10-Q 1 form10-q.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

[  ] TRANSITION REPORT PURSUANT TO 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.)

 

5503 Cahuenga Blvd, #203

Los Angeles, CA

 

 

91601

(Address of principal executive offices)   (Zip Code)

 

(818) 299-0653

Registrant’s telephone number, including area code

 

 

(Former address, if changed since last report)

 

 

(Former fiscal year, if changed since last report)

 

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 [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 submit and post such files). Yes [  ] No [X].

 

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

 

  Large accelerated filer [  ]   Accelerated filer [  ]
       
 

Non-accelerated filer [  ]

   Smaller reporting company [X]
(Do not check if a smaller reporting company)    
      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 Exchange Act). Yes [  ] No [X].

 

Applicable only to issuers involved in bankruptcy proceedings during the preceding five years:

 

Indicate by check mark whether the registrant 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 [  ]

 

Applicable only to corporate issuers:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of August 17, 2017, there were 22,770,628 shares of common stock, $0.0001 par value, issued and outstanding.

 

 

 

 

 

 

BLOW & DRIVE INTERLOCK CORPORATION

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION 2
     
ITEM 1 Financial Statements 3
     
ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
   
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 31
     
ITEM 4 Controls and Procedures 31
     
PART II – OTHER INFORMATION 33
     
ITEM 1 Legal Proceedings 33
     
ITEM 1A Risk Factors 33
     
ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds 33
     
ITEM 3 Defaults Upon Senior Securities 34
     
ITEM 4 Mine Safety Disclosures 34
     
ITEM 5 Other Information 34
     
ITEM 6 Exhibits 36

 

 1 
 

 

PART I – FINANCIAL INFORMATION

 

This Quarterly Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (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 our possible or assumed future results of operations set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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. Our 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.

 

2
 

 

ITEM 1 Financial Statements

 

The consolidated balance sheets as of June 30, 2017 (unaudited) and December 31, 2016, the consolidated statements of operations for the three and six months ended June 30, 2017 and 2016, the consolidated statement of stockholders equity (deficit) for the six months ended June 30, 2017, and the consolidated statements of cash flows for the six months ending June 30, 2017 and 2016, follow. The unaudited interim condensed financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. All such adjustments are of a normal and recurring nature.

 

3
 

  

Blow & Drive

Consolidated Balance Sheets

 

   June 30, 2017   December 31, 2016 
   (unaudited)     
Assets          
Current Assets          
Cash  $58,448   $116,309 
Accounts receivable, net   66,561    51,241 
Prepaid expenses   3,000    2,361 
Inventories   10,650    10,650 
Total Current Assets   138,659    180,561 
Other Assets          
Deposits   52,404    256,254 
Furniture and equipment, net   873,449    356,346 
Total Assets  $1,064,512   $793,161 
Liabilities and Stockholders’ Equity (Deficit)          
Current Liabilities          
Accounts payable  $80,253   $28,250 
Accrued expenses   105,301    68,795 
Accrued interest   39,350    10,110 
Income taxes payable   7,300    5,700 
Deferred revenue   155,524    106,331 
Derivative liability   56,064    73,556 
Notes payable, net of debt discount of $36,638 and $15,018 at June 30, 2017 and December 31, 2016, respectively   114,902    125,351 
Notes payable - related party   -    49,396 
Convertible notes payable, net of debt discount of $9,394 and $23,724 at June 30, 2017 and December 31, 2016, respectively   48,106    33,775 
Royalty notes payable, net of debt discount of $48,608 and $87,036 at June 30, 2017 and December 31, 2016, respectively   1,376    29,742 
Total Current Liabilities   608,176    531,006 
Long term liabilities          
Notes payable, net of debt discount of $51,583 and $32,292 at June 30, 2017 and December 31, 2016, respectively   168,377    17,708 
Notes payable - related party   -    48,353 
Royalty notes payable, net of debt discount of $398,348 and $574,294 at June 30, 2017 and December 31, 2016, respectively   118,652    8,778 
Accrued royalties payable   122,982    121,967 
Total Liabilities   1,018,187    727,812 
           
Stockholders’ Equity (Deficit)          
Preferred stock, par value $0.001, 20,000,000 shares authorized,
1,000,000 and 0 shares issued or issuable and outstanding at June 30, 2017 and December 31, 2016, respectively		   1,000    - 
Common stock, par value $0.0001, 100,000,000 shares authorized
22,474,052 and 19,575,605 shares issued or issuable and outstanding as of June 30, 2017 and December 31, 2016, respectively		   2,247    1,958 
Additional paid-in capital   2,459,174    1,594,721 
Accumulated deficit   (2,416,096)   (1,531,330)
Total Stockholders’ Equity (Deficit)   46,325    65,349 
Total Liabilities and Stockholders’ Equity  $1,064,512   $793,161 

 

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

 

4
 

 

Blow & Drive

Consolidated Statements of Operations

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2017   2016   2017   2016 
                 
Monitoring revenues  $204,738   $95,176   $280,058   $134,655 
Distributorship revenues   106,719    -    195,453    - 
Total revenues   311,457    95,176    475,511    134,655 
                     
Monitoring cost of revenue   46,085    11,163    54,067    17,718 
Distributorship cost of revenues   2,500    -    6,739    - 
Total cost of revenues   48,585    11,163    60,806    17,718 
Gross Profit   262,872    84,013    414,705    116,937 
Operating expenses:                    
Payroll   98,462    31,518    168,776    65,247 
Professional fees   35,771    36,985    76,902    61,621 
General and administrative expenses   (388,747)   142,402    327,345    225,959 
Depreciation   88,726    6,675    144,142    16,930 
Total operating expenses   (165,788)   217,580    717,165    369,757 
                     
Income (loss) from operations   428,660    (133,567)   (302,460)   (252,820)
                     
Other income (expense):                    
Interest expense   (150,489)   (42,507)   (294,798)   (69,925)
Change in fair value of derivative liability   1,464    15,122    17,492    (19,612)
Loss on extinguishment of debt   (305,000)   (19,612)   (305,000)   (19,612)
Total other income (expense)   (454,025)   (27,385)   (582,306)   (89,537)
                     
Net Income (loss)  $(25,365)  $(160,952)  $(884,766)  $(342,357)
                     
Basic and dilutive loss per common share  $(0.00)  $(0.01)  $(0.04)  $(0.02)
                     
Weighted average number of common shares outstanding - basic and diluted   22,260,585    15,407,687    21,525,449    15,407,687 

 

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

 

5
 

 

Blow & Drive

Consolidated Statements of Shareholders’ Equity (Deficit)

 

   Preferred Stock -       Additional       Total Stockholders’ 
   Series A   Common Stock   Paid-In   Accumulated   Equity 
   Shares   Amount   Shares   Amount   Capital   Deficit   (Deficit) 
Balance December 31, 2016   -   $-    19,575,605   $1,958   $1,594,721   $(1,531,330)  $65,349 
Shares issued for services   -    -    27,180    3    13,910    -    13,913 
Shares issued related to debt   1,000,000    1,000    195,400    19    434,700    -    435,719 
Shares issued for cash   -    -    2,311,218    231    415,879    -    416,110 
Shares issued related to anti-dilution   -    -    364,649    36    (36)   -    - 
Net loss   -    -    -    -    -    (884,766)   (884,766)
Balance June 30, 2017 (unaudited)   1,000,000   $1,000    22,474,052   $2,247   $2,459,174   $(2,416,096)  $46,325 

