NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
NOTE 1. ORGANIZATION, OPERATIONS, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CORRECTION OF ERROR
SOBR Safe, Inc. (“SOBR Safe”), formerly TransBiotec, Inc. was incorporated as Imagine Media LTD., in August, 2007 in the State of Delaware. A corporation also named TransBiotec, Inc. (“TransBiotec – CA”) was formed in the state of California July 4, 2004. Effective September 19, 2011 TransBiotec - DE was acquired by TransBiotec - CA in a transaction classified as a reverse acquisition as the shareholders of TransBiotec - CA retained the majority of the outstanding common stock of TransBiotec - DE after the share exchange. The consolidated financial statements represent the activity of TransBiotec - CA from July 4, 2004 forward, and the consolidated activity of TransBiotec - DE and TransBiotec - CA from September 19, 2011 forward. TransBiotec - DE and TransBiotec - CA are hereinafter referred to collectively as the “Company” or “We”. The Company has developed and plans to market and sell a non-invasive alcohol sensing system which includes an ignition interlock. The Company has not generated any revenues from its operations.
On March 23, 2020, the Company filed a Definitive 14C providing notice that the Board of Directors has recommended, and that holders of a majority of the voting power of the Company’s outstanding stock voted, to approve the following.
| 1. | To remove and re-elect four (4) directors to serve until the next Annual Meeting of Shareholders and thereafter until their successors are elected and qualified; and |
| | |
| 2. | To approve an amendment to the Company’s Certificate of Incorporation to: (a) change the Company’s name to SOBR SAFE, Inc., (b) decrease the Company’s authorized common stock from 800,000,000 shares, par value $0.00001 to 100,000,000 shares, par value $0.00001, and (c) effect a reverse stock split of the Company’s outstanding common stock at a ratio between 1-for-32 and 1-for-35 (with the exact ratio to be determined by the directors in their sole discretion without further approval by the shareholders). |
The above actions taken by the Company’s stockholders became effective on or about May 21, 2020. The effective dates of the above actions were June 5, 2020 and April 20, 2020, respectively, and the actual reverse stock split ratio was 1-for-33.26. All share and per share amounts have been adjusted in these consolidated financial statements to reflect the effect of the reverse stock split (see Note 19).
Basis of Presentation
The accompanying audited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) as promulgated in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for the presentation of annual financial information.
In management’s opinion, the audited consolidated financial statements reflect all adjustments (including reclassifications and normal recurring adjustments) necessary to present fairly the financial position for the years ended December 31, 2021 and December 31, 2020, and results of operations and cash flows for the years ended December 31, 2021 and December 31, 2020.
Principles of Consolidation
The accompanying audited consolidated financial statements include the accounts of the Company and its majority owned subsidiary, TransBiotec-CA. We have eliminated all intercompany transactions and balances between entities consolidated in these audited financial statements.
Use of Estimates
The preparation of audited consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect 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 revenues and expenses during the reporting period. Specifically, such estimates were made by the Company for the valuation of the derivative liabilities, beneficial conversion feature expenses and intellectual technology. Actual results could differ from those estimates.
Financial Instruments
Pursuant to Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures and ASC 825, Financial Instruments, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 and 825 establish a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 and 825 prioritize the inputs into three levels that may be used to measure fair value:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets: quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The Company’s financial instruments consist primarily of cash, accounts payable, accrued expenses, accrued interest payable, related party payables, notes payable, convertible debentures, and other liabilities. Pursuant to ASC 820 and 825, the fair value of our derivative liabilities is determined based on “Level 3” inputs. We believe that the recorded values of all of our other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.
The following table presents assets and liabilities that are measured and recognized at fair value as of December 31, 2021 and December 31, 2020:
December 31, 2021 | | | | | | | | | |
| | | | | | | | | |
| | Level 1 | | | Level 2 | | | Level 3 | |
Derivative liabilities | | $ | - | | | $ | - | | | $ | 1,040,000 | |
| | | | | | | | | | | | |
December 31, 2020 | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Level 1 | | | Level 2 | | | Level 3 | |
Derivative liabilities | | $ | - | | | $ | - | | | $ | - | |
Cash
The Company considers all highly liquid investments with an original maturity of three months or less as cash equivalents. The Company does not have any cash equivalents as of December 31, 2021 and December 31, 2020.
Inventory
Inventory is valued at the lower of cost or net realizable value. The cost of substantially all the Company’s inventory is determined by the FIFO cost method. Inventory is comprised primarily of finished products intended for sale to customers. The Company evaluates the need for reserves for excess or obsolete inventory determined primarily based upon estimates of future demand for the Company’s products. At December 31, 2021 the Company had no reserves for obsolescence.
Prepaid Expenses
Amounts incurred in advance of contractual performance or coverage periods are recorded as prepaid assets and recognized as expense in the period service or coverage is provided.
Beneficial Conversion Features
From time to time, the Company may issue convertible notes that may contain a beneficial conversion feature. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining unallocated proceeds of the note after first considering the allocation of a portion of the note proceeds to the fair value of the warrants, if related warrants have been granted. The intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid-in capital. The debt discount is amortized to interest expense over the life of the note using the effective interest method.
Derivative Instruments
The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instruments are initially recorded at their fair values and are then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations under other income (expense). The accounting treatment of derivative financial instruments requires that the Company record the embedded conversion option at its fair value as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. As a result of entering into warrant agreements, for which such instruments contained a variable conversion feature with no floor, the Company has adopted a sequencing policy in accordance with ASC 815-40-35-12 whereby all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation issued to employees or directors. For stock-based derivative financial instruments, the Company uses a Monte Carlo Simulation model to value the derivative instruments at inception and on subsequent valuation dates.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Debt Issuance Costs
Debt issuance costs incurred in connection with the issuance of debt are capitalized and amortized to interest expense over the term of the debt using the effective interest method. The unamortized amount is presented as a reduction of debt on the balance sheet.
Preferred Stock
We apply the guidance enumerated in ASC 480, Distinguishing Liabilities from Equity, when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. We classify conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control, as temporary equity. At all other times, we classified our preferred shares in stockholders’ equity.
Minority Interest (Noncontrolling Interest)
A subsidiary of the Company has minority members representing ownership interests of 1.38% at December 31, 2021 and December 31, 2020. The Company accounts for these minority, or noncontrolling interests, pursuant to ASC 810-10-65 whereby gains and losses in a subsidiary with a noncontrolling interest are allocated to the noncontrolling interest based on the ownership percentage of the noncontrolling interest, even if that allocation results in a deficit noncontrolling interest balance.
Impairment of Long-Lived Assets
Long-lived assets and identifiable intangibles held for use are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of undiscounted expected future cash flows is less than the carrying amount of the asset or if changes in facts and circumstances indicate, an impairment loss is recognized and measured using the asset’s fair value. The Company recognized an impairment loss of none and $25,320,555 during the years ended December 31, 2021 and 2020, respectively.
Stock-based Compensation
The Company follows the guidance of the accounting provisions of ASC 718, Share-based Compensation, which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (warrants, options, and restricted stock units). The fair value of each warrant and option is estimated on the date of grant using the Black-Scholes options pricing model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. The Company has not paid dividends historically and does not expect to pay them in the future. Expected volatilities are based on weighted averages of the historical volatility of the Company’s common stock estimated over the expected term of the awards. The expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus the contract term as historically the Company had limited activity surrounding its awards. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term. The grant date fair value of a restricted stock unit equals the closing price of our common stock on the trading day of the grant date.
Research and Development
The Company accounts for its research and development costs pursuant to ASC 730, whereby it requires the Company to disclose the amounts of costs for company and customer-sponsored research and development activities, if material. Research and development costs are expensed as incurred. The Company incurred research and development costs as it acquired new knowledge to bring about significant improvements in the functionality and design of its SOBR products. Research and development costs were $1,198,780 and $633,050 during the years ended December 31, 2021 and December 31, 2020, respectively.
Advertising and Marketing Costs
Advertising and marketing costs are charged to operations as incurred. Advertising and marketing costs were $104,738 and $96,637 during the years ended December 31, 2021 and December 31, 2020, respectively.
Income Tax
The Company accounts for income taxes pursuant to ASC 740. Under ASC 740, deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company has a deferred tax asset of approximately $4,129,000 and $2,830,000 that is offset by a 100% valuation allowance at December 31, 2021 and December 31, 2020, respectively. Therefore, the Company has not recorded any deferred tax assets or liabilities at December 31, 2021 and December 31, 2020.
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share gives the effect to all dilutive potential common shares outstanding during the period, including stock options, warrants and convertible instruments. Diluted net loss per share excludes all potentially issuable shares if their effect is anti-dilutive. Because the effect of the Company’s dilutive securities is anti-dilutive, diluted net loss per share is the same as basic loss per share for the periods presented.
