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Blow Drive Interlock Corp (BDIC) SEC Filing 10-K Annual report for the fiscal year ending Monday, December 31, 2018

Blow Drive Interlock Corp

CIK: 1586495 Ticker: BDIC
Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2018
Jul. 15, 2019
Jun. 30, 2018
Document And Entity Information   
Entity Registrant NameBlow & Drive Interlock Corp  
Entity Central Index Key0001586495  
Document Type10-K  
Document Period End DateDec. 31, 2018  
Amendment Flagfalse  
Current Fiscal Year End Date--12-31  
Entity Well-known Seasoned IssuerNo  
Entity Voluntary FilerNo  
Entity Current Reporting StatusNo  
Entity Interactive Data CurrentNo  
Entity Filer CategoryNon-accelerated Filer  
Entity Small Business Flagtrue  
Entity Emerging Growth Companyfalse  
Entity Ex Transition Periodfalse  
Entity Shell Companyfalse  
Entity Public Float  $ 3,355,232
Entity Common Stock, Shares Outstanding 31,350,683 
Document Fiscal Period FocusFY  
Document Fiscal Year Focus2018  

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2018

 

OR

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from_____________ to _____________.

 

Commission file number 000-55053

 

Blow & Drive Interlock Corporation

(Exact name of registrant as specified in its charter)

 

Delaware   46-3590850

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1427 S. Robertson Blvd.

Los Angeles, CA

  90035
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code (877) 238-4492

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
     
None   None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, par value $0.0001

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [  ] No [X]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to and post such files). Yes [  ] No [X]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

  Large accelerated filer [  ]   Accelerated filer [  ]
       
  Non-accelerated filer [  ]   Smaller reporting company [X]
       
      Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

 

Aggregate market value of the voting stock held by non-affiliates: $3,355,232 as based on last reported sales price of such stock on June 30, 2018. The voting stock held by non-affiliates on that date consisted of 18,640,182 shares of common stock the closing stock price was $0.18.

 

Applicable Only to Registrants Involved in Bankruptcy Proceedings During the Preceding Five Years:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [  ] No [  ]

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of July 15, 2019, there were 31,350,683 shares of common stock, $0.001 par value, issued and outstanding.

 

Documents Incorporated by Reference

 

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to rule 424(b) or (c) of the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980). None.

 

 

 

 

 

 

Blow & Drive Interlock Corporation

 

TABLE OF CONTENTS

 

PART I  
   
ITEM 1 – BUSINESS 2
ITEM 1A – RISK FACTORS 7
ITEM 1B – UNRESOLVED STAFF COMMENTS 11
ITEM 2 - PROPERTIES 11
ITEM 3 - LEGAL PROCEEDINGS 11
ITEM 4 – MINE SAFETY DISCLOSURES 11
   
PART II  
   
ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 12
ITEM 6 – SELECTED FINANCIAL DATA 13
ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 13
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 19
ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 19
ITEM 9A – CONTROLS AND PROCEDURES 19
ITEM 9B – OTHER INFORMATION 21
   
PART III  
   
ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNACE 21
ITEM 11 – EXECUTIVE COMPENSATION 25
ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 28
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 29
ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES 30
   
PART IV  
   
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES 31

 

i

 

 

PART I

 

Forward Looking Statements

 

This Annual Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on management’s beliefs and assumptions, and on information currently available to management. Forward-looking statements include the information concerning possible or assumed future results of operations of the Company set forth under the heading “Management’s Discussion and Analysis of Financial Condition or Plan of Operation.” Forward-looking statements also include statements in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “consider,” or similar expressions are used.

 

Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties, and assumptions. The Company’s future results and shareholder values may differ materially from those expressed in these forward-looking statements. Readers are cautioned not to put undue reliance on any forward-looking statements.

 

ITEM 1 – BUSINESS

 

Corporate History

 

We were incorporated under the name Jam Run Acquisition Corporation on July 2, 2013 in the State of Delaware. From inception through early February 2014, we were a blank check company and qualified as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act which became law in April, 2012, with a business plan of entering into a transaction with a foreign or domestic private company in order for that company to become a reporting company as part of the process toward the public trading of its stock.

 

On February 6, 2014, we issued 9,700,000 shares of our common stock, representing approximately 97% of our then-outstanding shares to Laurence Wainer for $1,970. In connection with this transaction, we changed our name Blow & Drive Interlock Corporation and Mr. Wainer became our sole officer and director.

 

On March 7, 2017, we entered into an Debt Conversion and Series A Preferred Stock Purchase Agreement (the “SPA”) with Mr. Wainer, one of our officers and directors at that time, under which we agreed to create a new series of non-convertible preferred stock entitled “Series A Preferred Stock,” with One Million (1,000,000) shares authorized and the following rights: (i) no dividend rights; (ii) no liquidation preference over the Company’s common stock; (iii) no conversion rights; (iv) no redemption rights; (v) no call rights by the Company; (vi) each share of Series A Convertible Preferred stock will have one hundred (100) votes on all matters validly brought to the Company’s common stockholders; and Mr. Wainer agreed to acquire 1,000,000 shares of our Series A Preferred Stock, once created, in exchange for Mr. Wainer forgiving $25,537 in accrued salary we owed to him as of December 31, 2016. The Series A Preferred Stock was created with the State of Delaware by filing a Certificate of Designation on March 13, 2017. The description of the SPA set forth in this report is qualified in its entirety by reference to the full text of that document, which is attached hereto as Exhibit 10.26 and is incorporated herein by reference.

 

On January 2, 2019, Mr. Wainer closed the transaction that was the subject of an Agreement to Purchase Common Stock and Preferred Stock (the “Agreement”) between Mr. Wainer and The Doheny Group, LLC, a Nevada limited liability company (“Doheny Group”), under which Doheny Group acquired 8,924,000 shares of our common stock (the “Common Shares”) and One Million (1,000,000) shares of our Series A Preferred Stock (the “Preferred Shares” and together with the Common Shares, the “Shares”), from Mr. Wainer in exchange for $30,000. Combined, the Shares represent approximately 84% of our outstanding voting rights. Mr. David Haridim is the principal of Doheny and was appointed to our Board of Directors and as our sole executive officer. We were a party to the Agreement solely for the purpose of acknowledging certain representations and warranties about the company in the Agreement. The description of the Agreement set forth in this report is qualified in its entirety by reference to the full text of that document, which is attached hereto as Exhibit 10.20 and is incorporated herein by reference.

 

2

 

 

Our offices are located at 1427 S. Robertson Blvd., Los Angeles, CA 90035, telephone number (877) 238-4492.

 

Business Overview

 

General

 

We manufacture, market, lease, install and monitor a Breath Alcohol Ignition Interlock Device (BAIID) we developed known as the BDI-747 Ignition Interlock Device (the “BDI-747/1”), which is a mechanism that is installed on the steering column of an automobile and into which a driver exhales prior to starting their vehicle. The device in turn provides a blood-alcohol concentration analysis. If the driver’s blood-alcohol content is higher than a certain pre-programmed limit, the device prevents the ignition from engaging and the automobile from starting. These devices are often required for use by DUI or DWI (“driving under the influence” or “driving while intoxicated”) offenders as part of a mandatory court or motor vehicle department program. The BDI-747/1 has met the 2013 National Highway Traffic Safety Administration (NHTSA) guidelines for Breath Alcohol Ignition Interlock Devices [Federal Register Volume 78, Number 89] as an authorized BAIID [Element Materials Technology/Report # ESP018444P June 17, 2015]. The BDI-747/1 is manufactured by BDI Manufacturing Inc., a subsidiary of Blow & Drive Interlock, Inc., from parts and supplies from C4 Development Ltd.

 

The primary market for the BDI-747/1 Ignition Interlock Device is as a breathalyzer device to be used by persons convicted of a driving under the influence of alcohol. In order for the BDI-747/1 to be used in states for persons convicted of driving under the influence the device must be approved by each individual state. The process to get the device approved varies greatly state-to-state. As of December 31, 2018, the BDI-747/1 device was approved in Oregon, Texas, Arizona, and Kentucky. As of March 31, 2019, the BDI-747/1 device was only approved in Arizona and Texas. The states where our BDI-747/1 device is approved has decreased primarily as a result of new state certification rules that require increased capital investment that we are not able to afford.

 

In states where the BDI-747/1 is approved as a BAIID, we lease the BDI-747/1 devices to offenders, typically for twelve months, but the time could differ on a case-by-case basis depending on the sentence received by the offender. In some states we market, lease, install and support the devices directly and in other states we sell distributorships to authorized distributors allowing them to lease, install, service, remove and support the BDI-747/1 devices. Currently, we lease the devices directly in the states we are approved, except West Phoenix, Arizona and Lubbock, Texas, where we have licensed distributors that lease the devices.

 

In states where we lease the devices directly to consumers, we typically charge between $89-$189 in upfront fees for the user (which covers one month of the lease payment), and then between $69-$89/month for the other eleven months of the lease for the typical one year lease. The lease payment covers the installation of the device in the consumer’s vehicle, the rental of the device, recalibration of the device as required by each state (typically every 30 to 60 days) and the monitoring services for the device, which are then reported to the state in accordance with each state’s requirements. In states and areas where we do not have a direct presence, which we only have in Phoenix, Arizona, we contract with independent service centers, such as car alarm installation companies or other auto services companies, to perform the installations of our BDI-747/1 device, which centers must be approved by the states in which we perform the installations. Because our devices are installed in consumers’ vehicles are part of a judicially-mandated program, and since the use of the device controls the individual’s driving privileges, collection rates of the monthly leasing fees is close to 100%. The failure to make the payment could be a violation of the consumer’s sentence or probation and could cause them to lose the device and their driving privileges.

 

3

 

 

In areas where we have a distributor, in our typical distributorship arrangement, we charge the distributor a flat fee distributorship territory fee up front (which fee varies based on the size and location of the distributorship), a $150 per unit registration fee, and then a $35 monthly fee for each device the distributor has in its inventory. These fees may vary on a case-by-case basis. The relationship with our distributors may either be on an exclusive or non-exclusive basis depending upon the location of the distributorship and the fees charged.

 

As of December 31, 2018, we had approximately 1,100 units on the road, with approximately 885 devices being leased directly from us and approximately 215 devices leased through our distributors, compared to December 31, 2017, when we had approximately 1,558 units on the road, with approximately 1,451 devices being leased directly from us and approximately 107 devices leased through our distributors. The decrease in the total number of devices we have on the road is primarily due to the fact the BDI-747/1 devices was approved in fewer states in 2018 compared to 2017.

 

Due to the decrease in the number of states where our BDI-747/1 device is approved, and the resulting decrease in the number of devices we have on the road, our management is currently exploring all options related to our business, including, but not limited to: (i) taking out loans or selling our stock in order to raise money to continue, and try to expand, our current business; (ii) trying to acquire a synergistic business and grow our current business; or (iii) selling our current business and trying to find another business to, in or out of our current business segment, to take over the public corporation.

 

Our website is www.blowanddrive.com.

 

Principal Products and Services

 

Our only product is the BDI-747/1 Breath Alcohol Ignition Interlock Device. The BDI-747/1 device is used to detect alcohol in a person’s system by measuring the level of alcohol in a person’s breath by having them blow into the device and determining whether that level is over or under a preset level set by the installer or a trained technician. The pre-determined level differs by state, but is typically around .02. The device is approximately the size of a smartphone which is installed directly onto a vehicle’s steering column. The device requires the driver to exhale into the device prior to starting the vehicle. The device will prevent the vehicle from starting if the driver’s blood-alcohol content exceeds the predetermined set level.

 

 

(photo of BDI-747/1)

 

Our device, designed by Well Electric, incorporates the latest technology and design in the market for such devices. The device has both GPS and video capabilities. The device has a fuel cell sensor and a color display screen. The external camera mounting can wrap around the automobile’s rear view mirror. The device is powered by either an internal battery or a power cable from a control box which supports both 24V and 12V batteries. The device has both USB communication capabilities and WiFi (with approval from service provider).

 

The specifications for our ignition interlock device are as follows:

 

Sample head  
Sensor Fuel cell
Working Temperature -40˚C to 85˚C
Display Screen Color screen
Memory and Save 80,000 events with pictures save and download form sample head
Communication USB, WiFi, 3G(user need to get US approval with service provider)
Communication with control box Wireless
Power supply Internal battery or power cable from control box
Human checking Flow sensing, air temperature sensing
   
External  
Camera External camera mounting around the review mirror
Night photo White LED, and IR light
Control box Support 24V and 12V
Motor Start Checking Ignition checking, power checking, moving checking
PC software

One client side software, which able to set sample and input user information.

Picture and events may also be downloaded. This is not web or server side software

 

4

 

 

The BDI-747/1 unit takes about 30-45 minutes to install in a vehicle, depending on the vehicle. The ignition interlock component is installed on the steering column. Currently, our cost to order the requisite supplies and assemble the BDI-747/1 units is approximately $350-$500 per unit depending on the specifications of the unit. The device requires recalibration in accordance with state requirements, typically every 30 to 60 days.

 

Marketing

 

In 2017, most of our marketing consisted of getting approval for our BDI-747/1 device in as many states as possible. By gaining approval in a state our BDI-747/1 device appears on that state’s list of approved breathalyzer ignition interlock devices. Someone convicted of driving under the influence that is required to use a breathalyzer ignition interlock device must choose one from the list of state-approved devices. As a result, by gaining approvals in states, our device is automatically disseminated to our targeted consumers by the state. In addition to trying to obtain approvals in as many states as we can, our other marketing efforts related to our BDI-747/1 device have largely consisted of speaking with various individuals and companies that are in the breathalyzer ignition interlock device industry, such as companies in the business of conducting educational courses for individuals convicted of driving under the influence of alcohol, companies in the business of installing ignition interlock devices, and individuals involved in the approval process for breathalyzer ignition interlock devices.

