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. The Company has approval for its device in the following states: California, Arizona, Oregon, Kentucky, Tennessee and
Texas.
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.
During
the year ended December 31, 2015, the Company began to license others to distribute 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 four 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.
Since
December 31, 2015, the Company has received the monthly fees related to one distributor. In addition, the company has begun recognizing
monthly fee income from units the Company has installed into customer’s vehicles
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.
Going
Concern
The
Company’s unaudited condensed 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 June 30, 2016, the Company had an accumulated deficit of
$1,073,468. 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, 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 convertible notes, 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 condensed
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.
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
The
Company recognizes revenue when earned and related costs of sales and expenses when incurred. The Company recognizes revenue in
accordance with FASB ASC Topic 605-10-S99,
Revenue Recognition, Overall, SEC Materials
(“Section 605-10-S99”).
Section 605-10-S99 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of
an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectability
is reasonably assured. Cost of revenue consists of the cost of the purchased goods and labor related to the corresponding sales
transaction. When a right of return exists, the Company defers revenues until the right of return expires. The Company recognizes
revenue from services at the time the services are completed.
Distributorships
Revenue
is recognized pursuant to ASC Topic 605, “Revenue Recognition” (ASC 605). Monthly per unit fee revenue is earned and
recognized over the term of the contract as support services are provided. Revenues from territory exclusivity are earned when
there is persuasive evidence of an arrangement, delivery has occurred, the sales price has been determined and collectability
has been reasonably assured.
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 an 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 our allocation of revenue to each deliverable in the multiple element arrangement.
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 June 30, 2016.
Accounts
Receivable and Allowance for Doubtful Accounts
The
Company’s accounts receivable primarily consist 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 June 30,
2016 and December 31, 2015 is adequate, but actual write-offs could exceed the recorded allowance.
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
. We record 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 the modification that changes the fair value of an embedded conversion
feature, including a BCF, as a debt discount which we amortize 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
We
utilize 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:
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.
As
of June 30, 2016 and December 31, 2015, we did not have any level 3 assets or liabilities. As of June 30, 2016 and December 31,
2015, the derivative liabilities are considered level 2 items.
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.
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.
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.
Recently
Issued Accounting Pronouncements
In
May 2014, the FASB and the International Accounting Standards Board jointly issued ASU No. 2014-9,
Revenue from Contracts with
Customers
, which clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and
International Financial Reporting Standards. The core principle of the guidance is 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 and services. The ASU, as amended, is effective for public entities for annual
and interim periods beginning after December 15, 2017. Early adoption is not permitted under U.S. GAAP and retrospective application
is permitted, but not required. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial
position and results of operations.
In
August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statement-Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern
, which provides guidance under U.S. GAAP about
management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as
a going concern and to provide related footnote disclosures. In doing so, the amendments should reduce diversity in the timing
and content of footnote disclosures. The ASU is effective for all entities and for annual periods ending after December 15, 2016,
and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. The adoption of ASU
No. 2014-15 is not expected to have a significant impact on the Company’s consolidated financial statements and related
disclosures.
In
November 2015, the FASB issued guidance related to the presentation of deferred income taxes. The guidance requires that deferred
tax assets and liabilities are classified as non-current in a consolidated balance sheet. This guidance is effective in the first
quarter of 2017 and is not expected to materially impact financial position or net earnings.
In
February 2016, the FASB issued a new accounting standard on leasing. The new standard will require companies to record most leased
assets and liabilities on the balance sheet, and also proposes a dual model for recognizing expense. This guidance will be effective
in the first quarter of 2019 with early adoption permitted. The Company is evaluating the impact that adopting this guidance will
have on consolidated financial statements.
