UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| [X] | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2018
OR
| [ ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from_____________ to _____________.
Commission file number 000-55053
Blow & Drive Interlock Corporation
(Exact name of registrant as specified in its charter)
| Delaware | 46-3590850 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1427 S. Robertson Blvd. Los Angeles, CA |
90035 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (877) 238-4492
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| None | None |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.0001
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to and post such files). Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer [ ] | Accelerated filer [ ] | ||
| Non-accelerated filer [ ] | Smaller reporting company [X] | ||
| Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Aggregate market value of the voting stock held by non-affiliates: $3,355,232 as based on last reported sales price of such stock on June 30, 2018. The voting stock held by non-affiliates on that date consisted of 18,640,182 shares of common stock the closing stock price was $0.18.
Applicable Only to Registrants Involved in Bankruptcy Proceedings During the Preceding Five Years:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of July 15, 2019, there were 31,350,683 shares of common stock, $0.001 par value, issued and outstanding.
Documents Incorporated by Reference
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to rule 424(b) or (c) of the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980). None.
Blow & Drive Interlock Corporation
TABLE OF CONTENTS
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Forward Looking Statements
This Annual Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on management’s beliefs and assumptions, and on information currently available to management. Forward-looking statements include the information concerning possible or assumed future results of operations of the Company set forth under the heading “Management’s Discussion and Analysis of Financial Condition or Plan of Operation.” Forward-looking statements also include statements in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “consider,” or similar expressions are used.
Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties, and assumptions. The Company’s future results and shareholder values may differ materially from those expressed in these forward-looking statements. Readers are cautioned not to put undue reliance on any forward-looking statements.
Corporate History
We were incorporated under the name Jam Run Acquisition Corporation on July 2, 2013 in the State of Delaware. From inception through early February 2014, we were a blank check company and qualified as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act which became law in April, 2012, with a business plan of entering into a transaction with a foreign or domestic private company in order for that company to become a reporting company as part of the process toward the public trading of its stock.
On February 6, 2014, we issued 9,700,000 shares of our common stock, representing approximately 97% of our then-outstanding shares to Laurence Wainer for $1,970. In connection with this transaction, we changed our name Blow & Drive Interlock Corporation and Mr. Wainer became our sole officer and director.
On March 7, 2017, we entered into an Debt Conversion and Series A Preferred Stock Purchase Agreement (the “SPA”) with Mr. Wainer, one of our officers and directors at that time, under which we agreed to create a new series of non-convertible preferred stock entitled “Series A Preferred Stock,” with One Million (1,000,000) shares authorized and the following rights: (i) no dividend rights; (ii) no liquidation preference over the Company’s common stock; (iii) no conversion rights; (iv) no redemption rights; (v) no call rights by the Company; (vi) each share of Series A Convertible Preferred stock will have one hundred (100) votes on all matters validly brought to the Company’s common stockholders; and Mr. Wainer agreed to acquire 1,000,000 shares of our Series A Preferred Stock, once created, in exchange for Mr. Wainer forgiving $25,537 in accrued salary we owed to him as of December 31, 2016. The Series A Preferred Stock was created with the State of Delaware by filing a Certificate of Designation on March 13, 2017. The description of the SPA set forth in this report is qualified in its entirety by reference to the full text of that document, which is attached hereto as Exhibit 10.26 and is incorporated herein by reference.
On January 2, 2019, Mr. Wainer closed the transaction that was the subject of an Agreement to Purchase Common Stock and Preferred Stock (the “Agreement”) between Mr. Wainer and The Doheny Group, LLC, a Nevada limited liability company (“Doheny Group”), under which Doheny Group acquired 8,924,000 shares of our common stock (the “Common Shares”) and One Million (1,000,000) shares of our Series A Preferred Stock (the “Preferred Shares” and together with the Common Shares, the “Shares”), from Mr. Wainer in exchange for $30,000. Combined, the Shares represent approximately 84% of our outstanding voting rights. Mr. David Haridim is the principal of Doheny and was appointed to our Board of Directors and as our sole executive officer. We were a party to the Agreement solely for the purpose of acknowledging certain representations and warranties about the company in the Agreement. The description of the Agreement set forth in this report is qualified in its entirety by reference to the full text of that document, which is attached hereto as Exhibit 10.20 and is incorporated herein by reference.
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Our offices are located at 1427 S. Robertson Blvd., Los Angeles, CA 90035, telephone number (877) 238-4492.
Business Overview
General
We manufacture, market, lease, install and monitor a Breath Alcohol Ignition Interlock Device (BAIID) we developed known as the BDI-747 Ignition Interlock Device (the “BDI-747/1”), which is a mechanism that is installed on the steering column of an automobile and into which a driver exhales prior to starting their vehicle. The device in turn provides a blood-alcohol concentration analysis. If the driver’s blood-alcohol content is higher than a certain pre-programmed limit, the device prevents the ignition from engaging and the automobile from starting. These devices are often required for use by DUI or DWI (“driving under the influence” or “driving while intoxicated”) offenders as part of a mandatory court or motor vehicle department program. The BDI-747/1 has met the 2013 National Highway Traffic Safety Administration (NHTSA) guidelines for Breath Alcohol Ignition Interlock Devices [Federal Register Volume 78, Number 89] as an authorized BAIID [Element Materials Technology/Report # ESP018444P June 17, 2015]. The BDI-747/1 is manufactured by BDI Manufacturing Inc., a subsidiary of Blow & Drive Interlock, Inc., from parts and supplies from C4 Development Ltd.
The primary market for the BDI-747/1 Ignition Interlock Device is as a breathalyzer device to be used by persons convicted of a driving under the influence of alcohol. In order for the BDI-747/1 to be used in states for persons convicted of driving under the influence the device must be approved by each individual state. The process to get the device approved varies greatly state-to-state. As of December 31, 2018, the BDI-747/1 device was approved in Oregon, Texas, Arizona, and Kentucky. As of March 31, 2019, the BDI-747/1 device was only approved in Arizona and Texas. The states where our BDI-747/1 device is approved has decreased primarily as a result of new state certification rules that require increased capital investment that we are not able to afford.
In states where the BDI-747/1 is approved as a BAIID, we lease the BDI-747/1 devices to offenders, typically for twelve months, but the time could differ on a case-by-case basis depending on the sentence received by the offender. In some states we market, lease, install and support the devices directly and in other states we sell distributorships to authorized distributors allowing them to lease, install, service, remove and support the BDI-747/1 devices. Currently, we lease the devices directly in the states we are approved, except West Phoenix, Arizona and Lubbock, Texas, where we have licensed distributors that lease the devices.
In states where we lease the devices directly to consumers, we typically charge between $89-$189 in upfront fees for the user (which covers one month of the lease payment), and then between $69-$89/month for the other eleven months of the lease for the typical one year lease. The lease payment covers the installation of the device in the consumer’s vehicle, the rental of the device, recalibration of the device as required by each state (typically every 30 to 60 days) and the monitoring services for the device, which are then reported to the state in accordance with each state’s requirements. In states and areas where we do not have a direct presence, which we only have in Phoenix, Arizona, we contract with independent service centers, such as car alarm installation companies or other auto services companies, to perform the installations of our BDI-747/1 device, which centers must be approved by the states in which we perform the installations. Because our devices are installed in consumers’ vehicles are part of a judicially-mandated program, and since the use of the device controls the individual’s driving privileges, collection rates of the monthly leasing fees is close to 100%. The failure to make the payment could be a violation of the consumer’s sentence or probation and could cause them to lose the device and their driving privileges.
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In areas where we have a distributor, in our typical distributorship arrangement, we charge the distributor a flat fee distributorship territory fee up front (which fee varies based on the size and location of the distributorship), a $150 per unit registration fee, and then a $35 monthly fee for each device the distributor has in its inventory. These fees may vary on a case-by-case basis. The relationship with our distributors may either be on an exclusive or non-exclusive basis depending upon the location of the distributorship and the fees charged.
As of December 31, 2018, we had approximately 1,100 units on the road, with approximately 885 devices being leased directly from us and approximately 215 devices leased through our distributors, compared to December 31, 2017, when we had approximately 1,558 units on the road, with approximately 1,451 devices being leased directly from us and approximately 107 devices leased through our distributors. The decrease in the total number of devices we have on the road is primarily due to the fact the BDI-747/1 devices was approved in fewer states in 2018 compared to 2017.
Due to the decrease in the number of states where our BDI-747/1 device is approved, and the resulting decrease in the number of devices we have on the road, our management is currently exploring all options related to our business, including, but not limited to: (i) taking out loans or selling our stock in order to raise money to continue, and try to expand, our current business; (ii) trying to acquire a synergistic business and grow our current business; or (iii) selling our current business and trying to find another business to, in or out of our current business segment, to take over the public corporation.
Our website is www.blowanddrive.com.
Principal Products and Services
Our only product is the BDI-747/1 Breath Alcohol Ignition Interlock Device. The BDI-747/1 device is used to detect alcohol in a person’s system by measuring the level of alcohol in a person’s breath by having them blow into the device and determining whether that level is over or under a preset level set by the installer or a trained technician. The pre-determined level differs by state, but is typically around .02. The device is approximately the size of a smartphone which is installed directly onto a vehicle’s steering column. The device requires the driver to exhale into the device prior to starting the vehicle. The device will prevent the vehicle from starting if the driver’s blood-alcohol content exceeds the predetermined set level.
(photo of BDI-747/1)
Our device, designed by Well Electric, incorporates the latest technology and design in the market for such devices. The device has both GPS and video capabilities. The device has a fuel cell sensor and a color display screen. The external camera mounting can wrap around the automobile’s rear view mirror. The device is powered by either an internal battery or a power cable from a control box which supports both 24V and 12V batteries. The device has both USB communication capabilities and WiFi (with approval from service provider).
The specifications for our ignition interlock device are as follows:
| Sample head | |
| Sensor | Fuel cell |
| Working Temperature | -40˚C to 85˚C |
| Display Screen | Color screen |
| Memory and Save | 80,000 events with pictures save and download form sample head |
| Communication | USB, WiFi, 3G(user need to get US approval with service provider) |
| Communication with control box | Wireless |
| Power supply | Internal battery or power cable from control box |
| Human checking | Flow sensing, air temperature sensing |
| External | |
| Camera | External camera mounting around the review mirror |
| Night photo | White LED, and IR light |
| Control box | Support 24V and 12V |
| Motor Start Checking | Ignition checking, power checking, moving checking |
| PC software | One client side software, which able to set sample and input user information. Picture and events may also be downloaded. This is not web or server side software |
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The BDI-747/1 unit takes about 30-45 minutes to install in a vehicle, depending on the vehicle. The ignition interlock component is installed on the steering column. Currently, our cost to order the requisite supplies and assemble the BDI-747/1 units is approximately $350-$500 per unit depending on the specifications of the unit. The device requires recalibration in accordance with state requirements, typically every 30 to 60 days.
Marketing
In 2017, most of our marketing consisted of getting approval for our BDI-747/1 device in as many states as possible. By gaining approval in a state our BDI-747/1 device appears on that state’s list of approved breathalyzer ignition interlock devices. Someone convicted of driving under the influence that is required to use a breathalyzer ignition interlock device must choose one from the list of state-approved devices. As a result, by gaining approvals in states, our device is automatically disseminated to our targeted consumers by the state. In addition to trying to obtain approvals in as many states as we can, our other marketing efforts related to our BDI-747/1 device have largely consisted of speaking with various individuals and companies that are in the breathalyzer ignition interlock device industry, such as companies in the business of conducting educational courses for individuals convicted of driving under the influence of alcohol, companies in the business of installing ignition interlock devices, and individuals involved in the approval process for breathalyzer ignition interlock devices.
In addition to marketing our BDI-747/1 device directly to consumers, we have also marketed our distributorship opportunities to various individuals and companies that are in the breathalyzer ignition interlock device industry. In the past, the efforts have included radio and television advertisements of our distributorship program. Although we are not currently running any radio or television advertisements for our distributorship program, we may do so again in the future. We have also discussed these opportunities with various companies and individuals in the industry, similar to what we have done with our marketing of our BDI-747/1 device.
Manufacturing
We are the primary manufacturer of our BDI-747/1 device, through our wholly-owned subsidiary, BDI Manufacturing, Inc., an Arizona corporation. However, we do utilize a supply and assembly company called C4 Development Ltd., a Hong Kong corporation (“C4 Development”). On June 29, 2015, we entered into a Supply Agreement with C4 Development, under which C4 Development supplies us with a part known as the “PCB with Alcohol Tester.” This device has certain parts utilized in our BDI-747/1 device, but the PCB with Alcohol Tester is not a device, by itself, that is capable of obtaining approval from the NHTSA as a breath alcohol interlock device. Once we obtain these parts for a device from C4 Development, we compile the components to the devices at our facility in Phoenix, Arizona in order to create our BDI-747/1 device.
Competition
The business of breathalyzer ignition interlock device industry is competitive, and from time-to-time new companies may appear on the list of approved providers in various states, however, there is a high barrier to entry due to the cost of development fees, manufacturing fees, NHSTA-approved testing, and state field testing. We compete with a number of successful companies in the industry, including, but not limited to, LifeSafer®, Smart Start®, Intoxalock®, Guardian Interlock Systems and Dräger. These larger companies have greater financial resources than we do, have approval in most (if not all) states, and likely have 50,000 of their respective ignition interlock devices on the road each. By comparison as of March 31, 2019, we were approved in two states and had approximately 1,100 units on the road. Although we believe our BDI-747/1 device compares favorably to the interlock devices provided by our competitors, we will need to raise significant capital and gain approval in most states in order capitalize on our BDI-747/1 device. We believe if we do this we will be able to compete better with these larger competitors.
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Due to the state approvals necessary to service the judicially-mandated breath analyzer ignition interlock market we believe there is a barrier to entry that will discourage too many other companies from entering the industry. Not only must a new entrant develop and manufacture a breathalyzer device, it must meet the NHTSA requirements, and then get approved by state regulators, all of which can be costly. The complexities and costs of meeting all these steps should keep new entrants into the industry to a minimum.
Intellectual Property
We currently have a utility patent for our BDI Model #1 power line filter, which is used with our BDI-747 Breath Alcohol Ignition Interlock Device to prevent interference from electromagnetic waves. Although we do not have any other formal intellectual property protection over our BDI-747/1 device (such as device patents or trademarks), we do have general intellectual property protections provided by federal and state laws that prohibit unfair business practices, etc.
Government Regulation
Ignition interlock devices must be certified by the states in which a company intends to market and lease the devices. Before applying for certification to any state, the devices are sent to an independent laboratory for testing and certification that the device meets or exceeds the guidelines published by the National Highway Traffic Safety Administration as the Model Specifications for Breath Alcohol Ignition Interlock Devices. Each state has its own set of certification guidelines that must be met. Typically the requirements for state certification are met once the device is certified by an independent laboratory as meeting or exceeding the National Highway Traffic Safety Administration’s published guidelines.
Our BDI-747/1 device was certified by an independent testing laboratory in June 2015. As of As of December 31, 2018, the BDI-747/1 device was approved in Oregon, Texas, Arizona, and Kentucky. As of March 31, 2019, the BDI-747/1 device was only approved in Arizona and Texas.
Employees
As of December 31, 2018, we had four independent contractors, which primarily install, calibrate, remove and monitor our BDI-747/1 devices. Mr. Laurence Wainer, our President and Secretary at December 31, 2018, was an independent contractor. We have approximately 25 installers and technicians working in the states where we approved that are independent contractors.
Available Information
We are a fully reporting issuer, subject to the Securities Exchange Act of 1934. Our Quarterly Reports, Annual Reports, and other filings can be obtained from the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m. You may also obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission at http://www.sec.gov.
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As a smaller reporting company we are not required to provide a statement of risk factors. However, we believe this information may be valuable to our shareholders for this filing. We reserve the right to not provide risk factors in our future filings. Our primary risk factors and other considerations include:
We have a limited operating history and historical financial information upon which you may evaluate our performance.
You should consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, are in their early stages of development. We may not successfully address these risks and uncertainties or successfully implement our existing and new products. If we fail to do so, it could materially harm our business and impair the value of our common stock. Even if we accomplish these objectives, we may not generate the positive cash flows or profits we anticipate in the future. We were incorporated in Delaware on July 2, 2013. Our business to date business focused on developing, manufacturing, and getting independent certification and state approvals for our BDI-747/1 device, hiring management and staff personnel, contracting with distributors and leasing and servicing our products. Unanticipated problems, expenses and delays are frequently encountered in establishing a new business and developing new products. These include, but are not limited to, inadequate funding, lack of consumer acceptance, competition, product development, and inadequate sales and marketing. The failure by us to meet any of these conditions would have a materially adverse effect upon us and may force us to reduce or curtail operations. No assurance can be given that we can or will ever operate profitably.
We may not be able to meet our future capital needs.
To date, we have not generated sufficient revenue to meet our capital needs, and we may not be able to in the future. Our future capital requirements will depend on many factors, including our ability to develop our products, cash flow from operations, and competing market developments. We will need additional capital in the near future. Any equity financings will result in dilution to our then-existing stockholders. Sources of debt financing may result in high interest expense. Any financing, if available, may be on unfavorable terms. If adequate funds are not obtained, we will be required to reduce or curtail operations.
If we cannot obtain additional funding, our product development and commercialization efforts may be reduced or discontinued and we may not be able to continue operations.
We have historically experienced negative cash flows from operations since our inception and we expect the negative cash flows from operations to continue for the foreseeable future. Unless and until we are able to generate higher revenues, we expect such losses to continue for the foreseeable future. As discussed in our financial statements, there exists substantial doubt regarding our ability to continue as a going concern.
