10-K/A 1 form10ka.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K/A

(Amendment No. 1)

 

[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.

 

 

  

   
 

 

 EXPLANATORY NOTE

 

We are filing this Amendment No. 1 on Form 10-K/A (the “Amendment”) to our Annual Report on Form 10-K for the year ended December 31, 2018 (the “Form 10-K”), filed with the United States Securities and Exchange Commission on July 19, 2019 (the “Original Filing Date”), solely to correct an error on the Report of Independent Registered Accounting Public Accounting Firm (the “Report”). In the Report submitted by the independent accounting firm that audited our financial statements contained in the Form 10-K, the Report incorrectly references that the Report only covers “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.” The Report should have referenced the fact the Report actually covers both 2018 and 2017, and should have stated: “the accompanying consolidated balance sheet of Blow & Drive Interlock Corporation (the “Company”) as of December 31, 2018 and 2017 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years 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 2017, 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.”

 

This Amendment contains the corrected Report of Independent Registered Accounting Public Accounting Firm. We have also included the financial statements and related notes that relate to the corrected report but no changes were made to those financial statements and related notes from the versions submitted with our Form 10-K.

 

No other changes have been made to the Form 10-K. This Amendment speaks as of the Original Filing Date and does not reflect events that may have occurred subsequent to the Original Filing Date, and does not modify or update in any way the disclosures made in the Form 10-K.

 

2
 

 

PART IV

 

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.

 
Item No.   Description
     
3.1 (1)   Certificate of Incorporation of Jam Run Acquisition Corporation dated June 28, 2013
     
3.2 (17)   Articles of Amendment to Articles of Incorporation to Jam Run Acquisition Corporation dated February 6, 2014 (changing corporate name to Blow & Drive Interlock Corporation)
     
3.3 (1)   Bylaws of Jam Run Acquisition Corporation (now Blow & Drive Interlock Corporation) dated June 2013
     
10.1 (2)   Agreement between Tiber Creek Corporation and Laurence Wainer dated January 25, 2014
     
10.2 (2)   Promissory Note between the Company and Laurence Wainer dated February 16, 2014
     
10.3 (3)   Lease Agreement by and between Marsel Plaza LLC and Laurence Wainer and Blow and Drive Interlock Corporation dated January 21, 2015
     
10.4 (4)   Exclusive Distributorship Agreement with Theenk Inc. dated August 21, 2015
     
10.5 (4)   Exclusive Distributorship Agreement with Jay Lopez dated July 24, 2015
     
10.6 (4)   Independent Contractor Agreement with Laurence Wainer dated September 11, 2015
     
10.7 (5)   Exclusive Distributorship Agreement with Stephen Ferraro dated November 9, 2015
     
10.4 (6)   Supply Agreement by and between BDI Manufacturing, Inc., an Arizona corporation, and C4 Development Ltd. dated June 29, 2015
     
10.5 (7)   Securities Purchase Agreement with David Stuart Petlak entered into on November 19, 2015
     
10.6 (7)   Convertible Promissory Note issued to David Stuart Petlak dated November 19, 2015
     
10.7 (7)   Common Stock Warrant issued to David Stuart Petlak dated November 19, 2015
     
10.8 (8)   Exclusive Distributorship Agreement with dba Blow & Drive Houston dated January 11, 2016
     
10.9 (9)   Secured Promissory Note and Agreement with Ira Silver dated January 20, 2016

 

3
 

 

10.10 (9)   Secured Promissory Note and Agreement with Chaim K. Wainer dated October 29, 2015
     
10.11 (10)   Securities Purchase Agreement with Dr. Oren Azulay dated March 30, 2016
     
10.12 (10)   Common Stock Purchase Agreement with Gustavo Arceo dated April 2016
     
10.13 (10)   Common Stock Purchase Agreement with LGL LLC dated May 6, 2016
     
10.14 (11)   Loan and Security Agreement with Doheny Group, LLC dated September 30, 2016
     
10.15 (11)   Phase 1 Loan Agreement with D1oheny Group, LLC dated September 30, 2016
     
10.16 (11)   Royalty Agreement with Doheny Group, LLC dated September 30, 2016
     
10.17 (11)   Common Stock Purchase Agreement with Doheny Group, LLC dated September 30, 2016
     
10.18 (11)   Agreement with Abraham Summers and Gnossis International, LLC
     
10.19 (12)   Termination of Services Agreement by and between Blow & Drive Interlock Corporation, Abraham Summers and Gnosiis International, LLC dated June 19, 2017
     
10.20 (13)   Amendment No. 1 to Debt Conversion and Series A Preferred Stock Purchase Agreement dated May 17, 2017
     
10.21 (13)   Amendment No. 1 to Loan and Security Agreement with Doheny Group, LLC dated June 3, 2017
     
10.22 (13)   Amendment No. 1 to Royalty Agreement with Doheny Group, LLC dated June 3, 2017
     
10.23 (14)   Form of Securities Purchase Agreement
     
10.24 (14)   Settlement Agreement by and between Blow & Drive Interlock Corporation and J C Lopez/BDI Interlock LLC dated January 21, 2018 (memorializes oral agreement between the parties dated September 30, 2017)
     
10.25 (15)   Agreement to Purchase Common Stock and Preferred Stock dated December 31, 2018
     
10.26 (16)   Debt Conversion and Series A Preferred Stock Purchase Agreement by and between Blow & Drive Interlock Corporation and Laurence Wainer dated March 7, 2017
     
31.1   Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer (filed herewith).
     
31.2   Rule 13a-14(a)/15d-14(a) Certification of Chief Accounting Officer (filed herewith).
     
32.1   Section 1350 Certification of Chief Executive Officer (filed herewith).
     
32.2   Section 1350 Certification of Chief Accounting Officer (filed herewith).

 

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

 

4
 

 

* 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

 

5
 

 

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: August 22, 2019   /s/ David Haridim
  By: David Haridim
  Its: President (Principal Executive Officer)

 

Dated: August 22, 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: August 22, 2019   /s/ David Haridim
  By: David Haridim, Director, President, and Secretary

 

6
 

 

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

INDEX

 

  Page
   
Financial Statements:  
   
Report of Independent Registered Public Accounting Firm F-2
Report of Independent Registered Public Accounting Firm F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Stockholders’ Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8

 

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 2017 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years 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 2017, 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 audits. 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 audits 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 audits 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 audits 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 audits provide a reasonable basis for our opinion.

 

/s/ Benjamin & Young, LLP  

We served as the Company’s Auditor since 2018

Anaheim, California

July 16, 2019 (as revised on August 21, 2019)

 

F-2
 

 

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-3
 

 

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-4
 

 

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-5
 

 

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-6
 

 

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-7
 

 

BLOW AND DRIVE INTERLOCK CORPORATION

NOTES TO FINANCIAL STATEMENTS

 

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-8
 

 

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-9
 

 

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-10
 

 

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-11
 

 

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-12
 

 

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-13
 

 

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-14
 

 

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-15
 

 

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-16
 

 

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-17
 

 

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-18
 

 

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-19
 

 

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-20
 

 

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-21
 

 

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-22
 

 

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-23
 

 

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-24
 

 

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-25
 

 

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-26
 

 

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-27
 

 

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-28
 

 

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-29
 

 

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-30
 

 

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-31
 

 

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-32
 

 

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-33
 

 

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-34