Note
3 – Property and Equipment
Property
and equipment consist of the following:
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Monitoring Units
|
|
$
|
182,398
|
|
|
$
|
46,150
|
|
Furniture, Fixtures, and Equipment
|
|
|
4,798
|
|
|
|
2,398
|
|
Total Assets
|
|
|
187,196
|
|
|
|
48,548
|
|
Less: accumulated depreciation
|
|
|
(19,832
|
)
|
|
|
(2,901
|
)
|
Furniture and Equipment, net
|
|
|
167,364
|
|
|
|
45,647
|
|
Depreciation
expense for the three and six months ended June 30, 2016 and 2015 amounted to $6,675 and $120, and $16,930 and $240, respectively.
Note
4 – Accrued Expense
Other
current liabilities consist of the following:
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Accrued professional fees
|
|
$
|
750
|
|
|
$
|
27,013
|
|
Accrued wages
|
|
|
8,840
|
|
|
|
1,949
|
|
Accrued payroll taxes
|
|
|
22,529
|
|
|
|
7,419
|
|
Refundable distributorship deposit
|
|
|
17,500
|
|
|
|
17,500
|
|
Total
|
|
$
|
49,619
|
|
|
$
|
53,881
|
|
Note
5 – 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 June 30, 2016 and December 31, 2015 deferred revenue totaled $120,673 and 81,674, with $50,000, and
$50,000, respectively, related to distributorship agreements. The remaining deferred revenue relates to Company serviced ignition
interlock monitoring customers.
Note
6 – Notes Payable
Notes
payable consist of the following:
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|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Principal
|
|
|
Accrued Interest
|
|
|
Principal
|
|
|
Accrued Interest
|
|
Convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible note #1
|
|
|
7,500
|
|
|
|
93
|
|
|
|
15,000
|
|
|
|
-
|
|
Debt Discount
|
|
|
(5,765
|
)
|
|
|
-
|
|
|
|
(8,426
|
)
|
|
|
|
|
Convertible note #2
|
|
|
50,000
|
|
|
|
1,667
|
|
|
|
50,000
|
|
|
|
1,667
|
|
Debt Discount
|
|
|
(32,290
|
)
|
|
|
-
|
|
|
|
(43,960
|
)
|
|
|
|
|
Subtotal convertible notes net
|
|
|
19,445
|
|
|
|
1,760
|
|
|
|
12,614
|
|
|
|
1,667
|
|
Promissory notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory note #1
|
|
|
6,509
|
|
|
|
-
|
|
|
|
10,200
|
|
|
|
333
|
|
Promissory note #2
|
|
|
9,290
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Debt Discount
|
|
|
(2,955
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Promissory note #3
|
|
|
50,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Debt Discount
|
|
|
(46,181
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Subtotal promissory notes
|
|
|
16,663
|
|
|
|
-
|
|
|
|
10,200
|
|
|
|
333
|
|
Royalty notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty note #1
|
|
|
60,938
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Debt Discount
|
|
|
(46,979
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Royalty note #2
|
|
|
50,938
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Debt Discount
|
|
|
(50,104
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Subtotal royalty notes
|
|
|
14,793
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Related party promissory note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party promissory note
|
|
|
126,171
|
|
|
|
-
|
|
|
|
140,407
|
|
|
|
-
|
|
Total
|
|
|
177,072
|
|
|
|
1,760
|
|
|
|
163,221
|
|
|
|
2,000
|
|
Current portion
|
|
|
60,275
|
|
|
|
1,760
|
|
|
|
66,541
|
|
|
|
2,000
|
|
Long-term portion
|
|
$
|
116,797
|
|
|
$
|
-
|
|
|
$
|
96,680
|
|
|
$
|
-
|
|
Convertible
notes
On
August 7, 2015, the Company entered into an agreement with a third party non-affiliate and issued a 7.5% interest bearing convertible
debenture for $15,000 due on August 7, 2017, with conversion features commencing after 180 days following the date of the note.
