesting is required. Share-based compensation awards issued to non-employees for services are recorded at either the fair value of the services rendered or the fair value of the share-based payments whichever is more readily determinable. The fair value of restricted stock awards is based on the fair value of the stock underlying the awards on the grant date as there is no exercise price. |
Note 1 - Summary of Signicant Accounting Policies: Recently Enacted Accounting Standards (Policies) |
12 Months Ended |
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Dec. 31, 2018 | |
Policies | |
Recently Enacted Accounting Standards | Recently Enacted Accounting Standards - From time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Companys financial statements upon adoption.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases (ASU 2016-02). The guidance in this new standard requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to the current accounting and eliminates the current real estate-specific provisions for all entities. The guidance also modifies the classification criteria and the accounting for sales-type and direct financing leases for lessors. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-02.
In May 2014, in addition to several amendments issued during 2016, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This pronouncement updated the accounting guidance related to revenue from contracts with customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle is that a company should recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The standard defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. These updates are effective for the Company for its annual period ending December 31, 2019, and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of ASU 2014-09. |
Note 1 - Summary of Signicant Accounting Policies: Concentrations: Schedules of Concentration of Risk, by Risk Factor (Tables) |
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Schedules of Concentration of Risk, by Risk Factor |
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Note 1 - Summary of Signicant Accounting Policies: Inventory, Policy: Schedule of Inventory, Current (Tables) |
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Schedule of Inventory, Current |
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Note 3 - Property and Equipment: Schedule of Property and Equipment (Tables) |
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Schedule of Property and Equipment |
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Note 4 - Intangible Assets: Schedule of Finite-Lived Intangible Assets (Tables) |
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Schedule of Finite-Lived Intangible Assets |
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Note 5 - Notes Payable: Schedule of Short-term Debt (Tables) |
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Schedule of Short-term Debt |
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Note 5 - Notes Payable: Schedule of Long-term Debt Instruments (Tables) |
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Schedule of Long-term Debt Instruments |
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Note 6 - Convertible Notes: Schedule of Convertible Notes Payable (Tables) |
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Schedule of Convertible Notes Payable |
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Note 7 - Commitments and Contingencies: Schedule of Future Minimum Rental Payments for Operating Leases (Tables) |
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Schedule of Future Minimum Rental Payments for Operating Leases |
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Note 8 - Related Party Transactions: Schedule of Related Party Transactions (Tables) |
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Schedule of Related Party Transactions |
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Schedule of Related Party Transactions |
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Note 10 - Share Based Compensation: Schedule of Assumptions for Fair Value at the Commitment Date as of Balance Sheet Date (Tables) |
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Dec. 31, 2018 | ||||||||||||||||||||||||||
Tables/Schedules | ||||||||||||||||||||||||||
Schedule of Assumptions for Fair Value at the Commitment Date as of Balance Sheet Date |
|
Note 10 - Share Based Compensation: Share-based Compensation, Activity (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tables/Schedules | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based Compensation, Activity |
The Companys outstanding employee options at December 31, 2018 are as follows:
|
Note 10 - Share Based Compensation: Share-based Compensation, Performance Shares Award Nonvested Activity (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tables/Schedules | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based Compensation, Performance Shares Award Nonvested Activity |
|
NOTE 11 - WARRANTS: Schedule of Assumptions for Fair Value at the Commitment Date as of Balance Sheet Date (Tables) |
12 Months Ended | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2018 | ||||||||||||||||||||||||||
Schedule of Assumptions for Fair Value at the Commitment Date as of Balance Sheet Date |
|
|||||||||||||||||||||||||
Warrant | ||||||||||||||||||||||||||