Concentration of Risk
Credit Risk – Financial instruments that potentially subject the Company to concentration of credit risk consisted primarily of cash. The Company maintains its cash at one domestic financial institution. The Company is exposed to credit risk in the event of a default by the financial institution to the extent that cash is in excess of the amount insured by the Federal Deposit Insurance Corporation. The Company places its cash with high-credit quality financial institutions and are managed within established guidelines to mitigate risk. To date, the Company has not experienced any loss on its cash.
Concentration of Suppliers – The Company relies on a limited number of component and contract suppliers to assemble its product. If supplier shortages occur, or quality problems arise, production schedules could be significantly delayed or costs significantly increased, which could in turn have a material adverse effect on the Company’s financial condition, results of operations and cash flow.
Related Parties
Related parties are any entities or individuals that, through employment, ownership or other means, possess the ability to direct or cause the direction of the management and policies of the Company.
Recent Issued Accounting Guidance
In December 2019, the FASB issued Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021. The Company is evaluating the effects, if any, of the adoption of ASU 2019-12 guidance on the Company's financial position, results of operations and cash flows.
In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other Options (“Subtopic 470-20”) and Derivatives and Hedging—Contracts in Entity’s Own Equity “(Subtopic 815-40”): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and it also simplifies the diluted earnings per share calculation in certain areas. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the impact of this standard on its financial statements and related disclosures.
The Company has reviewed other recently issued, but not yet effective, accounting pronouncements and does not believe the future adoptions of any such pronouncements will be expected to cause a material impact on its financial condition or the results of operations.
Correction of Error
While preparing financial statements for periods in 2021, the Company discovered an error in the statement of operations for the year ended December 31, 2020. The error related to the presentation of the loss on disposal of property and equipment and asset impairment adjustment in accordance with ASC 360-10-45.
Loss on disposal of property and equipment and asset impairment adjustment of $39,434 and $25,320,555, respectively, were presented as other income/expense-net, instead of as operating expenses. As a result, loss from operations for the year ended December 31, 2020, was understated by $25,359,989 and other income/expenses-net was overstated by the same amount. The errors had no effect on the net loss or net loss per share for the year ended December 31, 2020.
As a result of this correction, the statement of operations for the year ended December 31, 2020 in the accompanying financial statements has been retroactively restated.
NOTE 2. GOING CONCERN
The Company has incurred recurring losses from operations and has limited cash liquidity and capital resources. Future capital requirements will depend on many factors, including the Company’s ability to develop and sell products, generate cash flow from operations, and competing market developments. The Company will need additional capital in the near future. Sources of debt financing may result in high interest expense. Any financing, if available, may be on unfavorable terms. If adequate funds are not obtained, we will be required to reduce or curtail operations.
As of December 31, 2021, the Company has an accumulated deficit of approximately $57,472,000. During the year ended December 31, 2021, the Company also experienced negative cash flows from operating activities of approximately $3,688,000. It appears these principal conditions or events, considered in the aggregate, indicate it is probable that the Company will be unable to meet its obligations as they become due within one year after the date the financial statements are issued. As such, there is substantial doubt about the entity’s ability to continue as a going concern.
As a result, the Company is in the process of preparing an offering for the sale of its common stock in 2022 and has entered into an agreement with an underwriter planned to raise a minimum of $15,000,000 gross proceeds to mitigate the probable conditions that have raised substantial doubt about the Company’s ability to continue as a going concern.
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2022. However, if the pandemic continues, it may have a adverse effect on the Company’s results of future operations, financial position, and liquidity in fiscal year 2022.
Management believes actions presently being taken to obtain additional funding provide the opportunity for the Company to continue as a going concern; however, these plans are contingent upon actions to be performed by the Company and these conditions have not been met on or before December 31, 2021. Additionally, the COVID-19 outbreak could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown, which would impair the Company’s ability to raise needed funds to continue as a going concern. As such, substantial doubt about the entity’s ability to continue as a going concern was not alleviated as of December 31, 2021.
NOTE 3. ASSET PURCHASE
On June 5, 2020, the Company completed a transaction (the “Transaction”) with IDTEC subject to the terms and conditions of the Asset Purchase Agreement (the “APA”) and that was accounted for as an asset purchase. Pursuant to the APA, IDTEC provided personnel, experience, and access to funding to assist with the development of the SOBR device, as well as sold to us certain robotics assets, which our management believes are synergistic with our current assets, in exchange for 4,000,000 shares of our common stock after giving effect to the reverse stock split effected in connection with closing the Transaction. The closing of the Transaction was subject to several conditions precedent, primarily: (i) the Company had to be current in reporting requirements under the Securities Exchange Act of 1934, as amended, (ii) had to complete a reverse stock split of common stock such that approximately 2,666,667 shares were outstanding immediately prior to closing the transaction, (iii) could only have outstanding convertible instruments as set forth in the APA, (iv) authorized common stock had to be reduced to 100,000,000 shares, and (v) not have more than approximately $125,000 in current liabilities. Effective with the closing of the Transaction all of the closing conditions had been met, modified or waived by IDTEC, and the Company issued the 4,000,000 shares to IDTEC.
In advance of closing the Transaction, IDTEC and a few other affiliated parties voluntarily committed personnel and funds to the Company to assist with (i) general costs related to the Transaction, (ii) ongoing operating expenses and pay for further engineering and development work on the Company’s products and prototypes, (iii) protect, maintain and develop the Company’s products and intellectual property, (iv) hire, pay and retain the proposed management team, third party consultants and advisors for the Company following the consummation of the sale contemplated in the APA and, (v) take such further actions as are necessary to more quickly expand the Company’s business subsequent to the sale of the purchased assets. The parties agreed that the funds advanced directly to the Company’s vendors were voluntary and were not the obligation of the Company and the Company had no obligation to repay these funds in the event the Transaction contemplated by the APA did not close. In the event the Transaction did close, then on the closing date, the Company would issue promissory notes for the aggregate amounts incurred, paid or advanced. As a result of closing the Transaction, the Company issued a convertible promissory note for all the funds spent or advanced by IDTEC prior to closing. This note totaled $1,485,189 (the “APA Note”), with simple interest at 10% per annum, due upon demand, and may be convertible into shares of common stock at $1.50 per share (after giving effect to the reverse stock split and subject to anti-dilution protection against any future securities we may issue at an effective price of less than $1.50 per share) at the discretion of the holder. The repayment of APA Note is secured by a first priority security lien or security interest in the patents, trademarks, tradenames, and other intellectual property of the Company.
At closing, some of the closing conditions under the APA were either waived and/or modified by the parties. In order to document those modifications and waivers, we entered into a Waiver Under Asset Purchase Agreement and Post-Closing Covenant Agreement with IDTEC. One of the closing conditions that was the subject of the Waiver Under Asset Purchase Agreement and Post-Closing Covenant Agreement was the requirement that the Company have under $125,000 in permitted liabilities (not including aged liabilities) after closing of the Transaction. At closing, we had approximately $158,000 in non-permitted liabilities under the APA. As a result, the Company issued a Warrant to purchase Common Stock to IDTEC (the “Warrant”), under which IDTEC will purchase up to 106,667 shares of our common stock (post-split) at an exercise price of $1.50 per share, if either (i) we are forced to pay a non-permitted liability, then we may force IDTEC to exercise the Warrant and pay the exercise price to pay the non-permitted liability, but only in an amount sufficient to pay the non-permitted liability, or (ii) if IDTEC otherwise elects to exercise the Warrant and acquire some or all of the shares underlying the Warrant. The Warrant expires five years after the date of issuance.
The Transaction, recorded as an asset purchase, was valued at $29,222,955, which consists of the market price as of June 5, 2020 of the Company’s 4,000,000 shares of common stock issued totaling $27,120,000, the funds spent by IDTEC and affiliates prior to closing of $1,407,051 and the fair value of the Warrant issued of $695,454. In determining the fair value of the intangible assets, the Company considered, among other factors, the best use of acquired assets such as the analysis of historical financial performance of the products and estimates of future performance of the products and intellectual properties acquired. The allocation to identifiable intangible assets required extensive use of financial information and management's best estimate of fair value.
The following summarizes the transaction closing with IDTEC on June 5, 2020:
Property and equipment | | $ | 47,725 | |
Intangible assets | | | 29,175,230 | |
Total assets | | $ | 29,222,955 | |
| | | | |
Net purchase (fair value of stock issued, warrants and notes payable) | | $ | 29,222,955 | |
Subsequent to the Transaction closing, the Company evaluated the fair value of the assets acquired based on market estimates for property and equipment and discounted net cash flow for the SOBR Safe intellectual technology. The present value of the discounted cash flow utilized a 75% discount, which included a 25% risk return premium, over an estimated five-year net revenue stream expected to be derived from the technology acquired. Based on the assessment of fair value, the Company recognized an asset impairment loss of $25,320,555 during the year ended December 31, 2020. The stock price of the Company at closing of the Transaction was significantly higher than expected from the stock price of the Company when the Company signed the APA which resulted in the recognition of the impairment. The number of shares given to IDTEC as consideration for the Transaction was not adjusted for any stock price changes.