 

In addition to marketing our BDI-747/1 device directly to consumers, we have also marketed our distributorship opportunities to various individuals and companies that are in the breathalyzer ignition interlock device industry. In the past, the efforts have included radio and television advertisements of our distributorship program. Although we are not currently running any radio or television advertisements for our distributorship program, we may do so again in the future. We have also discussed these opportunities with various companies and individuals in the industry, similar to what we have done with our marketing of our BDI-747/1 device.

 

Manufacturing

 

We are the primary manufacturer of our BDI-747/1 device, through our wholly-owned subsidiary, BDI Manufacturing, Inc., an Arizona corporation. However, we do utilize a supply and assembly company called C4 Development Ltd., a Hong Kong corporation (“C4 Development”). On June 29, 2015, we entered into a Supply Agreement with C4 Development, under which C4 Development supplies us with a part known as the “PCB with Alcohol Tester.” This device has certain parts utilized in our BDI-747/1 device, but the PCB with Alcohol Tester is not a device, by itself, that is capable of obtaining approval from the NHTSA as a breath alcohol interlock device. Once we obtain these parts for a device from C4 Development, we compile the components to the devices at our facility in Phoenix, Arizona in order to create our BDI-747/1 device.

 

Competition

 

The business of breathalyzer ignition interlock device industry is competitive, and from time-to-time new companies may appear on the list of approved providers in various states, however, there is a high barrier to entry due to the cost of development fees, manufacturing fees, NHSTA-approved testing, and state field testing. We compete with a number of successful companies in the industry, including, but not limited to, LifeSafer®, Smart Start®, Intoxalock®, Guardian Interlock Systems and Dräger. These larger companies have greater financial resources than we do, have approval in most (if not all) states, and likely have 50,000 of their respective ignition interlock devices on the road each. By comparison as of March 31, 2019, we were approved in two states and had approximately 1,100 units on the road. Although we believe our BDI-747/1 device compares favorably to the interlock devices provided by our competitors, we will need to raise significant capital and gain approval in most states in order capitalize on our BDI-747/1 device. We believe if we do this we will be able to compete better with these larger competitors.

 

5

 

 

Due to the state approvals necessary to service the judicially-mandated breath analyzer ignition interlock market we believe there is a barrier to entry that will discourage too many other companies from entering the industry. Not only must a new entrant develop and manufacture a breathalyzer device, it must meet the NHTSA requirements, and then get approved by state regulators, all of which can be costly. The complexities and costs of meeting all these steps should keep new entrants into the industry to a minimum.

 

Intellectual Property

 

We currently have a utility patent for our BDI Model #1 power line filter, which is used with our BDI-747 Breath Alcohol Ignition Interlock Device to prevent interference from electromagnetic waves. Although we do not have any other formal intellectual property protection over our BDI-747/1 device (such as device patents or trademarks), we do have general intellectual property protections provided by federal and state laws that prohibit unfair business practices, etc.

 

Government Regulation

 

Ignition interlock devices must be certified by the states in which a company intends to market and lease the devices. Before applying for certification to any state, the devices are sent to an independent laboratory for testing and certification that the device meets or exceeds the guidelines published by the National Highway Traffic Safety Administration as the Model Specifications for Breath Alcohol Ignition Interlock Devices. Each state has its own set of certification guidelines that must be met. Typically the requirements for state certification are met once the device is certified by an independent laboratory as meeting or exceeding the National Highway Traffic Safety Administration’s published guidelines.

 

Our BDI-747/1 device was certified by an independent testing laboratory in June 2015. As of As of December 31, 2018, the BDI-747/1 device was approved in Oregon, Texas, Arizona, and Kentucky. As of March 31, 2019, the BDI-747/1 device was only approved in Arizona and Texas.

 

Employees

 

As of December 31, 2018, we had four independent contractors, which primarily install, calibrate, remove and monitor our BDI-747/1 devices. Mr. Laurence Wainer, our President and Secretary at December 31, 2018, was an independent contractor. We have approximately 25 installers and technicians working in the states where we approved that are independent contractors.

 

Available Information

 

We are a fully reporting issuer, subject to the Securities Exchange Act of 1934. Our Quarterly Reports, Annual Reports, and other filings can be obtained from the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m. You may also obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission at http://www.sec.gov.

 

6

 

 

ITEM 1A. – RISK FACTORS.

 

As a smaller reporting company we are not required to provide a statement of risk factors. However, we believe this information may be valuable to our shareholders for this filing. We reserve the right to not provide risk factors in our future filings. Our primary risk factors and other considerations include:

 

We have a limited operating history and historical financial information upon which you may evaluate our performance.

 

You should consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, are in their early stages of development. We may not successfully address these risks and uncertainties or successfully implement our existing and new products. If we fail to do so, it could materially harm our business and impair the value of our common stock. Even if we accomplish these objectives, we may not generate the positive cash flows or profits we anticipate in the future. We were incorporated in Delaware on July 2, 2013. Our business to date business focused on developing, manufacturing, and getting independent certification and state approvals for our BDI-747/1 device, hiring management and staff personnel, contracting with distributors and leasing and servicing our products. Unanticipated problems, expenses and delays are frequently encountered in establishing a new business and developing new products. These include, but are not limited to, inadequate funding, lack of consumer acceptance, competition, product development, and inadequate sales and marketing. The failure by us to meet any of these conditions would have a materially adverse effect upon us and may force us to reduce or curtail operations. No assurance can be given that we can or will ever operate profitably.

 

We may not be able to meet our future capital needs.

 

To date, we have not generated sufficient revenue to meet our capital needs, and we may not be able to in the future. Our future capital requirements will depend on many factors, including our ability to develop our products, cash flow from operations, and competing market developments. We will need additional capital in the near future. Any equity financings will result in dilution to our then-existing stockholders. Sources of debt financing may result in high interest expense. Any financing, if available, may be on unfavorable terms. If adequate funds are not obtained, we will be required to reduce or curtail operations.

 

If we cannot obtain additional funding, our product development and commercialization efforts may be reduced or discontinued and we may not be able to continue operations.

 

We have historically experienced negative cash flows from operations since our inception and we expect the negative cash flows from operations to continue for the foreseeable future. Unless and until we are able to generate higher revenues, we expect such losses to continue for the foreseeable future. As discussed in our financial statements, there exists substantial doubt regarding our ability to continue as a going concern.

 

Product manufacturing and development efforts are highly dependent on the amount of cash and cash equivalents on hand combined with our ability to raise additional capital to support our future operations through one or more methods, including but not limited to, issuing additional equity or debt.

 

In addition, we may also raise additional capital through additional equity offerings, and licensing our future products in development. While we will continue to explore these potential opportunities, there can be no assurances that we will be successful in raising sufficient capital on terms acceptable to us, or at all, or that we will be successful in licensing our future products. Based on our current projections, we believe we have insufficient cash on hand to meet our obligations as they become due based on current assumptions. The uncertainties surrounding our future cash inflows have raised substantial doubt regarding our ability to continue as a going concern.

 

7

 

 

Current economic conditions and capital markets are in a period of disruption and instability which could adversely affect our ability to access the capital markets, and thus adversely affect our business and liquidity.

 

The current economic conditions and financial crisis have had, and will continue to have, a negative impact on our ability to access the capital markets, and thus have a negative impact on our business and liquidity. The shortage of liquidity and credit combined with the substantial losses in worldwide equity markets could lead to an extended worldwide recession. We may face significant challenges if conditions in the capital markets do not improve. Our ability to access the capital markets has been and continues to be severely restricted at a time when we need to access such markets, which could have a negative impact on our business plans. Even if we are able to raise capital, it may not be at a price or on terms that are favorable to us. We cannot predict the occurrence of future disruptions or how long the current conditions may continue.

 

Because we face intense competition, we may not be able to operate profitably in our markets.

 

The market for our product is highly competitive and is becoming more so, which could hinder our ability to successfully market our products. We may not have the resources, expertise or other competitive factors to compete successfully in the future. We expect to face additional competition from existing competitors and new market entrants in the future. Many of our competitors have greater name recognition and more established relationships in the industry than we do. As a result, these competitors may be able to:

 

  develop and expand their product offerings more rapidly;
  adapt to new or emerging changes in customer requirements more quickly;
  take advantage of acquisition and other opportunities more readily; and
  devote greater resources to the marketing and sale of their products and adopt more aggressive pricing policies than we can.

 

If our products do not gain state approvals, are removed in jurisdictions where previously approved, and/or do not meet expected market acceptance, prospects for our sales revenue may be affected.

 

We use the BDI-747/1 device in the judicially-mandated market for DUI offenders. The judicially-mandated market is where a breathalyzer device is required by law as a punishment for the committing a crime. As a result, sales and servicing of our product is dependent upon us gaining approval in each individual state and/or locality where we want to lease our products. This result can be expensive and time-consuming and there is no guarantee we will be successful in obtaining approval in all the states where we apply and if we don’t get approval in a sufficient number of states the market for our products will suffer. Additionally, even if we gain state approval, there is no guarantee our products will stay as an approved device (we could get our approval revoked in one or more states) or will be chosen by a sufficient number of DUI offenders in those states to provide us with sufficient revenues to pay our expenses.

 

We plan to lease the BDI-747/1 device in many states through third-party distributors. If we are unsuccessful in finding qualified distributors or our distributors do not perform well, our business could suffer.

 

While we have a retail location in Phoenix, Arizona, and may open more in the future, under our current business plan we plan to lease the BDI-747/1 device through third-party distributors in many regions and states. If we are unable to find qualified distributors in certain regions and/or states, and/or the distributors we contract with do not perform well, then we may not lease and service as many of our BDI-747/1 devices as we anticipate, and our business would suffer as a result.

 

8

 

 

If critical components become unavailable or our suppliers delay their production of our key components, our business will be negatively impacted.

 

Currently, we rely on a primary supplier to supply us with the primary components for our BDI-747/1 device, which we then use to complete the assembly at our location in Phoenix, Arizona. As a result, the stability of component supply is crucial to our ability to get sufficient supplies to manufacture our products. Due to the fact we currently assemble our device from “off the shelf” parts and components, some of our critical devices and components are supplied by certain third-party manufacturers, and we may be unable to acquire necessary amounts of key components at competitive prices.

 

If we are successful in our growth, outsourcing the production of certain parts and components would be one way to reduce manufacturing costs. We plan to select these particular manufacturers based on their ability to consistently produce these products according to our requirements in an effort to obtain the best quality product at the most cost effective price. However, the loss of all or one of these suppliers or delays in obtaining shipments would have an adverse effect on our operations until an alternative supplier could be found, if one may be located at all. If we get to that stage of growth, such loss of manufacturers could cause us to breach any contracts we have in place at that time and would likely cause us to lose sales.

 

If our contract manufacturers fail to meet our requirements for quality, quantity and timeliness, our business growth could be harmed.

 

We obtain the primary components for the BDI-747/1 device from a third party supplier. This supplier likely procures most of the raw materials to make our device from third parties. If these companies were to terminate their agreements with our supplier, or our supplier with us, without adequate notice, or fail to provide the required capacity and quality on a timely basis, we would be delayed in our ability or unable to process and deliver our products to our customers.

 

Our products could contain defects or they may be installed or operated incorrectly, which could reduce sales of those products or result in claims against us.

 

Although we have quality assurance practices to ensure good product quality, defects still may be found in the future in our future products.

 

End-users could lose their confidence in our products and us if they unexpectedly use defective products or use our products improperly. This could result in loss of revenue, loss of profit margin, or loss of market share. Moreover, because our products may be employed in the automotive industry, if one of our products is a cause, or perceived to be the cause, of injury or death in a car accident, we would likely be subject to a claim. If we were found responsible it could cause us to incur liability which could interrupt or even cause us to terminate some or all of our operations.

 

If we are unable to recruit and retain qualified personnel, our business could be harmed.

 

Our growth and success highly depend on qualified personnel. Competition in the industry could cause us difficulty in recruiting or retaining a sufficient number of qualified technical personnel, which could harm our ability to develop new products. If we are unable to attract and retain necessary key talents, it would harm our ability to develop competitive product and retain good customers and could adversely affect our business and operating results.

 

Our BDI-747/1 device has lost its approval in a number of states and our number of devices on the road has been declining. At some point our business may not be viable. Our management is currently exploring all options regarding our current business, as well as other businesses.

 

Due to the decrease in the number of states where our BDI-747/1 device is approved, and the resulting decrease in the number of devices we have on the road, our management is currently exploring all options related to our business, including, but not limited to: (i) taking out loans or selling our stock in order to raise money to continue, and try to expand, our current business; (ii) trying to acquire a synergistic business and grow our current business; or (iii) selling our current business and trying to find another business to, in or out of our current business segment, to take over the public corporation. In the event we take out loans to fund our operations and/or public filing requirements, the terms of such financing may be on terms not favorable to us and could lead to a significant decrease in our stock price. In the event we sell our existing business or undergo a merger or business combination transaction our shareholders could incur significant dilution due to shares of our stock being issued to any incoming business.

 

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As of December 31, 2018, our internal controls were not effective which led to material weaknesses in our internal controls over financial reporting and, as a result, we may not be able to report our financial results accurately or timely and in the future could have a problem to detecting fraud, which could have a material adverse effect on our business.

 

An effective internal control environment is necessary for us to produce reliable financial reports and is an important part of our effort to prevent financial fraud. We are required to periodically evaluate the effectiveness of the design and operation of our internal controls over financial reporting. Based on these evaluations, we may conclude that enhancements, modifications, or changes to internal controls are necessary or desirable. While management evaluates the effectiveness of our internal controls on a regular basis, these controls may not always be effective, and as of December 31, 2018 they were not effective. There are inherent limitations on the effectiveness of internal controls, including collusion, management override, and failure of human judgment. In addition, control procedures are designed to reduce rather than eliminate business risks. If we fail to maintain an effective system of internal controls, or if management or our independent registered public accounting firm discovers material weaknesses in our internal controls, we may be unable to produce reliable financial reports or prevent fraud, which could have a material adverse effect on our business, including subjecting us to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission. Any such actions could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline or limit our access to capital.