Product manufacturing and development efforts are highly dependent on the amount of cash and cash equivalents on hand combined with our ability to raise additional capital to support our future operations through one or more methods, including but not limited to, issuing additional equity or debt.
In addition, we may also raise additional capital through additional equity offerings, and licensing our future products in development. While we will continue to explore these potential opportunities, there can be no assurances that we will be successful in raising sufficient capital on terms acceptable to us, or at all, or that we will be successful in licensing our future products. Based on our current projections, we believe we have insufficient cash on hand to meet our obligations as they become due based on current assumptions. The uncertainties surrounding our future cash inflows have raised substantial doubt regarding our ability to continue as a going concern.
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Current economic conditions and capital markets are in a period of disruption and instability which could adversely affect our ability to access the capital markets, and thus adversely affect our business and liquidity.
The current economic conditions and financial crisis have had, and will continue to have, a negative impact on our ability to access the capital markets, and thus have a negative impact on our business and liquidity. The shortage of liquidity and credit combined with the substantial losses in worldwide equity markets could lead to an extended worldwide recession. We may face significant challenges if conditions in the capital markets do not improve. Our ability to access the capital markets has been and continues to be severely restricted at a time when we need to access such markets, which could have a negative impact on our business plans. Even if we are able to raise capital, it may not be at a price or on terms that are favorable to us. We cannot predict the occurrence of future disruptions or how long the current conditions may continue.
Because we face intense competition, we may not be able to operate profitably in our markets.
The market for our product is highly competitive and is becoming more so, which could hinder our ability to successfully market our products. We may not have the resources, expertise or other competitive factors to compete successfully in the future. We expect to face additional competition from existing competitors and new market entrants in the future. Many of our competitors have greater name recognition and more established relationships in the industry than we do. As a result, these competitors may be able to:
| ● | develop and expand their product offerings more rapidly; | |
| ● | adapt to new or emerging changes in customer requirements more quickly; | |
| ● | take advantage of acquisition and other opportunities more readily; and | |
| ● | devote greater resources to the marketing and sale of their products and adopt more aggressive pricing policies than we can. |
If our products do not gain state approvals, are removed in jurisdictions where previously approved, and/or do not meet expected market acceptance, prospects for our sales revenue may be affected.
We use the BDI-747/1 device in the judicially-mandated market for DUI offenders. The judicially-mandated market is where a breathalyzer device is required by law as a punishment for the committing a crime. As a result, sales and servicing of our product is dependent upon us gaining approval in each individual state and/or locality where we want to lease our products. This result can be expensive and time-consuming and there is no guarantee we will be successful in obtaining approval in all the states where we apply and if we don’t get approval in a sufficient number of states the market for our products will suffer. Additionally, even if we gain state approval, there is no guarantee our products will stay as an approved device (we could get our approval revoked in one or more states) or will be chosen by a sufficient number of DUI offenders in those states to provide us with sufficient revenues to pay our expenses.
We plan to lease the BDI-747/1 device in many states through third-party distributors. If we are unsuccessful in finding qualified distributors or our distributors do not perform well, our business could suffer.
While we have a retail location in Phoenix, Arizona, and may open more in the future, under our current business plan we plan to lease the BDI-747/1 device through third-party distributors in many regions and states. If we are unable to find qualified distributors in certain regions and/or states, and/or the distributors we contract with do not perform well, then we may not lease and service as many of our BDI-747/1 devices as we anticipate, and our business would suffer as a result.
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If critical components become unavailable or our suppliers delay their production of our key components, our business will be negatively impacted.
Currently, we rely on a primary supplier to supply us with the primary components for our BDI-747/1 device, which we then use to complete the assembly at our location in Phoenix, Arizona. As a result, the stability of component supply is crucial to our ability to get sufficient supplies to manufacture our products. Due to the fact we currently assemble our device from “off the shelf” parts and components, some of our critical devices and components are supplied by certain third-party manufacturers, and we may be unable to acquire necessary amounts of key components at competitive prices.
If we are successful in our growth, outsourcing the production of certain parts and components would be one way to reduce manufacturing costs. We plan to select these particular manufacturers based on their ability to consistently produce these products according to our requirements in an effort to obtain the best quality product at the most cost effective price. However, the loss of all or one of these suppliers or delays in obtaining shipments would have an adverse effect on our operations until an alternative supplier could be found, if one may be located at all. If we get to that stage of growth, such loss of manufacturers could cause us to breach any contracts we have in place at that time and would likely cause us to lose sales.
If our contract manufacturers fail to meet our requirements for quality, quantity and timeliness, our business growth could be harmed.
We obtain the primary components for the BDI-747/1 device from a third party supplier. This supplier likely procures most of the raw materials to make our device from third parties. If these companies were to terminate their agreements with our supplier, or our supplier with us, without adequate notice, or fail to provide the required capacity and quality on a timely basis, we would be delayed in our ability or unable to process and deliver our products to our customers.
Our products could contain defects or they may be installed or operated incorrectly, which could reduce sales of those products or result in claims against us.
Although we have quality assurance practices to ensure good product quality, defects still may be found in the future in our future products.
End-users could lose their confidence in our products and us if they unexpectedly use defective products or use our products improperly. This could result in loss of revenue, loss of profit margin, or loss of market share. Moreover, because our products may be employed in the automotive industry, if one of our products is a cause, or perceived to be the cause, of injury or death in a car accident, we would likely be subject to a claim. If we were found responsible it could cause us to incur liability which could interrupt or even cause us to terminate some or all of our operations.
If we are unable to recruit and retain qualified personnel, our business could be harmed.
Our growth and success highly depend on qualified personnel. Competition in the industry could cause us difficulty in recruiting or retaining a sufficient number of qualified technical personnel, which could harm our ability to develop new products. If we are unable to attract and retain necessary key talents, it would harm our ability to develop competitive product and retain good customers and could adversely affect our business and operating results.
Our BDI-747/1 device has lost its approval in a number of states and our number of devices on the road has been declining. At some point our business may not be viable. Our management is currently exploring all options regarding our current business, as well as other businesses.
Due to the decrease in the number of states where our BDI-747/1 device is approved, and the resulting decrease in the number of devices we have on the road, our management is currently exploring all options related to our business, including, but not limited to: (i) taking out loans or selling our stock in order to raise money to continue, and try to expand, our current business; (ii) trying to acquire a synergistic business and grow our current business; or (iii) selling our current business and trying to find another business to, in or out of our current business segment, to take over the public corporation. In the event we take out loans to fund our operations and/or public filing requirements, the terms of such financing may be on terms not favorable to us and could lead to a significant decrease in our stock price. In the event we sell our existing business or undergo a merger or business combination transaction our shareholders could incur significant dilution due to shares of our stock being issued to any incoming business.
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As of December 31, 2018, our internal controls were not effective which led to material weaknesses in our internal controls over financial reporting and, as a result, we may not be able to report our financial results accurately or timely and in the future could have a problem to detecting fraud, which could have a material adverse effect on our business.
An effective internal control environment is necessary for us to produce reliable financial reports and is an important part of our effort to prevent financial fraud. We are required to periodically evaluate the effectiveness of the design and operation of our internal controls over financial reporting. Based on these evaluations, we may conclude that enhancements, modifications, or changes to internal controls are necessary or desirable. While management evaluates the effectiveness of our internal controls on a regular basis, these controls may not always be effective, and as of December 31, 2018 they were not effective. There are inherent limitations on the effectiveness of internal controls, including collusion, management override, and failure of human judgment. In addition, control procedures are designed to reduce rather than eliminate business risks. If we fail to maintain an effective system of internal controls, or if management or our independent registered public accounting firm discovers material weaknesses in our internal controls, we may be unable to produce reliable financial reports or prevent fraud, which could have a material adverse effect on our business, including subjecting us to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission. Any such actions could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline or limit our access to capital.
Our common stock has been thinly traded and we cannot predict the extent to which a trading market will develop.
Our common stock is quoted on the OTC Pink-tier of OTC Markets. Our common stock is thinly traded compared to larger more widely known companies. Thinly traded common stock can be more volatile than common stock trading in an active public market. We cannot predict the extent to which an active public market for our common stock will develop or be sustained after this offering.
Because we are subject to the “penny stock” rules, the level of trading activity in our stock may be reduced.
Our common stock is traded on the OTC Markets. Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by the Securities and Exchange Commission. Penny stocks, like shares of our common stock, generally are equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on NASDAQ. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, broker-dealers who sell these securities to persons other than established customers and “accredited investors” must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security subject to the penny stock rules, and investors in our common stock may find it difficult to sell their shares.
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ITEM 1B – UNRESOLVED STAFF COMMENTS
This Item is not applicable to us as we are not an accelerated filer, a large accelerated filer, or a well-seasoned issuer; however, we have not received written comments from the Commission staff regarding our periodic or current reports under the Securities Exchange Act of 1934 within the last 180 days before the end of our last fiscal year.
As of December 31, 2018, our executive offices, consisted of approximately 1,200 square feet, were located at 5503 Cahuenga Blvd., #203, Los Angeles, California 91601. Under our lease of these premises, we were paying $2,212 per month and the lease was to run through January 2020, but this lease was transferred to another entity when Mr. Wainer sold his controlling interest to Doheny Group, LLC, a limited liability company controlled by David Haridim, our sole officer and director.
As of January 2, 2019, our executive offices are located at 1427 S. Robertson Blvd., Los Angeles, CA 90035, and we have this location rent free from our executive officer.
As of January 2, 2019, our manufacturing facility is located at 2352 E. University Drive, Suite D-105, Phoenix, AZ 85034, under the terms of a two year lease that ran from October 31, 2016 to October 31, 2018, at $1,030 per month. Beginning in November 2018 the lease went to month-to-month at $1,696 per month.
On February 21, 2018, we filed a Complaint in the Superior Court of the State of Arizona, County of Maricopa against EZ Interlock, LLC (Blow & Drive Interlock Corp. v. EZ Interlock, LLC (Case No. CV2018-051689, Superior Court of the State of Arizona, Maricopa County) for Conversion, Implied/Quasi Contract and Quantum Meruit, Unjust Enrichment, Tortious Interference with Business Expectancy/Prospective Business Relations, and Lost Profits. The basis for our lawsuit was that EZ Interlock an authorized installer of ours in the State of Arizona, was a customer of BDI Interlock, LLC, one of our distributors, and EZ Interlock was installing our BDI-747/1 devices for customers in Arizona and collecting fees from such customers, but stopped remitting payment to BDI Interlock, LLC, which, in turn, was unable to remit funds to us. We filed the lawsuit to have EZ Interlock stop installing our devices, return our devices in its possession, and pay the amounts owed to BDI Interlock and us for the customers paying EZ Interlock for our devices. EZ Interlock filed an Answer and Counterclaim on July 23, 2018. Shortly after filing our Complaint, the Court granted our request for a Temporary Restraining Order and Preliminary Injunction from continuing to install devices and return the devices in its possession. On February 7, 2019, our new management elected to dismiss the lawsuit, without prejudice, based on their opinion that our chances of recovering money from EZ Interlock was slim compared to amount that would be necessary to fund the litigation. We received most of our devices back from EZ Interlock. No discovery was conducted during the litigation.
In the ordinary course of business, we are from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of our management, other than as set forth herein, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.
ITEM 4 – MINE SAFETY DISCLOSURES
There is no information required to be disclosed under this Item.
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ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is currently quoted on the OTCQB-tier of OTC Markets under the symbol “BDIC.” We were listed on June 30, 2015. The following table sets forth the high and low bid information for each quarter within the fiscal years ended December 31, 2018 and 2017, as best we could estimate from publicly-available information. The information reflects prices between dealers, and does not include retail markup, markdown, or commission, and may not represent actual transactions.
Fiscal Year Ended |
Bid Prices | |||||||||
| December 31, | Period | High | Low | |||||||
| 2017 | First Quarter | $ | 0.55 | $ | 0.28 | |||||
| Second Quarter | $ | 0.40 | $ | 0.19 | ||||||
| Third Quarter | $ | 0.36 | $ | 0.22 | ||||||
| Fourth Quarter | $ | 0.29 | $ | 0.22 | ||||||
| 2018 | First Quarter | $ | 0.39 | $ | 0.17 | |||||
| Second Quarter | $ | 0.30 | $ | 0.18 | ||||||
| Third Quarter | $ | 0.22 | $ | 0.07 | ||||||
| Fourth Quarter | $ | 0.08 | $ | 0.05 | ||||||
The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to a few exceptions which we do not meet. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.
We have not adopted any stock option or stock bonus plans.
Holders
As of December 31, 2018, there were 30,211,875 shares of our common stock outstanding held by 137 holders of record and numerous shares held in brokerage accounts. As of July 15, 2019, there were 31,350,683 shares of our common stock outstanding held by 140 holders of record. Of these shares, 19,779,768 were held by non-affiliates. As of June 30, 2018, we had 18,640,182 shares held by non-affiliates. On the cover page of this filing we value the 18,640,182 shares held by non-affiliates as of June 30, 2018 at $3,355,232. These shares were valued at $0.18 per share, based on our closing share price on June 30, 2018.
As of December 31, 2018, there were 1,000,000 shares of our preferred stock outstanding, with all shares being Series A Preferred Stock. Our Series A Preferred has One Million (1,000,000) shares authorized and the following rights: (i) no dividend rights; (ii) no liquidation preference over our common stock; (iii) no conversion rights; (iv) no redemption rights; (v) no call rights; (vi) each share of Series A Convertible Preferred stock will have one hundred (100) votes on all matters validly brought to our common stockholders. As of December 31, 2018, all 1,000,000 shares of Series A Preferred Stock were held by Laurence Wainer, our then sole officer and director. As of March 20, 2019, the 1,000,000 shares of Series A Preferred Stock are held by The Doheny Group, LLC, a limited liability company controlled by David Haridim, our sole officer and director.
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Warrants
We currently have warrants to acquire 5,787,586 shares of our common stock held by 105 holders. The warrants have expiration dates ranging from three to four years from the date of grant and exercise prices ranging from $0.10 to $1.00.
Dividends
There have been no cash dividends declared on our common stock, and we do not anticipate paying cash dividends in the foreseeable future. Dividends are declared at the sole discretion of our Board of Directors.
Securities Authorized for Issuance Under Equity Compensation Plans
There are no outstanding options or warrants to purchase shares of our common stock under any equity compensation plans.
Currently, we do not have any equity compensation plans. As a result, we did not have any options, warrants or rights outstanding under equity compensation plans as of December 31, 2018.
Recent Issuance of Unregistered Securities
During the three months ended December 31, 2018, we did not issue any unregistered securities.
If our stock is listed on an exchange we will be subject to the Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to a few exceptions which we do not meet. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.
ITEM 6 – SELECTED FINANCIAL DATA
As a smaller reporting company we are not required to provide the information required by this Item.
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Disclaimer Regarding Forward Looking Statements
In this document we make a number of statements, referred to as “forward-looking statements”, that are intended to convey our expectations or predictions regarding the occurrence of possible future events or the existence of trends and factors that may impact our future plans and operating results. The safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995 does not apply to us. We note, however, that these forward-looking statements are derived, in part, from various assumptions and analyses we have made in the context of our current business plan and information currently available to us and in light of our experience and perceptions of historical trends, current conditions and expected future developments and other factors we believe to be appropriate in the circumstances. You can generally identify forward-looking statements through words and phrases such as “seek,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “budget,” “project,” “may be,” “may continue,” “may likely result,” and similar expressions. When reading any forward looking-statement you should remain mindful that all forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of our company, and that actual results or developments may vary substantially from those expected as expressed in or implied by that statement for a number of reasons or factors, including those relating to:
| ● | whether or not our breath alcohol ignition interlock device receives the necessary certifications; | |
| ● | whether or not markets for our products develop and, if they do develop, the pace at which they develop; | |
| ● | our ability to attract and retain the qualified personnel to implement our growth strategies; | |
| ● | our ability to fund our short-term and long-term operating needs; | |
| ● | changes in our business plan and corporate strategies; and | |
| ● | other risks and uncertainties discussed in greater detail in the sections of this document. |
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Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning our company and our business made elsewhere in this document as well as other public reports filed with the Securities and Exchange Commission. You should not place undue reliance on any forward-looking statement as a prediction of actual results or developments. We are not obligated to update or revise any forward-looking statement contained in this document to reflect new events or circumstances unless and to the extent required by applicable law.
Overview and Outlook
We are a previous development stage company that was incorporated in the State of Delaware in July 2013. In the year ending December 31, 2018, we generated total revenues of $942,160, compared to $1,235,433 in the year ending December 31, 2017.
We market distributorships and lease a breath alcohol ignition interlock device called the BDI-747/1, which is a mechanism that is installed on the steering column of an automobile and into which a driver exhales. The device in turn provides a blood-alcohol concentration analysis. If the driver’s blood-alcohol content is higher than a certain pre-programmed limit, the device prevents the ignition from engaging and the automobile from starting. These devices are often required for use by DUI or DWI (“driving under the influence” or “driving while intoxicated”) offenders as part of a mandatory court or motor vehicle department program.
We paid Well Electric, a company located in China with experience in design and manufacture of ignition interlock devices, $30,000 to design and manufacture the prototype ignition interlock device for us. Well Electric produced six prototype devices for us which we received in November 2014.
At July 27, 2015 we began production of our patent pending BDI Model #1 power line filter to attach to our BDI-747 Breath Alcohol Ignition Interlock Device which together were certified by NHSTA on June 17, 2015 to work to together to meet or exceed 2013 NHSTA guidelines.