NOTE 4. PREPAID EXPENSES
Prepaid expenses consist of the following:
| | December 31, 2021 | | | December 31, 2020 | |
Insurance | | $ | 4,286 | | | $ | 3,370 | |
Consulting services | | | - | | | | 111,860 | |
Rent | | | 8,267 | | | | - | |
| | | | | | | |
Prepaid expenses | | $ | 12,553 | | | $ | 115,230 | |
On February 26, 2021, the Company entered into a lease agreement for its office facility for a 12-month term beginning March 1, 2021. In addition to monthly base rent of $6,000, the agreement required the issuance on 5,333 shares of its common stock valued at $49,600, all of which has been issued as of December 31, 2021, and is being amortized over the lease term.
During 2020, the Company entered into two consulting agreements for marketing services. As of December 31, 2021 the Company had issued a total of 29,167 of its common shares valued at $142,714 under the terms of the agreements. As of December 31, 2020, the share value is included in common stock subscriptions payable as the shares had not been issued. Stock-based compensation expense for the years ended December 31, 2021 and 2020 includes approximately $110,000 and $33,000, respectively for these service agreements.
NOTE 5. PROPERTY AND EQUIPMENT
| | December 31, 2020 | |
Robotics and testing equipment | | $ | 46,200 | |
Office furniture and equipment | | | 1,525 | |
| | | 47,725 | |
Accumulated depreciation | | | (7,340 | ) |
Net property and equipment disposed | | | (40,385 | ) |
Property and equipment, net | | $ | 0 | |
Depreciation is computed on a straight-line basis over the assets estimated useful lives of three years. Depreciation for the years ended December 31, 2021 and 2020 was none and $7,340, respectively.
NOTE 6. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 2021:
| | Gross Carrying | | | Accumulated | | | Net Intangible | | | Amortization Period | |
| | Amount | | | Amortization | | | Asset | | | (in years) | |
SOBR Safe | | | | | | | | | | | | |
Intellectual Technology | | $ | 3,854,675 | | | $ | 610,318 | | | $ | 3,244,357 | | | | 10 | |
Intangible assets consist of the following at December 31, 2020:
| | Gross Carrying | | | Accumulated | | | Net Intangible | | | Amortization Period | |
| | Amount | | | Amortization | | | Asset | | | (in years) | |
SOBR Safe | | | | | | | | | | | | |
Intellectual Technology | | $ | 3,854,675 | | | $ | 224,854 | | | $ | 3,629,821 | | | | 10 | |
Amortization expense for the years ended December 31, 2021 and 2020 was $385,464 and $224,854, respectively.
Estimated future amortization expense for device technology intangible assets is as follows:
2022 | | | 2023 | | | 2024 | | | 2025 | | | 2026 | | | Thereafter | |
$ | 385,467 | | | $ | 385,467 | | | $ | 385,467 | | | $ | 385,467 | | | $ | 385,467 | | | $ | 1,317,022 | |
NOTE 7. RELATED PARTY TRANSACTIONS
On July 1, 2015, the Company amended the December 3, 2014 note payable agreement with Lanphere Law Group, which forgave $108,000 of the note payable’s principal balance. This debt forgiveness decreased the original principal balance on the note of $214,334 to a new principal balance of $106,335, and a related party gain of $108,000 was recorded to additional paid-in capital. This amendment also extended the note payable’s due date to December 2, 2015. The note was converted to common stock during the year ended December 31, 2020.
On March 8, 2017, Lanphere Law Group irrevocably elected to exercise warrants in order to acquire 323,200 shares of the Company’s common stock in exchange for an aggregate exercise price of $112,871, which was used for the deduction of $74,672 of principal and $38,199 of accrued interest related to the December 3, 2014 note payable agreement with Lanphere Law Group. The forgiveness of the note payable principal of $74,672 was recorded to equity and the $38,199 of related accrued interest was also recorded to equity. The principal balance of the note after the debt deduction was $31,662. On January 3, 2020, the note payable principal balance of $31,662 was converted to 3,173 common shares at a per share price of $9.978.
On January 3, 2020, the Company entered into a Debt Conversion and Common Stock Purchase Plan with Michael Lanphere, a beneficial owner of the Company, under which he agreed to exercise warrants and the Company agreed to issue 151,366 shares of its common stock in exchange for a reduction in the amounts owed to Mr. Lanphere under two promissory notes. Mr. Lanphere’s option to acquire the shares was under the terms of certain Loan Agreement with Promissory Note and Stock Fees agreements entered into with the Company and Mr. Lanphere on April 17, 2019 and July 17, 2019. The amount of the debt reduction, and therefore the purchase price of the shares, was approximately $66,000 which was used for the deduction of related party notes payable principal of approximately $66,000. 60,132 common shares were issued on January 3, 2020 at an effective conversion price of $0.399 and 91,233 common shares were issued on January 3, 2020 at an effective conversion price of $0.459. After this exercise, Lanphere Law Group owns no warrants for shares of our common stock.
On January 3, 2020, the Company entered into another Debt Conversion and Common Stock Purchase Plan with Michael Lanphere, under which the Company agreed to issue 21,085 shares of its common stock in exchange for a reduction in the amounts owed to Mr. Lanphere under numerous other remaining promissory notes. The amount of the debt reduction, and therefore the purchase price of the shares, was $210,285 which was used for the deduction of related party notes payable principal of $169,606 and accrued interest of $40,679. Based on the fair value of the shares issued, the Company recognized a related party gain of approximately $52,000 and accounted for it as additional paid-in capital. The common shares were issued on January 3, 2020 at an effective conversion price of $9.978 per share.
On January 3, 2020, the Company entered into a Debt Conversion and Common Stock Purchase Plan with Vernon Justus, a shareholder, under which the Company agreed to issue 28,321 shares of its common stock in exchange for a reduction in the amounts owed to Mr. Justus under a promissory note. The amount of the debt reduction, and therefore the purchase price of the shares, was $282,588 which was used for the deduction of a related party note payable principal of $180,001 and accrued interest of $102,587. Based on the fair value of the shares issued, the Company recognized a related party gain of approximately $70,000 and accounted for it as additional paid-in capital. The common shares were issued on January 3, 2020 at an effective conversion price of $9.978 per share.
On January 16, 2020, the Company entered into a Accounts Payable Conversion and Common Stock Purchase Plan with Michael Lanphere, , under which the Company agreed to issue 71,628 shares of its common stock in exchange for a reduction in the amounts owed to Mr. Lanphere for unpaid legal bills. The amount of the debt reduction, and therefore the purchase price of the shares, was $714,700 which was used for the deduction of related party payables of $714,700. Based on the fair value of the shares issued, the Company recognized a related party gain of approximately $222,000 and accounted for it as additional paid-in capital. The common shares were issued on January 16, 2020 at an effective conversion price of $9.978 per share.
On January 30, 2020, the Company entered into a Debt Conversion and Common Stock Purchase Plan with Devadatt Mishal, one of the Company’s former directors and current shareholder, under which the Company agreed to issue 166,655 shares of its common stock in exchange for a reduction in the amounts owed to Mr. Mishal under numerous promissory notes. The amount of the debt reduction, and therefore the purchase price of the shares, was $456,641 which was used for the deduction of related party notes payable principal of $270,300 and accrued interest of $186,341. The Company also recorded a loss on related party debt extinguishment of approximately $144,000. The common shares were issued on January 30, 2020 at an effective conversion price of $2.74395 per share.
On March 23, 2020, the Company entered into a Debt Conversion and Common Stock Purchase Plan with Prakash Gadgil, one of the Company’s former directors and current shareholder, under which the Company agreed to issue 195 shares of its common stock in exchange for a reduction in the amounts owed to Mr. Gadgil under a promissory note. The amount of the debt reduction, and therefore the purchase price of the shares, was $1,950 which was used for the deduction of a related party note payable principal of $1,950. Based on the fair value of the shares issued, the Company recognized a related party gain of approximately $1,000 and accounted for it as additional paid-in capital. The common shares were issued on March 23, 2020 at an effective conversion price of $9.978 per share.
On April 6, 2020, the Company agreed with Nick Noceti, the Company’s former Chief Financial Officer, to issue 38,437 shares of its common stock in exchange for amounts due for accounting fees. The amount of the debt reduction, and therefore the purchase price of the shares, was $127,840 which was used for the deduction of a related party accounts payable of $127,480. Based on the fair value of the shares issued, the Company recognized a related party gain of approximately $49,000 and accounted for it as additional paid-in capital. The common shares were issued on April 4, 2020 at an effective conversion price of $9.978 per share.