 

Our common stock has been thinly traded and we cannot predict the extent to which a trading market will develop.

 

Our common stock is quoted on the OTC Pink-tier of OTC Markets. Our common stock is thinly traded compared to larger more widely known companies. Thinly traded common stock can be more volatile than common stock trading in an active public market. We cannot predict the extent to which an active public market for our common stock will develop or be sustained after this offering.

 

Because we are subject to the “penny stock” rules, the level of trading activity in our stock may be reduced.

 

Our common stock is traded on the OTC Markets. Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by the Securities and Exchange Commission. Penny stocks, like shares of our common stock, generally are equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on NASDAQ. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, broker-dealers who sell these securities to persons other than established customers and “accredited investors” must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security subject to the penny stock rules, and investors in our common stock may find it difficult to sell their shares.

 

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ITEM 1B – UNRESOLVED STAFF COMMENTS

 

This Item is not applicable to us as we are not an accelerated filer, a large accelerated filer, or a well-seasoned issuer; however, we have not received written comments from the Commission staff regarding our periodic or current reports under the Securities Exchange Act of 1934 within the last 180 days before the end of our last fiscal year.

 

ITEM 2 – PROPERTIES

 

As of December 31, 2018, our executive offices, consisted of approximately 1,200 square feet, were located at 5503 Cahuenga Blvd., #203, Los Angeles, California 91601. Under our lease of these premises, we were paying $2,212 per month and the lease was to run through January 2020, but this lease was transferred to another entity when Mr. Wainer sold his controlling interest to Doheny Group, LLC, a limited liability company controlled by David Haridim, our sole officer and director.

 

As of January 2, 2019, our executive offices are located at 1427 S. Robertson Blvd., Los Angeles, CA 90035, and we have this location rent free from our executive officer.

 

As of January 2, 2019, our manufacturing facility is located at 2352 E. University Drive, Suite D-105, Phoenix, AZ 85034, under the terms of a two year lease that ran from October 31, 2016 to October 31, 2018, at $1,030 per month. Beginning in November 2018 the lease went to month-to-month at $1,696 per month.

 

ITEM 3 - LEGAL PROCEEDINGS

 

On February 21, 2018, we filed a Complaint in the Superior Court of the State of Arizona, County of Maricopa against EZ Interlock, LLC (Blow & Drive Interlock Corp. v. EZ Interlock, LLC (Case No. CV2018-051689, Superior Court of the State of Arizona, Maricopa County) for Conversion, Implied/Quasi Contract and Quantum Meruit, Unjust Enrichment, Tortious Interference with Business Expectancy/Prospective Business Relations, and Lost Profits. The basis for our lawsuit was that EZ Interlock an authorized installer of ours in the State of Arizona, was a customer of BDI Interlock, LLC, one of our distributors, and EZ Interlock was installing our BDI-747/1 devices for customers in Arizona and collecting fees from such customers, but stopped remitting payment to BDI Interlock, LLC, which, in turn, was unable to remit funds to us. We filed the lawsuit to have EZ Interlock stop installing our devices, return our devices in its possession, and pay the amounts owed to BDI Interlock and us for the customers paying EZ Interlock for our devices. EZ Interlock filed an Answer and Counterclaim on July 23, 2018. Shortly after filing our Complaint, the Court granted our request for a Temporary Restraining Order and Preliminary Injunction from continuing to install devices and return the devices in its possession. On February 7, 2019, our new management elected to dismiss the lawsuit, without prejudice, based on their opinion that our chances of recovering money from EZ Interlock was slim compared to amount that would be necessary to fund the litigation. We received most of our devices back from EZ Interlock. No discovery was conducted during the litigation.

 

In the ordinary course of business, we are from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of our management, other than as set forth herein, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.

 

ITEM 4 – MINE SAFETY DISCLOSURES

 

There is no information required to be disclosed under this Item.

 

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PART II

 

ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common stock is currently quoted on the OTCQB-tier of OTC Markets under the symbol “BDIC.” We were listed on June 30, 2015. The following table sets forth the high and low bid information for each quarter within the fiscal years ended December 31, 2018 and 2017, as best we could estimate from publicly-available information. The information reflects prices between dealers, and does not include retail markup, markdown, or commission, and may not represent actual transactions.

 

Fiscal Year

Ended

      Bid Prices  
December 31,   Period   High     Low  
                 
2017   First Quarter   $ 0.55     $ 0.28  
    Second Quarter   $ 0.40     $ 0.19  
    Third Quarter   $ 0.36     $ 0.22  
    Fourth Quarter   $ 0.29     $ 0.22  
                     
2018   First Quarter   $ 0.39     $ 0.17  
    Second Quarter   $ 0.30     $ 0.18  
    Third Quarter   $ 0.22     $ 0.07  
    Fourth Quarter   $ 0.08     $ 0.05  

 

The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to a few exceptions which we do not meet. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.

 

We have not adopted any stock option or stock bonus plans.

 

Holders

 

As of December 31, 2018, there were 30,211,875 shares of our common stock outstanding held by 137 holders of record and numerous shares held in brokerage accounts. As of July 15, 2019, there were 31,350,683 shares of our common stock outstanding held by 140 holders of record. Of these shares, 19,779,768 were held by non-affiliates. As of June 30, 2018, we had 18,640,182 shares held by non-affiliates. On the cover page of this filing we value the 18,640,182 shares held by non-affiliates as of June 30, 2018 at $3,355,232. These shares were valued at $0.18 per share, based on our closing share price on June 30, 2018.

 

As of December 31, 2018, there were 1,000,000 shares of our preferred stock outstanding, with all shares being Series A Preferred Stock. Our Series A Preferred has One Million (1,000,000) shares authorized and the following rights: (i) no dividend rights; (ii) no liquidation preference over our common stock; (iii) no conversion rights; (iv) no redemption rights; (v) no call rights; (vi) each share of Series A Convertible Preferred stock will have one hundred (100) votes on all matters validly brought to our common stockholders. As of December 31, 2018, all 1,000,000 shares of Series A Preferred Stock were held by Laurence Wainer, our then sole officer and director. As of March 20, 2019, the 1,000,000 shares of Series A Preferred Stock are held by The Doheny Group, LLC, a limited liability company controlled by David Haridim, our sole officer and director.

 

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Warrants

 

We currently have warrants to acquire 5,787,586 shares of our common stock held by 105 holders. The warrants have expiration dates ranging from three to four years from the date of grant and exercise prices ranging from $0.10 to $1.00.

 

Dividends

 

There have been no cash dividends declared on our common stock, and we do not anticipate paying cash dividends in the foreseeable future. Dividends are declared at the sole discretion of our Board of Directors.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

There are no outstanding options or warrants to purchase shares of our common stock under any equity compensation plans.

 

Currently, we do not have any equity compensation plans. As a result, we did not have any options, warrants or rights outstanding under equity compensation plans as of December 31, 2018.

 

Recent Issuance of Unregistered Securities

 

During the three months ended December 31, 2018, we did not issue any unregistered securities.

 

If our stock is listed on an exchange we will be subject to the Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to a few exceptions which we do not meet. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.

 

ITEM 6 – SELECTED FINANCIAL DATA

 

As a smaller reporting company we are not required to provide the information required by this Item.

 

ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

Disclaimer Regarding Forward Looking Statements

 

In this document we make a number of statements, referred to as “forward-looking statements”, that are intended to convey our expectations or predictions regarding the occurrence of possible future events or the existence of trends and factors that may impact our future plans and operating results. The safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995 does not apply to us. We note, however, that these forward-looking statements are derived, in part, from various assumptions and analyses we have made in the context of our current business plan and information currently available to us and in light of our experience and perceptions of historical trends, current conditions and expected future developments and other factors we believe to be appropriate in the circumstances. You can generally identify forward-looking statements through words and phrases such as “seek,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “budget,” “project,” “may be,” “may continue,” “may likely result,” and similar expressions. When reading any forward looking-statement you should remain mindful that all forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of our company, and that actual results or developments may vary substantially from those expected as expressed in or implied by that statement for a number of reasons or factors, including those relating to:

 

  whether or not our breath alcohol ignition interlock device receives the necessary certifications;
     
  whether or not markets for our products develop and, if they do develop, the pace at which they develop;
     
  our ability to attract and retain the qualified personnel to implement our growth strategies;
     
  our ability to fund our short-term and long-term operating needs;
     
  changes in our business plan and corporate strategies; and
     
  other risks and uncertainties discussed in greater detail in the sections of this document.

 

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Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning our company and our business made elsewhere in this document as well as other public reports filed with the Securities and Exchange Commission. You should not place undue reliance on any forward-looking statement as a prediction of actual results or developments. We are not obligated to update or revise any forward-looking statement contained in this document to reflect new events or circumstances unless and to the extent required by applicable law.

 

Overview and Outlook

 

We are a previous development stage company that was incorporated in the State of Delaware in July 2013. In the year ending December 31, 2018, we generated total revenues of $942,160, compared to $1,235,433 in the year ending December 31, 2017.

 

We market distributorships and lease a breath alcohol ignition interlock device called the BDI-747/1, which is a mechanism that is installed on the steering column of an automobile and into which a driver exhales. The device in turn provides a blood-alcohol concentration analysis. If the driver’s blood-alcohol content is higher than a certain pre-programmed limit, the device prevents the ignition from engaging and the automobile from starting. These devices are often required for use by DUI or DWI (“driving under the influence” or “driving while intoxicated”) offenders as part of a mandatory court or motor vehicle department program.

 

We paid Well Electric, a company located in China with experience in design and manufacture of ignition interlock devices, $30,000 to design and manufacture the prototype ignition interlock device for us. Well Electric produced six prototype devices for us which we received in November 2014.

 

At July 27, 2015 we began production of our patent pending BDI Model #1 power line filter to attach to our BDI-747 Breath Alcohol Ignition Interlock Device which together were certified by NHSTA on June 17, 2015 to work to together to meet or exceed 2013 NHSTA guidelines.

 

As of December 31, 2018, the BDI-747/1 device was approved in Oregon, Texas, Arizona, and Kentucky. As of March 31, 2019, the BDI-747/1 device was only approved in Arizona and Texas. The states where our BDI-747/1 device is approved has decreased primarily as a result of new state certification rules that require increased capital investment that we are not able to afford.

 

We have a storefront location in Phoenix, Arizona and contract with four qualified contractors to install, calibrate, remove and monitor the devices. Our business plan includes growth of the company by continuing to complete and submit more state applications and to build up our service infrastructure by utilizing our own retail infrastructure, distributors and franchisees.

 

As of December 31, 2018, we had approximately 1,100 units on the road, with approximately 885 devices being leased directly from us and approximately 215 devices leased through our distributors, compared to December 31, 2017, when we had approximately 1,558 units on the road, with approximately 1,451 devices being leased directly from us and approximately 107 devices leased through our distributors. The decrease in the total number of devices we have on the road is primarily due to the fact the BDI-747/1 devices was approved in fewer states in 2018 compared to 2017.

 

Due to the decrease in the number of states where our BDI-747/1 device is approved, and the resulting decrease in the number of devices we have on the road, our management is currently exploring all options related to our business, including, but not limited to: (i) taking out loans or selling our stock in order to raise money to continue, and try to expand, our current business; (ii) trying to acquire a synergistic business and grow our current business; or (iii) selling our current business and trying to find another business to, in or out of our current business segment, to take over the public corporation.

 

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Results of Operations for the Years Ended December 31, 2018 and 2017

 

    Year Ended December 31,  
    2018     2017  
             
Monitoring revenue   $ 862,330     $ 926,454  
Distributorship revenues     79,830       308,979  
Total revenues     942,160       1,235,433  
                 
Monitoring cost of revenue     118,596       153,059  
Distributorship cost of revenues     -       7,738  
Total cost of revenues     118,596       160,797  
                 
Gross profit     823,564       1,074,636  
                 
Operating expenses:                
                 
Payroll     888,498       473,620  
Professional fees     157,764       146,406  
General and administrative     763,683       841,961  
Depreciation     -       338,044  
Impairment of fixed assets     -       801,983  
Total operating expenses     1,809,945       2,602,014  
                 
Loss from operations     (986,381 )     (1,527,378 )
                 
Interest expense, net     (494,321 )     (943,415 )
Change in fair value of derivative liability     5,155       68,078  
Gain (loss) on extinguishment of debt     311,670       (305,000 )
Loan default penalty     (635,000 )     -  
Total other income (expense)     (812,496 )     (1,180,337 )
                 
Loss before provision for income taxes     (1,798,877 )     (2,707,715 )
                 
Provision for income taxes     800       1,600  
                 
Net loss   $ (1,799,677 )   $ (2,709,315 )

 

Operating Loss; Net Loss

 

Our net loss decreased by $909,638, from $2,709,315 to $1,799,677 from the year ended 2017 compared to 2018. Our operating loss decreased by $540,997, from $1,527,378 to $986,381 for the same periods. The change in our net loss for the year ended December 31, 2018, compared to the prior year is primarily a result of the fact we impaired our assets and had a significant depreciation expense in the year ended 2017, which we did not have in 2018, partially offset by a decrease in our revenues and an increase in our payroll expense. These changes are detailed below.