As of December 31, 2018, the BDI-747/1 device was approved in Oregon, Texas, Arizona, and Kentucky. As of March 31, 2019, the BDI-747/1 device was only approved in Arizona and Texas. The states where our BDI-747/1 device is approved has decreased primarily as a result of new state certification rules that require increased capital investment that we are not able to afford.
We have a storefront location in Phoenix, Arizona and contract with four qualified contractors to install, calibrate, remove and monitor the devices. Our business plan includes growth of the company by continuing to complete and submit more state applications and to build up our service infrastructure by utilizing our own retail infrastructure, distributors and franchisees.
As of December 31, 2018, we had approximately 1,100 units on the road, with approximately 885 devices being leased directly from us and approximately 215 devices leased through our distributors, compared to December 31, 2017, when we had approximately 1,558 units on the road, with approximately 1,451 devices being leased directly from us and approximately 107 devices leased through our distributors. The decrease in the total number of devices we have on the road is primarily due to the fact the BDI-747/1 devices was approved in fewer states in 2018 compared to 2017.
Due to the decrease in the number of states where our BDI-747/1 device is approved, and the resulting decrease in the number of devices we have on the road, our management is currently exploring all options related to our business, including, but not limited to: (i) taking out loans or selling our stock in order to raise money to continue, and try to expand, our current business; (ii) trying to acquire a synergistic business and grow our current business; or (iii) selling our current business and trying to find another business to, in or out of our current business segment, to take over the public corporation.
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Results of Operations for the Years Ended December 31, 2018 and 2017
| Year Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Monitoring revenue | $ | 862,330 | $ | 926,454 | ||||
| Distributorship revenues | 79,830 | 308,979 | ||||||
| Total revenues | 942,160 | 1,235,433 | ||||||
| Monitoring cost of revenue | 118,596 | 153,059 | ||||||
| Distributorship cost of revenues | - | 7,738 | ||||||
| Total cost of revenues | 118,596 | 160,797 | ||||||
| Gross profit | 823,564 | 1,074,636 | ||||||
| Operating expenses: | ||||||||
| Payroll | 888,498 | 473,620 | ||||||
| Professional fees | 157,764 | 146,406 | ||||||
| General and administrative | 763,683 | 841,961 | ||||||
| Depreciation | - | 338,044 | ||||||
| Impairment of fixed assets | - | 801,983 | ||||||
| Total operating expenses | 1,809,945 | 2,602,014 | ||||||
| Loss from operations | (986,381 | ) | (1,527,378 | ) | ||||
| Interest expense, net | (494,321 | ) | (943,415 | ) | ||||
| Change in fair value of derivative liability | 5,155 | 68,078 | ||||||
| Gain (loss) on extinguishment of debt | 311,670 | (305,000 | ) | |||||
| Loan default penalty | (635,000 | ) | - | |||||
| Total other income (expense) | (812,496 | ) | (1,180,337 | ) | ||||
| Loss before provision for income taxes | (1,798,877 | ) | (2,707,715 | ) | ||||
| Provision for income taxes | 800 | 1,600 | ||||||
| Net loss | $ | (1,799,677 | ) | $ | (2,709,315 | ) | ||
Operating Loss; Net Loss
Our net loss decreased by $909,638, from $2,709,315 to $1,799,677 from the year ended 2017 compared to 2018. Our operating loss decreased by $540,997, from $1,527,378 to $986,381 for the same periods. The change in our net loss for the year ended December 31, 2018, compared to the prior year is primarily a result of the fact we impaired our assets and had a significant depreciation expense in the year ended 2017, which we did not have in 2018, partially offset by a decrease in our revenues and an increase in our payroll expense. These changes are detailed below.
Revenue
During the year ended December 31, 2018 we had $942,160 in revenues, with $862,330 coming from revenue from the monthly recurring payments we received from our customers that rent our BDI-747/1 breathalyzer device for the ongoing monitoring services related to the devices, and $79,830 coming from revenues paid to us from our distributors, compared to $926,454 and $308,979 from these revenue sources for the same period one year ago. Our revenue decreased overall during the year ended December 31, 2018 due to us having approximately 1,100 units on the road, compared to the year ended December 31, 2017, when we had approximately 1,558 units on the road. Notably, the source of our revenue continued to shift from revenue received our distributors to the revenue we receive from the monthly recurring payments we received from our customers that rent our BDI-747/1 breathalyzer device for the ongoing monitoring services related to the devices in the period ended December 31, 2018, compared to December 31, 2017. We expect the majority of our revenue in the future to come from the monthly recurring payments we receive from our customers that rent our BDI-747/1 breathalyzer device for the ongoing monitoring services related to the devices and not from distributors as we shift away from using distributors and more towards direct retail of our devices. We expect the revenue we receive from monitoring our devices on the road, as well as revenue from distributors, will increase in any periods we have more devices on the road versus the comparable period and will decrease in any period we have fewer units on the road versus the comparable period. We do not believe our revenues will increase if our number of devices on the road decreases since we do not believe we will charge more for leasing the BDI-747/1 device than what we charge now in the foreseeable future.
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Cost of Revenue
Our cost of revenue for the year ended December 31, 2018 was $118,596, compared to $160,797 for the year ended December 31, 2017. Our cost of revenue for the year ended December 31, 2018 was $118,596 for the revenue we received for the ongoing maintenance for units we lease to customers, and $0 related to the revenue we received from distributors. Our cost of revenue for the year ended December 31, 2017 was $153,059 for the revenue we received for the ongoing maintenance for units we lease to customers, and $7,738 related to the revenue we received from distributors. Again, we expect this shift in our cost of revenue to monitoring cost of revenue to continue as we move away from using distributors and more towards direct retail of our devices.
Payroll
Our payroll increased by $414,878, from $473,620 to $888,498, from the year ended December 31, 2017 compared to December 31, 2018. The significant increase in our payroll expense was primarily a result of us contracting with additional personnel in 2018 to service the units we had on the road during the year.
Professional Fees
Our professional fees increased during the year ended December 31, 2018 compared to the year ended December 31, 2017. Our professional fees were $157,764 for the year ended December 31, 2018 and $146,406 for the year ended December 31, 2017. These fees are largely related to fees paid for legal, accounting and audit services. We expect these fees to continue grow steadily if our business expands. In the event we undertake an unusual transaction, such as an acquisition or file a registration statement, we would expect these fees to substantially increase during that period.
General and Administrative Expenses
General and administrative expenses decreased by $78,278, from $841,961 for the year ended December 31, 2017 to $763,683 for the year ended December 31, 2018. This decrease was primarily related to a significant decrease in advertising expenses in 2018 compared to 2017, a fixed asset adjustment in 2018 when we returned a number of parts to our supplier, and lower commissions paid in 2018 since we paid our last commissions in 2017, partially offset by higher rent expense due to locations in Arizona, higher royalty payments in 2018 and an increase in special parts we ordered from our supplier in 2018.
Depreciation
Our depreciation decreased from $338,044 for the year ended December 31, 2017 to $0 for the year ended December 31, 2018. Our depreciation expense in the period ended September 30, 2017 was primarily related to the depreciation of the BDI-747/1 device. Since we fully impaired our remaining BDI-747/1 devices for the year ended December 31, 2017, due to the uncertainty with the direction of our business going forward, we did not have a depreciation expense for the year ended December 31, 2018.
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Impairment of Fixed Assets
During the year ended December 31, 2017, we had impairment of fixed assets of $801,983, compared to $0 during 2018. The impairment of our fixed assets in the year ended December 31, 2017 is a result of our management currently determining whether our current business model and operations are viable. Until this determination has been made, we have elected to impair our assets.
Interest Expense
Interest expense decreased by $449,094 from $943,415 for the year ended December 31, 2017 to $494,321 for the year ended December 31, 2018. For both periods these amounts are largely due to the interest we owe on outstanding debt including amortization of debt discount costs. The interest expense significantly decreased for the period ended December 31, 2018, compared to the same period one year ago, due to our decrease in outstanding debt compared to one year ago, and the related accretion of the amount of debt discount associated with the debt.
Change in Fair Value of Derivative Liability
During the year ended December 31, 2018, we had a change in fair value of derivative liability of $5,155 compared to $68,078 for the same period in 2017. The change in fair value of derivative liability for both periods, relates to the conversion feature of a promissory note we had outstanding during this period. Since the conversion price on the promissory note is calculated based on a discount to the closing price of our common stock, as our closing price fluctuates it changes the fair value of the derivative liability.
Loss on Extinguishment of Debt
During the year ended December 31, 2018, we had a gain on extinguishment of debt of $311,670 compared to a loss of ($305,000) for the same period in 2017. The gain on extinguishment of debt in the year ended December 31, 2018, relates to the settlement of three notes payable and related accrued interest totaling $73,640 for a total payment of $17,000, resulting in gains totaling $56,640, and the release of two claims of accrued royalties totaling $255,030. The loss on extinguishment of debt in the year ended December 31, 2017, relates to the conversion of a note balance totaling $43,561.50 owed to Mr. Laurence Wainer into shares of our Series A Preferred Stock.
Liquidity and Capital Resources for Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Introduction
During the year ended December 31, 2018 and 2017, because of our operating losses, we did not generate positive operating cash flows. Our cash on hand as of December 31, 2018 was $775 and our cash used in operations is approximately $100,000 per month. As a result, we have short term cash needs. These needs are being satisfied through proceeds from the sales of our securities and loans from both related parties and third parties. We currently do not believe we will be able to satisfy our cash needs from our revenues for some time.
Our cash, current assets, total assets, current liabilities, and total liabilities as of December 31, 2018 and as of December 31, 2017, respectively, are as follows:
| December 31, 2018 | December 31, 2017 | Change | ||||||||||
| Cash | $ | 775 | $ | 31,874 | $ | (31,099 | ) | |||||
| Total Current Assets | 7,146 | 63,445 | (56,299 | ) | ||||||||
| Total Assets | 13,627 | 68,576 | (54,949 | ) | ||||||||
| Total Current Liabilities | 564,477 | 585,749 | (21,272 | ) | ||||||||
| Total Liabilities | $ | 2,616,143 | $ | 1,449,846 | $ | 1,166,297 | ||||||
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Our current assets decreased as of December 31, 2018 as compared to December 31, 2017, due to us having less cash on hand, less accounts receivable, net, and less prepaid expenses. The decrease in our total assets between the two periods was also related to the decrease in our cash on hand, accounts receivable, net, and prepaid expenses, partially offset by a slight increase in deposits as of December 31, 2018.
Our current liabilities decreased by $21,272, as of December 31, 2018 as compared to December 31, 2017. This slight decrease was primarily due to decreases in our accounts payable, accrued royalty payable, deferred revenue, notes payable-related party, and convertible notes payable, partially offset by increases in accrued expenses, accrued interest, accrued interest – related party, derivative liability, and notes payable.
In order to repay our obligations in full or in part when due, we will be required to raise significant capital from other sources. There is no assurance, however, that we will be successful in these efforts.
Sources and Uses of Cash
Operations
We had net cash used in operating activities of $1,112,658 for the year ended December 31, 2018, as compared to $384,641 for the year ended December 31, 2017. For the period in 2018, the net cash used in operating activities consisted primarily of our net loss of ($1,799,677), adjusted primarily by shares issued for services of $114,642, gain on extinguishment of debt of ($311,670), change in fair value of derivative liability of ($5,155), loan default penalty of $635,000, and amortization of debt discount of $30,872, as well as changes in accrued expenses of $44,456, deferred revenue of ($92,216), accounts payable of ($39,695), prepaid expenses of $289, accrued royalties payable of ($101,922), accrued interest $19,773, accrued interest related party of $165,240, and accounts receivable of $23,561. For the period in 2017, the net cash used in operating activities consisted primarily of our net loss of ($2,709,315), adjusted primarily by impairment of long-lived assets of $804,322, depreciation of $338,044, shares and warrants issued for services of $14,191, loss on extinguishment of debt of $305,000, write off of debt discount due to refinance of $352,511, loss on disposal of property and equipment of $98,800, change in fair value of derivative liability of ($61,254), and amortization of debt discount of $361,676, as well as changes in accrued expenses of ($34,625), deferred revenue of $22,047, deposits of $1,123, accounts payable of $6,552, inventory of $10,650, prepaid expenses of ($294), accrued royalties payable of $58,026, income taxes payable of $230, accrued interest of $2,020 accrued interest related party of $23,330, and accounts receivable of $22,325.
Investments
We did not have cash used in investing activities in the year ended December 31, 2018, compared to $634,820 for December 31, 2017. For the year ended December 31, 2017, cash used in investing activities consisted of $884,820 of purchase of furniture and equipment, offset by $250,000 deposits used against the cost of purchasing interlock units.
Financing
Our net cash provided by financing activities for the year ended December 31, 2018 was $1,081,559, compared to $935,026 for the year ended December 31, 2017. For the year ended December 31, 2018, our net cash from financing activities consisted of proceeds from notes payable of $154,400, proceeds from notes payable-related party of $649,127, proceeds from issuance of common stock of $458,705, and proceeds from issuance of convertible notes payable of $20,000, partially offset by repayments of notes payable of ($74,623) and payments on note payable related party of ($126,050). For the year ended December 31, 2017, our net cash from financing activities consisted of proceeds from notes payable of $50,000, proceeds from notes payable-related party of $250,400, proceeds from issuance of common stock of $849,037, and proceeds from issuance of convertible notes payable of $5,000, partially offset by repayments of notes payable of ($56,662), payments on convertible notes payable of ($50,000), and payments on note payable related party of ($112,749).
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Contractual Obligations
As of December 31, 2018, we had the following contractual obligations for 2018 through 2022:
| 2019 | 2020 | 2021 | 2022 | 2023 | Total | |||||||||||||||||||
| Debt obligations (1) | $ | 831,444 | $ | 637,004 | $ | 626,334 | $ | 606,000 | $ | 2,575,500 | $ | 5,276,282 | ||||||||||||
| Capital leases | - | - | - | - | - | - | ||||||||||||||||||
| Operating leases | - | - | - | - | - | - | ||||||||||||||||||
| $ | 831,444 | $ | 637,004 | $ | 626,334 | $ | 606,000 | $ | 2,575,500 | $ | 5,276,282 | |||||||||||||
| (1) | The interest amounts for the contractual obligation for each year have been estimated. |
Off Balance Sheet Arrangements
We have no off balance sheet arrangements.
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company we are not required to provide the information required by this Item.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For a list of financial statements and supplementary data filed as part of this Annual Report, see the Index to Financial Statements beginning at page F-1 of this Annual Report.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There are no items required to be reported under this Item.
ITEM 9A - CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (our Principal Accounting Officer), of the effectiveness of our disclosure controls and procedures (as defined) in Exchange Act Rules 13a – 15(c) and 15d – 15(e)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer, who are our principal executive officer and principal financial officers, respectively, concluded that, as of the end of the period ended December 31, 2018, our disclosure controls and procedures were not effective (1) to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to us, including our chief executive and chief financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our Chief Executive Officer and Chief Financial Officer (our Principal Accounting Officer) do not expect that our disclosure controls or internal controls will prevent all error and all fraud. No matter how well conceived and operated, our disclosure controls and procedures can provide only a reasonable level of assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
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Furthermore, smaller reporting companies face additional limitations. Smaller reporting companies employ fewer individuals and find it difficult to properly segregate duties. Often, one or two individuals control every aspect of the company’s operation and are in a position to override any system of internal control. Additionally, smaller reporting companies tend to utilize general accounting software packages that lack a rigorous set of software controls.
(b) Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, as amended, as a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer (our Principal Financial Officer), and effected by our board of directors, management and other personnel, 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 in the United States and includes those policies and procedures that:
| ● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and any disposition of our assets;
|
| ● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, Management has identified the following three material weaknesses that have caused management to conclude that, as of December 31, 2018, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:
1. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
2. We have not documented our internal controls. We have limited policies and procedures that cover the recording and reporting of financial transactions and accounting provisions. As a result we may be delayed in our ability to calculate certain accounting provisions. While we believe these provisions are accounted for correctly in the attached audited financial statements our lack of internal controls could lead to a delay in our reporting obligations. We are required to provide written documentation of key internal controls over financial reporting. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
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3. Effective controls over the control environment were not maintained. Specifically, a formally adopted written code of business conduct and ethics that governs our employees, officers, and directors was not in place. Additionally, management has not developed and effectively communicated to our employees its accounting policies and procedures. This has resulted in inconsistent practices. Further, our Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.
4. Currently, we do not have ability systematic approach to timely and accurately record unearned revenue and revenue, convertible debt transactions, deferred revenue, and derivative liabilities in the financial statements and have needed additional time, beyond the filing deadlines set by the Commission, to file our periodic reports.
To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
(c) Remediation of Material Weaknesses
In order to remediate the material weakness in our documentation, evaluation and testing of internal controls, we hope to hire additional qualified and experienced personnel to assist us in remedying this material weakness.
(d) Changes in Internal Control over Financial Reporting
There are no changes to report during our fiscal quarter ended December 31, 2018.
There are no events required to be disclosed by the Item.
ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The following table sets forth the names and ages of our directors, director nominees, and executive officers as of June 15, 2019, the principal offices and positions with the Company held by each person and the date such person became a director or executive officer of the Company. The executive officers of the Company are elected annually by the Board of Directors. The directors serve one-year terms until their successors are elected. The executive officers serve terms of one year or until their death, resignation, or removal by the Board of Directors. Unless described below, there are no family relationships among any of the directors and officers.
| Name | Age | Position(s) | ||
| David Haridim | 36 | President, Chief Executive Officer, Chief Financial Officer Secretary (2019) and a Director (2019) |
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Business Experience
The following is a brief account of the education and business experience of each director and executive officer during at least the past five years, indicating each person’s principal occupation during the period, and the name and principal business of the organization by which he was employed.