On April 7, 2020, the Company agreed with Charles Bennington, one of the Company’s directors, to issue 2,277 shares of its common stock in exchange for amounts due for Board of Director fees. The amount of the debt reduction, and therefore the purchase price of the shares, was $9,656 which was used for the deduction of a related party accounts payable of $9,656. Based on the fair value of the shares issued, the Company recognized a related party gain of approximately $2,000 and accounted for it as additional paid-in capital. The common shares were issued on April 7, 2020 at an effective conversion price of $4.23 per share.
On February 12, 2021, the Company entered into a note payable agreement with David Gandini, an officer and shareholder, under which Mr. Gandini advanced the Company $30,000 for working capital purposes. The unsecured note carried interest at 0% and was paid in April 2021.
On March 30, 2021, the Company received notification from IDTEC that it was exercising a portion of the 106,667 warrants issued resulting from the Waiver Under Asset Purchase Agreement and Post-Closing Covenant Agreement. The warrant exercise price is $1.50 per share. With the proceeds of the exercise, we paid $88,469 during the year ended December 31, 2021 to settle an outstanding judgement (see Note 16) against the Company which was considered as a non-permitted liability under the Post-Closing Covenant Agreement. We issued 58,980 shares of our common stock for the $88,470 we received from IDTEC to pay the settlement.
On March 3 and 31, 2021, the Company issued convertible notes payable (see Note 10) totaling $350,000 to existing shareholders holding a direct or indirect interest in the Company and $200,000 to a Company’s director, an entity owned by a Company’s director and another director’s family member. The principal amount of the secured convertible debentures are convertible at $9 per share, and include warrants to purchase in total 91,667 shares of the Company’s common stock at $9 per share.
On May 31, 2021, the Company issued convertible notes payable (see Note 10) totaling $400,000 to existing shareholders holding a direct or indirect interest in the Company and $50,000 to a Company’s officer. The principal amount of the secured convertible debentures are convertible at $9 per share, and include warrants to purchase in total 75,000 shares of the Company’s common stock at $9 per share.
NOTE 8. ACCRUED EXPENSES
Accrued expenses consist of the following:
| | December 31, 2021 | | | December 31, 2020 | |
Registration rights damages (see Note 9) | | $ | 189,663 | | | $ | - | |
Consulting services | | | 163,647 | | | | 163,647 | |
Taxes and other | | | 110,590 | | | | 149,388 | |
| | | | | | | | |
Accrued expenses | | $ | 463,900 | | | $ | 313,035 | |
NOTE 9. CONVERTIBLE DEBENTURE PAYABLE
Convertible debenture payable consists of the following:
| | December 31, 2021 | | | December 31, 2020 | |
Convertible Debenture Payable with Detached Free-standing Warrant | | $ | 3,048,781 | | | $ | - | |
Unamortized Debt Discount | | | (1,291,882 | ) | | | - | |
| | | | | | | | |
Net Convertible Debenture Payable | | $ | 1,756,899 | | | $ | - | |
On September 28, 2021, (the “Closing Date”) the Company completed a financing transaction under a Securities Purchase Agreement (the “SPA”) and corresponding 18% Original Issue Discount Convertible Debenture (the “Debenture”), Common Stock Purchase Warrant (the “Warrant”) and Registration Rights Agreement (“RRA”). Under the terms of the SPA, the Company received $2,500,000 from the Purchaser and in exchange issued the Debenture in the principal amount of $3,048,781 and Warrants to purchase up to 406,504 shares of the Company’s common stock. The Debenture is convertible voluntarily by the Purchaser at any time into shares of our common stock, at the lesser of $7.50, representing 100% of the closing price of our common stock on the trading day immediately prior to the Closing Date, or 75% of the average VWAP of our common stock during the 5 trading day period immediately prior to the conversion date (the “Conversion Price”), or automatically upon the occurrence of a single public offering of our common stock which results in the listing of our common stock on a national securities exchange as defined in the Exchange Act (the “Qualified Offering”) into shares of our common stock at the lesser of the Conversion Price, or 75% of the offering price of the securities offered in the Qualified Offering. The Debenture matures on March 27, 2022, does not accrue interest unless there is an event of default under the terms of the Debenture. The Warrant is exercisable at any time through September 28, 2026 into shares of our common stock at an exercise price of $9.00 per share, unless an event of default occurs, at which time the exercise price will adjust to $3.00 per share. The Warrant contains a cashless exercise provision but only in the event the Company fails to have an effective registration statement registering the common shares underlying the Warrant at any time beginning six months from the Closing Date. The RRA requires the Company to register for resale and maintain effectiveness of such Registration Statement for all the registrable securities under the terms of the Debenture and Warrant, within defined time frames. Should the Company fail to meet the RRA requirements, until the date causing such event of noncompliance is cured, the Company shall pay to the Purchaser as partial liquidated damages equal to the product of 2% of the principal amount not to exceed 24% of the aggregate principal. If the Company fails to pay the liquidated damages within seven days after the date payable, the Company will pay interest at 18% until such amounts are paid in full. Although the Company completed the Registration Statement filings required, it did not meet the filing date requirements. The filing date requirements were cured in February 2022. Total unpaid damages and estimated related costs of approximately $189,700, are included in accrued expenses at December 31, 2021 (see Note 8), and general and administrative expenses in the Consolidated Statement of Operations for the year ended December 31, 2021. The Company evaluated the Debenture for derivative embedded and beneficial conversion features and determined that its embedded conversion feature carried a debt discount. The total conversion feature debt discount of $980,000 is amortized over the life of the convertible debenture. The debt discount amortization expense recorded as amortization of interest in the Consolidated Statements of Operations was $514,365 for the year ended December 31, 2021. As of December 31, 2021, the debenture carries outstanding warrants of 1,219,512. The relative fair market value of the related stock warrants granted during the year ended December 31, 2021 was $847,048. The unamortized discount at December 31, 2021 was $402,465. Stock warrants amortization expense recorded as interest expense was $444,583 for the year ended December 31, 2021. The Company incurred $548,781 of Original Issue Discount and $275,000 of debt issuance costs related to the Debenture which is being amortized to interest expense over the term of the debt using the effective interest method. Interest expense related to the Original Issue Discount and debt issuance costs was $399,999 for the year ended December 31, 2021. The unamortized discount and issuance costs at December 31, 2021 was $423,782.
NOTE 10. NOTES PAYABLE
RELATED PARTIES
Related party notes payable consist of the following:
| | December 31, 2021 | | | December 31, 2020 | |
Convertible Notes Payable with Detached Free-standing Warrants | | $ | 1,000,000 | | | $ | - | |
Conventional Non-Convertible Notes Payable | | | 11,810 | | | | 11,810 | |
Unamortized Debt Discount | | | (645,547 | ) | | | - | |
Net Related Party Notes Payable | | $ | 366,263 | | | $ | 11,810 | |
Current Portion | | | (11,810 | ) | | | (11,810 | ) |
Net Long-Term Portion | | $ | 354,453 | | | $ | - | |
Total interest expense for related party notes was $85,397 and $98,313 for the years ended December 31, 2021 and 2020, respectively.
Related Party Convertible Notes Payable
The Company has thirteen convertible notes payable to related parties, each with detached free-standing warrants to purchase the Company’s common stock at $9 per share, that have a total principal balance of $1,000,000 as of December 31, 2021. The notes, secured by the Company’s patents and patents applications, include interest at 12%, are convertible at $9 per share of the Company’s common stock and are due 24 months after issuance. The note holders may elect to have the interest paid in cash monthly or have the interest accrue and be payable on the maturity date. Interest elected to be accrued will be paid in cash or may be converted into shares of our common stock under the same terms as the principal amount on the maturity date. The notes contain both voluntary and automatic conversion features. The notes may be convertible at any time, by the holders, beginning on the date of issuance. However, the holders may not convert any outstanding amounts due under the note if at the time of such conversion the amount of common stock issued for the conversion, when added to other shares of Company common stock owned by the holders or which can be acquired by holders upon exercise or conversion of any other instrument, would cause the holder to own more than 4.9% of the Company’s outstanding common stock. Beginning on the issuance date, the outstanding principal amount of the note, and any accrued interest, will automatically convert into shares of the Company’s common stock if the Company’s common stock closes at or above $6 per share for five (5) consecutive trading days while listed on Nasdaq. The Company evaluated the convertible notes payable for derivative embedded and beneficial conversion features. The Company determined that there were beneficial conversion features to record. The total beneficial conversion feature debt discount of $448,999 is amortized over the life of the convertible notes payable. The debt discount amortization expense recorded as amortization of interest – beneficial conversion feature in the consolidated statements of operations was $157,657 for the year ended December 31, 2021. As of December 31, 2021, these notes carry outstanding warrants of 166,667. The relative fair market value of the related stock warrants granted during the year ended December 31, 2021 and 2020 was $551,001 and none, respectively. The unamortized discount at December 31, 2021 and December 31, 2020 is $354,205 and none, respectively. Stock warrants amortization expense recorded as interest expense was $196,796 for the year ended December 31, 2021.