Schedule of Assumptions for Fair Value at the Commitment Date as of Balance Sheet Date |
|
NOTE 11 - WARRANTS: Schedule of Stockholders' Equity Note, Warrants or Rights (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tables/Schedules | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Stockholders' Equity Note, Warrants or Rights |
The Companys outstanding warrants at December 31, 2018 are as follows:
|
NOTE 12 - EARNINGS (LOSS) PER SHARE: Schedule of Common Stock Equivalents (Tables) |
12 Months Ended | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2018 | |||||||||||||||||||||||||
Tables/Schedules | |||||||||||||||||||||||||
Schedule of Common Stock Equivalents |
|
Note 14 - Discontinued Operations: Disposal Groups, Including Discontinued Operations (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||
Tables/Schedules | |||||||||||||||||||||||||||||||||||||||||||||||||
Disposal Groups, Including Discontinued Operations |
|
Note 15 - Income Taxes: Schedule of Deferred Tax Assets and Liabilities (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tables/Schedules | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Deferred Tax Assets and Liabilities |
|
Note 15 - Income Taxes: Schedule of Effective Income Tax Rate Reconciliation (Tables) |
12 Months Ended | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2018 | ||||||||||||||||||||||||||
Tables/Schedules | ||||||||||||||||||||||||||
Schedule of Effective Income Tax Rate Reconciliation |
|
Note 1 - Summary of Signicant Accounting Policies: Concentrations: Schedules of Concentration of Risk, by Risk Factor (Details) |
12 Months Ended | |
---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
Accounts Receivable | ||
Concentration Risk, Percentage | 0.00% | |
Customer A | Revenue | ||
Concentration Risk, Percentage | 77.00% | 0.00% |
Customer B | Revenue | ||
Concentration Risk, Percentage | 10.00% | 12.00% |
Customer C | Revenue | ||
Concentration Risk, Percentage | 4.00% | 41.00% |
Customer D | Revenue | ||
Concentration Risk, Percentage | 34.00% |
Note 1 - Summary of Signicant Accounting Policies: Inventory, Policy: Schedule of Inventory, Current (Details) - USD ($) |
Dec. 31, 2018 |
Dec. 31, 2017 |
---|---|---|
Details | ||
Inventory, Gross | $ 391,658 | $ 376,063 |
Allowance for obsolescence | (335,655) | (335,655) |
Inventory | $ 56,003 | $ 40,408 |
Note 2 - Going Concern (Details) - USD ($) |
12 Months Ended | 104 Months Ended | |
---|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
Dec. 31, 2018 |
|
Details | |||
Net Income (Loss) | $ 17,150,967 | $ 15,345,644 | $ 67,047,343 |
Note 3 - Property and Equipment: Schedule of Property and Equipment (Details) - USD ($) |
12 Months Ended | |
---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
Property and equipment, net | $ 78,821 | $ 87,628 |
Accumulated Depreciation, Depletion and Amortization, Property, Plant, and Equipment | $ 9,596 | 790 |
Building Improvements | ||
Property, Plant and Equipment, Useful Life | 15 years | |
Property and equipment, net | $ 55,390 | 55,390 |
Furniture and Fixtures | ||
Property, Plant and Equipment, Useful Life | 7 years | |
Property and equipment, net | $ 26,101 | 26,101 |
Computer Equipment | ||
Property, Plant and Equipment, Useful Life | 5 years | |
Property and equipment, net | $ 6,926 | $ 8,927 |
Note 4 - Intangible Assets (Details) - USD ($) |
12 Months Ended | |
---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
Details | ||
Capitalized Intangible Assets | $ 2,332,715 | $ 1,563,122 |
Amortization of Intangible Assets | $ 455,999 | $ 443,021 |
Note 4 - Intangible Assets: Schedule of Finite-Lived Intangible Assets (Details) - USD ($) |
12 Months Ended | |
---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
Intangible assets, net | $ 8,920,360 | $ 7,043,644 |
Finite-Lived Intangible Assets, Accumulated Amortization | $ (1,888,807) | (1,432,808) |
Patents | ||
Property, Plant and Equipment, Useful Life | 15 years | |
Intangible assets, net | $ 542,846 | 397,417 |
Software Licenses | ||
Property, Plant and Equipment, Useful Life | 7 years | |
Intangible assets, net | $ 58,260 | 58,260 |
Software Development | ||
Property, Plant and Equipment, Useful Life | 5 years | |
Intangible assets, net | $ 10,208,061 | $ 8,020,775 |
Note 5 - Notes Payable: Schedule of Short-term Debt (Details) - USD ($) |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|
Short-term notes payable | $ 45,232 | $ 50,232 | $ 89,221 |
Short Term Notes Payable | |||
Notes acquired in business acquisition | 0 | 208,811 | |
Repayments - continuing operations | (5,000) | (38,989) | |
Repayments - discontinued operations | 0 | (53,132) | |
Notes divested in disposal of discontinued operations | $ 0 | $ (155,679) |
Note 5 - Notes Payable: Schedule of Long-term Debt Instruments (Details) - USD ($) |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|
Long-term Debt | $ 366,657 | $ 766,658 | $ 1,200,000 |
Current portion of long term debt | 366,657 | 400,000 | |
Notes payable | 0 | 366,658 | |
Long Term Notes Payable | |||
Notes acquired in business acquisition | 0 | 136,830 | |
Repayments - continuing operations | (400,001) | (433,342) | |
Repayments - discontinued operations | 0 | (1,603) | |
Notes divested in disposal of discontinued operations | $ 0 | $ (135,227) |
Note 6 - Convertible Notes: Schedule of Convertible Notes Payable (Details) - USD ($) |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|