 

Revenue

 

During the year ended December 31, 2018 we had $942,160 in revenues, with $862,330 coming from revenue from the monthly recurring payments we received from our customers that rent our BDI-747/1 breathalyzer device for the ongoing monitoring services related to the devices, and $79,830 coming from revenues paid to us from our distributors, compared to $926,454 and $308,979 from these revenue sources for the same period one year ago. Our revenue decreased overall during the year ended December 31, 2018 due to us having approximately 1,100 units on the road, compared to the year ended December 31, 2017, when we had approximately 1,558 units on the road. Notably, the source of our revenue continued to shift from revenue received our distributors to the revenue we receive from the monthly recurring payments we received from our customers that rent our BDI-747/1 breathalyzer device for the ongoing monitoring services related to the devices in the period ended December 31, 2018, compared to December 31, 2017. We expect the majority of our revenue in the future to come from the monthly recurring payments we receive from our customers that rent our BDI-747/1 breathalyzer device for the ongoing monitoring services related to the devices and not from distributors as we shift away from using distributors and more towards direct retail of our devices. We expect the revenue we receive from monitoring our devices on the road, as well as revenue from distributors, will increase in any periods we have more devices on the road versus the comparable period and will decrease in any period we have fewer units on the road versus the comparable period. We do not believe our revenues will increase if our number of devices on the road decreases since we do not believe we will charge more for leasing the BDI-747/1 device than what we charge now in the foreseeable future.

 

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Cost of Revenue

 

Our cost of revenue for the year ended December 31, 2018 was $118,596, compared to $160,797 for the year ended December 31, 2017. Our cost of revenue for the year ended December 31, 2018 was $118,596 for the revenue we received for the ongoing maintenance for units we lease to customers, and $0 related to the revenue we received from distributors. Our cost of revenue for the year ended December 31, 2017 was $153,059 for the revenue we received for the ongoing maintenance for units we lease to customers, and $7,738 related to the revenue we received from distributors. Again, we expect this shift in our cost of revenue to monitoring cost of revenue to continue as we move away from using distributors and more towards direct retail of our devices.

 

Payroll

 

Our payroll increased by $414,878, from $473,620 to $888,498, from the year ended December 31, 2017 compared to December 31, 2018. The significant increase in our payroll expense was primarily a result of us contracting with additional personnel in 2018 to service the units we had on the road during the year.

 

Professional Fees

 

Our professional fees increased during the year ended December 31, 2018 compared to the year ended December 31, 2017. Our professional fees were $157,764 for the year ended December 31, 2018 and $146,406 for the year ended December 31, 2017. These fees are largely related to fees paid for legal, accounting and audit services. We expect these fees to continue grow steadily if our business expands. In the event we undertake an unusual transaction, such as an acquisition or file a registration statement, we would expect these fees to substantially increase during that period.

 

General and Administrative Expenses

 

General and administrative expenses decreased by $78,278, from $841,961 for the year ended December 31, 2017 to $763,683 for the year ended December 31, 2018. This decrease was primarily related to a significant decrease in advertising expenses in 2018 compared to 2017, a fixed asset adjustment in 2018 when we returned a number of parts to our supplier, and lower commissions paid in 2018 since we paid our last commissions in 2017, partially offset by higher rent expense due to locations in Arizona, higher royalty payments in 2018 and an increase in special parts we ordered from our supplier in 2018.

 

Depreciation

 

Our depreciation decreased from $338,044 for the year ended December 31, 2017 to $0 for the year ended December 31, 2018. Our depreciation expense in the period ended September 30, 2017 was primarily related to the depreciation of the BDI-747/1 device. Since we fully impaired our remaining BDI-747/1 devices for the year ended December 31, 2017, due to the uncertainty with the direction of our business going forward, we did not have a depreciation expense for the year ended December 31, 2018.

 

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Impairment of Fixed Assets

 

During the year ended December 31, 2017, we had impairment of fixed assets of $801,983, compared to $0 during 2018. The impairment of our fixed assets in the year ended December 31, 2017 is a result of our management currently determining whether our current business model and operations are viable. Until this determination has been made, we have elected to impair our assets.

 

Interest Expense

 

Interest expense decreased by $449,094 from $943,415 for the year ended December 31, 2017 to $494,321 for the year ended December 31, 2018. For both periods these amounts are largely due to the interest we owe on outstanding debt including amortization of debt discount costs. The interest expense significantly decreased for the period ended December 31, 2018, compared to the same period one year ago, due to our decrease in outstanding debt compared to one year ago, and the related accretion of the amount of debt discount associated with the debt.

 

Change in Fair Value of Derivative Liability

 

During the year ended December 31, 2018, we had a change in fair value of derivative liability of $5,155 compared to $68,078 for the same period in 2017. The change in fair value of derivative liability for both periods, relates to the conversion feature of a promissory note we had outstanding during this period. Since the conversion price on the promissory note is calculated based on a discount to the closing price of our common stock, as our closing price fluctuates it changes the fair value of the derivative liability.

 

Loss on Extinguishment of Debt

 

During the year ended December 31, 2018, we had a gain on extinguishment of debt of $311,670 compared to a loss of ($305,000) for the same period in 2017. The gain on extinguishment of debt in the year ended December 31, 2018, relates to the settlement of three notes payable and related accrued interest totaling $73,640 for a total payment of $17,000, resulting in gains totaling $56,640, and the release of two claims of accrued royalties totaling $255,030. The loss on extinguishment of debt in the year ended December 31, 2017, relates to the conversion of a note balance totaling $43,561.50 owed to Mr. Laurence Wainer into shares of our Series A Preferred Stock.

 

Liquidity and Capital Resources for Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

 

Introduction

 

During the year ended December 31, 2018 and 2017, because of our operating losses, we did not generate positive operating cash flows. Our cash on hand as of December 31, 2018 was $775 and our cash used in operations is approximately $100,000 per month. As a result, we have short term cash needs. These needs are being satisfied through proceeds from the sales of our securities and loans from both related parties and third parties. We currently do not believe we will be able to satisfy our cash needs from our revenues for some time.

 

Our cash, current assets, total assets, current liabilities, and total liabilities as of December 31, 2018 and as of December 31, 2017, respectively, are as follows:

 

    December 31, 2018     December 31, 2017     Change  
                   
Cash   $ 775     $ 31,874     $ (31,099 )
Total Current Assets     7,146       63,445       (56,299 )
Total Assets     13,627       68,576       (54,949 )
Total Current Liabilities     564,477       585,749       (21,272 )
Total Liabilities   $ 2,616,143     $ 1,449,846     $ 1,166,297  

 

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Our current assets decreased as of December 31, 2018 as compared to December 31, 2017, due to us having less cash on hand, less accounts receivable, net, and less prepaid expenses. The decrease in our total assets between the two periods was also related to the decrease in our cash on hand, accounts receivable, net, and prepaid expenses, partially offset by a slight increase in deposits as of December 31, 2018.

 

Our current liabilities decreased by $21,272, as of December 31, 2018 as compared to December 31, 2017. This slight decrease was primarily due to decreases in our accounts payable, accrued royalty payable, deferred revenue, notes payable-related party, and convertible notes payable, partially offset by increases in accrued expenses, accrued interest, accrued interest – related party, derivative liability, and notes payable.

 

In order to repay our obligations in full or in part when due, we will be required to raise significant capital from other sources. There is no assurance, however, that we will be successful in these efforts.

 

Sources and Uses of Cash

 

Operations

 

We had net cash used in operating activities of $1,112,658 for the year ended December 31, 2018, as compared to $384,641 for the year ended December 31, 2017. For the period in 2018, the net cash used in operating activities consisted primarily of our net loss of ($1,799,677), adjusted primarily by shares issued for services of $114,642, gain on extinguishment of debt of ($311,670), change in fair value of derivative liability of ($5,155), loan default penalty of $635,000, and amortization of debt discount of $30,872, as well as changes in accrued expenses of $44,456, deferred revenue of ($92,216), accounts payable of ($39,695), prepaid expenses of $289, accrued royalties payable of ($101,922), accrued interest $19,773, accrued interest related party of $165,240, and accounts receivable of $23,561. For the period in 2017, the net cash used in operating activities consisted primarily of our net loss of ($2,709,315), adjusted primarily by impairment of long-lived assets of $804,322, depreciation of $338,044, shares and warrants issued for services of $14,191, loss on extinguishment of debt of $305,000, write off of debt discount due to refinance of $352,511, loss on disposal of property and equipment of $98,800, change in fair value of derivative liability of ($61,254), and amortization of debt discount of $361,676, as well as changes in accrued expenses of ($34,625), deferred revenue of $22,047, deposits of $1,123, accounts payable of $6,552, inventory of $10,650, prepaid expenses of ($294), accrued royalties payable of $58,026, income taxes payable of $230, accrued interest of $2,020 accrued interest related party of $23,330, and accounts receivable of $22,325.

 

Investments

 

We did not have cash used in investing activities in the year ended December 31, 2018, compared to $634,820 for December 31, 2017. For the year ended December 31, 2017, cash used in investing activities consisted of $884,820 of purchase of furniture and equipment, offset by $250,000 deposits used against the cost of purchasing interlock units.

 

Financing

 

Our net cash provided by financing activities for the year ended December 31, 2018 was $1,081,559, compared to $935,026 for the year ended December 31, 2017. For the year ended December 31, 2018, our net cash from financing activities consisted of proceeds from notes payable of $154,400, proceeds from notes payable-related party of $649,127, proceeds from issuance of common stock of $458,705, and proceeds from issuance of convertible notes payable of $20,000, partially offset by repayments of notes payable of ($74,623) and payments on note payable related party of ($126,050). For the year ended December 31, 2017, our net cash from financing activities consisted of proceeds from notes payable of $50,000, proceeds from notes payable-related party of $250,400, proceeds from issuance of common stock of $849,037, and proceeds from issuance of convertible notes payable of $5,000, partially offset by repayments of notes payable of ($56,662), payments on convertible notes payable of ($50,000), and payments on note payable related party of ($112,749).

 

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Contractual Obligations

 

As of December 31, 2018, we had the following contractual obligations for 2018 through 2022:

 

    2019     2020     2021     2022     2023     Total  
                                     
Debt obligations (1)   $ 831,444     $ 637,004     $ 626,334     $ 606,000     $ 2,575,500     $ 5,276,282  
Capital leases     -       -       -       -       -       -  
Operating leases     -       -       -       -       -       -  
    $ 831,444     $ 637,004     $ 626,334     $ 606,000     $ 2,575,500     $ 5,276,282  

 

  (1) The interest amounts for the contractual obligation for each year have been estimated.

 

Off Balance Sheet Arrangements

 

We have no off balance sheet arrangements.

 

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company we are not required to provide the information required by this Item.

 

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

For a list of financial statements and supplementary data filed as part of this Annual Report, see the Index to Financial Statements beginning at page F-1 of this Annual Report.

 

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

There are no items required to be reported under this Item.

 

ITEM 9A - CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (our Principal Accounting Officer), of the effectiveness of our disclosure controls and procedures (as defined) in Exchange Act Rules 13a – 15(c) and 15d – 15(e)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer, who are our principal executive officer and principal financial officers, respectively, concluded that, as of the end of the period ended December 31, 2018, our disclosure controls and procedures were not effective (1) to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to us, including our chief executive and chief financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

Our Chief Executive Officer and Chief Financial Officer (our Principal Accounting Officer) do not expect that our disclosure controls or internal controls will prevent all error and all fraud. No matter how well conceived and operated, our disclosure controls and procedures can provide only a reasonable level of assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

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Furthermore, smaller reporting companies face additional limitations. Smaller reporting companies employ fewer individuals and find it difficult to properly segregate duties. Often, one or two individuals control every aspect of the company’s operation and are in a position to override any system of internal control. Additionally, smaller reporting companies tend to utilize general accounting software packages that lack a rigorous set of software controls.

 

(b) Management’s Annual Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, as amended, as a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer (our Principal Financial Officer), and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States and includes those policies and procedures that:

 

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and any disposition of our assets;

 

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, Management has identified the following three material weaknesses that have caused management to conclude that, as of December 31, 2018, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:

 

1. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

2. We have not documented our internal controls. We have limited policies and procedures that cover the recording and reporting of financial transactions and accounting provisions. As a result we may be delayed in our ability to calculate certain accounting provisions. While we believe these provisions are accounted for correctly in the attached audited financial statements our lack of internal controls could lead to a delay in our reporting obligations. We are required to provide written documentation of key internal controls over financial reporting. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

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3. Effective controls over the control environment were not maintained. Specifically, a formally adopted written code of business conduct and ethics that governs our employees, officers, and directors was not in place. Additionally, management has not developed and effectively communicated to our employees its accounting policies and procedures. This has resulted in inconsistent practices. Further, our Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.

 

4. Currently, we do not have ability systematic approach to timely and accurately record unearned revenue and revenue, convertible debt transactions, deferred revenue, and derivative liabilities in the financial statements and have needed additional time, beyond the filing deadlines set by the Commission, to file our periodic reports.

 

To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

 

(c) Remediation of Material Weaknesses

 

In order to remediate the material weakness in our documentation, evaluation and testing of internal controls, we hope to hire additional qualified and experienced personnel to assist us in remedying this material weakness.

 

(d) Changes in Internal Control over Financial Reporting

 

There are no changes to report during our fiscal quarter ended December 31, 2018.

 

ITEM 9B – OTHER INFORMATION

 

There are no events required to be disclosed by the Item.

 

PART III

 

ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors and Executive Officers

 

The following table sets forth the names and ages of our directors, director nominees, and executive officers as of June 15, 2019, the principal offices and positions with the Company held by each person and the date such person became a director or executive officer of the Company. The executive officers of the Company are elected annually by the Board of Directors. The directors serve one-year terms until their successors are elected. The executive officers serve terms of one year or until their death, resignation, or removal by the Board of Directors. Unless described below, there are no family relationships among any of the directors and officers.

 

Name   Age   Position(s)
         
David Haridim   36   President, Chief Executive Officer, Chief Financial Officer Secretary (2019) and a Director (2019)

 

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Business Experience

 

The following is a brief account of the education and business experience of each director and executive officer during at least the past five years, indicating each person’s principal occupation during the period, and the name and principal business of the organization by which he was employed.