During 2020, the Company entered into a Debt Conversion and Common Stock Purchase Plan with a related party, under which the Company agreed to issue approximately 52,333 shares of its common stock in exchange for a reduction of four convertible notes payable to related parties. The amount of the debt reduction, and therefore the purchase price of the shares, was $143,119 which was used for the deduction of related party convertible notes payable principal of $91,000 and accrued interest of $52,119.
On June 5, 2020 the Company issued the convertible APA Note to a related party with a principal balance of $1,485,189, which included the $70,000 balance of three convertible notes payable to related parties and related accrued interest of $7,689 outstanding at December 31, 2019. The note includes simple interest at 10% per annum, due upon demand, and may be convertible into shares of common stock at $1.50 per share (after giving effect to the reverse stock split and subject to anti-dilution protection against any future securities we may issue at an effective price of less than $1.50 per share) at the discretion of the holder. The Company evaluated the convertible note payable for derivative embedded and beneficial conversion features. The Company determined that there was a beneficial conversion feature to record. During the year ended December 31, 2020, beneficial conversion feature amortization expense related to this related party convertible note payable of $1,407,675 was accounted for as amortization of interest - beneficial conversion feature expense in the consolidated statements of operations. On November 15, 2020, the related party holder elected to convert the note principal and accrued interest balance of $1,551,514 into 1,034,343 of shares of common stock.
Related Party Non-convertible Notes Payable
The Company has one non-convertible note payable to a related party that has a principal balance of $11,810 as of December 31, 2021 and December 31, 2020. The note carries an interest rate at 0%. The note payable had a due date of December 31, 2012 and is currently in default.
During 2020, the Company entered into Debt Conversion and Common Stock Purchase Plans with four related parties, under which the Company agreed to issue approximately 114,333 shares of its common stock in exchange for a reduction of eight non-convertible notes payable to related parties. The amount of the debt reduction, and therefore the purchase price of the shares, was $549,311 which was used for the reduction of related party non-convertible notes payable principal of $316,613 and accrued interest of $232,698.
Related Party Notes Payable with Warrants
During 2020, the Company entered into Debt Conversion and Common Stock Purchase Plans with two related parties, under which the Company agreed to issue approximately 200,667 shares of its common stock in exchange for a reduction of 24 notes payable with detached free-standing warrants to related parties. The amount of the debt reduction, and therefore the purchase price of the shares, was $320,858 which was used for the deduction of related party notes payable with detached free-standing warrants principal of $280,119 and accrued interest of $40,739.
NON- RELATED PARTIES
Non-related party notes payable consist of the following:
| | December 31, 2021 | | | December 31, 2020 | |
Convertible Notes Payable with Detached Free-standing Warrants | | $ | 1,005,000 | | | $ | - | |
Convertible Notes Payable | | | 56,683 | | | | 56,683 | |
Conventional Non-Convertible Notes Payable | | | 42,500 | | | | 42,500 | |
Notes Payable with Detached Free-standing Warrants | | | 5,000 | | | | 5,000 | |
Unamortized Debt Discount | | | (648,580 | ) | | | - | |
Net Non-Related Party Notes Payable | | $ | 460,603 | | | $ | 104,183 | |
Current Portion | | | (104,183 | ) | | | (79,183 | ) |
Net Long-Term Portion | | $ | 356,420 | | | $ | 25,000 | |
Total interest expense for non-related party notes was $98,647 and $17,415 for the years ended December 31, 2021 and 2020, respectively.
Convertible Notes Payable with Warrants
The Company has sixteen convertible notes payable to non-related parties, each with detached free-standing warrants to purchase the Company’s common stock at $9 per share, that have a total principal balance of $1,005,000 as of December 31, 2021. The notes, secured by the Company’s patents and patents applications, include interest at 12%, are convertible at $9 per share of the Company’s common stock and are due 24 months after issuance. The note holders may elect to have the interest paid in cash monthly or have the interest accrue and be payable on the maturity date. Interest elected to be accrued will be paid in cash or may be converted into shares of our common stock under the same terms as the principal amount on the maturity date. The notes contain both voluntary and automatic conversion features. The notes may be convertible at any time, by the holders, beginning on the date of issuance. However, the holders may not convert any outstanding amounts due under the note if at the time of such conversion the amount of common stock issued for the conversion, when added to other shares of Company common stock owned by the holders or which can be acquired by holders upon exercise or conversion of any other instrument, would cause the holder to own more than 4.9% of the Company’s outstanding common stock. Beginning on the issuance date, the outstanding principal amount of the note, and any accrued interest, will automatically convert into shares of the Company’s common stock if the Company’s common stock closes at or above $6 per share for five (5) consecutive trading days while listed on Nasdaq. The Company evaluated the convertible notes payable for derivative embedded and beneficial conversion features. The Company determined that there were beneficial conversion features to record. The total beneficial conversion feature debt discount of $460,215 is amortized over the life of the convertible notes payable. The debt discount recorded as amortization of interest – beneficial conversion feature in the Consolidated Statements of Operations was $163,059 for the year ended December 31, 2021. As of December 31, 2021, these notes carry outstanding warrants of 167,500. The relative fair market value of the related stock warrants granted during the year ended December 31, 2021 and December 31, 2020 was $541,707 and none, respectively. The unamortized discount at December 31, 2021 and December 31, 2020 was $351,424 and none, respectively. Stock warrants amortization expense recorded as interest expense was $190,283 for the year ended December 31, 2021.
Convertible Notes Payable
The Company has three convertible notes payable to non-related parties that have a principal balance of $56,683 as of December 31, 2021 and December 31, 2020. These notes carry interest rates ranging from 5% - 12% and have due dates ranging from February 2013 to March 2022. Two of the three notes are currently in default. These notes carry conversion prices ranging from $6.00- $32.2857 per share. Subsequent to December 31, 2021 a note with a principal balance of $47,500 was converted into common stock (see Note 18). The Company evaluated these convertible notes payable for derivative embedded and beneficial conversion features. The Company determined that there were beneficial conversion features to record. The conversion features were either fully amortized upon grant or over the life of the convertible notes payable. The conversion features were fully amortized prior to 2020.
During 2020, the Company entered into Debt Conversion and Common Stock Purchase Plans with six non-related parties, under which the Company agreed to issue 16,712 shares of its common stock in exchange for a reduction of eleven convertible notes payable to non-related parties. The amount of the debt reduction, and therefore the purchase price of the shares, was $166,750 which was used for the deduction of non-related party convertible notes payable principal of $83,953 and accrued interest of $82,797. The Company recorded a non-related party gain on loan extinguishment of approximately $103,000.
During 2020, the Company also entered into a non-related party convertible note payable agreement to convert a high interest rate convertible non-related party note payable with a principal balance of $25,000 and accrued interest due of $22,500 to a non-related party convertible note payable of $47,500 that accrues interest at 5%. The note conversion rate is $6 per common share. The Company recorded a loss on non-related party debt extinguishment of $11,697.
During 2020, the holder of a $25,000 convertible promissory note with interest at 30% and accrued interest of $61,875 replaced the carrying amount of the note and its conversion features with a new non-convertible note totaling $25,000 that bears interest at 5%. The Company recorded a gain on non-related party debt extinguishment of $61,875.
Non-convertible Notes Payable
The Company has three non-convertible notes payable to non-related parties that have a principal balance of $42,500 as of December 31, 2021, and December 31, 2020. These notes carry interest rates ranging from 5% - 10% and have due dates ranging from 12/25/2013 - 6/06/2022. Two of the three notes are currently in default.
During 2020, the Company entered into a Debt Conversion and Common Stock Purchase Plan with a non-related party, under which the Company agreed to issue 6,771 shares of its common stock in exchange for a reduction of a non-convertible non-related party note payable. The amount of the debt reduction, and therefore the purchase price of the shares, was $67,561 which was used for the deduction of non-related party non-convertible notes payable principal of $3,938 and accrued interest of $63,623. The Company recorded a non-related party gain on loan extinguishment of approximately $14,000.
On May 12, 2020, the Company received proceeds of $41,665 from a commercial bank under the SBA Payroll Protection Loan Program. The loan requires interest at 1% and 18 monthly payments of principal and interest beginning December 5, 2020. Provisions of the SBA Payroll Protection Loan Program allow for portions or all the loan balance to be forgiven should certain criteria be met. On December 7, 2020 the Company was notified that the principal balance and accrued interest of $242 was forgiven, and thus the Company recorded a gain on loan extinguishment of approximately $42,000.
Notes Payable with Warrants
The Company has one note payable with detached free-standing warrants to a non-related party that has a principal balance of $5,000 and $5,000 as of December 31, 2021 and December 31, 2020, respectively. This note carries an interest rate of 10% and had a due date of 9/11/2014. This note is currently in default. The detached free-standing warrants for this note payable were not exercised by the note holder and expired on May 16, 2019.