David Haridim, age 36, was appointed as our President, Chief Executive Officer, Chief Financial Officer and Secretary on January 2, 2019. He was also appointed to our Board of Directors on the same date. Mr. Haridim has been the Manager of The Doheny Group, LLC since January 2016. The Doheny Group, LLC invests in private and public companies in different industries and Mr. Haridim, as the Manager of The Doheny Group analyzes and approves any and all investments made by The Doheny Group, LLC. Prior to founding The Doheny Group, LLC, Mr. Haridim was the managing partner at Whitestone International Group. Mr. Haridim attended Southwestern School of Law, graduating with a J.D. in 2012.
Term of Office
Our directors hold office until the next annual meeting or until their successors have been elected and qualified, or until they resign or are removed. Our board of directors appoints our officers, and our officers hold office until their successors are chosen and qualify, or until their resignation or their removal.
Family Relationships
There are no family relationships among our directors or officers.
Involvement in Certain Legal Proceedings
Our directors and executive officers have not been involved in any of the following events during the past ten years:
| 1. | Other than the involuntary bankruptcy proceeding mentioned herein, no bankruptcy petition has been filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; | |
| 2. | any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); | |
| 3. | being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; | |
| 4. | being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; | |
| 5. | being the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: (i) any federal or state securities or commodities law or regulation; or (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or | |
| 6. | being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Securities Exchange Act of 1934), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
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Committees
All proceedings of the board of directors for the year ended December 31, 2018 were conducted by resolutions consented to in writing by the board of directors and filed with the minutes of the proceedings of our board of directors. Our company currently does not have nominating, compensation or audit committees or committees performing similar functions nor does our company have a written nominating, compensation or audit committee charter. Our board of directors does not believe that it is necessary to have such committees because it believes that the functions of such committees can be adequately performed by the board of directors.
We do not have any defined policy or procedural requirements for shareholders to submit recommendations or nominations for directors. The board of directors believes that, given the stage of our development, a specific nominating policy would be premature and of little assistance until our business operations develop to a more advanced level. Our company does not currently have any specific or minimum criteria for the election of nominees to the board of directors and we do not have any specific process or procedure for evaluating such nominees. The board of directors will assess all candidates, whether submitted by management or shareholders, and make recommendations for election or appointment.
A shareholder who wishes to communicate with our board of directors may do so by directing a written request addressed to our president at the address appearing on the first page of this annual report.
Audit Committee Financial Expert
Our board of directors has determined that it does not have an audit committee member that qualifies as an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K. We believe that the audit committee members are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. In addition, we believe that retaining an independent director who would qualify as an “audit committee financial expert” would be overly costly and burdensome and is not warranted in our circumstances given the early stages of our development and the fact that we have not generated revenues to date.
Nomination Procedures For Appointment of Directors
As of December 31, 2018, we did not effect any material changes to the procedures by which our stockholders may recommend nominees to our board of directors.
Code of Ethics
We do not have a code of ethics.
Section 16(a) Beneficial Ownership
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers and persons who own more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
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During the fiscal year ended December 31, 2018, to the Company’s knowledge, the following delinquencies occurred:
| Name | No. of Late Reports |
No. of Transactions Reported Late |
No. of Failures to File | |||
| Laurence Wainer | 0 | 0 | 0 |
Indemnification of Directors and Officers
Article Fourteen of our Articles of Incorporation provides that, to the fullest extent permitted by law, no director or officer shall be personally liable to the corporation or its shareholders for damages for breach of any duty owed to the corporation or its shareholders. In addition, the corporation shall have the power, in its bylaws or in any resolution of its stockholders or directors, to indemnify the officers and directors of the corporation against any liability as may be determined to be in the best interests of this corporation, and in conjunction therewith, to buy, at the corporation’s expense, policies of insurance.
Article XI of our Bylaws further addresses indemnification of our directors and officers and allows us to indemnify our directors and officers to the fullest extent permitted by the General Corporation Law of Delaware.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Act”) may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
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ITEM 11 - EXECUTIVE COMPENSATION
The particulars of compensation paid to the following persons:
| (a) | all individuals serving as our principal executive officer during the year ended December 31, 2018; | |
| (b) | each of our two most highly compensated executive officers other than our principal executive officer who were serving as executive officers at December 31, 2018 who had total compensation exceeding $100,000; and | |
| (c) | up to two additional individuals for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as our executive officer at December 31, 2018, |
who we will collectively refer to as the named executive officers, for the years ended December 31, 2018 and 2016, and 2015, are set out in the following summary compensation table:
Summary Compensation
The following table provides a summary of the compensation received by the persons set out therein for each of our last three fiscal years:
SUMMARY COMPENSATION TABLE
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||||||
Laurence Wainer President, COO, Secretary(1) | 2018 2017 2016 | $ | 131,434 60,500 52,000 | -0- -0- -0- | -0- -0- -0- | -0- -0- -0- | -0- -0- -0- | -0- -0- -0- | -0- -0- -0- | $ | 131,434 60,500 52,000 | |||||||||||||||||||||||
| Abraham Summers, CFO(2) | 2017 2016 | 4,780 3,500 | -0- -0- | -0- -0- | (3) | -0- -0- | -0- -0- | -0- -0- | -0- -0- | 4,780 3,500 | ||||||||||||||||||||||||
| (1) | Mr. Wainer was appointed President, Chief Executive Officer, Secretary and Director on February 6, 2014. He resigned effective January 2, 2019. | |
| (2) | Mr. Summers was appointed Chief Financial Officer on November 15, 2016. Mr. Summers ceased performing his job responsibilities on May 10, 2017. | |
| (3) | During 2016, Gnosiis International, LLC, an entity-controlled by Mr. Summers, received 533,100 shares of our common stock under the terms of a Finder’s Fee Agreement between us and Gnosiis International, LLC. Since those shares were paid as a finder’s fee for a transaction that closed prior to Mr. Summer’s appointment as our Chief Financial Officer, the value of those shares is not included in this table. |
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As noted above, on January 2, 2019, Mr. David Haridim, the principal of Doheny Group, LLC, was appointed to our Board of Directors and as our sole executive officer. Since his appointment neither he nor Doheny Group, LLC has received any compensation from us as salary, royalties, stock, or otherwise.
Employment Contracts
On November 15, 2016, we entered into an employment agreement with Mr. Abraham Summers through Gnosiis International, LLC. Under the terms of the employment agreement, we agreed to employ Mr. Summers as our Chief Financial Officer until terminated by either party. Under the employment agreement we agreed to compensate Gnosiis and Mr. Summers an aggregate of 80% of the compensation paid by us to Mr. Laurence Wainer, our President, with 50% of the compensation paid to Mr. Summers as an employee and 50% paid to Gnosiis for consulting services. On June 19, 2017, we entered into a Termination of Services Agreement, under which the agreements we had with Mr. Summers and Gnosiis International, LLC, were terminated effective immediately. Mr. Summers also relinquished his right to serve on our Board of Director and Gnosiis relinquished any anti-dilution rights that mandated us to issue Gnosiis additional shares when we issued shares of our common stock. Under the Termination of Services of Agreement, we paid Mr. Summers $55,000 and issued Gnosiis 294,321 shares of our common stock .
In September 11, 2015 we entered into an independent contract agreement with Mr. Laurence Wainer for his services as our sole executive officer. Under the terms of the agreement, we agreed to pay Mr. Wainer $4,000 per month for his services as our sole executive officer. The agreement was for an initial term of one year, which renewed for one year periods until terminated in accordance with the agreement. This agreement terminated when Mr. Wainer resigned from all his positions he held with us, effective January 2, 2019.
Long-Term Incentive Plans. We do not provide its officers or employees with pension, stock appreciation rights, long-term incentive or other plans and has no intention of implementing any of these plans for the foreseeable future.
Employee Pension, Profit Sharing or other Retirement Plans. We do not have a defined benefit, pension plan, profit sharing or other retirement plan, although it may adopt one or more of such plans in the future.
Director Compensation
The following table sets forth director compensation for 2018:
| Name | Fees
Earned or Paid in Cash ($) |
Stock
Awards ($) |
Option
Awards ($) |
Non-Equity
Incentive Plan Compensation ($) |
Nonqualified
Deferred Compensation Earnings ($) |
All
Other Compensation ($) |
Total
($) |
|||||||||||||||||||||
| Laurence Wainer | -0- | -0- | -0- | -0- | -0- | -0- | -0- | |||||||||||||||||||||
No director received compensation for the fiscal years December 31, 2018 and December 31, 2017. We have no formal plan for compensating our directors for their service in their capacity as directors, although such directors are expected in the future to receive stock options to purchase common shares as awarded by our board of directors or (as to future stock options) a compensation committee which may be established. Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our board of directors. Our board of directors may award special remuneration to any director undertaking any special services on our behalf other than services ordinarily required of a director.
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Outstanding Equity Awards at Fiscal Year-End
The following table sets forth certain information concerning outstanding stock awards held by the Named Executive Officers on December 31, 2018:
| Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable |
Number of Securities Underlying Unexercised Options (#) Unexercisable |
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) |
Option Exercise Price ($) |
Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) |
Market Value of Shares or Units of Stock That Have Not Vested ($) |
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) |
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) |
|||||||||||||||||||||||||
| Laurence Wainer | -0- | -0- | -0- | N/A | N/A | -0- | -0- | -0- | -0- | |||||||||||||||||||||||||
| Abraham Summers | -0- | -0- | -0- | N/A | N/A | -0- | -0- | -0- | -0- | |||||||||||||||||||||||||
Outstanding Equity Awards at Fiscal Year-End
There were no outstanding stock options or stock appreciation rights granted to our executive officers and directors at December 31, 2018.
Aggregated Option Exercises
There were no options exercised by any officer or director of our company during our twelve month period ended December 31, 2018.
Long-Term Incentive Plan
Currently, our company does not have a long-term incentive plan in favor of any director, officer, consultant or employee of our company.
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ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of June 15, 2019, certain information with respect to our equity securities owned of record or beneficially by (i) each Officer and Director of the Company; (ii) each person who owns beneficially more than 5% of each class of the Company’s outstanding equity securities; and (iii) all Directors and Executive Officers as a group.
Common Stock
| Title of Class | Name and Address of Beneficial Owner(2) |
Nature of Beneficial Ownership |
Amount | Percent of Class (1) |
Percent of Voting Rights(3) | |||||||||||
| Common Stock | David Haridim (4) | President, CEO, CFO, Secretary and Director | 11,570,915 | (5)(6) | 36.9 | % | 8.98 | % | ||||||||
| Common Stock | All Officers and Directors as a Group (1 person) | 11,570,915 | (5)(6) | 36.9 | % | 8.98 | % | |||||||||
| (1) | Unless otherwise indicated, based on 31,350,683 shares of common stock issued and outstanding. Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for the purposes of computing the percentage of any other person. | |
| (2) | Unless indicated otherwise, the address of the shareholder is 1427 S. Robertson Blvd., Los Angeles, CA 90035. | |
| (3) | Includes all voting securities of the company, common stock with any series of preferred stock. | |
| (4) | Indicates one of our officers or directors. | |
| (5) | Includes 11,570,915 shares owned The Doheny Group, LLC, an entity controlled by Mr. Haridim. Of the 11,570,915 shares, 447,914 shares were inadvertently issued in the name of David Haridim, the principal of The Doheny Group, LLC, but they are owned by The Doheny Group, LLC. | |
| (6) | Effective December 31, 2018, The Doheny Group, LLC, an entity controlled by David Haridim, our sole officer and director, entered into an agreement with us to rescind The Doheny Group, LLC’s anti-dilution rights. As a result, The Doheny Group, LLC will not have any anti-dilution rights (the right to receive additional shares whenever we issue shares of our common stock) and will return the approximately 670,000 shares of our common stock it received under its anti-dilution rights since 2016. Since these shares have not yet been returned and cancelled those shares are still included in this table as beneficially-owned by Mr. Haridim. |
Series A Preferred Stock
| Title of Class | Name and Address of Beneficial Owner(2) |
Nature of Beneficial Ownership |
Amount | Percent of Class (1) |
Percent of Voting Rights(3) | |||||||||||
| Preferred Stock | David Haridim (4) | President, CEO, CFO, Secretary and Director | 1,000,000 | (5) | 100 | % | 76.1 | % | ||||||||
| Common Stock | All Officers and Directors as a Group (1 person) | 1,000,000 | (5) | 100 | % | 76.1 | % | |||||||||
| (1) | Unless otherwise indicated, based on 1,000,000 shares of our Series A Preferred Stock issued and outstanding. Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for the purposes of computing the percentage of any other person. |
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| (2) | Unless indicated otherwise, the address of the shareholder is 1427 S. Robertson Blvd., Los Angeles, CA 90035. | |
| (3) | Includes all voting securities of the company, common stock with any series of preferred stock. Each share of our Series A Preferred Stock has 100 votes on any matter brought before our common stockholders for a vote. | |
| (4) | Indicates one of our officers or directors. | |
| (5) | Includes shares held in the name of The Doheny Group, LLC, an entity controlled by David Haridim. |
The issuer is not aware of any person who owns of record, or is known to own beneficially, ten percent or more of the outstanding securities of any class of the issuer, other than as set forth above. The issuer is not aware of any person who controls the issuer as specified in Section 2(a)(1) of the 1940 Act. There are no classes of stock other than common stock issued or outstanding. The Company does not have an investment advisor.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Effective December 31, 2018, The Doheny Group, LLC, an entity controlled by David Haridim, our sole officer and director, entered into an agreement with us to rescind The Doheny Group, LLC’s anti-dilution rights. As a result, The Doheny Group, LLC will not have any anti-dilution rights (the right to receive additional shares whenever we issue shares of our common stock) and will return the approximately 670,000 shares of our common stock it received under its anti-dilution rights since 2016.
On March 7, 2017, we entered into an Debt Conversion and Series A Preferred Stock Purchase Agreement (the “SPA”) with Laurence Wainer, one of our officers and directors (“Wainer”), under which we agreed to create a new series of non-convertible preferred stock entitled “Series A Preferred Stock,” with One Million (1,000,000) shares authorized and the following rights: (i) no dividend rights; (ii) no liquidation preference over the Company’s common stock; (iii) no conversion rights; (iv) no redemption rights; (v) no call rights by the Company; (vi) each share of Series A Convertible Preferred stock will have one hundred (100) votes on all matters validly brought to the Company’s common stockholders; and Wainer agreed to acquire 1,000,000 shares of our Series A Preferred Stock, once created, in exchange for Wainer forgiving $25,537 in accrued salary we owed to him as of December 31, 2016.
As additional consideration for Wainer’s acquisition of the Series A Preferred Shares we entered into a Lockup Agreement with Wainer dated March 7, 2017 (the “Lockup Agreement”). Under the Lockup Agreement Wainer agreed to refrain selling 8,000,000 out of the approximately 9,700,000 shares of our common stock he owns until the expiration of the Lockup Period, as defined in the Lockup Agreement.
On November 30, 2015, we entered into a Finder’s Fee Agreement with Gnosiis International, LLC, a Wyoming entity controlled by Mr. Abraham Summers, who is now our Chief Financial Officer. Under the Finder’s Fee Agreement we agreed to contract with Gnosiis to assist us with finding financing for the company, as well as for consulting services in connection with economics, project management and business development. Under the agreement, we agreed to pay Gnosiis one share for every dollar in financing closed by us as a result of Gnosiis’ efforts. On September 30, 2016, in connection with the Loan and Security Agreement we entered into with The Doheny Group, LLC, we issued Gnosiis 533,100 shares of our common stock. We also compensate Gnosiis weekly for consulting services provided to us.
On November 15, 2016, we entered into an employment agreement with Mr. Abraham Summers through Gnosiis. Under the terms of the employment agreement, we agreed to employ Mr. Summers as our Chief Financial Officer until terminated by either party. Under the employment agreement we agreed to compensate Gnosiis and Mr. Summers an aggregate of 80% of the compensation paid by us to Mr. Laurence Wainer, our President, with 50% of the compensation paid to Mr. Summers as an employee and 50% paid to Gnosiis for consulting services. The compensation is to be paid weekly and shall be at least $500 per week.
In September 11, 2015 we entered into an independent contract agreement with Mr. Laurence Wainer for his services as our sole executive officer. Under the terms of the agreement, we agreed to pay Mr. Wainer $4,000 per month for his services as our sole executive officer. The agreement is for an initial term of one year, which will automatically renew for one year periods unless terminated in accordance with the agreement.
Corporate Governance
As of December 31, 2018, our Board of Directors consisted of Laurence Wainer. As of December 31, 2018, we did not have any directors that qualified as “independent directors” as the term is used in NASDAQ rule 5605(a)(2).
Our current Board of Directors consists of David Haridim as our sole director.
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ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit fees
The aggregate fees billed for the two most recently completed fiscal periods ended December 31, 2018 and December 31, 2017 for professional services rendered by Benjamin & Young, LLP for the audit of our annual consolidated financial statements, quarterly reviews of our interim consolidated financial statements and services normally provided by the independent accountant in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:
| Year
Ended December 31, 2018 |
Year
Ended December 31, 2017 |
|||||||
| Audit Fees and Audit Related Fees | $ | 45,250 |
$ | 45,000 | ||||
| Tax Fees | $ | 0 | $ | 0 | ||||
| All Other Fees | $ | 0 | $ | 0 | ||||
| Total | $ | 45,250 |
$ | 45,000 | ||||
In the above table, “audit fees” are fees billed by our company’s external auditor for services provided in auditing our company’s annual financial statements for the subject year. “Audit-related fees” are fees not included in audit fees that are billed by the auditor for assurance and related services that are reasonably related to the performance of the audit review of our company’s financial statements. “Tax fees” are fees billed by the auditor for professional services rendered for tax compliance, tax advice and tax planning. “All other fees” are fees billed by the auditor for products and services not included in the foregoing categories.