 

David Haridim, age 36, was appointed as our President, Chief Executive Officer, Chief Financial Officer and Secretary on January 2, 2019. He was also appointed to our Board of Directors on the same date. Mr. Haridim has been the Manager of The Doheny Group, LLC since January 2016. The Doheny Group, LLC invests in private and public companies in different industries and Mr. Haridim, as the Manager of The Doheny Group analyzes and approves any and all investments made by The Doheny Group, LLC. Prior to founding The Doheny Group, LLC, Mr. Haridim was the managing partner at Whitestone International Group. Mr. Haridim attended Southwestern School of Law, graduating with a J.D. in 2012.

 

Term of Office

 

Our directors hold office until the next annual meeting or until their successors have been elected and qualified, or until they resign or are removed. Our board of directors appoints our officers, and our officers hold office until their successors are chosen and qualify, or until their resignation or their removal.

 

Family Relationships

 

There are no family relationships among our directors or officers.

 

Involvement in Certain Legal Proceedings

 

Our directors and executive officers have not been involved in any of the following events during the past ten years:

 

  1. Other than the involuntary bankruptcy proceeding mentioned herein, no bankruptcy petition has been filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
     
  2. any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
     
  3. being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities;
     
  4. being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
     
  5. being the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: (i) any federal or state securities or commodities law or regulation; or (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
     
  6. being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Securities Exchange Act of 1934), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

22

 

 

Committees

 

All proceedings of the board of directors for the year ended December 31, 2018 were conducted by resolutions consented to in writing by the board of directors and filed with the minutes of the proceedings of our board of directors. Our company currently does not have nominating, compensation or audit committees or committees performing similar functions nor does our company have a written nominating, compensation or audit committee charter. Our board of directors does not believe that it is necessary to have such committees because it believes that the functions of such committees can be adequately performed by the board of directors.

 

We do not have any defined policy or procedural requirements for shareholders to submit recommendations or nominations for directors. The board of directors believes that, given the stage of our development, a specific nominating policy would be premature and of little assistance until our business operations develop to a more advanced level. Our company does not currently have any specific or minimum criteria for the election of nominees to the board of directors and we do not have any specific process or procedure for evaluating such nominees. The board of directors will assess all candidates, whether submitted by management or shareholders, and make recommendations for election or appointment.

 

A shareholder who wishes to communicate with our board of directors may do so by directing a written request addressed to our president at the address appearing on the first page of this annual report.

 

Audit Committee Financial Expert

 

Our board of directors has determined that it does not have an audit committee member that qualifies as an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K. We believe that the audit committee members are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. In addition, we believe that retaining an independent director who would qualify as an “audit committee financial expert” would be overly costly and burdensome and is not warranted in our circumstances given the early stages of our development and the fact that we have not generated revenues to date.

 

Nomination Procedures For Appointment of Directors

 

As of December 31, 2018, we did not effect any material changes to the procedures by which our stockholders may recommend nominees to our board of directors.

 

Code of Ethics

 

We do not have a code of ethics.

 

Section 16(a) Beneficial Ownership

 

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers and persons who own more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

 

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During the fiscal year ended December 31, 2018, to the Company’s knowledge, the following delinquencies occurred:

 

Name  

No. of Late

Reports

 

No. of

Transactions

Reported Late

 

No. of

Failures to File

Laurence Wainer   0   0   0

 

Indemnification of Directors and Officers

 

Article Fourteen of our Articles of Incorporation provides that, to the fullest extent permitted by law, no director or officer shall be personally liable to the corporation or its shareholders for damages for breach of any duty owed to the corporation or its shareholders. In addition, the corporation shall have the power, in its bylaws or in any resolution of its stockholders or directors, to indemnify the officers and directors of the corporation against any liability as may be determined to be in the best interests of this corporation, and in conjunction therewith, to buy, at the corporation’s expense, policies of insurance.

 

Article XI of our Bylaws further addresses indemnification of our directors and officers and allows us to indemnify our directors and officers to the fullest extent permitted by the General Corporation Law of Delaware.

 

Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Act”) may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.

 

24

 

 

ITEM 11 - EXECUTIVE COMPENSATION

 

The particulars of compensation paid to the following persons:

 

  (a) all individuals serving as our principal executive officer during the year ended December 31, 2018;
     
  (b) each of our two most highly compensated executive officers other than our principal executive officer who were serving as executive officers at December 31, 2018 who had total compensation exceeding $100,000; and
     
  (c) up to two additional individuals for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as our executive officer at December 31, 2018,

 

who we will collectively refer to as the named executive officers, for the years ended December 31, 2018 and 2016, and 2015, are set out in the following summary compensation table:

 

Summary Compensation

 

The following table provides a summary of the compensation received by the persons set out therein for each of our last three fiscal years:

 

SUMMARY COMPENSATION TABLE

 

Name  and Principal Position  Year  Salary ($)   Bonus ($)   Stock Awards  ($)   Option Awards ($)   Non-Equity Incentive Plan Compensation ($)   Change in Pension Value and Nonqualified Deferred Compensation Earnings  ($)   All Other Compensation ($)   Total ($) 

Laurence Wainer

President, COO, Secretary(1)

  2018
2017
2016
  $

131,434

60,500

52,000

    

-0-

-0-

-0-

    

-0-

-0-

-0-

    

-0-

-0-

-0-

    

-0-

-0-

-0-

    

-0-

-0-

-0-

    

-0-

-0-

-0-

   $

131,434

60,500

52,000

 
Abraham Summers, CFO(2)  2017
2016
   

4,780

3,500

    

-0-

-0-

    

-0-

-0-

(3)   

-0-

-0-

    

-0-

-0-

    

-0-

-0-

    

-0-

-0-

    

4,780

3,500

 

 

  (1) Mr. Wainer was appointed President, Chief Executive Officer, Secretary and Director on February 6, 2014. He resigned effective January 2, 2019.
  (2) Mr. Summers was appointed Chief Financial Officer on November 15, 2016. Mr. Summers ceased performing his job responsibilities on May 10, 2017.
  (3) During 2016, Gnosiis International, LLC, an entity-controlled by Mr. Summers, received 533,100 shares of our common stock under the terms of a Finder’s Fee Agreement between us and Gnosiis International, LLC. Since those shares were paid as a finder’s fee for a transaction that closed prior to Mr. Summer’s appointment as our Chief Financial Officer, the value of those shares is not included in this table.

 

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As noted above, on January 2, 2019, Mr. David Haridim, the principal of Doheny Group, LLC, was appointed to our Board of Directors and as our sole executive officer. Since his appointment neither he nor Doheny Group, LLC has received any compensation from us as salary, royalties, stock, or otherwise.

 

Employment Contracts

 

On November 15, 2016, we entered into an employment agreement with Mr. Abraham Summers through Gnosiis International, LLC. Under the terms of the employment agreement, we agreed to employ Mr. Summers as our Chief Financial Officer until terminated by either party. Under the employment agreement we agreed to compensate Gnosiis and Mr. Summers an aggregate of 80% of the compensation paid by us to Mr. Laurence Wainer, our President, with 50% of the compensation paid to Mr. Summers as an employee and 50% paid to Gnosiis for consulting services. On June 19, 2017, we entered into a Termination of Services Agreement, under which the agreements we had with Mr. Summers and Gnosiis International, LLC, were terminated effective immediately. Mr. Summers also relinquished his right to serve on our Board of Director and Gnosiis relinquished any anti-dilution rights that mandated us to issue Gnosiis additional shares when we issued shares of our common stock. Under the Termination of Services of Agreement, we paid Mr. Summers $55,000 and issued Gnosiis 294,321 shares of our common stock .

 

In September 11, 2015 we entered into an independent contract agreement with Mr. Laurence Wainer for his services as our sole executive officer. Under the terms of the agreement, we agreed to pay Mr. Wainer $4,000 per month for his services as our sole executive officer. The agreement was for an initial term of one year, which renewed for one year periods until terminated in accordance with the agreement. This agreement terminated when Mr. Wainer resigned from all his positions he held with us, effective January 2, 2019.

 

Long-Term Incentive Plans. We do not provide its officers or employees with pension, stock appreciation rights, long-term incentive or other plans and has no intention of implementing any of these plans for the foreseeable future.

 

Employee Pension, Profit Sharing or other Retirement Plans. We do not have a defined benefit, pension plan, profit sharing or other retirement plan, although it may adopt one or more of such plans in the future.

 

Director Compensation

 

The following table sets forth director compensation for 2018:

 

Name   Fees Earned or Paid in Cash
($)
    Stock Awards
($)
    Option Awards
($)
    Non-Equity Incentive Plan Compensation
($)
    Nonqualified Deferred Compensation Earnings
($)
    All Other Compensation
($)
    Total
($)
 
                                                         
Laurence Wainer     -0-       -0-       -0-       -0-       -0-       -0-       -0-  

 

No director received compensation for the fiscal years December 31, 2018 and December 31, 2017. We have no formal plan for compensating our directors for their service in their capacity as directors, although such directors are expected in the future to receive stock options to purchase common shares as awarded by our board of directors or (as to future stock options) a compensation committee which may be established. Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our board of directors. Our board of directors may award special remuneration to any director undertaking any special services on our behalf other than services ordinarily required of a director.

 

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Outstanding Equity Awards at Fiscal Year-End

 

The following table sets forth certain information concerning outstanding stock awards held by the Named Executive Officers on December 31, 2018:

 

      Option Awards                   Stock Awards          
Name    

Number of Securities Underlying Unexercised Options

(#)

Exercisable

     

Number of Securities Underlying Unexercised Options

(#)

Unexercisable

     

Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options

(#)

     

Option Exercise Price

($)

    Option Expiration Date    

Number of Shares or Units of Stock That Have Not Vested

(#)

     

Market Value of Shares or Units of Stock That Have Not Vested

($)

     

Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested

(#)

     

Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested

($)

 
                                                                     
Laurence Wainer     -0-       -0-       -0-       N/A     N/A     -0-       -0-       -0-       -0-  
Abraham Summers     -0-       -0-       -0-       N/A     N/A     -0-       -0-       -0-       -0-  

 

Outstanding Equity Awards at Fiscal Year-End

 

There were no outstanding stock options or stock appreciation rights granted to our executive officers and directors at December 31, 2018.

 

Aggregated Option Exercises

 

There were no options exercised by any officer or director of our company during our twelve month period ended December 31, 2018.

 

Long-Term Incentive Plan

 

Currently, our company does not have a long-term incentive plan in favor of any director, officer, consultant or employee of our company.

 

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ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth, as of June 15, 2019, certain information with respect to our equity securities owned of record or beneficially by (i) each Officer and Director of the Company; (ii) each person who owns beneficially more than 5% of each class of the Company’s outstanding equity securities; and (iii) all Directors and Executive Officers as a group.

 

Common Stock

 

Title of Class  

Name and Address

of Beneficial Owner(2)

 

Nature of

Beneficial Ownership

  Amount    

Percent

of Class (1)

    Percent of Voting Rights(3)  
                           
Common Stock   David Haridim (4)   President, CEO, CFO, Secretary and Director     11,570,915 (5)(6)     36.9 %     8.98 %
                                 
Common Stock   All Officers and Directors as a Group (1 person)         11,570,915 (5)(6)     36.9 %     8.98 %

 

  (1) Unless otherwise indicated, based on 31,350,683 shares of common stock issued and outstanding. Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for the purposes of computing the percentage of any other person.
     
  (2) Unless indicated otherwise, the address of the shareholder is 1427 S. Robertson Blvd., Los Angeles, CA 90035.
     
  (3) Includes all voting securities of the company, common stock with any series of preferred stock.
     
  (4) Indicates one of our officers or directors.
     
  (5) Includes 11,570,915 shares owned The Doheny Group, LLC, an entity controlled by Mr. Haridim. Of the 11,570,915 shares, 447,914 shares were inadvertently issued in the name of David Haridim, the principal of The Doheny Group, LLC, but they are owned by The Doheny Group, LLC.
     
  (6) Effective December 31, 2018, The Doheny Group, LLC, an entity controlled by David Haridim, our sole officer and director, entered into an agreement with us to rescind The Doheny Group, LLC’s anti-dilution rights. As a result, The Doheny Group, LLC will not have any anti-dilution rights (the right to receive additional shares whenever we issue shares of our common stock) and will return the approximately 670,000 shares of our common stock it received under its anti-dilution rights since 2016. Since these shares have not yet been returned and cancelled those shares are still included in this table as beneficially-owned by Mr. Haridim.

 

Series A Preferred Stock

 

Title of Class  

Name and Address

of Beneficial Owner(2)

 

Nature of

Beneficial Ownership

  Amount    

Percent

of Class (1)

    Percent of Voting Rights(3)  
                           
Preferred Stock   David Haridim (4)   President, CEO, CFO, Secretary and Director     1,000,000 (5)     100 %     76.1 %
                                 
Common Stock   All Officers and Directors as a Group (1 person)         1,000,000 (5)     100 %     76.1 %

 

  (1) Unless otherwise indicated, based on 1,000,000 shares of our Series A Preferred Stock issued and outstanding. Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for the purposes of computing the percentage of any other person.

 

28

 

 

  (2) Unless indicated otherwise, the address of the shareholder is 1427 S. Robertson Blvd., Los Angeles, CA 90035.
     
  (3) Includes all voting securities of the company, common stock with any series of preferred stock. Each share of our Series A Preferred Stock has 100 votes on any matter brought before our common stockholders for a vote.
     
  (4) Indicates one of our officers or directors.
     
  (5) Includes shares held in the name of The Doheny Group, LLC, an entity controlled by David Haridim.