 

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

 

6
 

 

Blow & Drive

Consolidated Statement of Cash Flows

 

   Six Months Ended June 30, 
   2017   2016 
Cash flows from operating activities:          
Net loss  $(884,766)  $(342,357)
Adjustments to reconcile from net loss to net cash used in operating activities:          
Depreciation   144,142    16,930 
Shares issued for services   13,913    117,362 
Loss on extinguishment of debt   305,000    - 
Amortization of debt discount   186,477    54,005 
Change in fair value of derivative liability   (17,492)   19,612 
Changes in operating assets and liabilities          
Accounts receivable, net   (15,320)   (29,484)
Prepaid expenses   (639)   2,087 
Deposits   53,850    (14,600)
Accounts payable   52,003    23,456 
Accrued expenses   37,944    (2,662)
Accrued interest   29,240    (240)
Income taxes payable   1,600    - 
Deferred revenue   49,193    38,999 
Accrued royalties payable   1,015    - 
Net cash provided by (used in) operating activities   (43,840)    (116,892)
           
Cash flows from investing activities:          
Purchases of furniture and equipment   (661,245)   (138,932)
Deposits on units   150,000    - 
Net cash used in investing activities   (511,245)   (138,932)
           
Cash flows from financing activities:          
Proceeds from notes payable   195,400    209,099 
Repayments of notes payable   (114,286)   (78,761)
Proceeds from issuance of common stock   416,110    157,500 
Net cash provided by financing activities   497,224    287,838 
           
Net increase (decrease) in cash   (57,861)   32,014 
Cash, beginning of period   116,309    9,103 
Cash, end of period  $58,448   $41,117 
           
Supplemental disclosure of cash flow information:          
Cash paid during the period for:          
Interest  $79,371   $15,351 
Income taxes  $-   $- 
Supplemental disclosure of non-cash investing and financing activities:          
Common stock issued for services  $13,913   $117,362 
Establishment of debt discount for accrued royalties payable  $-   $120,000 
Preferred stock issued for debt reduction and services  $350,000   $- 

 

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

 

7
 

 

BLOW & DRIVE INTERLOCK CORPORATION

Notes to the Consolidated 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. The Company has approval for its device in the following states: California, Colorado, Kansas, New York, Tennessee, Arizona, Oregon, Kentucky, Oklahoma, Pennsylvania, 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.

 

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.

 

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, 2017, the Company had an accumulated deficit of $2,416,096. 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 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

 

8
 

 

BLOW & DRIVE INTERLOCK CORPORATION

Notes to the Consolidated Financial Statements

 

  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-S74”). 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. 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.

 

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, 2017 and December 31, 2016 is adequate, but actual write-offs could exceed the recorded allowance.

 

Inventories

 

Inventories are valued at the first-in first-out method and at June 30, 2017 and December 31, 2016 consists of spare parts for the BDI 747 monitoring units.

 

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.

 

9
 

 

BLOW & DRIVE INTERLOCK CORPORATION

Notes to the Consolidated Financial Statements

 

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:

 

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 Measurments Using: 
   Level 1   Level 2   Level 3 
Balance December 31, 2016  $-   $73,556   $- 
Valuation of preferred shares issuance   -    -    350,000 
Change in fair value of derivative liability   -    (17,492)   - 
Balance June 30, 2017 (unaudited)  $-   $56,064   $350,000 

 

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.

 

10
 

 

BLOW & DRIVE INTERLOCK CORPORATION

Notes to the Consolidated Financial Statements

 

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.

 

The Company has multiple distributors as of June 30, 2017, and is actively engaging more in new markets. However, for the three and six months ended June 30, 2017, one distributor, licensed in four states, makes up approximately 90% percent of all revenues from distributors, and 67% of accounts receivable at June 30, 2017. The loss of this distributer would have a material impact on the Company’s revenues

 

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 June 30, 2017, 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.

 

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 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.

 

11
 

 

BLOW & DRIVE INTERLOCK CORPORATION

Notes to the Consolidated Financial Statements

 

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 June 30, 2017 and December 31, 2016.

 

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.

 

12
 

 

BLOW & DRIVE INTERLOCK CORPORATION

Notes to the Consolidated Financial Statements

 

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

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2017   2016   2017   2016 
Segment gross profit (a):                    
Monitoring  $158,653   $84,013   $225,991   $116,937 
Distributorships   104,219    -    188,714    - 
Gross Profit   262,872    84,013    414,705    116,937 
                     
Identifiable segment operating expenses (b):                    
Monitoring   51,580    6,356    57,412    15,557 
Distributorships   37,560    -    86,090    - 
    89,140    6,356    143,502    15,557 
Identifiable segment operating income (c):                    
Monitoring   107,073    77,657    168,579    101,380 
Distributorships   66,659    -    102,624    - 
    173,732    77,657    271,203    101,380 
Reconcilliation of identifiable segment income to corporate income (d):                    
Payroll   98,462    31,518    168,776    65,247 
Professional fees   35,771    36,985    76,902    61,621 
General and administrative expenses   (388,747)   142,402    327,345    225,959 
Depreciation   (414)   319    640    1,373 
Interest expense   150,489    42,507    294,798    69,925 
Change in fair value of derivative liability   (1,464)   (15,122)   (17,492)   19,612 
Loss on extinguishment of debt   305,000    -    305,000    - 
                     
Income (loss) before provision for income taxes   (25,365)   (160,952)   (884,766)   (342,357)
                     
Provision for income taxes   -    -    -    - 
Net Income (loss)  $(25,365)  $(160,952)  $(884,766)  $(342,357)
                     
Total net property, plant, and equipment assets                    
Monitoring             348,792    164,445 
Distributorships             523,018    - 
Corporate             1,639    2,919 
              873,449    167,364 

 

(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 income consists of segment gross profit, less identifiable operating expense
(d)General corporate expense consists of all other non-identifiable expenses

 

13
 

 

BLOW & DRIVE INTERLOCK CORPORATION

Notes to the Consolidated Financial Statements

 

Note 4 – Furniture and Equipment

 

Furniture and equipment consist of the following:

 

   June 30, 2017   December 31, 2016 
Monitoring Units  $1,081,143   $419,898 
Furniture, Fixtures, and Equipment   4,798    4,798 
Total Assets   1,085,941    424,696 
Less: accumulated depreciation   (212,492)   (68,350)
Furniture and Equipment, net   873,449    356,346 

 

Depreciation expense for the three and six months ended June 30, 2017 and 2016 were $88,725 and $144,142, and $6,676 and $16,930, respectively.