Policy on Pre-Approval by Audit Committee of Services Performed by Independent Auditors
The board of directors pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by the board of directors before the respective services were rendered.
The board of directors has considered the nature and amount of fees billed by Benjamin & Young, LLP and believes that the provision of services for activities unrelated to the audit is compatible with maintaining Benjamin & Young, LLP independence.
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ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
For a list of financial statements and supplementary data filed as part of this Annual Report, see the Index to Financial Statements beginning at page F-1 of this Annual Report.
(a)(2) Financial Statement Schedules
We do not have any financial statement schedules required to be supplied under this Item.
(a)(3) Exhibits
Refer to (b) below.
| 31 |
| 101.INS ** | XBRL Instance Document | |
| 101.SCH ** | XBRL Taxonomy Extension Schema Document | |
| 101.CAL ** | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF ** | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB ** | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE ** | XBRL Taxonomy Extension Presentation Linkbase Document |
| 32 |
* Filed herewith
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
| (1) | Incorporated by reference from our Registration Statement on Form 10, filed with the Commission on September 30, 2013. | |
| (2) | Incorporated by reference from our Registration Statement on Form S-1, filed with the Commission on July 24, 2014. | |
| (3) | Incorporated by reference from our Annual Report on Form 10-K, filed with the Commission on March 30, 2015. | |
| (4) | Incorporated by reference from our Current Report on Form 8-K filed with the Commission on September 11, 2015. | |
| (5) | Incorporated by reference from our Current Report on Form 8-K filed with the Commission on November 12, 2015. | |
| (6) | Incorporated by reference from our Quarterly Report on Form 10-Q, filed with the Commission on August 13, 2015. | |
| (7) | Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 2, 2015. | |
| (8) | Incorporated by reference from our Current Report on Form 8-K filed with the Commission on February 22, 2016. | |
| (9) | Incorporated by reference from our Current Report on Form 8-K filed with the Commission on March 17, 2016. | |
| (10) | Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on August 22, 2016. | |
| (11) | Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on November 21, 2016. | |
| (12) | Incorporated by reference from our Current Report on Form 8-K filed with the Commission on July 3, 2017. | |
| (13) | Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on August 21, 2017. | |
| (14) | Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on February 9, 2018. | |
| (15) | Incorporated by reference from our Current Report on Form 8-K filed with the Commission on January 11, 2019. | |
| (16) | Incorporated by reference from our Current Report on Form 8-K filed with the Commission on March 15, 2017 | |
| (17) | Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on June 27, 2019 |
| 33 |
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Blow & Drive Interlock Corporation | ||
| Dated: July 18, 2019 | /s/ David Haridim | |
| By: | David Haridim | |
| Its: | President (Principal Executive Officer) | |
| Dated: July 18, 2019 | /s/ David Haridim | |
| By: | David Haridim | |
| Its: | Chief Financial Officer and Principal Accounting Officer |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Dated: July 18, 2019 | /s/ David Haridim | |
| By: | David Haridim, Director, President, and Secretary |
| 34 |
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
Supplementary Data
Not applicable
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Of Blow & Drive Interlock Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Blow & Drive Interlock Corporation (the “Company”) as of December 31, 2018 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt About the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered losses from operations and cash outflows from operating activities that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Benjamin & Young, LLP
We served as the Company’s Auditor since 2018
Anaheim, California
July 16, 2019
| F-2 |
PART I – FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
| BLOW & DRIVE INTERLOCK CORPORATION | ||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||
| December 31, 2018 | December 31, 2017 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 775 | $ | 31,874 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $0 and $26,541 at December 31, 2018 and 2017, respectively | 5,355 | 28,916 | ||||||
| Prepaid Expenses | 1,016 | 2,655 | ||||||
| Total current assets | 7,146 | 63,445 | ||||||
| Deposits | 6,481 | 5,131 | ||||||
| Total assets | $ | 13,627 | $ | 68,576 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | - | $ | 39,695 | ||||
| Accrued expenses | 60,058 | 15,685 | ||||||
| Accrued royalty payable | 26,885 | 179,993 | ||||||
| Accrued interest | 17,155 | 10,082 | ||||||
| Accrued interest – related party | 190,618 | 25,378 | ||||||
| Income taxes payable | 5,930 | 5,930 | ||||||
| Deferred revenue | 92,162 | 184,378 | ||||||
| Derivative liability | 22,517 | 12,302 | ||||||
| Notes payable, net of debt discount of $7,549 and $18,729 at December 31, 2018 and December 31, 2017, respectively | 117,776 | 60,006 | ||||||
| Notes payable – related party | 29,000 | 45,328 | ||||||
| Convertible notes payable | 2,376 | 6,972 | ||||||
| Total current liabilities | 564,477 | 585,749 | ||||||
| Non-current Liabilities | ||||||||
| Notes payable, net of debt discount of $6,925 and $14,473 at December 31, 2018 and December 31, 2017, respectively | 18,069 | 21,274 | ||||||
| Notes payable – related party | 2,020,000 | 839,306 | ||||||
| Convertible notes payable, net of debt discount of $0 and $2,011 at December 31, 2018 and December 31, 2017, respectively | 13,597 | 3,517 | ||||||
| Total non-current liabilities | 2,051,666 | 864,097 | ||||||
| Total Liabilities | 2,616,143 | 1,449,846 | ||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock, par value $0.001, 20,000,000 shares authorized, 1,000,000 and 1,000,000 shares issued or issuable and outstanding as of December 31, 2018 and December 31, 2017, respectively | 1,000 | 1,000 | ||||||
| Common stock, par value $0.0001, 100,000,000 shares authorized, 31,073,529 and 26,223,834 shares issued or issuable and outstanding as of December 31, 2018 and December 31, 2017, respectively | 3,107 | 2,622 | ||||||
| Additional paid-in capital | 3,489,699 | 2,911,753 | ||||||
| Accumulated deficit | (6,096,322 | ) | (4,296,645 | ) | ||||
| Total stockholders’ deficit | (2,602,516 | ) | (1,381,270 | ) | ||||
| Total liabilities and stockholders’ equity (deficit) | $ | 13,627 | $ | 68,576 | ||||
The accompanying notes are an integral part of these financial statements.
| F-3 |
BLOW & DRIVE INTERLOCK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| Years Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Revenue: | ||||||||
| Monitoring revenues | $ | 862,330 | $ | 926,454 | ||||
| Distributorship revenues | 79,830 | 308,979 | ||||||
| Total revenues | 942,160 | 1,235,433 | ||||||
| Cost of sales: | ||||||||
| Monitoring cost of revenue | 118,596 | 153,059 | ||||||
| Distributorship cost of revenue | - | 7,738 | ||||||
| Cost of sales | 118,596 | 160,797 | ||||||
| Gross profit | 823,564 | 1,074,636 | ||||||
| Operating expenses: | ||||||||
| Payroll | 888,498 | 473,620 | ||||||
| Professional fees | 157,764 | 146,406 | ||||||
| General and administrative | 763,683 | 841,961 | ||||||
| Depreciation | - | 338,044 | ||||||
| Impairment of fixed assets | - | 801,983 | ||||||
| Total operating expenses | 1,809,945 | 2,602,014 | ||||||
| Loss from operations | (986,381 | ) | (1,527,378 | ) | ||||
| Other income (expense) | ||||||||
| Interest expense, net | (494,321 | ) | (943,415 | ) | ||||
| Change in fair value of derivative liability | 5,155 | 68,078 | ||||||
| Gain (loss) on extinguishment of debt | 311,670 | (305,000 | ) | |||||
| Loan default penalty | (635,000 | ) | - | |||||
| Total other income (expense) | (812,496 | ) | (1,180,337 | ) | ||||
| Loss before provision for income taxes | (1,798,877 | ) | (2,707,715 | ) | ||||
| Provision for income taxes | 800 | 1,600 | ||||||
| Net loss | $ | (1,799,677 | ) | $ | (2,709,315 | ) | ||
| Loss per share: | ||||||||
| Basic and diluted | $ | (0.06 | ) | $ | (0.12 | ) | ||
| Weighted-average shares of common stock outstanding: | ||||||||
| Basic and diluted | 29,772,036 | 22,856,861 | ||||||
The accompanying notes are an integral part of these financial statements.
| F-4 |
BLOW & DRIVE INTERLOCK CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
| Total | ||||||||||||||||||||||||||||
| Preferred Stock - Series A | Common Stock | Additional Paid-In | Accumulated | Stockholders’ Equity | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance December 31, 2016 (restated) | - | $ | - | 19,575,605 | $ | 1,958 | $ | 1,594,721 | $ | (1,587,330 | ) | $ | 9,349 | |||||||||||||||
| Shares issued for services | - | - | 27,180 | 3 | 13,910 | - | 13,913 | |||||||||||||||||||||
| Warrants issued for services | - | - | - | - | 278 | - | 278 | |||||||||||||||||||||
| Shares issued for cash | - | - | 5,686,656 | 569 | 848,468 | - | 849,037 | |||||||||||||||||||||
| Shares issued related to debt | 1,000,000 | 1,000 | 195,400 | 18 | 454,450 | - | 455,468 | |||||||||||||||||||||
| Shares issued related to anti-dilution | - | - | 739,253 | 74 | (74 | ) | - | - | ||||||||||||||||||||
| Other | - | - | (260 | ) | - | - | - | - | ||||||||||||||||||||
| Net loss | - | - | - | - | - | (2,709,315 | ) | (2,709,315 | ) | |||||||||||||||||||
| Balance December 31, 2017 | 1,000,000 | 1,000 | 26,223,834 | 2,622 | 2,911,753 | (4,296,645 | ) | (1,381,270 | ) | |||||||||||||||||||
| Shares issued for services | - | - | 476,000 | 48 | 114,595 | - | 114,643 | |||||||||||||||||||||
| Shares issued for cash | - | - | 4,340,883 | 434 | 458,271 | - | 458,705 | |||||||||||||||||||||
| Shares issued for conversion of debt | - | - | 32,812 | 3 | 5,080 | - | 5,083 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (1,799,677 | ) | (1,799,677 | ) | |||||||||||||||||||
| Balance December 31, 2018 | 1,000,000 | $ | 1,000 | 31,073,529 | $ | 3,107 | $ | 3,489,699 | $ | (6,096,322 | ) | $ | (2,602,516 | ) | ||||||||||||||
The accompanying notes are an integral part of these financial statements
| F-5 |
BLOW & DRIVE INTERLOCK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (1,799,677 | ) | $ | (2,709,315 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | - | 338,044 | ||||||
| Loss on fixed assets disposals | - | 98,800 | ||||||
| Impairment of fixed assets | - | 804,322 | ||||||
| Shares issued for services | 114,642 | 14,191 | ||||||
| (Gain) loss on extinguishments of debt | (311,670 | ) | 305,000 | |||||
| Write off of debt discount due to refinance | - | 352,511 | ||||||
| Amortization of debt discount | 30,872 | 361,676 | ||||||
| Change in fair value of derivative liability | (5,155 | ) | (61,254 | ) | ||||
| Loan default penalty | 635,000 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 23,561 | 22,325 | ||||||
| Prepaid expenses | 289 | (294 | ) | |||||
| Inventory | - | 10,650 | ||||||
| Deposits | - | 1,123 | ||||||
| Accounts payable | (39,695 | ) | 6,552 | |||||
| Accrued expenses | 44,456 | (34,625 | ) | |||||
| Income taxes payable | - | 230 | ||||||
| Accrued interest | 19,773 | 2,020 | ||||||
| Accrued interest – related party | 165,240 | 23,330 | ||||||
| Deferred revenue | (92,216 | ) | 22,047 | |||||
| Accrued royalties payable | 101,922 | 58,026 | ||||||
| Net cash used in operating activities | (1,112,658 | ) | (384,641 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment | - | (884,820 | ) | |||||
| Deposits on units | - | 250,000 | ||||||
| Net cash used in investing activities | - | (634,820 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from issuances of notes payable | 154,400 | 50,000 | ||||||
| Principal payments of notes payable | (74,623 | ) | (56,662 | ) | ||||
| Proceeds from issuance of convertible notes payable | 20,000 | 5,000 | ||||||
| Principal payments of convertible notes payable | - | (50,000 | ) | |||||
| Proceeds from issuances of related party notes payable | 649,127 | 250,400 | ||||||
| Principal payments of related party note payable | (126,050 | ) | (112,749 | ) | ||||
| Proceeds from issuance of common stock | 458,705 | 849,037 | ||||||
| Net cash provided by financing activities | 1,081,559 | 935,026 | ||||||
| NET INCREASE (DECREASE) IN CASH | (31,099 | ) | (84,435 | ) | ||||
| CASH – beginning of period | 31,874 | 116,309 | ||||||
| CASH – end of period | $ | 775 | $ | 31,874 | ||||
| ADDITIONAL CASH FLOW INFORMATION | ||||||||
| Interest paid | $ | 291,135 | $ | 134,105 | ||||
| Income taxes paid | $ | - | $ | - | ||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
| Years Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Common stock and warrants issued for services | $ | 114,642 | $ | 14,191 | ||||
| Preferred stock issued for debt reduction and services | $ | - | $ | 350,000 | ||||
The accompanying notes are an integral part of these financial statements.
| F-6 |
BLOW AND DRIVE INTERLOCK CORPORATION
Note 1 - Organization and Nature of Business
Blow & Drive Interlock (“the Company”) was incorporated on July 2, 2013 under the laws of the State of Delaware to engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisitions. The Company markets and rents alcohol ignition interlock devices to DUI/DWI offenders as part of their mandatory court or motor vehicle department programs. As of December 31, 2018, the BDI-747/1 device was approved in Oregon, Texas, Arizona, and Kentucky. As of March 31, 2019, the BDI-747/1 device was only approved in Arizona and Texas. The states where our BDI-747/1 device is approved has decreased primarily as a result of new state certification rules that require increased capital investment that we are not able to afford.
In 2015, the Company formed BDI Manufacturing, Inc., an Arizona corporation which is a 100% wholly owned subsidiary of Blow & Drive Interlock Corporation. The Company markets, installs and monitors a breath alcohol ignition interlock device (BAIID) called the BDI-747/1, which is a mechanism that is installed on the steering column of an automobile and into which a driver exhales. The device in turn provides a blood-alcohol concentration analysis. If the driver’s blood-alcohol content is higher than a certain pre-programmed limit, the device prevents the ignition from engaging and the automobile from starting. These devices are often required for use by DUI or DWI (“driving under the influence” or “driving while intoxicated”) offenders as part of a mandatory court or motor vehicle department program.
The Company licenses the rights to third party distributors to promote the BDI-747/1 and provide services related to the device. The distributorships are for specific geographical areas (either entire states or certain counties within states). The Company currently has entered into six distributorship agreements. Under the distribution agreements the Company typically receives a onetime fee, and then is entitled to receive a per unit registration fee and a per unit monthly fee for each BDI-747/1 unit the distributor has in inventory or on the road beginning thirty (30) days after the distributor receives the unit.
On December 31, 2018, Laurence Wainer, CEO of the Company, and The Doheny Group, a major note holder of the Company, reached an agreement in which Laurence Wainer sold 8,924,000 shares of common stock and 1,000,000 shares of preferred stock for a total of $30,000. Upon completion of the sale, David Haridim, managing member of The Doheny Group, assumed the position of CEO of Blow and Drive.
Note 2 – Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America, and pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments, consisting of normal recurring adjustments, which management believes are necessary to fairly present the financial position, results of operations and cash flows of the Company.
| F-7 |
Consolidation
The accompanying consolidated financial statements include the results of operations of BDI Manufacturing (the Subsidiary). All material intercompany accounts and transactions between the Company and the Subsidiary have been eliminated in consolidation.
Going Concern
The Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and allow it to continue as a going concern. As of December 31, 2018, the Company had an accumulated deficit of $6,096,322. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease or reduce its operations.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. The Company will continue to raise funds through the sale of its equity securities or issuance of notes payable to obtain additional operating capital. The Company is dependent upon its ability to, and will continue to attempt to, secure additional equity and/or debt financing until the Company can earn revenue and realize positive cash flow from its operations. There are no assurances that the Company will be successful in earning revenue and realizing positive cash flow from its operations. Without sufficient financing it would be unlikely that the Company will continue as a going concern.
Based on the Company’s current rate of cash outflows, cash on hand and proceeds from the prior sale of equity securities and issuance of notes payable, management believes that its current cash will not be sufficient to meet the anticipated cash needs for working capital for the next 12 months. The Company’s plans with respect to its liquidity issues include, but are not limited to, the following:
| 1) | Continue to issue restricted stock for compensation due to consultants and for its legacy accounts payable in lieu of cash payments; and | |
| 2) | Seek additional capital to continue its operations as it rolls out its current products. The Company is currently evaluating additional debt or equity financing opportunities and may execute them when appropriate. However, there can be no assurances that the Company can consummate such a transaction or consummate a transaction at favorable pricing. |
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and achieve profitable operations. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty.
| F-8 |
Reclassifications
Certain reclassifications have been made to amounts in prior periods to conform to the current period presentation. All reclassifications have been applied consistently to the periods presented.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
Revenue Recognition
On January 1, 2018, the Company adopted FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance.