Payments of interest only are due monthly beginning September 2015. The loan is convertible at 70% of the average of the closing
prices for the common stock during the five trading days prior to the conversion date. In connection with this Convertible note
payable, the Company recorded a $5,770 discount on debt, related to the beneficial conversion feature of the note to be amortized
over the life of the note or until the note is converted or repaid. This note was bifurcated with the embedded conversion option
recorded as a derivative liability at fair value (See Note 8). On May 6, 2016 the note holder elected to convert $7,500 in principal
into 30,000 shares of common stock.
In
connection with the issuance of the August Convertible Note Payable, the Company issued a warrant on August 7, 2015 to purchase
30,000 shares of the Company’s common stock at a purchase price of $0.50 per share. The Black Scholes model was used in
valuing the warrants in determining the relative fair value of the warrants issued in connection with the convertible note payable
using the following inputs: Expected Term – 3 years, Expected Dividend Rate – 0%, Volatility – 100%, Risk Free
Interest Rate -1.08%. The Company recorded an additional $4,873 discount on debt, related to the relative fair value of the warrants
issued associated with the note to be amortized over the life of the note.
On
November 24, 2015, the Company entered into an agreement with an existing non-affiliated shareholder, and issued a 10% interest
bearing convertible debenture for $50,000 due on November 19, 2017. Payments of interest only are due monthly beginning December
2015. The loan is convertible at 70% of the average of the closing prices for the common stock during the five trading days prior
to the conversion date, but may not be converted if such conversion would cause the holder to own more than 9.9% of outstanding
common stock after giving effect to the conversion (which limitation may be removed by the holder upon 61 days advanced notice
to the company). In connection with this Convertible Note Payable, the Company recorded a $32,897 discount on debt, related to
the beneficial conversion feature of the note to be amortized over the life of the note or until the note is converted or repaid.
This note was bifurcated with the embedded conversion option recorded as a derivative liability at fair value (See Note 7). As
of June 30, 2016 this note has not been converted.
In
connection with the issuance of the November convertible note payable, the Company issued a warrant to purchase 80,000 shares
of our common stock at an exercise price of $0.80 per share. The warrant has an exercise period of two years from the date of
issuance. The Black Scholes model was used in valuing the warrants in determining the relative fair value of the warrants issued
in connection with the convertible note payable using the following inputs: Expected Term – 2 years, Expected Dividend Rate
– 0%, Volatility – 100%, Risk Free Interest Rate -.61%. The Company recorded an additional $13,783 discount on debt,
related to the relative fair value of the warrants issued associated with the note to be amortized over the life of the note.
Promissory
notes
On
December 18, 2015, the Company entered into a note payable agreement with a third party. The note was for a principal balance
of $10,200. The interest due is dependent on a cost schedule that is tied to the date of repayment of the principle. The note
is due by June 16, 2016.
On
January 29, 2016, the Company entered into a note payable agreement with a third party. The note was for a principal balance of
$44,850 in exchange for $29,505 in cash. The note will be paid back via daily ACH debits for $320 per business day with an estimated
payback date of August 2016.
On
March 30, 2016, the Company provided an agreement to a third party under which the Company would issue a $50,000 promissory note
and 50,000 restricted common shares in exchange for $50,000 in cash. 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 and services provided
associated with the note to be amortized over the life of the note.
Royalty
notes
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 begin 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.
On
March 29, 2016 the Company consummated a non-interest bearing note payable and royalty agreement with a relative of our CEO with
terms almost identical to the note referenced above. Under the note, the Company borrowed $55,000 and begin to repay the principal
amount at a rate of approximately $937 per month with escalations to approximately $3,531 per month as of April 2017 until the
note is paid in full. In addition, starting in February 2018, the Company will pay the lender a royalty fee of five ($5) dollars
per month for every ignition interlock devise that the Company has on the road in customers’ vehicles up to eight hundred
(800) in perpetuity, and for every unit over 800, the Company will owe the lender $1 per month per device in perpetuity.