 

Note 5 – Deposits

 

Deposits consist of the following:

 

   June 30, 2017   December 31, 2016 
Deposit for BDI-747 units  $50,000   $250,000 
Other   2,404    6,254 
Total  $52,404   $256,254 

 

Note 6 – Accrued Expenses

 

Accrued Expense consist of the following:

 

   June 30, 2017   December 31, 2016 
Accrued expenses  $5,233   $3,503 
Accrued wages   32,371    32,700 
Accrued payroll taxes   67,697    32,592 
Total  $105,301   $68,795 

 

Note 7 - 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, 2017 and December 31, 2016 deferred revenue consist of the following:

 

   June 30, 2017   December 31, 2016 
Monitoring deferred revenues  $150,524   $103,831 
Distributership deferred revenues   5,000    2,500 
Total  $155,524   $106,331 

 

14
 

 

BLOW & DRIVE INTERLOCK CORPORATION

Notes to the Consolidated Financial Statements

 

Note 8 – Notes Payable

 

Notes payable consist of the following:

 

   June 30, 2017   December 31, 2016 
   Principal   Accrued Interest   Principal   Accrued Interest 
Convertible notes                    
Convertible note #1   7,500    117    7,500    31 
Debt Discount   (444)   -    (3,104)   - 
Convertible note #2   50,000    2,033    50,000    1,617 
Debt Discount   (8,950)   -    (20,620)   - 
Subtotal convertible notes net   48,106    2,150    33,776    1,648 
Promissory notes                    
Promissory note #1   -    -    990    - 
Promissory note #2   -    -    13,278    - 
Debt Discount   -    -    (3,510)   - 
Promissory note #3   50,000    750    50,000    - 
Debt Discount   (19,792)   -    (32,292)   - 
Promissory note #4   10,000    1,600    10,000    400 
Debt Discount   (2,692)   -    (7,308)   - 
Promissory note #5   36,100    1,504    36,100    3,581 
Promissory note #6   5,040    -    5,040    106 
Debt Discount   (1,680)   -    (4,200)   - 
Promissory note #7   24,960    2,629    24,960    - 
Promissory note #8   50,000    2,083    50,000    - 
Promissory note #9   50,400    1,050    -    - 
Debt Discount   (12,474)   -    -    - 
Promissory note #10   70,000    2,917    -    - 
Debt Discount   (24,500)   -    -    - 
Promissory note #11   75,000    3,125    -    - 
Debt Discount   (27,083)   -    -    - 
Subtotal promissory notes   283,279    15,658    143,058    4,087 
Royalty notes                    
Royalty note #1   25,731    -    46,876    - 
Debt Discount   (25,209)   -    (45,903)   - 
Royalty note #2   24,253    -    48,938    - 
Debt Discount   (23,399)   -    (41,133)   - 
Royalty note #3   192,000    8,000    192,000    - 
Debt Discount   (144,000)   -    (176,000)   - 
Royalty note #4   325,000    13,542    325,000    4,375 
Debt Discount   (254,348)   -    (311,258)   - 
Subtotal royalty notes   120,028    21,542    38,520    4,375 
Related party promissory note                    
Related party promissory note   -    -    97,749    - 
Total   451,413    39,350    313,103    10,110 
Current portion   164,387    39,350    238,264    10,110 
Long-term portion  $287,029   $-   $74,839   $- 

 

15
 

 

BLOW & DRIVE INTERLOCK CORPORATION

Notes to the Consolidated Financial Statements

 

Convertible note #1:

 

On August 7, 2015, the Company entered into an agreement with a third party non-affiliate and issued a 7.5% interest bearing convertible debenture for $15,000 due on August 7, 2017, with conversion features commencing after 180 days following the date of the note. Payments of interest only were due monthly beginning September 2015. The loan is convertible at 70% of the average of the closing prices for the common stock during the five trading days prior to the conversion date. In connection with this Convertible note payable, the Company recorded a $5,770 discount on debt, related to the beneficial conversion feature of the note to be amortized over the life of the note or until the note is converted or repaid. This note was bifurcated with the embedded conversion option recorded as a derivative liability at fair value (See Note 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.

 

Convertible note #2

 

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. As of December 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 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 note #1:

 

On December 18, 2015, the Company entered into a borrowing facility with a third party. The initial note value was for a principal balance of $10,200. The Company is allowed to draw limited additional funds at any time. During 2016 the Company drew an additional $13,100 in connection with this borrowing facility. The interest due is dependent on a cost schedule that is tied to the date of repayment of the principle. This borrowing facility was paid back in January 2017.

 

Promissory note #2:

 

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 initial borrowing was paid back in August 2016. Subsequent to this initial repayment, the Company borrowed an additional $28,600 in September of 2016. The subsequent borrowing was paid back in April 2017.

 

Promissory note #3:

 

On March 30, 2016, the Company provided an agreement to a third party to obtain a $50,000 promissory note in exchange for 50,000 restricted common shares and $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 associated with the note to be amortized over the life of the note.

 

16
 

 

BLOW & DRIVE INTERLOCK CORPORATION

Notes to the Consolidated Financial Statements

 

Promissory note #4:

 

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 has a maturity date of October 31, 2017 and bears interest at 24% per annum. 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.

 

Promissory note #5:

 

On September 30, 2016, the Company provided an agreement to a third party to obtain a $36,100 promissory note in exchange for $36,100 in cash. The promissory note has a maturity date of October 1, 2017 and bears interest at 25% per annum. The note requires interest only payments of $752 per month and a balloon payment of $36,100 for principle upon maturity.

 

Promissory note #6:

 

On November 1, 2016, the Company provided an agreement to a third party to obtain a $5,040 promissory note in exchange for $5,040 in cash. The promissory note has a maturity date of November 1, 2017 and bears interest at 25% per annum. The note requires interest only payments of $105 per month. In connection with the issuance of the note payable, the Company issued a warrant to purchase 50,000 shares of common stock at an exercise price of $0.10 per share. The warrant has an exercise period of four years from the date of issuance. The Black Scholes model was used in valuing the warrants in determining the relative fair value of the warrant using the following inputs: Expected Term – 4 years, Expected Dividend Rate – 0%, Volatility – 329%, Risk Free Interest Rate -1.56%. The Company recorded a discount of $5,040, related to the relative fair value of the warrants issued associated with the note to be amortized over the life of the note.

 

Promissory note #7:

 

On November 1, 2016, the Company provided an agreement to a third party to obtain a $24,960 promissory note in exchange for $24,960 in cash. The promissory note has a maturity date of November 1, 2017 and bears interest at 25% per annum. The note requires total payments of $520 per month and a balloon payment of $24,960 for principle upon maturity.

 

Promissory note #8:

 

On November 1, 2016, 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 has a maturity date of November 1, 2019 and bears interest at 25% per annum. The note requires total payments of $1,042 per month and a balloon payment of $50,000 for principle upon maturity.

 

Promissory note #9:

 

On January 15, 2017, the Company provided an agreement to a third party to obtain a $50,400 promissory note in exchange for $50,400 in cash. The promissory note has a maturity date of January 15, 2018 and bears interest at 25% per annum. The note requires total payments of $1,042 per month and a balloon payment of $50,000 for principle upon maturity. The Company recorded a debt discount of $27,720 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.

 

Promissory note #10:

 

On February 27, 2017, the Company provided an agreement to a third party to obtain a $70,000 promissory note in exchange for $70,000 in cash. The promissory note has a maturity date of February 27, 2020 and bears interest at 25% per annum. The note requires total payments of $1,458 per month and a balloon payment of $70,000 for principle upon maturity. The Company recorded a debt discount of $28,000 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.