The Company’s principal activity from which it generates revenue is a service which is the use of its interlock units. Revenue is measured based on considerations specified in a contract with a customer. A contract exists when it becomes a legally enforceable agreement with a customer. These contracts define each party’s rights, payment terms and other contractual terms and conditions of the sale. Consideration is typically paid at time of sale via credit card, check, or cash when the interlock units are installed on customers’ vehicles
A performance obligation is a promise in a contract to provide a distinct service to the customer, which for the Company is transfer of a service to customers. Performance obligations promised in a contract are identified based on the services that will be provided to the customer that are both capable of being distinct and are distinct in the context of the contract, whereby the service is separately identifiable from other promises in the contract. The Company has concluded the services accounted for as the single performance obligation.
The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. The transaction price is determined based on the consideration to which the Company will be entitled to receive in exchange for transferring goods to the customer. We do not issue refunds.
| F-9 |
The Company recognizes revenue when it satisfies a performance obligation in a contract by providing a service to a customer when the Company installs the interlock units on the customers’ vehicles. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
Deferred revenue
Deferred revenue consists of customer orders paid in advance of the delivery of the order. Deferred revenue is classified as short-term as the typical order ships within approximately three weeks of placing the order. Deferred revenue is recognized as revenue when the product is shipped to the customer and all other revenue recognition criteria have been met.
Advertising and Marketing Costs
Advertising and marketing costs are recorded as general and administrative expenses when they are incurred. Advertising and marketing expenses were $90,742 and $19,941 for the years ended December 31, 2018 and 2017, respectively
Accounts Receivable and Allowance for Doubtful Accounts
The Company’s accounts receivable at December 31, 2018 consists of an amount due for an overpayment by the Company.
The Company’s accounts receivable at December 31, 2017 primarily consists of trade receivables. The Company records an allowance for doubtful accounts that is based on historical trends, customer knowledge, any known disputes, and the aging of the accounts receivable balances combined with management’s estimate of future potential recoverability. Receivables are written off against the allowance after all attempts to collect a receivable have failed. The Company believes its allowance for doubtful accounts as of December 31, 2018 and 2017 is adequate, but actual write-offs could exceed the recorded allowance.
Royalty Accrual
The Company entered into royalty agreement to be paid out in perpetuity based on number of units sold for specified product model in years 2018, 2017 and 2016 in connection with notes payable as discussed in Note 11. These estimates were performed at the inception for the notes to reflect the associated debt discount. The Company accruals royalties and is reduced by payments. The Company wrote off $255,030 in accrued royalties to gain on extinguishment of debt due to the December 31, 2018 settlement with two royalty noteholders in which they relinquished all claims to accrued royalties.
| F-10 |
Derivative Liability
The Company applies the provisions of ASC Topic 815-40, Contracts in Entity’s Own Equity (“ASC Topic 815-40”), under which convertible instruments, which contain terms that protect holders from declines in the stock price, may not be exempt from derivative accounting treatment. As a result, embedded conversion options (whose exercise price is not fixed and determinable) in convertible debt (which is not conventionally convertible due to the exercise price not being fixed and determinable) are initially recorded as a liability and are revalued at fair value at each reporting date using the Black Sholes Model. The Company revalues these derivatives each quarter using the Black Sholes Model. The change in valuation is accounted for as a gain or loss in derivative liability.
Convertible Debt and Warrants Issued with Convertible Debt
Convertible debt is accounted for under the guidelines established by ASC 470, Debt with Conversion and Other Options and ASC 740, Beneficial Conversion Features. The Company records a beneficial conversion feature (“BCF”) when convertible debt is issued with conversion features at fixed or adjustable rates that are below market value when issued. If, however, the conversion feature is dependent upon a condition being met or the occurrence of a specific event, the BCF will be recorded when the related contingency is met or occurs. The BCF for the convertible instrument is recorded as a reduction, or discount, to the carrying amount of the convertible instrument equal to the fair value of the conversion feature. The discount is then amortized to interest over the life of the underlying debt using the effective interest method.
The Company calculates the fair value of warrants issued with the convertible instruments using the Black-Scholes valuation method, using the same assumptions used for valuing employee options for purposes of ASC 718, Compensation – Stock Compensation, except that the contractual life of the warrant is used. Under these guidelines, the Company allocates the value of the proceeds received from a convertible debt transaction between the conversion feature and any other detachable instruments (such as warrants) on a relative fair value basis. The allocated fair value is recorded as a debt discount or premium and is amortized over the expected term of the convertible debt to interest expense.
For modifications of convertible debt, the Company records a modification that changes the fair value of an embedded conversion feature, including a BCF, as a debt discount which is then amortized to interest expense over the remaining life of the debt. If modification is considered substantial (i.e. greater than 10% of the carrying value of the debt), an extinguishment of debt is deemed to have occurred, resulting in the recognition of an extinguishment gain or loss.
Fair Value of Financial Instruments
The Company utilizes ASC 820-10, Fair Value Measurement and Disclosure, for valuing financial assets and liabilities measured on a recurring basis. Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
| F-11 |
Level 1. Observable inputs such as quoted prices in active markets;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The table below describes the Company’s valuation of financial instruments using guidance from ASC 820-10:
| Fair Value Measurements Using | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Balance December 31, 2017 | $ | - | $ | 12,302 | $ | - | ||||||
| Additions to fair value of derivative liability | - | 15,370 | - | |||||||||
| Change in fair value of derivative liability | - | (5,155 | ) | - | ||||||||
| Balance December 31, 2018 | $ | - | $ | 22,517 | $ | - | ||||||
Net Income (Loss) Per Share
Basic earnings per share is calculated by dividing income available to common stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted average number of common and dilutive common share equivalents outstanding during the period.
Stock Based Compensation
The Company recognizes stock-based compensation in accordance with FASB ASC Topic 718 Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to an employee stock purchase plan based on the estimated fair values.
For non-employee stock-based compensation, the Company applies FASB ASC Topic 505 Equity-Based Payments to Non-Employees, which requires stock-based compensation related to non-employees to be accounted for based on the fair value of the related stock or options or the fair value of the services on the grant date, whichever is more readily determinable in accordance with FASB ASC Topic 718.
| F-12 |
Related Parties
Related parties are any entities or individuals that, through employment, ownership or other means, possess the ability to direct or cause the direction of the management and policies of the Company.
Concentrations
All of the Company’s ignition interlock devices are purchased from one supplier in China. The loss of this supplier could have a material impact on the Company’s ability to timely obtain additional units.
For the year ended December 31, 2018, one distributor, licensed in four states, makes up approximately 92% percent of all revenues from distributors at December 31, 2018. The loss of this distributer would have a material impact on the Company’s revenues. Per an agreement dated January 21, 2018 that memorialized a September 30, 2017 oral agreement, the Company and its largest distributor cancelled their distributorship agreement dated September 5, 2015. See Note 17 below.
Income Taxes
The Company accounts for its income taxes in accordance with Income Taxes Topic of the FASB ASC 740, which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.
The Company also follows ASC 740-10-25, which provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with ASC Topic 740, “Accounting for Income Taxes”. ASC 740-10-25 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Derivative Liabilities
The Company assessed the classification of its derivative financial instruments as of December 31, 2018, which consist of convertible instruments and rights to shares of the Company’s common stock, and determined that such derivatives meet the criteria for liability classification under ASC 815.
| F-13 |
ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional, as defined.
Convertible Instruments
The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with professional standards for “Accounting for Derivative Instruments and Hedging Activities”.
ASC 815-40 provides that, among other things, generally, if an event is not within the entity’s control or could require net cash settlement, then the contract shall be classified as an asset or a liability.
Recently Issued Accounting Pronouncements
In June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (Topic 718). The amendments in the update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer, or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company believes that this will not have a material effect on its financial statements.
In March 2018 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-05, Income Taxes (Topic 740). The Tax Cut and Jobs Act of 2017 changes existing tax law and includes numerous provisions that will affect businesses. This guidance addresses the recognition of taxes payable or refundable for the current year and the recognition of deferred tax liabilities and deferred tax assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. The Company does not believe that this guidance will have an impact as the Company has been in a loss position and has not recognized federal taxes payable or refundable or deferred tax liabilities or deferred tax assets.
| F-14 |
In November 2017, the FASB issued ASU No. 2017-14, Income Statement-Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606). The ASU modified Topic 220 such that an operating-differential subsidy must be set forth as a separate line item in the statement of comprehensive income either under a revenue caption presented separately from revenue from contracts with customers accounted for under ASC Topic 606 or as credit in the costs and expenses section. The ASU essentially deleted Topic 605 and noted that it was superseded by Topic 606. The ASU modified Topic 606 for vaccine manufacturers to recognize revenue when vaccines are placed into Federal Governmental stockpile programs because control of the enumerated vaccines will have been transferred to the customer and the criteria to recognize revenue in a bill-and-hold arrangement under ASC Topic 606 will have been met. The Company is currently evaluating the impact of adopting this guidance.
In September 2017, the FASB issued ASU No. 2017-13, Revenue Recognition, Revenue from Contracts with Customers, Leases. The ASU adds SEC paragraphs to the new revenue and leases sections of the Accounting Standards Codification (ASC or Codification) on the announcement the SEC Observer made at the 20 July 2017 EITF meeting. The SEC Observer said that the SEC staff would not object if entities that are considered public business entities only because their financial statements or financial information is required to be included in another entity’s SEC filing use the effective dates for private companies when they adopt ASC 606, Revenue from Contracts with Customers, and ASC 842, Leases. This would include entities whose financial statements are included in another entity’s SEC filing because they are significant acquirees under Rule 3-05 of Regulation S-X, significant equity method investees under Rule 3-09 of Regulation S-X and equity method investees whose summarized financial information is included in a registrant’s financial statement notes under Rule 4-08(g) of Regulation S-X. The Company is currently evaluating the impact of adopting this guidance.
In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share; Distinguishing Liabilities from Equity; Derivatives and Hedging; Accounting for Certain Financial Instruments with Down Round Features; Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. An entity will no longer have to consider “down round” features (i.e., a provision in an equity-linked financial instrument or an embedded feature that reduces the exercise price if the entity sells stock for a lower price or issues an equity-linked instrument with a lower exercise price) when determining whether certain equity-linked financial instruments or embedded features are indexed to its own stock. An entity that presents earnings per share (EPS) under ASC 260 will recognize the effect of a down round feature in a freestanding equity-classified financial instrument only when it is triggered. The effect of triggering such a feature will be recognized as a dividend and a reduction to income available to common shareholders in basic EPS. The new guidance will require new disclosures for financial instruments with down round features and other terms that change conversion or exercise prices. The ASU also replaces today’s indefinite deferral of the guidance in ASC 480-10 for certain mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests with a scope exception. This change does not require any transition guidance because it does not have an accounting effect. The Company is currently evaluating the impact of adopting this guidance.
| F-15 |
In October 2016, the FASB issued ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. The ASU eliminates the deferral of the tax effects of intra-entity asset transfers other than inventory. As a result, the tax expense from the intercompany sale of assets, other than inventory, and associated changes to deferred taxes will be recognized when the sale occurs even though the pre-tax effects of the transaction have not been recognized. The effect of the adoption of the standard will depend on the nature and amount of any future transactions.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows; Classification of Certain Cash Receipts and Cash Payments. The new standard addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The eight issues are: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned insurance policies; distribution received from equity method investees; beneficial interests in securitization transactions; separately identifiable cash flows and application of the predominance principle. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within fiscal periods beginning after December 15, 2019. The Company is currently evaluating the impact of adopting this guidance.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers. The new standard clarifies the implementation guidance on principal versus agent considerations in Topic 606, Revenue from Contracts with Customers. Topic 606 addresses that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. When an entity is a principal (that is, if it controls the specific good or service before that good or service is transferred to a customer) and satisfies a performance obligation, the entity recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specific good or service transferred to the customer. When an entity is an agent and satisfies a performance obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specific good or service to be provided by the other party. The new standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the impact of adopting this guidance.
In February 2016, the FASB issued ASU No. 2016-2, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. Similarly, lessors will be required to classify leases as sales-type, finance or operating, with classification affecting the pattern of income recognition. Classification for both lessees and lessors will be based on an assessment of whether risks and rewards as well as substantive control have been transferred through a lease contract. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. A modified retrospective transition approach is required for leases for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of adopting this guidance.
| F-16 |
Note 3 – Segment Reporting
The Company has two reportable segments: (1) Monitoring and (2) Distributorships.
Monitoring fees on Company installed units
The Company rents units directly to customers and installs the units in the customer’s vehicles. The rental periods range from a few months to 2 years and include a combination of down payments made by the customer and monthly payments paid under the agreements with the Company. Revenue is recognized from these companies on the straight-line basis over the term of the agreement. Amounts collected in excess of those earned are classified as deferred revenue in the balance sheet, and amounts earned in excess of amounts collected are reflected in accounts receivable in the balance sheet at December 31, 2018 and December 31, 2017.
Distributorships
The Company enters into arrangements that include multiple deliverables, which typically consist of the sale of exclusive distributorship territory rights, startup supplies package, promotional material, three weeks of onsite training and ongoing monthly support services. The Company accounts for each material element within an arrangement with multiple deliverables as separate units of accounting. Revenue is allocated to each unit of accounting under the guidance of ASC Topic 605-25, Multiple-Element Revenue Arrangements, which provides criteria for separating consideration in multiple-deliverable arrangements by establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable is based on vendor-specific objective evidence (“VSOE”) if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third-party evidence is available. The Company is required to determine the best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. The Company generally does not separately sell distributorships or training on a standalone basis. Therefore, the Company does not have VSOE for the selling price of these units nor is third party evidence available and thus management uses its best estimate of selling prices in their allocation of revenue to each deliverable in the multiple element arrangement.
| F-17 |
The following table summarizes net sales and identifiable operating income by segment:
| Year Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Segment gross profit (a): | ||||||||
| Monitoring | $ | 743,734 | $ | 773,395 | ||||
| Distributorships | 79,830 | 301,240 | ||||||
| Gross profit | 823,564 | 1,074,635 | ||||||
| Identifiable segment operating expenses (b): | ||||||||
| Monitoring | - | 224,884 | ||||||
| Distributorships | - | 110,810 | ||||||
| - | 335,694 | |||||||
| Identifiable segment operating income (c): | ||||||||
| Monitoring | 743,734 | 548,511 | ||||||
| Distributorships | 79,830 | 190,430 | ||||||
| 823,564 | 738,941 | |||||||
| Reconciliation of identifiable segment income to corporate income (d): | ||||||||
| Payroll | 888,498 | 473,620 | ||||||
| Professional fees | 157,764 | 146,406 | ||||||
| General and administrative expenses | 763,683 | 841,961 | ||||||
| Depreciation | - | 2,349 | ||||||
| Interest expense | 1,129,321 | 943,415 | ||||||
| Change in fair value of derivative liability | (5,155 | ) | (68,078 | ) | ||||
| Gain on extinguishment of debt | (311,670 | ) | 305,000 | |||||
| Impairment of fixed assets | - | 801,983 | ||||||
| Loss before provision for income taxes | (1,798,877 | ) | (2,707,715 | ) | ||||
| Provision for income taxes | 800 | 1,600 | ||||||
| Net loss | $ | (1,799,677 | ) | $ | (2,709,315 | ) | ||
| Total net property, plant, and equipment assets | ||||||||
| Monitoring | $ | - | $ | 506,721 | ||||
| Distributorships | - | 249,682 | ||||||
| Corporate | - | 34,930 | ||||||
| $ | - | $ | 791,333 | |||||
(a) Segment gross profit includes segment net sales less segment cost of sales
(b) Identifiable segment operating expenses consists of identifiable depreciation expense
(c) Identifiable segment operating incomes consists of segment gross profit less identifiable operating expense
(d) General corporate expense consists of all other non-identifiable expenses
| F-18 |
Note 4 – Deposits
Deposits consist of the following:
| December 31, 2018 | December 31, 2017 | |||||||
| Lease Deposits | $ | 6,481 | $ | 5,131 | ||||
Note 5 – Accrued Expenses
Accrued Expenses consist of the following:
| December 31, 2018 | December 31, 2017 | |||||||
| Accrued payroll and payroll taxes | $ | 17,616 | $ | 6,141 | ||||
| Deferred rent | 5,317 | 4,544 | ||||||
| Other accrued expenses | 37,125 | 5,000 | ||||||
| Total | $ | 60,058 | $ | 15,685 | ||||
Note 6 - Deferred Revenue
The Company classifies income as deferred until the terms of the contract or time frame have been met within the Company’s revenue recognition policy. As of December 31, 2018 and December 31, 2017, deferred revenue consists of the following:
| December 31, 2018 | December 31, 2017 | |||||||
| Monitoring deferred revenues | $ | 92,162 | $ | 177,878 | ||||
| Distributorship deferred revenues | - | 6,500 | ||||||
| Total | $ | 92,162 | $ | 184,378 | ||||
| F-19 |
Note 7 – Notes Payable
Notes payable consist of the following:
| As of December 31, 2018 | As of December 31, 2017 | |||||||||||||||||||||||
| Amount | Discount | Net Balance | Amount | Discount | Net Balance | |||||||||||||||||||
| January 2016 ($65,000) - 0% interest with payment of $937 per month for 4 months, $1,250 per month for 8 months, and $3,531 per month until fully paid. | $ | - | $ | - | $ | - | $ | 4,482 | $ | (3,889 | ) | $ | 593 | |||||||||||
| April 2016 ($50,000) - 18% interest at payment of $750 per month with unpaid balance due at March 31, 2018 including issuance of 50,000 common shares. | - | - | - | 50,000 | (7,292 | ) | 42,708 | |||||||||||||||||
| September 2016 ($10,000) - 24% interest with outstanding balance with accrued interest due at October 31, 2018 with an option of accrued interest to be converted to common stock with 25% discount of trading price | - | - | - | 10,000 | - | 10,000 | ||||||||||||||||||
| December 2017 ($50,000) - 15% interest due in December 2020 including issuance of 100,000 shares of common stock with exercise price at $0.25 per share. | 40,736 | (14,474 | ) | 26,262 | 50,000 | (22,021 | ) | 27,979 | ||||||||||||||||
| October 2018 ($60,000) - $561 daily principal and interest until paid in full | 42,424 | - | 42,424 | - | - | - | ||||||||||||||||||
| October 2018 ($72,800) - $11,527 monthly principal and interest for first six months, $9,975 monthly principal and interest last six months | 67,159 | - | 67,159 | - | - | - | ||||||||||||||||||
| Total notes payable | 150,319 | (14,474 | ) | 135,845 | 114,482 | (33,202 | ) | 81,280 | ||||||||||||||||
| Less: non-current portion | (24,994 | ) | 6,925 | (18,069 | ) | (35,747 | ) | 14,473 | (21,274 | ) | ||||||||||||||
| Notes payable, current portion | $ | 125,325 | $ | (7,549 | ) | $ | 117,776 | $ | 78,735 | $ | (18,729 | ) | $ | 60,006 | ||||||||||
January 2016 - $65,000
On January 20, 2016, the Company entered into a non-interest bearing note payable and royalty agreement with a third party. Under the note, the Company borrowed $65,000 and began to repay the principal amount at a rate of approximately $937 per month with escalations to approximately $3,531 per month as of February 2017 until the note is paid in full. In addition, starting in February 2018, the Company will pay the lender a royalty fee of five ($5) dollars per month for every ignition interlock devise that the Company has on the road in customers’ vehicles up to eight hundred (800) in perpetuity, and for every unit over 800, the Company will owe the lender $1 per month per device in perpetuity. In connection with this note, the Company recorded a debt discount of $65,000 relating to the future royalty payments, to be amortized over the life of the note.