In
connection with these two notes, the Company recorded a debt discount of $120,000 relating to the future royalty payments
Related
party promissory notes
On
February 16, 2014, the Company entered into a note payable agreement with Laurence Wainer, the director, President and sole officer
of the Company. The note was for a principal balance of $160,000 and bears interest at 7.75% per annum. Principal and interest
payments are due in 60 equal monthly installments beginning in March 2014 of $3,205. The Company and Laurence Wainer entered into
an additional agreement effective April 2014 suspending loan repayments until January 2015. As of January 2015, the payments have
resumed.
Note
7 – Derivative Financial Instruments
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 has a $7,500 and a $50,000 convertible note with variable conversion pricing outstanding at June 30, 2016.
The
Company calculates the estimated fair values of the liabilities for derivative instruments using the Black Scholes option pricing
model and revalues them each quarter. The change in valuation is accounted for as a gain or loss in derivative liability. For
the period ending June 30, 2016 the Company expensed $19,612 in connection with the revaluation. The Black Scholes model was used
in determining the relative fair value of the notes using the following inputs: Expected Term – 1.35 and 1.58 years, Expected
Dividend Rate – 0%, Volatility – 281%, Risk Free Interest Rate - 0.77%.
The
following table describes the Derivative liability as of June 30, 2016 and December 31, 2015.
Balance December 31, 2015
|
|
|
51,325
|
|
Change in fair market value of derivative
|
|
|
19,612
|
|
Balance June 30, 2016
|
|
|
70,937
|
|
Note
8 – Accrued Royalties Payable
In
connection with the Royalty Notes as discussed in Note 6 above the company has estimated that a value equal to the face value
of the notes should be booked as a debt discount with the corresponding entry to estimated royalties to be paid out in perpetuity.
No payments are due for royalties until February 2018 unless the Company hits certain sales milestones as set forth in the royalty
agreements earlier.
Note
9 – Stockholders’ Equity
Preferred
Stock
The
Company’s articles of incorporation authorize the Company to issue up to 50,000,000 preferred shares of $0.001 par value,
having preferences to be determined by the Board of Directors for dividends, and liquidation of the Company’s assets. As
of June 30, 2016 and December 31, 2015, the Company had no preferred shares outstanding.
Common
Stock
Holders
of common stock are entitled to one vote for each share held. There are no restrictions that limit the Company’s ability
to pay dividends on its common stock, subject to the requirements of the Delaware Revised Statutes. The Company has not declared
any dividends since incorporation. During the six months ended June 30, 2016, the Company issued the 147,750 shares of $0.001
par value common stock for services with a value of $107,362.
The
Company also issued shares in connection with debt of 80,000 for an aggregate fair value of $59,450. Additionally, the Company
issued and sold 1,026,000 shares of its common stock to several investors for an aggregate purchase price of $157,500. The total
number of shares outstanding as of June 30, 2016 was 16,260,500.
Note
10 – Warrants
The
following table reflects warrant activity during the six months ended June 30, 2016:
|
|
Warrants for
|
|
|
Weighted
|
|
|
|
Common
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Outstanding as of December 31, 2015
|
|
|
110,000
|
|
|
$
|
0.72
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited, cancelled, expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of June 30, 2016
|
|
|
110,000
|
|
|
$
|
0.72
|
|
Note
11 – Income (Loss) Per Share
Net
income (loss) per share is provided in accordance with FASB ASC 260-10,
“Earnings per Share”.