 

Promissory note #11:

 

On March 16, 2017, the Company provided an agreement to a third party to obtain a $75,000 promissory note in exchange for $75,000 in cash. The promissory note has a maturity date of March 16, 2020 and bears interest at 25% per annum. The note requires total payments of $1,563 per month and a balloon payment of $75,000 for principle upon maturity. The Company recorded a debt discount of $30,000 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.

 

Royalty note #1:

 

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.

 

17
 

 

BLOW & DRIVE INTERLOCK CORPORATION

Notes to the Consolidated Financial Statements

 

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.

 

Royalty note #2:

 

On March 29, 2016, the company consummated a non-interest bearing note payable and royalty agreement with a relative of the CEO with terms almost identical to the note referenced above. Under the note, the Company borrowed $55,000 and began to repay the principal amount at a rate of approximately $937 per month with escalations to approximately $3,531 per month as of April 2017 until the note is paid in full. In addition, starting in February 2018, the Company will pay the lender a royalty fee of five ($5) dollars per month for every ignition interlock devise that the Company has on the road in customers’ vehicles up to eight hundred (800) in perpetuity, and for every unit over 800, the Company will owe the lender $1 per month per device in perpetuity. In connection with this note, the Company recorded a debt discount of $55,000 relating to the future royalty payments, to be amortized over the life of the note.

 

On September 30, 2016, the Company entered into Amendment No. 1 to Royalty note #2 to amend the royalty provisions of the original note to be $1 for each Device on the road beginning in the 25th month after the date of the Royalty note #2. In connection with this amendment, the Company issued 50,000 shares of restricted common stock and recorded an additional debt discount of $8,959. This amendment was accounted for as a debt modification pursuant to ASC 470.

 

Royalty note #3:

 

On September 30, 2016, the Company entered into a Loan and Security Agreement (the “LSA”) with Doheny Group, LLC, a Delaware limited liability company (“Doheny”), under which Doheny agreed to loan up to $542,400 in two phases, to be used to acquire additional parts and supplies to manufacture the Company’s proprietary breath alcohol ignition interlock devices. Under the terms of the LSA, the first phase will be a loan of up to $192,000 to acquire parts and supplies to manufacture 600 Devices; and the second phase will be a loan of up to $350,400 to acquire parts and supplies to manufacture 1,000 Devices.

 

The Phase 1 Loan was funded in the amount of $192,000 by Doheny on September 30, 2016, upon which the Company forwarded the funds to its supplier on or about October 5, 2016, in order to acquire parts and supplies to manufacture 600 Devices. Both the Phase 1 Loan and the Phase 2 Loan mature three years from the date of funding, and are at an interest rate of 25% per annum. The note requires interest only payments of $4,000 per month. The Company can prepay the Phase 1 Loan and the Phase 2 Loan (if applicable) at any time without penalty. In exchange for Doheny funding the Phase 1 Loan, the Company issued Doheny a promissory note for $192,000 and also issued Doheny shares of common stock equal to 4.99% of the then-outstanding common stock, pursuant to the terms of a stock purchase agreement. As a result, on or about October 7, 2016, the Company issued Doheny 845,913 shares of common stock. In addition, upon funding of any portion of the Phase 2 loan (Royalty Note #4 below) then the Company is obligated to issue Doheny that number of additional shares of common stock that equals 5% of the then-outstanding common stock. Until the Company repays the Phase 1 Loan and the Phase 2 Loan, as applicable, Doheny has anti-dilution rights for the percentage of stock Doheny owns in the event the Company issues additional shares of common stock during that period. The Company also entered into a Royalty Agreement with Doheny, under which Doheny was granted perpetual royalty rights on all Devices when the Company has 500 or more Devices in service whether leased to end users or distributors. The royalty amounts vary between $1 and $2 per Device depending on a variety of factors. The Company recorded a debt discount of $192,000 related to the relative fair value of the issued shares associated with the Phase 1 note to be amortized over the life of the note.

 

Royalty note #4:

 

On November 4, 2016, the Company agreed to fund an initial portion of the Phase 2 loan as described in “Royalty note #3” above. In connection with this funding the common stock ownership percentage of Doheny Group was increased to 9.95%. As also described in “Royalty note #3” above Doheny has anti-dilution privileges to maintain 9.95% of common stock ownership at no additional cost until both Royalty note #3 and Royalty note #4 are paid in full. As of June 30, 2017 the Company has drawn $325,000 out of the maximum allowance of $350,400 in connection with Royalty note #4.

 

18
 

 

BLOW & DRIVE INTERLOCK CORPORATION

Notes to the Consolidated Financial Statements

 

Related party promissory note

 

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. On March 31, 2017 the Company entered into an agreement with Mr. Wainer to issue to him 1,000,000 Series A Preferred Shares in exchange $25,537 in accrued salary. On May 19, 2017, the Company amended the March 31, 2017 agreement to forgive $45,000 in debt owed by Company to Mr. Wainer instead of the forgiveness of $25,537 in accrued salary. The Company paid back the remaining amounts due under this note in June 2017.

 

Note 9 – 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, 2017. The following inputs were used in within the Black Sholes Model to determine the initial relative fair value: Expected Term – .85 and 1.11 years, Expected Dividend Rate – 0%, Volatility – 312%, Risk Free Interest Rate - 0.55%.

 

The Company revalues these derivatives each quarter using the Black Sholes Model. The change in valuation is accounted for as a gain or loss in derivative liability. The following table describes the Derivative liability as of June 30, 2017 and December 31, 2016.

 

Balance December 31, 2016  $73,556 
Change in fair market value of derivative   17,492 
Balance June 30, 2017 (unaudited)  $56,064 

 

Note 10 – Accrued Royalties Payable

 

In connection with the Royalty Notes number 1-4 as discussed in Note 8 above the Company has estimated the royalties to be paid out in perpetuity. These estimates were performed at the inception for the notes to reflect the associated debt discount. Payments on such royalty notes became due in October 2016 upon the Company hitting certain sales milestones as set forth in the royalty agreements.

 

Note 11 – Stockholders’ Equity

 

Preferred Stock

 

The Company’s articles of incorporation authorize the Company to issue up to 20,000,000 preferred shares of $0.001 par value.

 

Series A Preferred Stock

 

The Company has been authorized to issue 1,000,000 shares of Series A Preferred Stock. The Series A shares have the following preferences: no dividend rights; no liquidation preference over the Company’s common stock; no conversion rights; no redemption rights; no call rights by the Company; each share of Series A Preferred stock will have one hundred (100) votes on all matters validly brought to the Company’s common stockholders.

 

During the three months ended March 31, 2017, the Company entered into a material definitive agreement to issue 1,000,000 shares of series A preferred stock to an officer and director of the Company with a preliminary estimated value of $350,000. As of June 30, 2017 the total number of preferred shares issued or issuable was 1,000,000.

 

Common Stock

 

The Company has authorized 100,000,000 shares of $.0001. Holders of common stock are entitled to one vote for each share held. There are no restrictions that limit the Company’s ability to pay dividends on its common stock, subject to the requirements of the Delaware Revised Statutes. The Company has not declared any dividends since incorporation.