 

The issuer is not aware of any person who owns of record, or is known to own beneficially, ten percent or more of the outstanding securities of any class of the issuer, other than as set forth above. The issuer is not aware of any person who controls the issuer as specified in Section 2(a)(1) of the 1940 Act. There are no classes of stock other than common stock issued or outstanding. The Company does not have an investment advisor.

 

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Effective December 31, 2018, The Doheny Group, LLC, an entity controlled by David Haridim, our sole officer and director, entered into an agreement with us to rescind The Doheny Group, LLC’s anti-dilution rights. As a result, The Doheny Group, LLC will not have any anti-dilution rights (the right to receive additional shares whenever we issue shares of our common stock) and will return the approximately 670,000 shares of our common stock it received under its anti-dilution rights since 2016. 

 

On March 7, 2017, we entered into an Debt Conversion and Series A Preferred Stock Purchase Agreement (the “SPA”) with Laurence Wainer, one of our officers and directors (“Wainer”), under which we agreed to create a new series of non-convertible preferred stock entitled “Series A Preferred Stock,” with One Million (1,000,000) shares authorized and the following rights: (i) no dividend rights; (ii) no liquidation preference over the Company’s common stock; (iii) no conversion rights; (iv) no redemption rights; (v) no call rights by the Company; (vi) each share of Series A Convertible Preferred stock will have one hundred (100) votes on all matters validly brought to the Company’s common stockholders; and Wainer agreed to acquire 1,000,000 shares of our Series A Preferred Stock, once created, in exchange for Wainer forgiving $25,537 in accrued salary we owed to him as of December 31, 2016.

 

As additional consideration for Wainer’s acquisition of the Series A Preferred Shares we entered into a Lockup Agreement with Wainer dated March 7, 2017 (the “Lockup Agreement”). Under the Lockup Agreement Wainer agreed to refrain selling 8,000,000 out of the approximately 9,700,000 shares of our common stock he owns until the expiration of the Lockup Period, as defined in the Lockup Agreement.

 

On November 30, 2015, we entered into a Finder’s Fee Agreement with Gnosiis International, LLC, a Wyoming entity controlled by Mr. Abraham Summers, who is now our Chief Financial Officer. Under the Finder’s Fee Agreement we agreed to contract with Gnosiis to assist us with finding financing for the company, as well as for consulting services in connection with economics, project management and business development. Under the agreement, we agreed to pay Gnosiis one share for every dollar in financing closed by us as a result of Gnosiis’ efforts. On September 30, 2016, in connection with the Loan and Security Agreement we entered into with The Doheny Group, LLC, we issued Gnosiis 533,100 shares of our common stock. We also compensate Gnosiis weekly for consulting services provided to us.

 

On November 15, 2016, we entered into an employment agreement with Mr. Abraham Summers through Gnosiis. Under the terms of the employment agreement, we agreed to employ Mr. Summers as our Chief Financial Officer until terminated by either party. Under the employment agreement we agreed to compensate Gnosiis and Mr. Summers an aggregate of 80% of the compensation paid by us to Mr. Laurence Wainer, our President, with 50% of the compensation paid to Mr. Summers as an employee and 50% paid to Gnosiis for consulting services. The compensation is to be paid weekly and shall be at least $500 per week.

 

In September 11, 2015 we entered into an independent contract agreement with Mr. Laurence Wainer for his services as our sole executive officer. Under the terms of the agreement, we agreed to pay Mr. Wainer $4,000 per month for his services as our sole executive officer. The agreement is for an initial term of one year, which will automatically renew for one year periods unless terminated in accordance with the agreement.

 

Corporate Governance

 

As of December 31, 2018, our Board of Directors consisted of Laurence Wainer. As of December 31, 2018, we did not have any directors that qualified as “independent directors” as the term is used in NASDAQ rule 5605(a)(2).

 

Our current Board of Directors consists of David Haridim as our sole director.

 

29

 

 

ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Audit fees

 

The aggregate fees billed for the two most recently completed fiscal periods ended December 31, 2018 and December 31, 2017 for professional services rendered by Benjamin & Young, LLP for the audit of our annual consolidated financial statements, quarterly reviews of our interim consolidated financial statements and services normally provided by the independent accountant in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:

 

    Year Ended
December 31, 2018
    Year Ended
December 31, 2017
 
Audit Fees and Audit Related Fees   $

45,250

    $ 45,000  
Tax Fees   $ 0     $ 0  
All Other Fees   $ 0     $ 0  
Total   $

45,250

    $ 45,000  

 

In the above table, “audit fees” are fees billed by our company’s external auditor for services provided in auditing our company’s annual financial statements for the subject year. “Audit-related fees” are fees not included in audit fees that are billed by the auditor for assurance and related services that are reasonably related to the performance of the audit review of our company’s financial statements. “Tax fees” are fees billed by the auditor for professional services rendered for tax compliance, tax advice and tax planning. “All other fees” are fees billed by the auditor for products and services not included in the foregoing categories.

 

Policy on Pre-Approval by Audit Committee of Services Performed by Independent Auditors

 

The board of directors pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by the board of directors before the respective services were rendered.

 

The board of directors has considered the nature and amount of fees billed by Benjamin & Young, LLP and believes that the provision of services for activities unrelated to the audit is compatible with maintaining Benjamin & Young, LLP independence.

 

30

 

 

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

 

31

 

 

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

 

32

 

 

* Filed herewith

 

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

  (1) Incorporated by reference from our Registration Statement on Form 10, filed with the Commission on September 30, 2013.
     
  (2) Incorporated by reference from our Registration Statement on Form S-1, filed with the Commission on July 24, 2014.
     
  (3) Incorporated by reference from our Annual Report on Form 10-K, filed with the Commission on March 30, 2015.
     
  (4) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on September 11, 2015.
     
  (5) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on November 12, 2015.
     
  (6) Incorporated by reference from our Quarterly Report on Form 10-Q, filed with the Commission on August 13, 2015.
     
  (7) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 2, 2015.
     
  (8) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on February 22, 2016.
     
  (9) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on March 17, 2016.
     
  (10) Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on August 22, 2016.
     
  (11) Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on November 21, 2016.
     
  (12) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on July 3, 2017.
     
  (13) Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on August 21, 2017.
     
  (14) Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on February 9, 2018.
     
  (15) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on January 11, 2019.
     
  (16) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on March 15, 2017
     
  (17)

Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on June 27, 2019

 

33

 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Blow & Drive Interlock Corporation
     
Dated: July 18, 2019   /s/ David Haridim
  By:  David Haridim
  Its: President (Principal Executive Officer)

 

Dated: July 18, 2019   /s/ David Haridim
  By:  David Haridim
  Its: Chief Financial Officer and Principal Accounting Officer

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Dated: July 18, 2019   /s/ David Haridim
  By:  David Haridim, Director, President, and Secretary

 

34

 

 

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

INDEX

 

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

 

Supplementary Data

 

Not applicable

 

 F-1 
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders

Of Blow & Drive Interlock Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Blow & Drive Interlock Corporation (the “Company”) as of December 31, 2018 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Substantial Doubt About the Company’s Ability to Continue as a Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered losses from operations and cash outflows from operating activities that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

/s/ Benjamin & Young, LLP

We served as the Company’s Auditor since 2018

Anaheim, California

July 16, 2019

 

 F-2 
 

  

PART I – FINANCIAL INFORMATION

 

ITEM 1 - FINANCIAL STATEMENTS

 

BLOW & DRIVE INTERLOCK CORPORATION
CONSOLIDATED BALANCE SHEETS
         
   December 31, 2018   December 31, 2017 
         
ASSETS          
           
Current Assets          
Cash  $775   $31,874 
Accounts receivable, net of allowance for doubtful accounts of $0 and $26,541 at December 31, 2018 and 2017, respectively   5,355    28,916 
Prepaid Expenses   1,016    2,655 
Total current assets   7,146    63,445 
           
Deposits   6,481    5,131 
           
Total assets  $13,627   $68,576 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
Current Liabilities          
Accounts payable  $-   $39,695 
Accrued expenses   60,058    15,685 
Accrued royalty payable   26,885    179,993 
Accrued interest   17,155    10,082 
Accrued interest – related party   190,618    25,378 
Income taxes payable   5,930    5,930 
Deferred revenue   92,162    184,378 
Derivative liability   22,517    12,302 
Notes payable, net of debt discount of $7,549 and $18,729 at December 31, 2018 and December 31, 2017, respectively   117,776    60,006 
Notes payable – related party   29,000    45,328 
Convertible notes payable   2,376    6,972 
Total current liabilities   564,477    585,749 
           
Non-current Liabilities          
Notes payable, net of debt discount of $6,925 and $14,473 at December 31, 2018 and December 31, 2017, respectively   18,069    21,274 
Notes payable – related party   2,020,000    839,306 
Convertible notes payable, net of debt discount of $0 and $2,011 at December 31, 2018 and December 31, 2017, respectively   13,597    3,517 
Total non-current liabilities   2,051,666    864,097 
           
Total Liabilities   2,616,143    1,449,846 
           
Stockholders’ Deficit          
Preferred stock, par value $0.001, 20,000,000 shares authorized, 1,000,000 and 1,000,000 shares issued or issuable and outstanding as of December 31, 2018 and December 31, 2017, respectively   1,000    1,000 
Common stock, par value $0.0001, 100,000,000 shares authorized, 31,073,529 and 26,223,834 shares issued or issuable and outstanding as of December 31, 2018 and December 31, 2017, respectively   3,107    2,622 
Additional paid-in capital   3,489,699    2,911,753 
Accumulated deficit   (6,096,322)   (4,296,645)
Total stockholders’ deficit   (2,602,516)   (1,381,270)
           
Total liabilities and stockholders’ equity (deficit)  $13,627   $68,576 

 

The accompanying notes are an integral part of these financial statements.

 

 F-3 
 

 

BLOW & DRIVE INTERLOCK CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Years Ended December 31, 
   2018   2017 
Revenue:          
Monitoring revenues  $862,330   $926,454 
Distributorship revenues   79,830    308,979 
Total revenues   942,160    1,235,433 
           
Cost of sales:          
Monitoring cost of revenue   118,596    153,059 
Distributorship cost of revenue   -    7,738 
Cost of sales   118,596    160,797 
           
Gross profit   823,564    1,074,636 
           
Operating expenses:          
Payroll   888,498    473,620 
Professional fees   157,764    146,406 
General and administrative   763,683    841,961 
Depreciation   -    338,044 
Impairment of fixed assets   -    801,983 
Total operating expenses   1,809,945    2,602,014 
           
Loss from operations   (986,381)   (1,527,378)
           
Other income (expense)          
Interest expense, net   (494,321)   (943,415)
Change in fair value of derivative liability   5,155    68,078 
Gain (loss) on extinguishment of debt   311,670    (305,000)
Loan default penalty   (635,000)   - 
Total other income (expense)   (812,496)   (1,180,337)
           
Loss before provision for income taxes   (1,798,877)   (2,707,715)
           
Provision for income taxes   800    1,600 
           
Net loss  $(1,799,677)  $(2,709,315)
           
Loss per share:          
Basic and diluted  $(0.06)  $(0.12)
           
Weighted-average shares of common stock outstanding:          
Basic and diluted   29,772,036    22,856,861 

 

The accompanying notes are an integral part of these financial statements.

 

 F-4 
 

 

BLOW & DRIVE INTERLOCK CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

 

                   Total 
   Preferred Stock - Series A   Common Stock   Additional Paid-In   Accumulated   Stockholders’ Equity 
   Shares   Amount   Shares   Amount   Capital   Deficit   (Deficit) 
Balance December 31, 2016 (restated)   -   $-    19,575,605   $1,958   $1,594,721   $(1,587,330)  $9,349 
Shares issued for services   -    -    27,180    3    13,910    -    13,913 
Warrants issued for services   -    -    -    -    278    -    278 
Shares issued for cash   -    -    5,686,656    569    848,468    -    849,037 
Shares issued related to debt   1,000,000    1,000    195,400    18    454,450    -    455,468 
Shares issued related to anti-dilution   -    -    739,253    74    (74)   -    - 
Other   -    -    (260)   -    -    -    - 
Net loss   -    -    -    -    -    (2,709,315)   (2,709,315)
Balance December 31, 2017   1,000,000    1,000    26,223,834    2,622    2,911,753    (4,296,645)   (1,381,270)
Shares issued for services   -    -    476,000    48    114,595    -    114,643 
Shares issued for cash   -    -    4,340,883    434    458,271    -    458,705 
Shares issued for conversion of debt   -    -    32,812    3    5,080    -    5,083 
Net loss   -    -    -    -    -    (1,799,677   (1,799,677
Balance December 31, 2018   1,000,000   $1,000    31,073,529   $3,107   $3,489,699   $(6,096,322)  $(2,602,516)

 

The accompanying notes are an integral part of these financial statements

 

 F-5 
 

 

BLOW & DRIVE INTERLOCK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Years Ended December 31, 
   2018   2017 
         
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(1,799,677)  $(2,709,315)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   -    338,044 
Loss on fixed assets disposals   -    98,800 
Impairment of fixed assets   -    804,322 
Shares issued for services   114,642    14,191 
(Gain) loss on extinguishments of debt   (311,670)   305,000 
Write off of debt discount due to refinance   -    352,511 
Amortization of debt discount   30,872    361,676 
Change in fair value of derivative liability   (5,155)   (61,254)
Loan default penalty   635,000    - 
Changes in operating assets and liabilities:          
Accounts receivable   23,561    22,325 
Prepaid expenses   289    (294)
Inventory   -    10,650 
Deposits   -    1,123 
Accounts payable   (39,695)   6,552 
Accrued expenses   44,456    (34,625)
Income taxes payable   -    230 
Accrued interest   19,773    2,020 
Accrued interest – related party   165,240    23,330 
Deferred revenue   (92,216)   22,047 
Accrued royalties payable   101,922   58,026 
Net cash used in operating activities   (1,112,658)   (384,641)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchase of property and equipment   -    (884,820)
Deposits on units   -    250,000 
Net cash used in investing activities   -    (634,820)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from issuances of notes payable   154,400    50,000 
Principal payments of notes payable   (74,623)   (56,662)
Proceeds from issuance of convertible notes payable   20,000    5,000 
Principal payments of convertible notes payable   -    (50,000)
Proceeds from issuances of related party notes payable   649,127    250,400 
Principal payments of related party note payable   (126,050)   (112,749)
Proceeds from issuance of common stock   458,705    849,037 
Net cash provided by financing activities   1,081,559    935,026 
           
NET INCREASE (DECREASE) IN CASH   (31,099)   (84,435)
           
CASH – beginning of period   31,874    116,309 
           
CASH – end of period  $775   $31,874 
           
ADDITIONAL CASH FLOW INFORMATION          
Interest paid  $291,135   $134,105 
Income taxes paid  $-   $- 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

 

   Years Ended December 31, 
   2018   2017 
Common stock and warrants issued for services  $114,642   $14,191 
Preferred stock issued for debt reduction and services  $-   $350,000 

 

The accompanying notes are an integral part of these financial statements.