NOTE 11. DERIVATIVE LIABILITY
In September 2021, the Company completed a financing transition and received $2,500,000 from the Purchaser and in exchange issued an 18% Original Issue Discount Convertible Debenture in the principal amount of $3,048,781. The debenture includes voluntary and automatic conversion features at a variable conversion prices convertible into the Company’s common shares at an undetermined future date. In 2019, the Company borrowed $70,000 under convertible promissory note agreements from an unrelated party that are due upon demand. The notes bear interest at a rate of 10% per annum and are convertible into the Company’s common shares at a variable conversion price based on a 50% discount of the market price at an undetermined future date. The Company analyzed the conversion features of the debenture and note agreements for derivative accounting consideration under ASU 2017-11 (ASC 815-15, Derivatives and Hedging), and determined the embedded conversion features should be classified as a derivative because the exercise price of the convertible debenture and notes are subject to variable conversion rates and should therefore be accounted for at fair value under ASC 820 and ASC 825. In accordance with ASC 815-15, the Company has bifurcated the conversion features of the debenture and notes and recorded a derivative liability.
The embedded derivative for the debenture and the notes were carried on the Company’s balance sheet at fair value. The derivative liability was revalued each measurement period and any unrealized change in fair value is recorded as a component of the Consolidated Statement of Operations and the associated fair value carrying amount on the balance sheet was adjusted by the change.
The Company fair valued the debenture embedded derivative using a Monte Carlo simulation model based on the following assumptions: (1) expected volatility of 120%, (2) risk-free interest rate of 0.05%, and (3) expected life from 4 to 6 months. On September 28, 2021, the Closing Date of the transaction, the fair value of the embedded derivative was $980,000 and is amortized to interest over the term of the Debenture. Utilizing level 3 inputs, the Company recorded a fair value loss of $60,000 for the year ended December 31, 2021. The fair value of the embedded derivative recorded on the balance sheet as a liability was $1,040,000 at December 31, 2021.
The Company fair valued the notes embedded derivatives using a Monte Carlo simulation model based on the following assumptions: (1) expected volatility of 180%, (2) risk-free interest rate of 0.13%, and (3) expected life from 1 month to 1 year. On March 1, 2019, the date of the first note, the fair value of the embedded derivative was $28,000. On May 3, 2019, the date of the second note, the fair value of the embedded derivative was $28,100. On October 26, 2019, the date of the third note, the fair value of the embedded derivative was $8,700. The notes carried an embedded conversion feature of $64,800 that was fully amortized to interest expense during the year ended December 31, 2019. The notes were not converted and deemed paid in full at the closing of the Transaction on June 5, 2020. The principal amounts of these notes were settled and transferred to the APA Note and a loss on debt extinguishment of $273,462 was recognized during the year ended December 31, 2020. The fair value of the embedded derivative recorded on the balance sheet as a liability was none at December 31, 2020. Utilizing level 3 inputs, the Company recorded a fair value gain of $60,650 for the year ended December 31, 2020.
A summary of the activity of the derivative liability is shown below:
Balance at December 31, 2019 | | $ | 60,650 | |
Fair value adjustments (including settlements) | | | (60,650 | ) |
Balance at December 31, 2020 | | $ | - | |
| | | | |
Balance at December 31, 2020 | | $ | - | |
Fair value of derivatives issued | | | 980,000 | |
Fair value adjustments | | | 60,000 | |
Balance at December 31, 2021 | | $ | 1,040,000 | |
NOTE 12. COMMON STOCK
The Company’s common stock transactions for the year ended December 31, 2020 consists of the following:
342 shares were issued at $60.87 per share to a non-related party as compensation for services provided.
24,053 shares were issued for services provided under an Employment Agreement with Kevin Moore dated October 25, 2019.
151,366 shares were issued for the conversion of $65,728 of related parties’ debt from $0.4590 to $0.39912 per share pursuant to terms of the convertible promissory notes. 151,366 stock warrants were settled along with the related party debt.
4,000,000 shares were issued to complete the Transaction with IDTEC that was accounted for as an asset purchase. The shares were issued at a value of $27,120,000.
53,132 shares were issued to non-related parties for the conversion of approximately $266,000 of accounts payable and accrued expenses from $1.7463 to $9.978 per share. The Company recorded a net gain of approximately $62,000 resulting from the stock issuance.
86,717 shares were issued to related parties for the conversion of $852,196 of related party payables from $3.345 to $9.978 per share. A related party gain of $272,299 was recorded as additional paid-in capital.
216,246 shares were issued to related parties for the conversion of $622,004 of debt from $2.7438 to $9.978 per share. The Company recorded $143,660 of loss on debt extinguishment and a related party gain of $124,291 was recorded as additional paid in-capital as a result of the stock issuance.
23,483 shares were issued to non-related parties for the conversion of $65,391 of debt at $9.978 per share. The Company recorded $41,665 of loss resulting from the stock issuance.
1,034,343 shares were issued to a related party for the conversion of $1,551,514 of debt under the terms of a convertible promissory note. The note converted at $1.50 per share.
900,000 shares were issued to a related party under the terms governing the shares of Series A-1 Convertible Preferred Stock. In addition, as a result of the conversion of the Series A-1 Convertible Preferred Stock we owed accrued dividends totaling $107,880, which we could pay in cash or in shares of our common stock based on the price of common stock on the applicable dividend dates. Our management and Board of Directors elected to pay the accrued dividends in shares of common stock. Based on the price of the common stock on the applicable dividend dates, we owed 14,390 shares of common stock in full satisfaction of the accrued dividends. As of December 31, 2020, 14,390 shares were recorded in common stock subscriptions payable and were issued on January 6, 2021.
The Company’s common stock transactions for the year ended December 31, 2021 consists of the following:
The Company issued 14,390 shares of its common stock to SOBR Safe, LLC, an entity controlled by a beneficial owner of the Company, in full satisfaction of $107,880 of accrued dividends resulting from the December 2020 conversion of the Series A-1 Convertible Preferred Stock into common shares, (see Note 13).
The Company issued 5,334 shares of its common stock valued at $49,600 to its landlord under the terms of a lease agreement expiring in February 2022. The amount has been recorded as prepaid expense and amortized monthly over the lease term as general and administrative expense in the consolidated statement of operations.
The Company issued 34,806 shares of its common stock valued at $145,805 previously recorded in stock subscriptions payable for contracted consulting services.
The Company issued 58,980 shares of its common stock to IDTEC at the stock warrant exercise price of $1.50 per share.
The Company issued 24,368 shares of its common stock at the stock options exercise price of $0.79026 per share.
NOTE 13. PREFERRED STOCK
On November 20, 2015, the Company’s Board of Directors authorized a class of stock designated as preferred stock with a par value of $0.00001 per share comprising 25,000,000 shares, 3,000,000 shares of which were classified as Series A Convertible Preferred Stock. In each calendar year, the holders of the Series A Convertible Preferred Stock are entitled to receive, when, as and if, declared by the Board of Directors, out of any funds and assets of the Company legally available, non-cumulative dividends, in an amount equal to any dividends or other Distribution on the common stock in such calendar year (other than a Common Stock Dividend). No dividends (other than a Common Stock Dividend) shall be paid and no distribution shall be made with respect to the common stock unless dividends shall have been paid or declared and set apart for payment to the holders of the Series A Convertible Preferred Stock simultaneously. Dividends on the Series A Convertible Preferred Stock shall not be mandatory or cumulative, and no rights or interest shall accrue to the holders of the Series A Convertible Preferred Stock by reason of the fact that the Company shall fail to declare or pay dividends on the Series A Convertible Preferred Stock, except for such rights or interest that may arise as a result of the Company paying a dividend or making a distribution on the common stock in violation of the terms. The holders of each share of Series A Convertible Preferred Stock then outstanding shall be entitled to be paid, out of the Available Funds and Assets, and prior and in preference to any payment or Distribution (or any setting part of any payment or Distribution) of any Available Funds and Assets on any shares of common stock, and equal in preference to any payment or Distribution (or any setting part of any payment or Distribution) of any Available Funds and Assets on any shares of any other series of preferred stock that have liquidation preference, an amount per share equal to the Original Issue Price of the Series A Convertible Preferred Stock plus all declared but unpaid dividends on the Series A Convertible Preferred Stock. A reorganization, or any other consolidation or merger of the Company with or into any other corporation, or any other sale of all or substantially all of the assets of the Company, shall not be deemed a liquidation, dissolution, or winding up of the Company. Shares of the Series A Convertible Preferred Stock are convertible at a 35% discount rate to the average closing price per share of the Company’s common stock (either as listed on a national exchange or as quoted over-the-market) for the last 15 trading days immediately prior to conversion. However, no conversions of the Series A Convertible Preferred Stock to shares of common stock can occur unless the average closing price per share of the Corporation’s common stock (either as listed on a national exchange or as quoted over-the-market) for the last 15 trading days immediately prior to conversion is at least $5.01. The shares of Series A Convertible Preferred Stock vote on a one for one basis. The right of conversion is limited by the fact the holder of the Series A Convertible Preferred Stock may not convert if such conversion would cause the holder to beneficially own more than 4.9% of the Company’s common stock after giving effect to such conversion.