 

During the six months ended June 30, 2017, the Company issued 27,180 shares of $0.001 par value common stock for services with a value of $13,910. The Company also issued 195,400 shares, valued at $85,720, to a related party in connection with obtaining debt financing. Additionally, the Company issued and sold 2,311,218 shares of its common stock to several investors for an aggregate purchase price of $360,879. In addition the Company issued 364,649 common shares in accordance with the anti-dilution provisions of Royalty notes #3 and #4 (see Note 8). The total number of shares issued or issuable as of June 30, 2017 was 22,474,052.

 

19
 

 

BLOW & DRIVE INTERLOCK CORPORATION

Notes to the Consolidated Financial Statements

 

Note 12 – Warrants

 

The Company also sold warrants to purchase 750,000 common shares for an aggregate purchase price of $55,000.

 

The following table reflects warrant activity:

 

       Weighted Average     
   Warrants for   Weighted Average   Remaining   Aggregate 
   Common Shares   Exercise Price   Contractual Term   Intrinsic Value 
Outstanding and exercisable as of December 31, 2014   -   $-   $-   $- 
Granted   110,000    0.72    2.27    - 
Exercised   -    -    -    - 
Forfeited, cancelled, expired   -    -    -    - 
Outstanding as of December 31, 2015   110,000   $0.72   $2.10    - 
Granted   50,000    0.10    4.00      
Exercised   -    -    -    - 
Forfeited, cancelled, expired   -    -    -    - 
Outstanding as of December 31, 2016   160,000   $0.53   $1.97    5,250 
Granted   1,944,426    0.21    4.00    195,700  
Exercised   -    -    -      
Forfeited, cancelled, expired   -    -    -      
Outstanding as of June 30, 2017   2,104,426   $0.23   $3.15    200,950 

 

Note 13 – Income (Loss) Per Share

 

Net income (loss) per share is provided in accordance with FASB ASC 260-10, “Earnings per Share”. Basic net income (loss) per common share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average shares outstanding, assuming all dilutive potential common shares were issued, unless doing so is anti-dilutive.

 

The following shares are not included in the computation of diluted income (loss) per share, because their inclusion would be anti-dilutive:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2017   2016   2017   2016 
Preferred shares   -    -    -      
Convertible notes   409,159    19,038    409,159    19,751 
Warrants   2,104,426    110,000    2,104,426    110,000 
Options   -    -    -    - 
Total anti-dilutive weighted average shares   2,513,585    129,038    2,513,585    129,751 

 

If all dilutive securities had been exercised at June 30, 2017 the total number of common shares outstanding would be as follows:

 

   June 30, 2017 
Common Shares   22,474,052 
Preferred Shares   - 
Convertible notes   409,159 
Warrants   2,104,426 
Options   - 
Total potential shares   24,987,637 

 

20
 

 

BLOW & DRIVE INTERLOCK CORPORATION

Notes to the Consolidated Financial Statements

 

Note 14 – Commitments and Contingencies

 

On December 1, 2016, the Company entered into a four-year lease with Cahuenga Management LLC for a storefront location at 15503 Cahuenga Blvd., North Hollywood, California 91601. Base rent under the lease is $2,200 per month, with an escalating provision up to $2,404 throughout the lease term. The rental agreement includes operating expenses such as common area maintenance, property taxes and insurance.

 

Legal Proceedings

 

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

 

Note 15 – 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.

 

Subsequent to June 30, 2017, and through the date of this filing, the Company has issued a total of 296,576 common shares for an aggregate cash purchase price of $51,500.21. In connection with these sales of common shares the Company has also issued warrants for 547,338 common shares.

 

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ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Disclaimer Regarding Forward Looking Statements

 

Our Management’s Discussion and Analysis or Plan of Operations contains not only statements that are historical facts, but also statements that are forward-looking. Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.

 

Although the forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

 

Overview

 

We are a previous development stage company that was incorporated in the State of Delaware in July 2013. In the year ending December 31, 2016, we generated total revenues of $359,765, compared to $30,569 in the year ending December 31, 2015. From July 2, 2013 (inception) to December 31, 2016, we experienced a net loss and accumulated deficit of $1,531,330 and total liabilities of $727,812 including $97,749 in notes payable to our president, Laurence Wainer. For the three months ended June 30, 2017, we had total revenues of $311,457 and a net loss of $25,365.

 

We are in the business of renting 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. We also have the option of in-car camera technology, which some states require for state approval. The in-car camera feature is just one of several anti-circumvention features found on the BDI-747. 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.

 

On June 17, 2015, our BDI-747 Breath Alcohol Ignition Interlock Device, together with our patent pending BDI Model #1 power line filter, were certified by the National Highway Traffic Safety Administration (NHTSA) as meeting or exceeding the 2013 NHSTA guidelines. As a result, on July 27, 2015 we began production of our BDI-747 Breath Alcohol Ignition Interlock Device with the attached BDI Model #1 power line filter.

 

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Since receiving our NHSTA Certification we have submitted applications to a number of states to be considered as a state-certified breath alcohol ignition interlock manufacturer and provider for all Ignition Interlock Mandated DUI/DWI offenders throughout each state. The process to get the device approved varies greatly state-to-state. As of June 30, 2017, the BDI-747/1 was approved for use in eleven states, namely California, Colorado, Oregon, Texas, Arizona, Kentucky, Oklahoma, Tennessee, Pennsylvania, New York, and Kansas. Our plan for the remainder of 2017 is to build our infrastructure in the states where we have approval to ensure we can service all areas of those states, as well as to gain approval in an additional 3-5 states.

 

In states where the BDI-747/1 is approved as a BAIID, we rent 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 eight states and areas – California, Oregon, Colorado, Oklahoma, Tennessee, New York, Kansas and parts of Texas - and license the device to distributors in four different areas – two counties in Texas and in the states of Arizona, Kentucky and Pennsylvania.

 

In states where we rent the devices directly to consumers, we typically charge between $159-$198 in upfront fees for the user (which covers two months of the lease payment), and then between $59-$99/month for the remainder of the lease, which differs depending on the state and the individual consumer. After the upfront payments the leases and payments are month-to-month. The payments cover 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 Los Angeles, California, 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 the 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.

 

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 June 30, 2017, we had approximately 2,500 units on the road, with approximately 1,000 devices being rented directly from us and approximately 1,500 devices rented through our distributors. As of August 15, 2017, we had approximately 2,700 units on the road, with approximately 1,325 devices being rented directly from us and approximately 1,375 devices rented through our distributors. We plan to refine our manufacturing processes and increase our marketing of the device, and more aggressively pursue sales and distributors once we have funds to manufacture additional units.

 

Our website is www.blowanddrive.com.