 

 F-6 
 

 

BLOW AND DRIVE INTERLOCK CORPORATION

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-7 
 

 

Consolidation

 

The accompanying consolidated financial statements include the results of operations of BDI Manufacturing (the Subsidiary). All material intercompany accounts and transactions between the Company and the Subsidiary have been eliminated in consolidation.

 

Going Concern

 

The Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and allow it to continue as a going concern. As of December 31, 2018, the Company had an accumulated deficit of $6,096,322. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease or reduce its operations.

 

In order to continue as a going concern, the Company will need, among other things, additional capital resources. The Company will continue to raise funds through the sale of its equity securities or issuance of notes payable to obtain additional operating capital. The Company is dependent upon its ability to, and will continue to attempt to, secure additional equity and/or debt financing until the Company can earn revenue and realize positive cash flow from its operations. There are no assurances that the Company will be successful in earning revenue and realizing positive cash flow from its operations. Without sufficient financing it would be unlikely that the Company will continue as a going concern.

 

Based on the Company’s current rate of cash outflows, cash on hand and proceeds from the prior sale of equity securities and issuance of notes payable, management believes that its current cash will not be sufficient to meet the anticipated cash needs for working capital for the next 12 months. The Company’s plans with respect to its liquidity issues include, but are not limited to, the following:

 

  1) Continue to issue restricted stock for compensation due to consultants and for its legacy accounts payable in lieu of cash payments; and
     
  2) Seek additional capital to continue its operations as it rolls out its current products. The Company is currently evaluating additional debt or equity financing opportunities and may execute them when appropriate. However, there can be no assurances that the Company can consummate such a transaction or consummate a transaction at favorable pricing.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and achieve profitable operations. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty.

 

 F-8 
 

 

Reclassifications

 

Certain reclassifications have been made to amounts in prior periods to conform to the current period presentation. All reclassifications have been applied consistently to the periods presented.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

 

Revenue Recognition

 

On January 1, 2018, the Company adopted FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance.

 

The Company’s principal activity from which it generates revenue is a service which is the use of its interlock units. Revenue is measured based on considerations specified in a contract with a customer. A contract exists when it becomes a legally enforceable agreement with a customer. These contracts define each party’s rights, payment terms and other contractual terms and conditions of the sale. Consideration is typically paid at time of sale via credit card, check, or cash when the interlock units are installed on customers’ vehicles

 

A performance obligation is a promise in a contract to provide a distinct service to the customer, which for the Company is transfer of a service to customers. Performance obligations promised in a contract are identified based on the services that will be provided to the customer that are both capable of being distinct and are distinct in the context of the contract, whereby the service is separately identifiable from other promises in the contract. The Company has concluded the services accounted for as the single performance obligation.

 

The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. The transaction price is determined based on the consideration to which the Company will be entitled to receive in exchange for transferring goods to the customer. We do not issue refunds.

 

 F-9 
 

 

The Company recognizes revenue when it satisfies a performance obligation in a contract by providing a service to a customer when the Company installs the interlock units on the customers’ vehicles. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.

 

Deferred revenue

 

Deferred revenue consists of customer orders paid in advance of the delivery of the order. Deferred revenue is classified as short-term as the typical order ships within approximately three weeks of placing the order. Deferred revenue is recognized as revenue when the product is shipped to the customer and all other revenue recognition criteria have been met.

 

Advertising and Marketing Costs

 

Advertising and marketing costs are recorded as general and administrative expenses when they are incurred. Advertising and marketing expenses were $90,742 and $19,941 for the years ended December 31, 2018 and 2017, respectively

 

Accounts Receivable and Allowance for Doubtful Accounts

 

The Company’s accounts receivable at December 31, 2018 consists of an amount due for an overpayment by the Company.

 

The Company’s accounts receivable at December 31, 2017 primarily consists of trade receivables. The Company records an allowance for doubtful accounts that is based on historical trends, customer knowledge, any known disputes, and the aging of the accounts receivable balances combined with management’s estimate of future potential recoverability. Receivables are written off against the allowance after all attempts to collect a receivable have failed. The Company believes its allowance for doubtful accounts as of December 31, 2018 and 2017 is adequate, but actual write-offs could exceed the recorded allowance.

 

Royalty Accrual

 

The Company entered into royalty agreement to be paid out in perpetuity based on number of units sold for specified product model in years 2018, 2017 and 2016 in connection with notes payable as discussed in Note 11. These estimates were performed at the inception for the notes to reflect the associated debt discount. The Company accruals royalties and is reduced by payments. The Company wrote off $255,030 in accrued royalties to gain on extinguishment of debt due to the December 31, 2018 settlement with two royalty noteholders in which they relinquished all claims to accrued royalties.

 

 F-10 
 

 

Derivative Liability

 

The Company applies the provisions of ASC Topic 815-40, Contracts in Entity’s Own Equity (“ASC Topic 815-40”), under which convertible instruments, which contain terms that protect holders from declines in the stock price, may not be exempt from derivative accounting treatment. As a result, embedded conversion options (whose exercise price is not fixed and determinable) in convertible debt (which is not conventionally convertible due to the exercise price not being fixed and determinable) are initially recorded as a liability and are revalued at fair value at each reporting date using the Black Sholes Model. The Company revalues these derivatives each quarter using the Black Sholes Model. The change in valuation is accounted for as a gain or loss in derivative liability.

 

Convertible Debt and Warrants Issued with Convertible Debt

 

Convertible debt is accounted for under the guidelines established by ASC 470, Debt with Conversion and Other Options and ASC 740, Beneficial Conversion Features. The Company records a beneficial conversion feature (“BCF”) when convertible debt is issued with conversion features at fixed or adjustable rates that are below market value when issued. If, however, the conversion feature is dependent upon a condition being met or the occurrence of a specific event, the BCF will be recorded when the related contingency is met or occurs. The BCF for the convertible instrument is recorded as a reduction, or discount, to the carrying amount of the convertible instrument equal to the fair value of the conversion feature. The discount is then amortized to interest over the life of the underlying debt using the effective interest method.

 

The Company calculates the fair value of warrants issued with the convertible instruments using the Black-Scholes valuation method, using the same assumptions used for valuing employee options for purposes of ASC 718, Compensation – Stock Compensation, except that the contractual life of the warrant is used. Under these guidelines, the Company allocates the value of the proceeds received from a convertible debt transaction between the conversion feature and any other detachable instruments (such as warrants) on a relative fair value basis. The allocated fair value is recorded as a debt discount or premium and is amortized over the expected term of the convertible debt to interest expense.

 

For modifications of convertible debt, the Company records a modification that changes the fair value of an embedded conversion feature, including a BCF, as a debt discount which is then amortized to interest expense over the remaining life of the debt. If modification is considered substantial (i.e. greater than 10% of the carrying value of the debt), an extinguishment of debt is deemed to have occurred, resulting in the recognition of an extinguishment gain or loss.

 

Fair Value of Financial Instruments

 

The Company utilizes ASC 820-10, Fair Value Measurement and Disclosure, for valuing financial assets and liabilities measured on a recurring basis. Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

 

 F-11 
 

 

Level 1. Observable inputs such as quoted prices in active markets;

 

Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 

Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

The table below describes the Company’s valuation of financial instruments using guidance from ASC 820-10:

 

   Fair Value Measurements Using 
   Level 1   Level 2   Level 3 
Balance December 31, 2017  $-   $12,302   $- 
Additions to fair value of derivative liability   -    15,370    - 
Change in fair value of derivative liability   -    (5,155)   - 
Balance December 31, 2018  $-   $22,517   $- 

 

Net Income (Loss) Per Share

 

Basic earnings per share is calculated by dividing income available to common stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted average number of common and dilutive common share equivalents outstanding during the period.

 

Stock Based Compensation

 

The Company recognizes stock-based compensation in accordance with FASB ASC Topic 718 Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to an employee stock purchase plan based on the estimated fair values.

 

For non-employee stock-based compensation, the Company applies FASB ASC Topic 505 Equity-Based Payments to Non-Employees, which requires stock-based compensation related to non-employees to be accounted for based on the fair value of the related stock or options or the fair value of the services on the grant date, whichever is more readily determinable in accordance with FASB ASC Topic 718.

 

 F-12 
 

 

Related Parties

 

Related parties are any entities or individuals that, through employment, ownership or other means, possess the ability to direct or cause the direction of the management and policies of the Company.

 

Concentrations

 

All of the Company’s ignition interlock devices are purchased from one supplier in China. The loss of this supplier could have a material impact on the Company’s ability to timely obtain additional units.

 

For the year ended December 31, 2018, one distributor, licensed in four states, makes up approximately 92% percent of all revenues from distributors at December 31, 2018. The loss of this distributer would have a material impact on the Company’s revenues. Per an agreement dated January 21, 2018 that memorialized a September 30, 2017 oral agreement, the Company and its largest distributor cancelled their distributorship agreement dated September 5, 2015. See Note 17 below.

 

Income Taxes

 

The Company accounts for its income taxes in accordance with Income Taxes Topic of the FASB ASC 740, which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.

 

The Company also follows ASC 740-10-25, which provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with ASC Topic 740, “Accounting for Income Taxes”. ASC 740-10-25 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

Derivative Liabilities

 

The Company assessed the classification of its derivative financial instruments as of December 31, 2018, which consist of convertible instruments and rights to shares of the Company’s common stock, and determined that such derivatives meet the criteria for liability classification under ASC 815.

 

 F-13 
 

 

ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional, as defined.

 

Convertible Instruments

 

The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with professional standards for “Accounting for Derivative Instruments and Hedging Activities”.

 

ASC 815-40 provides that, among other things, generally, if an event is not within the entity’s control or could require net cash settlement, then the contract shall be classified as an asset or a liability.

 

Recently Issued Accounting Pronouncements

 

In June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (Topic 718). The amendments in the update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer, or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company believes that this will not have a material effect on its financial statements.

 

In March 2018 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-05, Income Taxes (Topic 740). The Tax Cut and Jobs Act of 2017 changes existing tax law and includes numerous provisions that will affect businesses. This guidance addresses the recognition of taxes payable or refundable for the current year and the recognition of deferred tax liabilities and deferred tax assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. The Company does not believe that this guidance will have an impact as the Company has been in a loss position and has not recognized federal taxes payable or refundable or deferred tax liabilities or deferred tax assets.

 

 F-14 
 

 

In November 2017, the FASB issued ASU No. 2017-14, Income Statement-Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606). The ASU modified Topic 220 such that an operating-differential subsidy must be set forth as a separate line item in the statement of comprehensive income either under a revenue caption presented separately from revenue from contracts with customers accounted for under ASC Topic 606 or as credit in the costs and expenses section. The ASU essentially deleted Topic 605 and noted that it was superseded by Topic 606. The ASU modified Topic 606 for vaccine manufacturers to recognize revenue when vaccines are placed into Federal Governmental stockpile programs because control of the enumerated vaccines will have been transferred to the customer and the criteria to recognize revenue in a bill-and-hold arrangement under ASC Topic 606 will have been met. The Company is currently evaluating the impact of adopting this guidance.

 

In September 2017, the FASB issued ASU No. 2017-13, Revenue Recognition, Revenue from Contracts with Customers, Leases. The ASU adds SEC paragraphs to the new revenue and leases sections of the Accounting Standards Codification (ASC or Codification) on the announcement the SEC Observer made at the 20 July 2017 EITF meeting. The SEC Observer said that the SEC staff would not object if entities that are considered public business entities only because their financial statements or financial information is required to be included in another entity’s SEC filing use the effective dates for private companies when they adopt ASC 606, Revenue from Contracts with Customers, and ASC 842, Leases. This would include entities whose financial statements are included in another entity’s SEC filing because they are significant acquirees under Rule 3-05 of Regulation S-X, significant equity method investees under Rule 3-09 of Regulation S-X and equity method investees whose summarized financial information is included in a registrant’s financial statement notes under Rule 4-08(g) of Regulation S-X. The Company is currently evaluating the impact of adopting this guidance.

 

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share; Distinguishing Liabilities from Equity; Derivatives and Hedging; Accounting for Certain Financial Instruments with Down Round Features; Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. An entity will no longer have to consider “down round” features (i.e., a provision in an equity-linked financial instrument or an embedded feature that reduces the exercise price if the entity sells stock for a lower price or issues an equity-linked instrument with a lower exercise price) when determining whether certain equity-linked financial instruments or embedded features are indexed to its own stock. An entity that presents earnings per share (EPS) under ASC 260 will recognize the effect of a down round feature in a freestanding equity-classified financial instrument only when it is triggered. The effect of triggering such a feature will be recognized as a dividend and a reduction to income available to common shareholders in basic EPS. The new guidance will require new disclosures for financial instruments with down round features and other terms that change conversion or exercise prices. The ASU also replaces today’s indefinite deferral of the guidance in ASC 480-10 for certain mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests with a scope exception. This change does not require any transition guidance because it does not have an accounting effect. The Company is currently evaluating the impact of adopting this guidance.