| F-20 |
On September 30, 2016, the Company entered into Amendment No. 1 to Royalty note #1 in order to remove a security interest in the Company’s assets to secure repayment of the original note and amend the royalty provisions of the original note to be $1 for each Device on the road beginning in the 25th month after the date of the original note. In connection with this amendment, the Company issued 425,000 shares of restricted common stock. Pursuant to ASC 470 this amendment is a deemed extinguishment of the debt and the resulting revised debt is set up as a new note. In connection therewith, the Company recorded a loss on extinguishment of $116,541 during the year ended December 31, 2016.
Total interest expense was $0 and $0 for the years ended December 31, 2018 and 2017, respectively.
April 2016 - $50,000
On March 30, 2016, the Company entered into a borrowing agreement with a third party. The note was for a principal balance of $50,000 and included 50,000 restricted common shares. The promissory note has a maturity date of June 30, 2018 and bears interest at 18% per annum. The purchaser did not sign the agreement nor deliver the proper consideration prior to March 31, 2016. The exchange of the $50,000 in cash consideration by the purchaser and the issuance of the 50,000 restricted common shares by the Company was made in conjunction with delivery of the signed purchase agreement and promissory note on April 5, 2016. The Company recorded a debt discount of $50,000 related to the relative fair value of the issued shares associated with the note to be amortized over the life of the note. The Company paid $13,000 on December 31, 2018 in complete settlement of the note and accrued interest.
Total interest expense was $9,000 and $9,000 for the years ended December 31, 2018 and 2017, respectively.
September 2016 - $10,000
On September 23, 2016, the Company provided an agreement to a third party to obtain a $10,000 promissory note in exchange for 100,000 restricted common shares and $10,000 in cash. The promissory note had a maturity date of October 31, 2017 and bears interest at 24% per annum. On October 31, 2017, the note was amended to extend the maturity date to October 31, 2018. There are no other changes to the note. The Company recorded a debt discount of $10,000 related to the relative fair value of the issued shares associated with the note to be amortized over the life of the note. The Company paid $1,000 on December 31, 2018 in complete settlement of the note and accrued interest.
Total interest expense was $2,400 and $2,400 for the years ended December 31, 2018 and 2017, respectively.
| F-21 |
December 2017 - $50,000
On December 1, 2017, the Company provided an agreement to a third party to obtain a $50,000 promissory note in exchange for $50,000 in cash. The promissory note had a maturity date of December 1, 2020 and bears interest at 15% per annum. The note required total payments of $1,733 per month. The Company recorded a debt discount of $22,650 related to the value of the issued shares associated with the process of obtaining the note to be amortized over the life of the note.
Total interest expense was $6,546 and $1,250 for the years ended December 31, 2018 and 2017, respectively.
October 2018 - $60,000
On October 11, 2018, the Company provided an agreement to a third party to obtain a $60,000 promissory note in exchange for $59,105 in cash ($895 in processing fee was deducted from cash). The promissory note had a maturity date of May 5, 2019 and bears interest at 55% per annum. The note required total payments of $561.43 each business day. The note was settled on January 16, 2019 for $30,806, and a gain on settlement was recorded for $10,834.
Total interest expense was $10,390 and $0 for the years ended December 31, 2018 and 2017, respectively.
October 2018 - $72,800
On October 4, 2018, the Company provided an agreement to a third party to obtain a $72,800 promissory note in exchange for $72,800 in cash. The promissory note had a maturity date of October 4, 2019 and bears interest at 51% per annum. The note required total payments of $11,526.67 per month for the first six months and $6,794.67 per month for the last six months.
Total interest expense was $16,252 $0 for the years ended December 31, 2018 and 2017, respectively.
| F-22 |
Note 8 – Notes Payable – Related Parties
Notes payable to related parties consist of the following:
| As of December 31, 2018 | As of December 31, 2017 | |||||||||||||||||||||||||||
| Amount | Discount | Replacement | Net Balance | Amount | Discount | Net Balance | ||||||||||||||||||||||
| January 2016 ($55,000) – Payment of $937 per month for 4 months, $1,250 per month 5 months, and $3,531 per month until fully paid | $ | - | $ | - | $ | - | $ | 5,923 | $ | (6,289 | ) | $ | (366 | ) | ||||||||||||||
| November 2017 ($900,000) - 60 months of payments of $25,000 per month with $15,000 in principal payment and $10,000 in interest payment, first payment due on December 1, 2017 and the final payment on November 1, 2022. | 765,000 | - | (765,000 | ) | - | 885,000 | - | 885,000 | ||||||||||||||||||||
| February 2018 ($100,000) – Fee payment of $2,500 per month, principal due February 1, 2019. | 100,000 | - | (100,000 | ) | - | - | - | - | ||||||||||||||||||||
| March 2018 ($500,000) – Fee payment of $12,500 per month first year, $12,000 per month second year, $11,500 per month third year, $11,000 per month fourth year, $105,00 per month fifth year, principal due March 1, 2020. | 500,000 | - | (500,000 | ) | - | - | - | - | ||||||||||||||||||||
| August 2018 ($1,365,000) – Replaced August 2018 note ($1,365,000) that replaced November 2017 note ($765,000 balance at August 1, 2018), February 2018 note ($100,000) and March 2018 note ($500,000). Includes $635,000 penalty on default of August 2018 ($1,365,000) note and $20,000 for missed payment on August 2018 note. Interest only monthly payment of $50,500 for life of note. Entire principal due December 1, 2023. | 655,000 | - | 1,365,000 | 2,020,000 | - | - | - | |||||||||||||||||||||
| December 2018 ($6,000) – Principal only due December 17, 2019. No interest | 6,000 | - | - | 6,000 | - | - | - | |||||||||||||||||||||
| December 2018 ($23,000) – Principal only due December 31, 2019. No interest | 23,000 | - | - | 23,000 | - | - | - | |||||||||||||||||||||
| Total related party notes payable | 2,049,000 | - | - | 2,049,000 | 890,923 | (6,289 | ) | 884,634 | ||||||||||||||||||||
| Less: non-current portion | (2,020,000 | ) | - | - | (2,020,000 | ) | (839,306 | ) | - | (839,306 | ) | |||||||||||||||||
| Related party notes payable, current portion | $ | 29,000 | $ | - | - | $ | 29,000 | $ | 51,617 | $ | (6,289 | ) | $ | 45,328 | ||||||||||||||
| F-23 |
January 2016 - $55,000
On March 29, 2016, the Company consummated a non-interest bearing note payable and royalty agreement with a relative of the CEO with terms almost identical to the note referenced above. Under the note, the Company borrowed $55,000 and began to repay the principal amount at a rate of approximately $937 per month with escalations to approximately $3,531 per month as of April 2017 until the note is paid in full. In addition, starting in February 2018, the Company will pay the lender a royalty fee of five ($5) dollars per month for every ignition interlock devise that the Company has on the road in customers’ vehicles up to eight hundred (800) in perpetuity, and for every unit over 800, the Company will owe the lender $1 per month per device in perpetuity. In connection with this note, the Company recorded a debt discount of $55,000 relating to the future royalty payments, to be amortized over the life of the note.
On September 30, 2016, the Company entered into Amendment No. 1 to Royalty note #2 to amend the royalty provisions of the original note to be $1 for each Device on the road beginning in the 25th month after the date of the Royalty note #2. In connection with this amendment, the Company issued 50,000 shares of restricted common stock and recorded an additional debt discount of $8,959. This amendment was accounted for as a debt modification pursuant to ASC 470.
Total interest expense was $0 and $0 for the years ended December 31, 2018 and 2017, respectively.
November 2017 - $900,000
On November 1, 2017, the Company entered into an agreement with a related third party to exchange the September 2016 $36,100 note, the September 2016 $192,000 note, the October 2016 $24,960 note, the November 2016 $5,040 note, the November 2016 $50,000 note, the November 2016 $325,000 note, the January 2017 $50,400 note, the February 2017 $70,000 note, and the March 2017 $75,000 note for a new promissory note for $900,000. The new promissory note also included accrued interest payable and payment of Company expenses. The term of the loan is sixty months and payments are to be $25,000 per month with $15,000 in principal payment and $10,000 in interest payment. The first payment is to be on December 1, 2017 and the final payment on November 1, 2022. On August 1, 2018, the Company entered into an agreement with a related party to replace the balance ($765,000) on the note, the February 2018 note, and the March 2018 note with a new note for $1,365,000.
Total interest expense was $126,229 and $39,016 for the years ended December 31, 2018 and 2017, respectively.
February 2018 - $100,000
On February 1, 2018, the Company entered into an agreement with a related third party to obtain a $100,000 promissory note in exchange for $100,000 cash. The note calls for a monthly fee of $2,500 and the principal is due February 1, 2019. On August 1, 2018, the Company entered into an agreement with a related party to replace the note, the March 2018 note, and the balance ($765,000) on the November 2017 note with a new note for $1,365,000.
Total interest expense was $15,000 and $0 for the years ended December 31, 2018 and 2017, respectively.
March 2018 - $500,000
On March 1, 2018, the Company entered into an agreement with a related third party to obtain a $500,000 promissory note in exchange for $500,000 cash. The note calls for a monthly fee of $12,500 per month for the first year, $12,000 per month for the second year, $11,500 for the third year, $11,000 for the fourth year, and $10,500 for the fifth year, and the principal is due March 1, 2023. On August 1, 2018, the Company entered into an agreement with a related party to replace the note, the February 2018 note, and the balance ($765,000) on the November 2017 note with a new note for $1,365,000.
Total interest expense was $58,475 and $0 for the years ended December 31, 2018 and 2017, respectively.
| F-24 |
August 2018 - $1,365,000
On August 1, 2018, the Company entered into an agreement with a related third party to replace the balance ($765,000) on the November 2017 note, the February 2018 note ($100,000), and the March 2018 note ($500,000) with a new note for $1,365,000. The note calls for interest only payments of $20,000 per month for the first nine months, and then payments of $53,500 per month for principal and interest. After the forty-eight months, the principal will be paid in full. In December 2018, the note was replaced by a new note of $2,020,000.
Total interest expense was $158,897 and $0 for the years ended December 31, 2018 and 2017, respectively.
December 2018 - $2,020,000
On December 1, 2018, the Company entered into an agreement with a related third party to replace the August 2018 note of $1,365,000 with a new note for $2,020,000. The new note also includes a default penalty of $635,000 on the August 2018 note and $20,000 for a missed payment on the August 2018 note. The note calls for interest only payments of $50,500 per month for the life of the note. The entire principal is due on December 1, 2023. The effective interest rate was approximately 30% at December 31, 2018.
Total interest expense was $50,500 and $0 for the years ended December 31, 2018 and 2017, respectively.
December 2018 - $6,000
On December 17, 2018, the Company entered into an agreement with a related third party to obtain a $6,000 promissory note in exchange for $6,000 cash. The note bears no interest and is due in full on December 17, 2019.
December 2018 - $23,000
On December 31, 2018, the Company entered into an agreement with a related third party to obtain a $23,000 promissory note in exchange for $23,000 cash. The note bears no interest and is due in full on December 31, 2019.
Note 9 – Convertible Notes Payable
Convertible notes payable consists of the following:
| As of December 31, 2018 | As of December 31, 2017 | |||||||||||||||||||||||
| Amount | Discount | Net Balance | Amount | Discount | Net Balance | |||||||||||||||||||
| August 2015 ($15,000) - 7.5% interest bearing convertible debenture due on August 7, 2017 with interest only payments and due upon maturity. | $ | 7,500 | $ | - | $ | 7,500 | $ | 7,500 | $ | - | $ | 7,500 | ||||||||||||
| November 2017 ($5,000) - 10% interest bearing convertible debenture due on October 27, 2020 with interest only payments and due upon maturity. | - | - | - | 5,000 | (2,011 | ) | 2,989 | |||||||||||||||||
| March 2018 ($20,000) – 10% interest bearing convertible debenture due on March 9, 2021, with interest paid in cash for the first six months, and either in cash or shares of common stock thereafter. Principal is due March 9, 2021, paid either in cash or common stock, at the Company’s discretion | 20,000 | -(11,527 | ) | 8,473 | - | - | - | |||||||||||||||||
| Total convertible notes payable | 27,500 | (11,527 | ) | 15,973 | 12,500 | (2,011 | ) | 10,489 | ||||||||||||||||
| Less: non-current portion | (20,000 | ) | 6,403 | (13,597 | ) | (5,000 | ) | 1,483 | (3,517 | ) | ||||||||||||||
| Convertible notes payable, current portion | $ | 7,500 | $ | (5,124 | ) | $ | 2,376 | $ | 7,500 | $ | (528 | ) | $ | 6,972 | ||||||||||
| F-25 |
August 2015 - $15,000
On August 7, 2015, the Company entered into an agreement with a third party non-affiliate and issued a 7.5% interest bearing convertible debenture for $15,000 due on August 7, 2017, with conversion features commencing after 180 days following the date of the note. Payments of interest only were due monthly beginning September 2015. The loan is convertible at 70% of the average of the closing prices for the common stock during the five trading days prior to the conversion date. In connection with this Convertible note payable, the Company recorded a $5,770 discount on debt, related to the beneficial conversion feature of the note to be amortized over the life of the note or until the note is converted or repaid. This note was bifurcated with the embedded conversion option recorded as a derivative liability at fair value (See Note 9). On May 6, 2016 the note holder elected to convert $7,500 in principal into 30,000 shares of common stock. The note is currently in default.
In connection with the issuance of the August Convertible Note Payable, the Company issued a warrant on August 7, 2015 to purchase 30,000 shares of the Company’s common stock at a purchase price of $0.50 per share. The Black Scholes model was used in valuing the warrants in determining the relative fair value of the warrants issued in connection with the convertible note payable using the following inputs: Expected Term – 3 years, Expected Dividend Rate – 0%, Volatility – 100%, Risk Free Interest Rate -1.08%. The Company recorded an additional $4,873 discount on debt, related to the relative fair value of the warrants issued associated with the note to be amortized over the life of the note.
Total interest expense was $563 and $563 for the years ended December 31, 2018 and 2017, respectively.
November 2017 - $5,000
On November 1, 2017, the Company entered into an agreement with a non-affiliated shareholder and issued a 10% interest bearing convertible debenture for $5,000 due on October 27, 2020. Payments of interest only are due monthly beginning December 2017. The loan is convertible at 61% of the average of the closing prices for the common stock during the five trading days prior to the conversion date but may not be converted if such conversion would cause the holder to own more than 4.9% of outstanding common stock after giving effect to the conversion. In connection with this Convertible Note Payable, the Company recorded a $5,000 discount on debt (the total discount was $6,825, of which $1,825 was expensed), related to the beneficial conversion feature of the note to be amortized over the life of the note or until the note is converted or repaid. This note was bifurcated with the embedded conversion option recorded as a derivative liability at fair value. The note and accrued interest were converted to 32,812 common shares in June 2018.
In connection with the issuance of the November convertible note payable, the Company issued a warrant to purchase 10,000 shares of common stock at an exercise price of $1.00 per share. The warrant has an exercise period of four years from the date of issuance. The Black Scholes model was used in valuing the warrants in determining the relative fair value of the warrants issued in connection with the convertible note payable using the following inputs: Expected Term – 4 years, Expected Dividend Rate – 0%, Volatility – 373%, Risk Free Interest Rate – 2.37%. The Company recorded an additional $2,099 discount on debt, related to the relative fair value of the warrants issued associated with the note to be amortized over the life of the note.
| F-26 |
Total interest expense was $250 and $83 for the years ended December 31, 2018 and 2017, respectively.