 

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Results of Operations for Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

 

Summary of Results of Operations

 

  

Three Months Ended
June 30,

 
   2017   2016 
Revenue:  $    $- 
    

 

      
Monitoring revenue   204,738    95,176 
Distributorship revenue   106,719    - 
Total revenues   311,457    95,176 
           
Cost of revenue:          
           
Monitoring cost of revenue   46,085    11,163 
Distributorship cost of revenue   2,500    - 
Total cost of revenue   48,585    11,163 
           
Gross profit   262,872    84,013 
           
Operating expenses:          
           
Payroll   98,462    31,518 
Professional fees   35,771    36,985 
General and administrative expenses   (388,747)   142,402 
Depreciation   88,726    6,675 
Total operating expenses   (165,788)   (217,580)
           
Income (loss) from operations   428,660    (133,567)
           
Other income (expense):          
           
Interest expense   (150,780)   (42,507)
Change in fair value of derivative liability   1,464    15,122 
Loss on extinguishment of debt   (305,000)   (19,612)
Total other income (expense)   (454,025)   (27,385)
           
Net income (loss)  $(25,365)  $(160,952)

 

Operating Loss; Net Income (Loss)

 

Our net loss decreased by $135,587, from ($160,952) to ($25,365), from the three months ended June 30, 2016 compared to June 30, 2017. Our operating income (loss) increased by $562,227, from ($133,567) to $428,660 for the same periods. The decrease in our net loss for the three months ended June 30, 2017, compared to the prior year period, is primarily a result of a significant decrease in our general and administrative expenses and an increase in our gross profit of $178,859 for the period, offset by increases in our payroll and depreciation. These changes are detailed below.

 

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Revenue

 

During the three months ended June 30, 2017 we had $311,457 in revenues, with $204,738 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 $106,719 coming from revenues received from our distributors, compared to $95,176 and $0 from these revenue sources for the same period one year ago. We expect the revenue we receive from monitoring our devices on the road will continue to increase as we have more units on the road.

 

Cost of Revenue

 

Our cost of revenue for the three months ended June 30, 2017 was $48,585, compared to $11,163 for the three months ended June 30, 2016. Our cost of revenue for the three months ended June 30, 2017 was attributed as $46,085 to monitoring cost of revenue and $2,500 to distributorship cost of revenue. For the three months ended June 30, 2016, our cost of revenue was completely related to our monthly monitoring services we provide to our customers.

 

Payroll

 

Our payroll increased by $66,944, from $31,518 to $98,462, from the three months ended June 30, 2016 compared to June 30, 2017. This increase was largely related to hiring additional personnel as we put more units on the road. We expect our payroll in future quarterly periods will be approximately $50,000 to $55,000 per quarter until we are able to expand our operations. If we expand our operations, especially by renting units to individuals directly from us (as opposed to through distributors), we expect our payroll will continue to increase as we put additional units on the road.

 

Professional Fees

 

Our professional fees increased during the three months ended June 30, 2017 compared to the three months ended June 30, 2016. Our professional fees were $35,771 for the three months ended June 30, 2017 and $36,985 for the three months ended June 30, 2016. These fees are largely related to fees paid for legal, accounting and audit services. We expect these fees to continue grow steadily as our business expands. In the event we undertake an unusual transaction, such as an acquisition, securities offering, 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 significantly for the periods presented, from $142,402 for the three months ended June 30, 2016 to ($388,747) for the three months ended June 30, 2017. This significant decrease was related to the fact we paid a settlement of $50,000 to an ex-employee and removed the higher amount we had accrued for that employee, and we amended our preferred stock purchase agreement with Mr. Laurence Wainer such that his payment for the shares was full satisfaction of approximately $45,000 of debt owed to him rather than $25,500 of accrued salary, which was the original payment. In quarters that we do not have similar one-time transactions we expect our general and administrative expenses to be around $125,000 to $150,000 per quarter for the foreseeable future.

 

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Depreciation

 

We had depreciation of $88,726 for the three months ended June 30, 2017, compared to $6,675 for the same period one year ago. Our depreciation and amortization expenses in 2016 were primarily related to the depreciation of the BDI-747/1 device. We anticipate our depreciation expense will continue to increase as we manufacture more devices.

 

Interest Expense

 

Interest expense increased by $108,273 from $42,507 for the three months ended June 30, 2016 to $150,780 for the three months ended June 30, 2017. 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 increased for the period ended June 30, 2017, compared to the same period one year ago, due to our increase in outstanding debt compared to one year ago, primarily related to the loans we received from Doheny Group, LLC.

 

Change in Fair Value of Derivative Liability

 

During the three months ended June 30, 2017, we had a change in fair value of derivative liability of $1,464 compared to $15,122 for the same period in 2016. The change in fair value of derivative liability in the three months ended June 30, 2017, 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 three months ended June 30, 2017, we had loss on extinguishment of ($305,000) compared to ($19,612) for the same period in 2016. The loss on extinguishment of debt in the three months ended June 30, 2017, relates to debt we retired through the issuance of preferred stock to Laurence Wainer.

 

26
 

 

Results of Operations for Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

 

Summary of Results of Operations

 

  

Six Months Ended

June 30,

 
   2017   2016 
Revenue:  $    $- 
           
Monitoring revenue   280,058    134,655 
Distributorship revenue   195,453    - 
Total revenues   475,511    134,655 
           
Cost of revenue:          
           
Monitoring cost of revenue   54,067    17,718 
Distributorship cost of revenue   6,739    - 
Total cost of revenue   60,806    17,718 
           
Gross profit   414,705    116,937 
           
Operating expenses:          
           
Payroll   168,776    65,247 
Professional fees   76,902    61,621 
General and administrative expenses   327,345    225,959 
Depreciation   144,142    16,930 
Total operating expenses   717,165    369,757 
           
Loss from operations   (302,560)   (252,820)
           
Other income (expense):          
           
Interest expense   (295,089)   (69,925)
Change in fair value of derivative liability   17,492    (19,612)
Loss on extinguishment of debt   (305,000)   (19,612)
Total other income (expense)   (277,597)   (89,537)
           
Net income (loss)  $(884,766)  $(342,357)

 

Operating Loss; Net Income (Loss)

 

Our net loss increased by $542,409, from ($342,357) to ($884,766), from the six months ended June 30, 2016 compared to June 30, 2017. Our operating loss increased by $49,740, from ($252,820) to ($302,560) for the same periods. The increase in our net loss for the six months ended June 30, 2017, compared to the prior year period, is primarily a result of a increase in our general and administrative expenses, as well as increases in our payroll, professional fees and depreciation, partially offset by an increase in our gross profit of $297,768 for the period. These changes are detailed below.

 

27
 

 

Revenue

 

During the six months ended June 30, 2017 we had $475,511 in revenues, with $280,058 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 $195,453 coming from revenues paid to us from our distributors, compared to $134,655 and $0 from these revenue sources for the same period one year ago. We expect the revenue we receive from monitoring our devices on the road will continue to increase as we have more units on the road.

 

Cost of Revenue

 

Our cost of revenue for the six months ended June 30, 2017 was $60,806, compared to $17,718 for the six months ended June 30, 2016. Our cost of revenue for the six months ended June 30, 2017 was attributed as $54,067 to monitoring cost of revenue and $6,739 to distributorship cost of revenue. For the six months ended June 30, 2016, our cost of revenue was completely related to our monthly monitoring services we provide to our customers.