 

 F-15 
 

 

In October 2016, the FASB issued ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. The ASU eliminates the deferral of the tax effects of intra-entity asset transfers other than inventory. As a result, the tax expense from the intercompany sale of assets, other than inventory, and associated changes to deferred taxes will be recognized when the sale occurs even though the pre-tax effects of the transaction have not been recognized. The effect of the adoption of the standard will depend on the nature and amount of any future transactions.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows; Classification of Certain Cash Receipts and Cash Payments. The new standard addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The eight issues are: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned insurance policies; distribution received from equity method investees; beneficial interests in securitization transactions; separately identifiable cash flows and application of the predominance principle. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within fiscal periods beginning after December 15, 2019. The Company is currently evaluating the impact of adopting this guidance.

 

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers. The new standard clarifies the implementation guidance on principal versus agent considerations in Topic 606, Revenue from Contracts with Customers. Topic 606 addresses that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. When an entity is a principal (that is, if it controls the specific good or service before that good or service is transferred to a customer) and satisfies a performance obligation, the entity recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specific good or service transferred to the customer. When an entity is an agent and satisfies a performance obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specific good or service to be provided by the other party. The new standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the impact of adopting this guidance.

 

In February 2016, the FASB issued ASU No. 2016-2, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. Similarly, lessors will be required to classify leases as sales-type, finance or operating, with classification affecting the pattern of income recognition. Classification for both lessees and lessors will be based on an assessment of whether risks and rewards as well as substantive control have been transferred through a lease contract. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. A modified retrospective transition approach is required for leases for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of adopting this guidance.

 

 F-16 
 

 

Note 3 – Segment Reporting

 

The Company has two reportable segments: (1) Monitoring and (2) Distributorships.

 

Monitoring fees on Company installed units

 

The Company rents units directly to customers and installs the units in the customer’s vehicles. The rental periods range from a few months to 2 years and include a combination of down payments made by the customer and monthly payments paid under the agreements with the Company. Revenue is recognized from these companies on the straight-line basis over the term of the agreement. Amounts collected in excess of those earned are classified as deferred revenue in the balance sheet, and amounts earned in excess of amounts collected are reflected in accounts receivable in the balance sheet at December 31, 2018 and December 31, 2017.

 

Distributorships

 

The Company enters into arrangements that include multiple deliverables, which typically consist of the sale of exclusive distributorship territory rights, startup supplies package, promotional material, three weeks of onsite training and ongoing monthly support services. The Company accounts for each material element within an arrangement with multiple deliverables as separate units of accounting. Revenue is allocated to each unit of accounting under the guidance of ASC Topic 605-25, Multiple-Element Revenue Arrangements, which provides criteria for separating consideration in multiple-deliverable arrangements by establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable is based on vendor-specific objective evidence (“VSOE”) if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third-party evidence is available. The Company is required to determine the best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. The Company generally does not separately sell distributorships or training on a standalone basis. Therefore, the Company does not have VSOE for the selling price of these units nor is third party evidence available and thus management uses its best estimate of selling prices in their allocation of revenue to each deliverable in the multiple element arrangement.

 

 F-17 
 

 

The following table summarizes net sales and identifiable operating income by segment:

 

   Year Ended December 31, 
   2018   2017 
Segment gross profit (a):          
Monitoring  $743,734   $773,395 
Distributorships   79,830    301,240 
Gross profit   823,564    1,074,635 
           
Identifiable segment operating expenses (b):          
Monitoring   -    224,884 
Distributorships   -    110,810 
    -    335,694 
           
Identifiable segment operating income (c):          
Monitoring   743,734    548,511 
Distributorships   79,830    190,430 
    823,564    738,941 
           
Reconciliation of identifiable segment income to corporate income (d):          
Payroll   888,498    473,620 
Professional fees   157,764    146,406 
General and administrative expenses   763,683    841,961 
Depreciation   -    2,349 
Interest expense   1,129,321    943,415 
Change in fair value of derivative liability   (5,155)   (68,078)
Gain on extinguishment of debt   (311,670)   305,000 
Impairment of fixed assets   -    801,983 
Loss before provision for income taxes   (1,798,877)   (2,707,715)
           
Provision for income taxes   800    1,600 
Net loss  $(1,799,677)  $(2,709,315)
           
Total net property, plant, and equipment assets          
Monitoring  $-   $506,721 
Distributorships   -    249,682 
Corporate   -    34,930 
   $-   $791,333 

 

(a)  Segment gross profit includes segment net sales less segment cost of sales

(b)  Identifiable segment operating expenses consists of identifiable depreciation expense

(c)  Identifiable segment operating incomes consists of segment gross profit less identifiable operating expense

(d)  General corporate expense consists of all other non-identifiable expenses

 

 F-18 
 

 

Note 4 – Deposits

 

Deposits consist of the following:

 

   December 31, 2018   December 31, 2017 
Lease Deposits  $6,481   $5,131 

 

Note 5 – Accrued Expenses

 

Accrued Expenses consist of the following:

 

   December 31, 2018   December 31, 2017 
Accrued payroll and payroll taxes  $17,616   $6,141 
Deferred rent   5,317    4,544 
Other accrued expenses   37,125    5,000 
Total  $60,058   $15,685 

 

Note 6 - Deferred Revenue

 

The Company classifies income as deferred until the terms of the contract or time frame have been met within the Company’s revenue recognition policy. As of December 31, 2018 and December 31, 2017, deferred revenue consists of the following:

 

   December 31, 2018   December 31, 2017 
Monitoring deferred revenues  $92,162   $177,878 
Distributorship deferred revenues   -    6,500 
Total  $92,162   $184,378 

 

 F-19 
 

 

Note 7 – Notes Payable

 

Notes payable consist of the following:

 

   As of December 31, 2018   As of December 31, 2017 
   Amount   Discount   Net Balance   Amount   Discount   Net Balance 
                         
January 2016 ($65,000) - 0% interest with payment of $937 per month for 4 months, $1,250 per month for 8 months, and $3,531 per month until fully paid.  $-   $-   $-   $4,482   $(3,889)  $593 
April 2016 ($50,000) - 18% interest at payment of $750 per month with unpaid balance due at March 31, 2018 including issuance of 50,000 common shares.   -    -    -    50,000    (7,292)   42,708 
September 2016 ($10,000) - 24% interest with outstanding balance with accrued interest due at October 31, 2018 with an option of accrued interest to be converted to common stock with 25% discount of trading price   -    -    -    10,000    -    10,000 
December 2017 ($50,000) - 15% interest due in December 2020 including issuance of 100,000 shares of common stock with exercise price at $0.25 per share.   40,736    (14,474)   26,262    50,000    (22,021)   27,979 
October 2018 ($60,000) - $561 daily principal and interest until paid in full   42,424    -    42,424    -    -    - 
October 2018 ($72,800) - $11,527 monthly principal and interest for first six months, $9,975 monthly principal and interest last six months   67,159    -    67,159    -    -    - 
Total notes payable   150,319    (14,474)   135,845    114,482    (33,202)   81,280 
                               
Less: non-current portion   (24,994)   6,925    (18,069)   (35,747)   14,473    (21,274)
                               
Notes payable, current portion  $125,325   $(7,549)  $117,776   $78,735   $(18,729)  $60,006 

 

January 2016 - $65,000

 

On January 20, 2016, the Company entered into a non-interest bearing note payable and royalty agreement with a third party. Under the note, the Company borrowed $65,000 and began to repay the principal amount at a rate of approximately $937 per month with escalations to approximately $3,531 per month as of February 2017 until the note is paid in full. In addition, starting in February 2018, the Company will pay the lender a royalty fee of five ($5) dollars per month for every ignition interlock devise that the Company has on the road in customers’ vehicles up to eight hundred (800) in perpetuity, and for every unit over 800, the Company will owe the lender $1 per month per device in perpetuity. In connection with this note, the Company recorded a debt discount of $65,000 relating to the future royalty payments, to be amortized over the life of the note.

 

 F-20 
 

 

On September 30, 2016, the Company entered into Amendment No. 1 to Royalty note #1 in order to remove a security interest in the Company’s assets to secure repayment of the original note and amend the royalty provisions of the original note to be $1 for each Device on the road beginning in the 25th month after the date of the original note. In connection with this amendment, the Company issued 425,000 shares of restricted common stock. Pursuant to ASC 470 this amendment is a deemed extinguishment of the debt and the resulting revised debt is set up as a new note. In connection therewith, the Company recorded a loss on extinguishment of $116,541 during the year ended December 31, 2016.

 

Total interest expense was $0 and $0 for the years ended December 31, 2018 and 2017, respectively.

 

April 2016 - $50,000

 

On March 30, 2016, the Company entered into a borrowing agreement with a third party. The note was for a principal balance of $50,000 and included 50,000 restricted common shares. The promissory note has a maturity date of June 30, 2018 and bears interest at 18% per annum. The purchaser did not sign the agreement nor deliver the proper consideration prior to March 31, 2016. The exchange of the $50,000 in cash consideration by the purchaser and the issuance of the 50,000 restricted common shares by the Company was made in conjunction with delivery of the signed purchase agreement and promissory note on April 5, 2016. The Company recorded a debt discount of $50,000 related to the relative fair value of the issued shares associated with the note to be amortized over the life of the note. The Company paid $13,000 on December 31, 2018 in complete settlement of the note and accrued interest.

 

Total interest expense was $9,000 and $9,000 for the years ended December 31, 2018 and 2017, respectively.

 

September 2016 - $10,000

 

On September 23, 2016, the Company provided an agreement to a third party to obtain a $10,000 promissory note in exchange for 100,000 restricted common shares and $10,000 in cash. The promissory note had a maturity date of October 31, 2017 and bears interest at 24% per annum. On October 31, 2017, the note was amended to extend the maturity date to October 31, 2018. There are no other changes to the note. The Company recorded a debt discount of $10,000 related to the relative fair value of the issued shares associated with the note to be amortized over the life of the note. The Company paid $1,000 on December 31, 2018 in complete settlement of the note and accrued interest.

 

Total interest expense was $2,400 and $2,400 for the years ended December 31, 2018 and 2017, respectively.

 

 F-21 
 

 

December 2017 - $50,000

 

On December 1, 2017, the Company provided an agreement to a third party to obtain a $50,000 promissory note in exchange for $50,000 in cash. The promissory note had a maturity date of December 1, 2020 and bears interest at 15% per annum. The note required total payments of $1,733 per month. The Company recorded a debt discount of $22,650 related to the value of the issued shares associated with the process of obtaining the note to be amortized over the life of the note.

 

Total interest expense was $6,546 and $1,250 for the years ended December 31, 2018 and 2017, respectively.

 

October 2018 - $60,000

 

On October 11, 2018, the Company provided an agreement to a third party to obtain a $60,000 promissory note in exchange for $59,105 in cash ($895 in processing fee was deducted from cash). The promissory note had a maturity date of May 5, 2019 and bears interest at 55% per annum. The note required total payments of $561.43 each business day. The note was settled on January 16, 2019 for $30,806, and a gain on settlement was recorded for $10,834.

 

Total interest expense was $10,390 and $0 for the years ended December 31, 2018 and 2017, respectively.

 

October 2018 - $72,800

 

On October 4, 2018, the Company provided an agreement to a third party to obtain a $72,800 promissory note in exchange for $72,800 in cash. The promissory note had a maturity date of October 4, 2019 and bears interest at 51% per annum. The note required total payments of $11,526.67 per month for the first six months and $6,794.67 per month for the last six months.

 

Total interest expense was $16,252 $0 for the years ended December 31, 2018 and 2017, respectively.

 

 F-22 
 

 

Note 8 – Notes Payable – Related Parties  

 

Notes payable to related parties consist of the following:

 

   As of December 31, 2018   As of December 31, 2017 
   Amount   Discount   Replacement   Net Balance   Amount   Discount   Net Balance 
                             
January 2016 ($55,000) – Payment of $937 per month for 4 months, $1,250 per month 5 months, and $3,531 per month until fully paid  $-   $-        $-   $5,923   $(6,289)  $(366)
November 2017 ($900,000) - 60 months of payments of $25,000 per month with $15,000 in principal payment and $10,000 in interest payment, first payment due on December 1, 2017 and the final payment on November 1, 2022.   765,000    -    (765,000)   -    885,000    -    885,000 
February 2018 ($100,000) – Fee payment of $2,500 per month, principal due February 1, 2019.   100,000    -    (100,000)   -    -    -    - 
March 2018 ($500,000) – Fee payment of $12,500 per month first year, $12,000 per month second year, $11,500 per month third year, $11,000 per month fourth year, $105,00 per month fifth year, principal due March 1, 2020.   500,000    -    (500,000)   -    -    -    - 
August 2018 ($1,365,000) – Replaced August 2018 note ($1,365,000) that  replaced November 2017 note ($765,000 balance at August 1, 2018), February 2018 note ($100,000) and March 2018 note ($500,000). Includes $635,000 penalty on default of August 2018 ($1,365,000) note and $20,000 for missed payment on August 2018 note. Interest only monthly payment of $50,500 for life of note. Entire principal due December 1, 2023.   655,000    -    1,365,000    2,020,000    -    -    - 
                                    
December 2018 ($6,000) – Principal only due December 17, 2019. No interest   6,000    -    -    6,000    -    -    - 
December 2018 ($23,000) – Principal only due December 31, 2019. No interest   23,000    -    -    23,000    -    -    - 
Total related party notes payable   2,049,000    -    -    2,049,000    890,923    (6,289)   884,634 
                                    
Less: non-current portion   (2,020,000)