March 2018 - $20,000
On March 9, 2018, the Company entered into an agreement with a non-affiliated shareholder and issued a 10% interest bearing convertible debenture for $20,000 due on March 9, 2021. Payments of interest is in cash for the first six months, thereafter, interest may be paid either in cash or common stock of the Company. The loan is convertible at 61% of the average of the closing prices for the common stock during the five trading days prior to the conversion date but may not be converted if such conversion would cause the holder to own more than 4.9% of outstanding common stock after giving effect to the conversion. In connection with this Convertible Note Payable, the Company recorded a $20,000 discount on debt (the total discount was $47,768, of which $27,768 was expensed), related to the beneficial conversion feature of the note to be amortized over the life of the note or until the note is converted or repaid. This note was bifurcated with the embedded conversion option recorded as a derivative liability at fair value. As of December 31, 2018, this note has not been converted.
Total interest expense was $1,626 and $0 for the years months ended December 31, 2018 and 2017, respectively.
Note 10 – Derivative Liabilities
Derivative liabilities consisted of the following:
| December 31, 2018 | December 31, 2017 | |||||||
| August 2015 - $15,000 convertible debt | $ | 6,523 | $ | 7,310 | ||||
| November 2017 - $5,000 convertible debt | - | 4,992 | ||||||
| March 2018 - $20,000 convertible debt | 15,994 | - | ||||||
| Total derivative liabilities | $ | 22,517 | $ | 12,302 | ||||
The Company applies the provisions of ASC Topic 815-40, Contracts in Entity’s Own Equity (“ASC Topic 815-40”), under which convertible instruments, which contain terms that protect holders from declines in the stock price, may not be exempt from derivative accounting treatment. As a result, embedded conversion options (whose exercise price is not fixed and determinable) in convertible debt (which is not conventionally convertible due to the exercise price not being fixed and determinable) are initially recorded as a liability and are revalued at fair value at each reporting date using the Black Sholes Model.
| F-27 |
August 2015 Convertible Debt - $15,000
In August 2015, the Company entered into a $15,000 convertible note with variable conversion pricing. The following inputs were used within the Black Sholes Model to determine the initial relative fair values of the $15,000 convertible note with expected term of 1.58 years, expected dividend rate of 0%, volatility of 100% and risk free interest rate 0.61%.
November 2017 Convertible Debt - $5,000
In November 2017, the Company entered into a $5,000 convertible note with variable conversion pricing. The following inputs were used within the Black Sholes Model to determine the initial relative fair values of the $5,000 convertible note with expected term of 3.00 years, expected dividend rate of 0%, volatility of 312% and risk free interest rate 2.37%. This note and related accrued interest were converted to 32,812 common shares in June 2018.
March 2018 Convertible Debt - $20,000
In March 2018, the Company entered into a $20,000 convertible note with variable conversion pricing. The following inputs were used within the Black Sholes Model to determine the initial relative fair values of the $20,000 convertible note with expected term of 3.35 years, expected dividend rate of 0%, volatility of 413% and risk free interest rate 2.90%.
The Company revalues these derivatives each quarter using the Black Sholes Model. The change in valuation is accounted for as a gain or loss in derivative liability. The following table describes the derivative liability as of December 31, 2017 and December 31, 2018.
| Balance | Balance | |||||||||||||||
| at 12/31/17 | Additions | Changes | at 12/31/18 | |||||||||||||
| August 2015 - $15,000 convertible debt | $ | 7,310 | $ | - | $ | (787 | ) | $ | 6,523 | |||||||
| November 2017 - $5,000 convertible debt | 4,992 | (4,992 | ) | - | ||||||||||||
| March 2018 - $20,000 convertible debt | - | 15,370 | 624 | 15,994 | ||||||||||||
| Total | $ | 12,302 | $ | 15,370 | $ | (5,155 | ) | $ | 22,517 | |||||||
| F-28 |
Note 11 – Accrued Royalties Payable
The Company has estimated the royalties to be paid out in perpetuity under royalty agreements. The Company entered into royalty agreement as follows:
| ● | January 2016 Royalty Agreement – Under the note payable and royalty agreements of $65,000, the Company is required to pay the lender a royalty fee of five ($5) dollars per month for every ignition interlock devise that the Company has on the road in customers’ vehicles up to eight hundred (800) in perpetuity, and for every unit over 800, the Company will owe the lender $1 per month per device in perpetuity. The note holder relinquished all accrued royalties in a December 31, 2018 settlement agreement. | |
| ● | March 2016 Royalty Agreement – On March 29, 2016, the Company entered into a royalty agreement with a relative of the CEO together with note payable of $55,000. Under the royalty agreement and starting February 2018, the Company is required to pay the lender a royalty fee of five ($5) dollars per month for every ignition interlock devise that the Company has on the road in customers’ vehicles up to eight hundred (800) in perpetuity, and for every unit over 800, the Company will owe the lender $1 per month per device in perpetuity. The note holder relinquished all accrued royalties in a December 31, 2018 settlement agreement. | |
| ● | September and November 2016 Royalty Agreements – The Company entered into royalty agreements on September 30, 2016 and November 4, 2016 with a related party in relation to notes payable of $192,000 and $325,000, respectively. Under the royalty agreements, the Company is required to pay a royalty fee of from $1 to $2 per month for every ignition interlock devise that the Company has on the road in customers’ vehicles, the amount depending on how many devices are installed. | |
| ● | November 2017 Royalty Agreement – The Company entered into a royalty agreement with a related party on November 1, 2017 in relation to a note payable of $900,000. This note replaced the September and November 2016 Royalty Agreements. Under the royalty agreement, the Company is required to pay a royalty fee of from $1.50 to $3.00 per month for every ignition interlock devise that the Company has on the road in customers’ vehicles, the amount depending on how many devices are installed. | |
| ● | August 2018 Royalty Agreement – the Company entered into a royalty agreement with a related party on August 1, 2018 in relation to a note payable of $1,365,000. This note replaced the November 2017 Royalty Agreement as well as other, non-royalty notes payable. Under the royalty agreement, the Company is required to pay $1.50 and accrue an additional $3.50 for every ignition interlock devise for the first nine months of the note payable. After the first nine months, the Company is required to pay $1.50 per devise and the amount accrued during the first nine months will be paid monthly through the next twelve months. After the note payable is paid in full, the Company is required to pay $3.00 per devise in perpetuity. | |
| ● | December 2018 royalty Agreement – the Company entered into a royalty agreement with a related party on December 1, 2018 in relation to a note payable of $2,020,000. This note replaced the August 2018 Royalty Agreement. Under the royalty agreement, the Company is required to pay a royalty fee of $5.00 per month for every ignition interlock device that the Company has on the road in customers’ vehicles. |
Based on the royalty agreement, the Company had the following royalty accruals:
| December 31, 2018 | December 31, 2017 | |||||||
| January 2016 royalty agreement | $ | - | $ | 86,230 | ||||
| March 2016 royalty agreement | - | 88,010 | ||||||
| November 2017 royalty agreement | 3,327 | 5,753 | ||||||
| August 2018 royalty agreement | 18,058 | - | ||||||
| December 2018 royalty agreement | 5,500 | - | ||||||
| Total accrued royalties | $ | 26,885 | $ | 179,993 | ||||
Royalty expense was $150,206 and $85,679 for the years ended December 31, 2018 and 2017, respectively.
| F-29 |
Note 12 – Stockholders’ Equity
Preferred Stock
The Company’s articles of incorporation authorize the Company to issue up to 20,000,000 preferred shares of $0.001 par value.
Series A Preferred Stock
The Company has been authorized to issue 1,000,000 shares of Series A Preferred Stock. The Series A shares have the following preferences: no dividend rights; no liquidation preference over the Company’s common stock; no conversion rights; no redemption rights; no call rights by the Company; each share of Series A Preferred stock will have one hundred (100) votes on all matters validly brought to the Company’s common stockholders.
During the three months ended March 31, 2017, the Company entered into a material definitive agreement to issue 1,000,000 shares of series A preferred stock to an officer and director of the Company with a preliminary estimated value of $350,000. As of December 31, 2018, the total number of preferred shares issued or issuable was 1,000,000.
Common Stock
The Company has authorized 100,000,000 shares of $.0001. Holders of common stock are entitled to one vote for each share held. There are no restrictions that limit the Company’s ability to pay dividends on its common stock, subject to the requirements of the Delaware Revised Statutes. The Company has not declared any dividends since incorporation.
During the year ended December 31, 2018, the Company issued 476,000 shares of its common stock for services valued at $110,200. In addition , the Company sold 4,340,883 shares of its common stock to several investors for an aggregate purchase price of $458,705. In addition, the Company issued 32,812 common shares in the conversion of $5,083 of notes payable and related accrued interest. The total number of shares issued or issuable as of December 31, 2018 was 31,611,785.
Note 13 – Warrants
The Company issued warrants in individual sales and in connection with common stock purchase agreements. The warrants have expiration dates ranging from three to four years from the date of grant and exercise prices ranging from $0.10 to $1.00.
| F-30 |
A summary of warrant activity for the periods presented is as follows:
| Weighted Average | ||||||||||||||||
| Warrants for | Weighted Average | Remaining | Aggregate | |||||||||||||
| Common Shares | Exercise Price | Contractual Term | Intrinsic Value | |||||||||||||
| Outstanding as of December 31, 2016 | 160,000 | $ | 0.53 | 1.97 | 5,250 | |||||||||||
| Granted | 4,697,176 | 0.51 | 4.00 | 407,614 | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Forfeited, cancelled, expired | - | 0.14 | - | - | ||||||||||||
| Outstanding as of December 31, 2017 | 4,857,176 | $ | 0.51 | 3.19 | 412,864 | |||||||||||
| Granted | 930,410 | 1.35 | 4.00 | 208,633 | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Forfeited, cancelled, expired | (110,000 | ) | 0.72 | - | - | |||||||||||
| Outstanding as of December 31, 2018 | 5,677,586 | $ | 0.60 | 2.40 | 621,497 | |||||||||||
Note 14 – Income (Loss) Per Share
Net income (loss) per share is provided in accordance with FASB ASC 260-10, “Earnings per Share”. Basic net income (loss) per common share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average shares outstanding, assuming all dilutive potential common shares were issued, unless doing so is anti-dilutive.
The following shares are not included in the computation of diluted income (loss) per share, because their inclusion would be anti-dilutive:
| Year Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Preferred shares | - | - | ||||||
| Convertible notes | 632,101 | 375,082 | ||||||
| Warrants | 5,677,586 | 5,137,298 | ||||||
| Options | - | - | ||||||
| Total anti-dilutive weighted average shares | 6,309,687 | 5,512,380 | ||||||
If all dilutive securities had been exercised at December 31, 2018, the total number of common shares outstanding would be as follows:
| Common Shares | 31,073,529 | |||
| Preferred Shares | - | |||
| Convertible notes | 632,101 | |||
| Warrants | 5,677,586 | |||
| Options | - | |||
| Total potential shares | 37,383,216 |
Note 15 – Commitments and Contingencies
On December 1, 2016, the Company entered into a four-year lease with Cahuenga Management LLC for a storefront location at 15503 Cahuenga Blvd., North Hollywood, California 91601. Base rent under the lease is $2,200 per month, with an escalating provision up to $2,404 throughout the lease term. The rental agreement includes operating expenses such as common area maintenance, property taxes and insurance.
On August 28, 2017, the Company entered into a one-year lease with B3 Investments, LLC for a storefront location at Suites D104 and D105, 2406 24th Street, South Phoenix, Arizona. Base rent under the lease is $1,350 per month plus 2% ($27) rental tax. The rental agreement includes operating expenses such as common area maintenance, property taxes and insurance.
| F-31 |
Legal Proceedings
In the ordinary course of business, the Company from time to time is involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon the Company’s financial condition and/or results of operations. However, in the opinion of management, other than as set forth herein, matters currently pending or threatened against the Company are not expected to have a material adverse effect on the Company’s financial position or results of operations.
Note 16 – Related Party Transactions
The Company had the following related party transactions:
| ● | Notes payable of $2,049,000 to the Doheny Group at December 31, 2018 (refer to notes payable related party section) | |
| ● | 3,208,017 shares of common stock, of which 1,863,152 were granted to the Doheny Group in relation to notes payable and 756,609 were granted to the Doheny Group as anti-dilution shares for the year ended December 31, 2017 and none in 2018 | |
| ● | 50,000 warrants were granted to David Haridim for the year ended December 31, 2017 |
Note 17 – Settlement with Distributor
On January 21, 2018, the Company and its major distributor memorialized a September 30, 2017 oral agreement that terminated their September 5, 2015 distributorship agreement. The distributor had failed to timely make required monthly payments. The Company agreed to not pursue amounts due it from the distributor. The Company has sent letters to all customers of the distributor and believes that it will retain most, if not all, customers. If customers are not retained, the customers will need to have the interlock device removed and returned to the Company. The Company had approximately 900 interlock units rented to the distributor. As of December 31, 2017, $35,979 in distributor revenue and accounts receivable were reversed out. As of October 1, 2017, the distributor became an employee of the Company and was to service the area that he had been a distributor of.
Note 18 – Income Taxes
The Company did not have material income tax provision (benefit) because of net loss and valuation allowances against deferred income tax provision for the years ended December 31, 2018 and 2017.
| Years Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Statutory federal rate | 21.00 | % | 21.00 | % | ||||
| Change in valuation allowance | -21.00 | % | -21.00 | % | ||||
| Effective income tax rate | 0.00 | % | 0.00 | % | ||||
The income tax benefit differs from the amount computed by applying the U.S. federal statutory tax rate of 21%, primarily due to the change in the valuation allowance and state income tax benefit, offset by nondeductible expenses.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the deferred tax assets and liabilities are as follows:
| Years Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Deferred tax assets: | ||||||||
| Deferred revenue | $ | 27,635 | $ | 55,018 | ||||
| Net operating loss carryforwards | 1,387,104 | 942,364 | ||||||
| Total deferred tax assets | 1,414,739 | 997,382 | ||||||
| Valuation allowance | (1,414,739 | ) | (997,382 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
At December 31, 2018, the Company had available net operating loss carryovers of approximately $4.3 million that may be applied against future taxable income and expires at various dates between 2026 and 2038, subject to certain limitations. The Company has a deferred tax asset arising substantially from the benefits of such net operating loss deduction and has recorded a valuation allowance for the full amount of this deferred tax asset since it is more likely than not that some or all of the deferred tax asset may not be realized. The net change in the valuation allowance is primarily due to the net loss in 2018, which increased net operating loss carryforward in 2018 compared to 2017.
The Company files income tax returns in the U.S. federal jurisdiction and California and is subject to income tax examinations by federal tax authorities for tax years ended 2015 and later and by California authorities for tax years ended 2013 and later. The Company currently is not under examination by any tax authority. The Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense. As of December 31, 2018, the Company has no accrued interest or penalties related to uncertain tax positions.
Note 19 – Subsequent Events
The Company follows the guidance in FASB ASC Topic 855, Subsequent Events (“ASC 855”), which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before the consolidated financial statements are issued or are available to be issued. ASC 855 sets forth (i) the period after the balance sheet date during which management of a reporting entity evaluates events or transactions that may occur for potential recognition or disclosure in the consolidated financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its consolidated financial statements, and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.
| F-32 |
On January 3, 2019, the Company entered into a loan agreement with the Doheny Group for $32,700. The note has no interest (0%), no monthly payments, and a balloon payment of $32,700 on January 3, 2020.
On January 11, 2019, the Company entered into a loan agreement with the Doheny Group for $40,000. The note has no interest (0%), no monthly payments, and a balloon payment of $40,000 on January 11, 2020.
On January 15, 2019, the Company entered into a loan agreement with the Doheny Group for $14,500. The note has no interest (0%), no monthly payments, and a balloon payment of $14,500 on January 15, 2020.
On January 30, 2019, the Company reached a release of all claims with note holder Lucky Draw, LLC. The Company owed Lucky Draw a promissory note payable of $50,000 and accrued interest.
On February 1, 2019, the Company entered into a loan agreement with the Doheny Group for $15,000. The note has no interest (0%), no monthly payments, and a balloon payment of $15,000 on February 1, 2020.
On February 19, 2019, the Company entered into a loan agreement with The Doheny Group for $5,000. The loan has no interest (0%), no monthly payments, and a balloon payment of $5,000 on February 19, 2020.
On March 4, 2019, the Company entered into a loan agreement with The Doheny Group for $10,000. The loan has no interest (0%), no monthly payments, and a balloon payment of $10,000 on March 4, 2020.
On May 1, 2019, the Company entered into a loan agreement with The Doheny Group for $20,000. The loan has no interest (0%), no monthly payments, and a balloon payment of $20,000 on May 1, 2020.
On June 3, 2019, the Company entered into a loan agreement with The Doheny Group for $89,000. The loan has no interest (0%), no monthly payments, and a balloon payment of $89,000 on June 3, 2020.
On July 10, 2019, the Company entered into a loan agreement with The Doheny Group for $13,000. The loan has no interest (0%), no monthly payments, and a balloon payment of $13,000 on July 10, 2020.
On July 18, 2019, the Company entered into a loan agreement with The Doheny Group for $8,000. The loan has no interest (0%), no monthly payments, and a balloon payment of $8,000 on July 18, 2020.
| F-33 |