 

Payroll

 

Our payroll increased by $103,529, from $65,247 to $168,776, from the six months ended June 30, 2016 compared to June 30, 2017. This increase was largely related to hiring additional personnel as we put more units on the road. We expect our payroll in future quarterly periods will be approximately $50,000 to $55,000 per quarter until we are able to expand our operations. If we expand our operations, especially by renting units to individuals directly from us (as opposed to through distributors), we expect our payroll will continue to increase as we put additional units on the road.

 

Professional Fees

 

Our professional fees increased during the six months ended June 30, 2017 compared to the six months ended June 30, 2016. Our professional fees were $76,902 for the six months ended June 30, 2017 and $61,621 for the six months ended June 30, 2016. These fees are largely related to fees paid for legal, accounting and audit services. We expect these fees to continue grow steadily as our business expands. In the event we undertake an unusual transaction, such as an acquisition, securities offering, or file a registration statement, we would expect these fees to substantially increase during that period.

 

General and Administrative Expenses

 

General and administrative expenses increased for the periods presented, from $225,959 for the six months ended June 30, 2016 to $327,345 for the six months ended June 30, 2017. This increase would have been larger except for we paid a settlement of $50,000 to an ex-employee and removed the higher amount we had accrued for that employee, and we amended our preferred stock purchase agreement with Mr. Laurence Wainer such that his payment for the shares was full satisfaction of approximately $45,000 of debt owed to him rather than $25,500 of accrued salary, which was the original payment. In quarters that we do not have similar one-time transactions we expect our general and administrative expenses to be around $125,000 to $150,000 per quarter for the foreseeable future.

 

28
 

 

Depreciation

 

We had depreciation of $144,142 for the six months ended June 30, 2017, compared to $16,930 for the same period one year ago. Our depreciation and amortization expenses in 2016 were primarily related to the depreciation of the BDI-747/1 device. We anticipate our depreciation expense will continue to increase as we manufacture more devices.

 

Interest Expense

 

Interest expense increased by $225,164 from $69,925 for the six months ended June 30, 2016 to $295,089 for the six months ended June 30, 2017. 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 increased for the period ended June 30, 2017, compared to the same period one year ago, due to our increase in outstanding debt compared to one year ago, primarily related to the loans we received from Doheny Group, LLC.

 

Change in Fair Value of Derivative Liability

 

During the six months ended June 30, 2017, we had a change in fair value of derivative liability of $17,492 compared to ($19,612) for the same period in 2016. The change in fair value of derivative liability in the six months ended June 30, 2017, 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 six months ended June 30, 2017, we had loss on extinguishment of ($305,000) compared to ($19,612) for the same period in 2016. The loss on extinguishment of debt in the six months ended June 30, 2017, relates to debt we retired through the issuance of preferred stock to Laurence Wainer.

 

29
 

 

Liquidity and Capital Resources for Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

 

Introduction

 

During the six months ended June 30, 2017 and 2016, because of our operating losses, we did not generate positive operating cash flows. Our cash on hand as of June 30, 2017 was $58,448 and our cash used in operations is approximately $13,000 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 June 30, 2017 and as of December 31, 2016, respectively, are as follows:

 

   June 30, 2017   December 31, 2016   Change 
             
Cash  $58,448   $116,309   $57,861 
Total Current Assets   138,659    180,561    (41,902)
Total Assets   1,064,512    793,161    271,351 
Total Current Liabilities   608,176    531,006    77,170 
Total Liabilities  $1,018,187   $727,812   $290,375 

 

Our current assets decreased as of June 30, 2017 as compared to December 31, 2016, primarily due to us having less cash on hand, offset slightly by higher accounts receivable, net as of June 30, 2017. The increase in our total assets between the two periods was primarily related to the increase accounts receivable, net, as well as an increase in furniture and equipment as of June 30, 2017.

 

Our current liabilities increased by $77,170, as of June 30, 2017 as compared to December 31, 2016. This decrease was primarily due to increases in our accrued expenses and accrued interest, offset by slight decreases in our accounts payable, derivative liability, and royalty notes payable, net of debt discount.

 

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 $43,480 for the six months ended June 30, 2017, as compared to ($116,892) for the six months ended June 30, 2016. For the period in 2017, the net cash used in operating activities consisted primarily of our net income (loss) of ($884,766), adjusted primarily by change in fair value of derivative liability of ($17,492), shares issued for services of $13,913, amortization of debt discount of $186,477, and depreciation of $144,142, as well as changes in, accrued expenses of $37,944, accounts receivable, net of ($15,320), prepaid expenses of ($639), deposits of $53,850, deferred revenue of $49,193, accounts payable of $52,003, income taxes payable of $1,600, accrued royalties payable of $1,015, and accrued interest of $29,240. For the period in 2016, the net cash used in operating activities consisted primarily of our net income (loss) of ($342,357), adjusted primarily by change in fair value of derivative liability of $19,612, shares issued for services of $117,362, amortization of debt discount of $54,005, and depreciation and amortization of $16,930, as well as changes in, accrued expenses of ($2,662), deferred revenue of $38,999, deposits of ($14,600), accounts payable of $23,456, and accounts receivable of ($29,484).

 

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Investments

 

We had cash used in investing activities in the six months ended June 30, 2017 of $511,245, compared to $138,932 for June 30, 2016. For the period ended June 30, 2017, the cash used in investing activities related to purchases of furniture and equipment of ($661,245) partially offset by deposits on units of $150,000. For the period ended June 30, 2016, the cash used in investing activities related to purchases of furniture and equipment.

 

Financing

 

Our net cash provided by financing activities for the six months ended June 30, 2017 was $497,224, compared to $287,838 for the six months ended June 30, 2016. For the six months ended June 30, 2017, our net cash from financing activities consisted of proceeds from notes payable of $195,400 and proceeds from issuance of common stock of $416,110, partially offset by repayments of notes payable of ($114,286). For the six months ended June 30, 2016, our net cash from financing activities consisted of proceeds from notes payable of $209,099 and proceeds from issuance of common stock of $157,500, partially offset by repayments of notes payable of ($78,761).

 

Off Balance Sheet Arrangements

 

We have no off balance sheet arrangements.

 

Commitments and Contingent Liabilities

 

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. As of June 30, 2017, we have no contingent liability that is required to be recorded nor disclosed.

 

ITEM 3 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 4 Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Pursuant to rules adopted by the Securities and Exchange Commission we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to rules promulgated under the Securities Exchange Act of 1934. This evaluation was done as of the end of June 30, 2017 under the supervision and with the participation of our principal executive officer and our principal financial officer.

 

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Based upon our evaluation, our principal executive and financial officer concluded that, as of June 30, 2017, our existing disclosure controls and procedures were not effective. Disclosure controls and procedures means controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. With only two officers in charge of such reporting controls, there is no backup to the oversight of such individual and thus such disclosure controls and procedures may not be considered effective.

 

We have engaged outside accounting and finance advisors to assist us in better implementing effective disclosure controls and procedures.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our first quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Internal Control over Financial Reporting

 

We are responsible for establishing and maintaining adequate internal control over financial reporting in accordance with Rule 13a-15 of the Securities Exchange Act of 1934. Our president conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2017, based on the criteria establish in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was ineffective as of June 30, 2017, based on those criteria. A control system can provide only reasonably, not absolute, assurance that the objectives of the control system are met and no evaluation of controls can provide absolute assurance that all control issues have been detected.