Convertible Debt | $ 3,471,644 | $ 601,576 | $ 3,996,810 |
Proceeds from Issuance of Convertible Preferred Stock | 1,903,438 | 146,669 | |
Proceeds from issuance of convertible notes - related party | 0 | 237,000 | |
Repayments of short term convertible notes | 0 | (100,000) | |
Conversion of notes payable into common stock | (570,000) | (3,712,638) | |
Debt restructured | (112,017) | ||
Amortization of debt discounts | 1,821,189 | 33,735 | |
Convertible notes, short term | 17,860,274 | ||
Convertible notes, short term - related party | 183,172 | 521,172 | |
Due to Related Parties, Noncurrent | 150,000 | 0 | |
Debt discounts | 14,721,802 | ||
Convertible Debt | |||
Amortization of debt discounts | $ 1,648,647 | $ 33,735 |
Note 7 - Commitments and Contingencies (Details) - USD ($) |
12 Months Ended | |
---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
Details | ||
Operating Leases, Rent Expense | $ 287,649 | $ 186,640 |
Payments to Acquire Equipment on Lease | $ 2,871 |
Note 7 - Commitments and Contingencies: Schedule of Future Minimum Rental Payments for Operating Leases (Details) |
Dec. 31, 2018
USD ($)
|
---|---|
Details | |
Operating Leases, Future Minimum Payments, Remainder of Fiscal Year | $ 259,851 |
Operating Leases, Future Minimum Payments, Due in Two Years | 209,559 |
Operating Leases, Future Minimum Payments, Due in Three Years | 214,107 |
Operating Leases, Future Minimum Payments, Due in Four Years | 218,654 |
Operating Leases, Future Minimum Payments, Due in Five Years | 18,569 |
Operating Leases, Future Minimum Payments, Due Thereafter | 0 |
Operating Leases, Future Minimum Payments Due | $ 920,740 |
Note 8 - Related Party Transactions (Details) - USD ($) |
12 Months Ended | |
---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
Details | ||
Change in Accrued Interest - Related Party | $ 525,785 | $ 604,145 |
Note 8 - Related Party Transactions: Schedule of Related Party Transactions (Details) - USD ($) |
Dec. 31, 2018 |
Dec. 31, 2017 |
---|---|---|
Accounts Payable, Related Parties, Current | $ 9,690 | $ 68,060 |
Advances - related party | 0 | 65,000 |
John Bluher | ||
Accounts Payable, Related Parties, Current | 4,465 | 0 |
John Hayes | ||
Accounts Payable, Related Parties, Current | 5,225 | 55,254 |
Robert Graham | ||
Accounts Payable, Related Parties, Current | 0 | 6,806 |
Robert Graham 2 | ||
Accounts Payable, Related Parties, Current | 0 | 6,000 |
Thomas Bruderman | ||
Advances - related party | $ 0 | $ 65,000 |
Note 9 - Stockholders' Equity (Details) - shares |
12 Months Ended | |
---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
Common Stock, Shares, Outstanding | 96,872,725 | 77,063,171 |
Preferred Stock, Shares Outstanding | 3,577,370 | 3,639,783 |
Stock Issuance 1 | ||
Stock Issued During Period, Shares, New Issues | 1,771,666 |
Note 10 - Share Based Compensation (Details) |
12 Months Ended |
---|---|
Dec. 31, 2018
USD ($)
| |
Details | |
Stock Granted, Value, Share-based Compensation, Net of Forfeitures | $ 1,522,580 |
Unrecognized Expense for Unvested Share-based Compensation | $ 2,000,971 |
Note 10 - Share Based Compensation: Schedule of Assumptions for Fair Value at the Commitment Date as of Balance Sheet Date (Details) |
12 Months Ended |
---|---|
Dec. 31, 2018 | |
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Term | 5 years |
Minimum | |
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Risk Free Interest Rate | 1.91% |
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Volatility Rate | 48.24% |
Maximum | |
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Risk Free Interest Rate | 2.96% |
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Volatility Rate | 52.49% |
Note 15 - Income Taxes (Details) - USD ($) |
Dec. 31, 2018 |
Dec. 31, 2017 |
---|---|---|
Details | ||
Operating Loss Carryforwards | $ 51,417,242 | $ 34,394,555 |
Deferred Tax Assets, Operating Loss Carryforwards, State and Local | $ 59,104,026 | $ 26,508,562 |
Note 15 - Income Taxes: Schedule of Deferred Tax Assets and Liabilities (Details) - USD ($) |
Dec. 31, 2018 |
Dec. 31, 2017 |
---|---|---|
Details | ||
Deferred Tax Assets, Operating Loss Carryforwards | $ 11,878,168 | $ 7,897,392 |
Deferred Tax Assets, Operating Loss Carryforwards, Inventory obsolescence reserve | 72,645 | 77,993 |
Deferred Tax Assets, Operating Loss Carryforwards, Accrued wages, related party | 990,408 | 1,216,954 |
Deferred Tax Assets, Operating Loss Carryforwards, Accrued interest - convertible debt, related party | 270,904 | 290,845 |
Deferred Tax Assets, Operating Loss Carryforwards, Depreciation and amortization | (508,882) | (125,749) |
Deferred Tax Assets, Other | 4,119 | 3,566 |
Deferred Tax Assets, Operating Loss Carryforwards, Deferred Revenue | (4,363) | (4,625) |
Deferred Tax Assets, Valuation Allowance | $ (12,702,998) | $ (9,356,375) |
Note 15 - Income Taxes: Schedule of Effective Income Tax Rate Reconciliation (Details) - USD ($) |
12 Months Ended | |
---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
Details | ||
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent | 21.00% | |
Effective Income Tax Rate Reconciliation at Federal Statutory Income Tax Rate, Amount | $ 2,390,872 | $ (3,346,623) |
Effective Income Tax Rate Reconciliation, Change in Deferred Tax Assets Valuation Allowance, Amount | $ (2,390,872) | $ 3,346,623 |
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