Basic net income
(loss) per common share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed by dividing
net income (loss) by the weighted average shares outstanding, assuming all dilutive potential common shares were issued, unless
doing so is anti-dilutive. The numerators and denominators used to calculate basic and diluted income (loss) per share are as
follows for the three and six months ended June 30, 2016 and 2015:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerator for income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss attributable to common shareholders
|
|
$
|
(160,952
|
)
|
|
$
|
(141,025
|
)
|
|
$
|
(342,357
|
)
|
|
$
|
(253,830
|
)
|
Interest savings on convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Numerator for diluted income (loss) per share
|
|
$
|
3,183,983
|
|
|
$
|
531,780
|
|
|
$
|
(342,357
|
)
|
|
$
|
(253,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
15,407,687
|
|
|
|
14,978,198
|
|
|
|
15,407,687
|
|
|
|
14,932,453
|
|
Weighted average preferred shares
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Denominator for diluted income (loss) per share
|
|
|
15,407,687
|
|
|
|
14,978,198
|
|
|
|
15,407,687
|
|
|
|
14,932,453
|
|
The
following shares are not included in the computation of diluted income (loss) per share, because their inclusion would be anti-dilutive:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Preferred shares
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Convertible notes
|
|
|
19,038
|
|
|
|
-
|
|
|
|
19,751
|
|
|
|
-
|
|
Warrants
|
|
|
110,000
|
|
|
|
-
|
|
|
|
110,000
|
|
|
|
-
|
|
Options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total anti-dilutive weighted average shares
|
|
|
129,038
|
|
|
|
-
|
|
|
|
129,751
|
|
|
|
-
|
|
If
all dilutive securities had been exercised at June 30, 2016 the total number of common shares outstanding would be as follows:
|
|
|
June 30, 2016
|
|
Common Shares
|
|
|
16,260,500
|
|
Preferred Shares
|
|
|
-
|
|
Convertible notes
|
|
|
18,104
|
|
Warrants
|
|
|
110,000
|
|
Options
|
|
|
-
|
|
Total potential shares
|
|
|
16,388,604
|
|
Note
12 – Commitments and Contingencies
On
January 21, 2015, the Company and Mr. Wainer entered into a two-year lease with Marsel Plaza LLC for a storefront location at
1080 South La Cienega Boulevard, Suite 304, Los Angeles, California 90035. Base rent under the lease is $1,450 per month. The
lease began on February 1, 2015.
Legal
Proceedings
In
the ordinary course of business, the Company is, 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 the Company’s financial condition and/or results of operations. However, in the opinion of the Company’s
management, other than as set forth herein, matters currently pending or threatened against the Company are not expected to have
a material adverse effect on the Company’s financial position or results of operations.
In
April 2016, the Company was sued in the District Court of Sedgwick County, State of Kansas (Case No. 16CV0822) by Theenk, Inc.,
a company it sold an independent distributorship. According to the Complaint, Theenk, Inc. alleges the Company failed to perform
under the Exclusive Distribution Agreement the Company entered into with them on September 4, 2015 by failing to obtain approval
for the Company’s BDI-747 breathalyzer interlock device from the State of Kansas within 60 days from the execution of the
Agreement, and further, that the Company failed to compensate Theenk, Inc. for certain engineering hours and manufacturing and
testing costs related to a potential add-on component to the BDI-747 device. The Complaint seeks damages of $64,726.06. The Company
originally received an extension of time to file its Answer from Theenk, Inc. On June 2, 2016, prior to the time an Answer was
due by the Company, it entered into a Settlement Agreement with Theenk, Inc., whereby the Company agreed to pay Theenk, Inc. $17,500
in full settlement of the lawsuit, including a dismissal of the lawsuit. The Company has tendered the check for $17,500 and Theenk,
Inc. states it will deposit the funds around August 30, 2016, after which it is obligated to dismiss the lawsuit.
Note
13 – Subsequent Events
The
Company follows the guidance in FASB ASC Topic 855,
Subsequent Events
(“ASC 855”), which provides guidance
to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before
the consolidated financial statements are issued or are available to be issued. ASC 855 sets forth (i) the period after the balance
sheet date during which management of a reporting entity evaluates events or transactions that may occur for potential recognition
or disclosure in the consolidated financial statements, (ii) the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its consolidated financial statements, and (iii) the disclosures that an
entity should make about events or transactions that occurred after the balance sheet date.
None