 

Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2017 and identified the following material weaknesses, which are outlined further in our Annual Report on Form 10-K for the year ended December 31, 2016:

 

Inadequate segregation of duties: We have an inadequate number of personnel to properly implement control procedures.

 

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.

 

We do not have effective controls over the control environment. 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. We also do not have independent members on our Board of Directors.

 

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We have not been able to timely and accurately record convertible debt transactions, deferred revenue, and derivative liabilities in the financial statements. As a result, we have needed additional time, beyond the filing deadlines, to file our periodic reports.

 

PART II – OTHER INFORMATION

 

ITEM 1 Legal Proceedings

 

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 1A Risk Factors

 

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

 

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds

 

During the three months ended June 30, 2017, we issued the following unregistered securities:

 

During the quarter ended June 30, 2017, we issued an aggregate of 450,500 shares of our common stock to five non-affiliated investors in exchange for $102,825. These shares were issued pursuant to stock purchase agreements and were issued with a standard restrictive legend. The issuances were exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, due to the fact the investors are sophisticated investors, known to our management and familiar with our operations.

 

During the three months ended June 30, 2017, we issued a warrant to purchase 750,000 shares of our common stock to a non-affiliated investor in exchange for $55,000. The warrant is exercisable at $0.10 per share and expires on June 19, 2021. The issuance was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, due to the fact the investor is a sophisticated investor, known to our management and familiar with our operations.

 

During the three months ended June 30, 2017, we issued two warrants to purchase an aggregate of 261,000 shares of our common stock to two non-affiliated investors as part of the investors purchase of our common stock.. The warrant is exercisable at $0.23 per share and expire four years after date of issuance. The issuance was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, due to the fact the investor is a sophisticated investor, known to our management and familiar with our operations.

 

During the three months ended June 30, 2017, we issued an aggregate of 799,801 shares of our common stock to Doheny Group, LLC and to Gnosiis International, LLC, pursuant to the anti-dilution rights they have under separate agreements with us. These shares will be issued with a standard restrictive legend. The issuances will be exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, due to the fact the purchasers are sophisticated investors, known to our management and familiar with our operations. Pursuant to a Termination of Services Agreement we entered into with Mr. Abraham Summers and Gnosiis International, LLC, an entity controlled by Mr. Summers on June 19, 2017, Gnosiis International no longer has anti-dilution rights for future stock issuances.

 

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As of June 30, 2017, we were obligated to issue an aggregate of 45,050 shares of our common stock to Doheny Group, LLC, pursuant to the anti-dilution rights they have under separate agreements with us, but have not yet issued the shares. These shares will be issued with a standard restrictive legend. The issuances will be exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, due to the fact the purchasers are sophisticated investors, known to our management and familiar with our operations.

 

ITEM 3 Defaults Upon Senior Securities

 

There have been no events which are required to be reported under this Item.

 

ITEM 4 Mine Safety Disclosures

 

There have been no events which are required to be reported under this Item.

 

ITEM 5 Other Information

 

Series A Preferred Stock

 

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, 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. When issued, the issuance will be exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, due to the fact Wainer is one of our officers and directors, is a sophisticated investor and familiar with our operations. On May 19th, 2017, we entered into an amendment No. 1 to the SPA under which we agreed to accept $45,000 in extinguished debt owed to Mr. Wainer as the purchase price for the Series A Preferred shares rather than the $25,527 in accrued salary.

 

Abraham Summers

 

On May 10, 2017, Abraham Summers informed our Chief Executive Officer that he would no longer be performing his job responsibilities as our Chief Financial Officer. On May 18, 2017, our Board of Directors appointed Laurence Wainer, our current Chief Executive Officer, to the position of Interim Chief Financial Officer (our Principal Accounting Officer). Mr. Wainer will serve in this capacity until a replacement Chief Financial Officer can be hired.

 

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On June 19, 2017, we entered into a Termination of Services Agreement with Mr. Summers and Gnosiis International, LLC, an entity controlled by Mr. Summers. Under the terms of the agreement: (i) we agreed with Mr. Summers that his Employment Agreement dated November 15, 2016, his employment with us, and Gnosiis’ independent contractor relationship with us, were all terminated effective May 10, 2017, (ii) we agreed to pay Mr. Summers $50,000 and issue him 294,321 shares of our common stock, restricted in accordance with Rule 144, (iii) Mr. Summers relinquished any rights he had to serve on our Board of Directors, (iv) Mr. Summers and Gnosiis agreed to relinquish any anti-dilution rights that would entitle Mr. Summers or Gnosiis additional shares of our common stock, including under the Employment Agreement or otherwise, (v) we agreed to reimburse Mr. Summers $5,000 for his attorney’s fees related to the agreement, and (vi) we entered into a mutual general release with Mr. Summers and Gnosiis with all parties releasing any and all claims they may have against another party, whether those claims are currently known or not.

 

Doheny Group Transaction

 

As previously reported, on September 30, 2016, we entered into an Loan and Security Agreement (the “LSA”) with Doheny Group, LLC, a Delaware limited liability company (“Doheny”), under which Doheny agreed to loan us up to $542,400 in two phases, to be used by us to acquire additional parts and supplies to allow us to manufacture our proprietary breath alcohol ignition interlock devices (the “Devices”). At that time we also entered into a Royalty Agreement with Doheny, under which we granted Doheny perpetual royalty rights on all Devices that we receive money from customers or distributors after we have 500 Devices leased to end users or distributors. The royalty amounts vary between $1 and $2 per Device depending on a variety of factors.

 

On June 3, 2017, we entered into Amendment No. 1s to the LSA and the Royalty Agreement with Doheny, under we amended the LSA and the Royalty Agreement to change the royalty amounts from variable amount between $1 and $2 per Device per month, to a flat royalty rate of $1.30 per Unit per month without regard as to whether the Device is a retail Device or a Wholesale Device with such rate being paid on all Devices that we collect money from the client for that month.

 

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ITEM 6 Exhibits

 

Item No.   Description
     
3.1 (1)   Certificate of Incorporation of Jam Run Acquisition Corporation dated June 28, 2013
     
3.2   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
     
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 June 30, 2017
     
10.15 (11)   Phase 1 Loan Agreement with Doheny Group, LLC dated June 30, 2017
     
10.16 (11)   Royalty Agreement with Doheny Group, LLC dated June 30, 2017
     
10.17 (11)   Common Stock Purchase Agreement with Doheny Group, LLC dated June 30, 2017

 

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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*   Amendment No. 1 to Debt Conversion and Series A Preferred Stock Purchase Agreement dated May 17, 2017
     
10.21*   Amendment No. 1 to Loan and Security Agreement with Doheny Group, LLC dated June 3, 2017
     
10.22*   Amendment No. 1 to Royalty Agreement with Doheny Group, LLC dated June 3, 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

 

* 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.

 

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  (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 September 11, 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 August 21, 2017.
     
  (12) Incorporated by reference from our Current Report on Form 10-Q filed with the Commission on July 3, 2017.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Blow & Drive Interlock Corporation
     
Dated: August 21, 2017 By: /s/ Laurence Wainer
  Laurence Wainer
    Chief Executive Officer

 

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