In accordance with the August 8, 2019 Investment Agreement with FCV, on December 9, 2019, the Company’s Board of Directors created a class of preferred stock designated as 8% Series A-1 Convertible Preferred Stock comprising of 2,000,000 shares. During 2020, the authorized shares were increased to 2,700,000 shares. The rights and preferences of the 8% Series A-1 Convertible Preferred Stock are as follows: (a) dividend rights of 8% per annum based on the original issuance price of $1 per share, (b) liquidation preference over the Company’s common stock, (c) conversion rights into shares of the Company’s common stock at $3 per share (not to be affected by any reverse stock split in connection with the Asset Purchase Agreement with IDTEC), (d) redemption rights such that we have the right, upon 30 days written notice, at any time after one year from the date of issuance, to redeem all or part of the Series A-1 Convertible Preferred Stock for 150% of the original issuance price, (e) no call rights by the Company, and (f) each share of Series A-1 Convertible Preferred Stock will vote on an “as converted” basis.
On December 9, 2019, the Company’s Board of Directors created a class of preferred stock designated as 8% Series A-1 Convertible Preferred Stock comprising of 2,000,000 shares. During 2020, the authorized shares were increased to 2,700,000 shares. The rights and preferences of the 8% Series A-1 Convertible Preferred Stock are as follows: (a) dividend rights of 8% per annum based on the original issuance price of $1 per share, (b) liquidation preference over the Company’s common stock, (c) conversion rights into shares of the Company’s common stock at $3 per share (not to be affected by any reverse stock split in connection with the Asset Purchase Agreement with IDTEC), (d) redemption rights such that we have the right, upon 30 days written notice, at any time after one year from the date of issuance, to redeem all or part of the Series A-1 Convertible Preferred Stock for 150% of the original issuance price, (e) no call rights by the Company, and (f) each share of Series A-1 Convertible Preferred Stock will vote on an “as converted” basis.
On December 12, 2019, the Company entered into a Series A-1 Preferred Stock Purchase Agreement (the “SPA”) with SOBR SAFE, LLC (“SOBR SAFE”), a Delaware limited liability company and an entity controlled by a beneficial owner of the Company, under which SOBR SAFE agreed to acquire 333,333 shares of our Series A-1 Convertible Preferred Stock in exchange for $1,000,000 (the “Purchase Price”). The Company received the Purchase Price on December 12, 2019.
On May 7, 2020, the Company amended a Convertible Preferred Stock Investment Agreement granting the exclusive right to SOBR SAFE to purchase up to 900,000 shares.
On July 2, 2020, the Company executed Amendment No. 2 to the Stock Investment Agreement which provides that the full amount of each dividend due on a dividend payment date, even if not declared, shall be paid to any holder regardless of the date on which the holder acquired the stock.
On December 7, 2020, we sent a Notice of Automatic Conversion and Calculation of Dividend Shares to SOBR SAFE notifying them that under the terms governing the shares of Series A-1 Convertible Preferred Stock the 900,000 shares of Series A-1 Convertible Preferred Stock owned by SOBR SAFE automatically converted into 900,000 shares of our common stock. In addition, as a result of the conversion of the Series A-1 Convertible Preferred Stock we owed SOBR SAFE accrued dividends totaling $107,880, which we could pay in cash or in shares of our common stock based on the price of common stock on the applicable dividend dates. Our management and Board of Directors elected to pay SOBR SAFE the accrued dividends in shares of our common stock.
NOTE 14. STOCK SUBSCRIPTIONS PAYABLE
The Company has no common stock subscriptions payable at December 31, 2021. The Company had stock subscriptions payable of $253,685 payable with 49,196 of its common shares of which $111,024 was payable to related parties with 20,029 of its common shares as of December 31, 2020. These amounts were settled in 2021.
NOTE 15. STOCK WARRANTS, STOCK OPTIONS AND RESTRICTED STOCK UNITS
The Company accounts for share-based compensation stock options and restricted stock units, and non-employee stock warrants under ASC 718, whereby costs are recorded based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable, utilizing the Black-Scholes pricing model for stock options and warrants, and the closing price of our common stock on the grant date for restricted stock units. Unless otherwise provided for, the Company covers equity instrument exercises by issuing new shares.
Stock Warrants
On August 8, 2019, the Company entered into an 8% Series A-1 Convertible Preferred Stock Investment agreement with First Capital Ventures, LLC (“FCV”), an entity controlled by a beneficial owner of the Company. FCV set up a special purpose vehicle (“SPV”) or SOBR SAFE, LLC, an entity controlled by a beneficial owner of the Company, that purchased 1,000,000 of the 8% Series A-1 Convertible Preferred Shares at $1.00 per share on December 12, 2019. Upon purchase, the Company issued the SPV through FCV a three-year warrant to purchase 48,106 shares of the Company’s common stock at an exercise price of $3.118125 per share. The number of warrants outstanding to the SPV through FCV at December 31, 2021 and December 31, 2020 are 48,106 and 48,106, respectively.
On May 4, 2020, the Company entered into an agreement with a vendor to provide investor relations services. Under the terms of the agreement, the Company issued warrants to purchase up to 40,000 shares of our common stock at an exercise price of $6.00 per share. The warrants expire five years after the date of issuance. Approximately $220,000 of expense was recognized for the warrants issued for the services provide by the vendor. In 2021, the vendor agreed to forfeit the warrants back to the Company.
On June 5, 2020, upon closing of the Transaction, the Company entered into a Waiver Under Asset Purchase Agreement and Post-Closing Covenant Agreement under which we issued warrants to IDTEC to purchase up to 106,667 shares of our common stock (post-split) at an exercise price of $1.50 per share. The warrants expire five years after the date of issuance, (see Note 3). The number of warrants outstanding at December 31, 2021 and December 31, 2020 are 47,687 and 106,667, respectively.
During March, April and May 2021, the Company issued through the Offering convertible notes payable with warrants, (see Note 10), to purchase up to 334,167 shares of our common stock at an exercise price of $9 per share. The warrants expire two years after the date of issuance.
On September 28, 2021, the Closing Date, the Company issued through the sale of the Debenture (see Note 9), warrants to purchase up to 406,504 shares of our common stock at an exercise price of $6 per share. The warrants expire five years after the date of issuance.
The total outstanding balance of all non-employee stock warrants in the Company is 836,464 and 194,772 at December 31, 2021 and December 31 2020, respectively. There were 740,671 non-employee detached free-standing stock warrants granted during the year ended December 31, 2021 and 146,667 non-employee detached free-standing stock warrants granted during the year ended December 31, 2020. The fair value of these non-employee stock warrants granted during the years ended December 31, 2021 and 2020 totaled $1,939,756 and $915,124, respectively, and were determined using the Black-Scholes option pricing model based on the following assumptions:
| | December 31, 2021 | | | December 31, 2020 | |
Exercise Price | | $ | 9.00-$6.00 | | | $ | 1.50-$6.00 | |
Dividend Yield | | | 0 | % | | | 0 | % |
Volatility | | | 120%-158 | % | | | 153% - 154 | % |
Risk-free Interest Rate | | | 0.14%- 0.98 | % | | | 0.19% – 0.29 | % |
Life of Warrants | | | 2-5 Years | | | | 5 Years | |
The following table summarizes the changes in the Company’s outstanding warrants during the years ended December 31, 2020 and 2021:
| | Warrants Outstanding Number of Shares | | | Exercise Price Per Share | | Weighted Average Remaining Contractual Life | | | Weighted Average Exercise Price Per Share | | | Aggregate Intrinsic Value | |
Balance at December 31, 2019 | | | 199,471 | | | $ | 0.39912 -3.118125 | | | 3.97 Years | | | $ | 1.0776 | | | $ | 1,276,870 | |
Warrants Granted | | | 146,667 | | | $ | 1.50 - 6.00 | | | 4.41 Years | | | $ | 2.7273 | | | $ | 898,000 | |
Warrants Exercised | | | (151,366 | ) | | $ | 0.39912 - 0.45897 | | | | | | $ | 0.4353 | | | | | |
Warrants Expired | | | - | | | | | | | | | | | | | | | | |
Balance at December 31, 2020 | | | 194,772 | | | $ | 1.50 – 6.00 | | | 3.80 Years | | | $ | 2.8239 | | | $ | 1,173,737 | |
| | Warrants Outstanding Number of Shares | | | Exercise Price Per Share | | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price Per Share | | | Aggregate Intrinsic Value | |
Balance at December 31, 2020 | | | 194,772 | | | $ | 1.50 – 6.00 | | | 3.80 Years | | $ | 2.8239 | | | $ | 1,173,737 | |
Warrants Granted | | | 740,671 | | | $ | 9.00-6.00 | | | 3.15 Years | | $ | 7.3500 | | | $ | 1,152,852 | |
Warrants Exercised | | | (58,979 | ) | | $ | 1.50 | | | | | $ | 1.5000 | | | | | |
Warrants Expired/Forfeited | | | (40,000 | ) | | $ | 6.00 | | | | | $ | 6.0000 | | | | | |
Balance at December 31, 2021 | | | 836,464 | | | $ | 1.50 – 9.00 | | | 3.04 Years | | $ | 6.7800 | | | $ | 1,784,838 | |
Share-Based Compensation
On October 24, 2019, the Company’s 2019 Equity Incentive Plan (the “Plan”) went effective authorizing 1,282,823 shares of Company common stock for issuance as stock options and restricted stock units (“RSUs”) to employees, directors or consultants. The Plan was approved by the Company’s Board of Directors and the holders of a majority of the Company’s voting stock on September 9, 2019. The plan’s number of authorized shares is 1,282,823. In January 2022, the stockholders ratified a further authorization of shares of common stock for a total of 1,733,333 shares subject to the Plan.
The Company generally recognizes share-based compensation expense on the grant date and over the period of vesting or period that services will be provided.
Stock Options
As of December 31, 2021 and December 31, 2020, the Company has granted Plan stock options to acquire 1,036,587 and 840,641 shares of common stock, respectively. As of December 31, 2021, the Plan has 618,840 vested shares and 417,747 non-vested shares. As of December 31, 2020, the Plan had 400,723 vested shares and 439,918 non-vested shares. The stock options are held by our officers, directors, employees, and certain key consultants.
During 2021, under the Plan, the Company granted stock options to acquire 386,667 shares of its common stock at exercise prices ranging from $8.31 to $10.74. The weighted average fair value of the options granted was approximately $3,074,000. The stock options vest monthly and quarterly over 6 months to 3-year terms. A total of 42,227 stock options were vested as of December 31, 2021. None of the vested stock options have been exercised and no shares have been issued as December 31, 2021.
For the years ended December 31, 2021 and 2020, the Company recorded in general and administrative expense $723,261 and $239,478, respectively, of share-based compensation related to the stock options. The unrecognized compensation expense as of December 31, 2021 was approximately $2,200,000 for non-vested share-based awards to be recognized over periods of approximately five months to three years.
In applying the Black-Scholes options pricing model, assumptions used to compute the fair value of the stock options granted during the year ended December 31, 2021 and 2020 were as follows:
| | December 31, 2021 | | | December 31, 2020 | |
Exercise Price | | $ | 8.31-10.74 | | | $ | 4.9350-9.90 | |
Dividend Yield | | | 0 | % | | | 0 | % |
Expected Volatility | | 138%-198 | % | | 162%-181 | % |
Risk-free Interest Rate | | 0.10%-0.79 | % | | 0.19%-0.43 | % |
Expected Life | | 2.7- 6.2 years | | | 1-2.7 years | |
The following table summarizes the changes in the Company’s outstanding stock options during the years ended December 31, 2020 and 2021:
| | Options Outstanding Number of Shares | | | Exercise Price Per Share | | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price Per Share | | | Aggregate Intrinsic Value | |
Balance at December 31, 2019 | | | 793,747 | | | $ | 0.7902 – 3.1170 | | | 9.00 Years | | $ | 0.8283 | | | $ | 5,238,080 | |
Granted | | | 23,965 | | | $ | 4.95-9.90 | | | 2.39 Years | | $ | 6.4500 | | | $ | 57,815 | |
Exercised | | | (15,302 | ) | | $ | 3.117 | | | | | | | | | | | |
Cancelled/Expired/Forfeited | | | - | | | | - | | | | | | | | | | | |
Balance at December 31, 2020 | | | 802,409 | | | $ | 0.792 – 9.90 | | | 7.86 Years | | $ | 1.0077 | | | $ | 6,292,844 | |
| | Options Outstanding Number of Shares | | | Exercise Price Per Share | | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price Per Share | | | Aggregate Intrinsic Value | |
Balance at December 31, 2020 | | | 802,409 | | | $ | 0.792 – 9.90 | | | 7.86 Years | | $ | 1.0077 | | | $ | 6,292,844 | |
Granted | | | 386,667 | | | $ | 8.31 – 10.74 | | | 3.87 Years | | $ | 9.6900 | | | $ | (301,815 | ) |
Exercised | | | (24,369 | ) | | $ | 0.79 | | | | | $ | 0.7902 | | | | | |
Cancelled/Expired/Forfeited | | | (111,351 | ) | | $ | 0.7902-9.87 | | | | | $ | 8.5800 | | | | | |
Balance at December 31, 2021 | | | 1,053,356 | | | $ | 0.7903 – 10.74 | | | 6.21 Years | | $ | 3.3900 | | | $ | 5,804,517 | |
| | | | | | | | | | | | | | | | | | |
Exercisable at December 31, 2020 | | | 417,491 | | | $ | 0.7902 – 9.90 | | | 7.4 Years | | $ | 0.9495 | | | $ | 3,299,006 | |
Exercisable at December 31, 2021 | | | 635,609 | | | $ | 0.7903 – 10.74 | | | 6.7 Years | | $ | 1.5861 | | | $ | 4,655,089 | |
Restricted Stock Units
The Plan provides for the grant of RSUs. RSUs are settled in shares of the Company’s common stock as the RSUs become vested. On January 12, 2022, 16,667 shares of the Company’s common stock was issued for the RSUs vested during 2021. In October and November 2020, the Company granted 55,000 service-based RSUs to a director vesting the earlier of the expiration of any lock-up period that includes the securities of the Company owned by the Plan participant after the up lift of the Company to a national exchange or January 1, 2023. In November 2020, the Company granted 16,667 performance based RSUs to a consultant vesting over a period of one year. In May 2021, the Company granted 3,333 service based RSUs to an executive officer. In September 2021, the Company granted 41,919 service based RSUs to executive officers and 50,000 service based RSUs to its legal counsel. In October 2021, the Company granted 16,667 service based RSUs to an executive officer. All RSUs granted in 2021 vest the earlier of the expiration of any lock-up period that includes the securities of the Company owned by the Plan participant after the up list of the Company to a national exchange or January 1, 2023.
The following table summarizes RSU activity under the Plan for the years ended December 31, 2020 and 2021:
| | RSUs | | | Weighted Average Grant Date Fair Value Per Share | | | Weighted Average Vesting Period | |
Unvested at December 31, 2019 | | | - | | | $ | - | | | | - | |
Granted | | | 71,667 | | | $ | 8.76 | | | 1.69 Years | |
Unvested at December 31, 2020 | | | 71,667 | | | $ | 8.76 | | | 1.54 Years | |
Granted | | | 78,585 | | | $ | 8.52 | | | 1.35 Years | |
Vested | | | (16,667 | ) | | $ | 8.97 | | | | | |
Unvested at December 31, 2021 | | | 133,585 | | | $ | 8.58 | | | 1.00 Years | |
For the years ended December 31, 2021 and 2020, the Company recorded in stock-based compensation expense $364,057 and none, respectively, of RSU based compensation. The fair value of RSUs granted during the years ended December 31, 2021 and 2020 was $669,750 and $626,800, respectively. As of December 31, 2021, total estimated compensation costs of RSUs granted and outstanding but not yet vested was $932,493 which is expected to be recognized over 1 year.
Executive Officers Stock Options and RSUs
The Company has 832,482 outstanding executive officers stock options exercisable at $0.79023 to $10.14 per share with a weighted average remaining contractual life of 6.9 years as of December 31, 2021 and 689,517 outstanding executive stock options exercisable at $0.79023 per share with a weighted average remaining contractual life of 8.7 years as of December 31, 2020. The Company has 61,919 unvested RSUs granted to executive officers with a remaining weighted average vesting period of 1 year as of December 31, 2021. There were no unvested RSUs granted to executive officers as of December 31, 2020.
On October 25, 2019, the Company granted Charles Bennington, one of the Company’s former executive officers, options to acquire 8,018 shares of the Company’s common stock under the Plan. The stock options have an exercise price of $0.7905 and vest quarterly over a one-year period commencing January 1, 2020. The stock options have a five-year term. A total of 8,018 vested options were exercised in 2021 and shares have been issued as of December 31, 2021.
On October 25, 2019, the Company granted Nick Noceti, the Company’s former Chief Financial Officer, options to acquire 8,018 shares of the Company’s common stock under the Plan. The stock options have an exercise price of $0.7905 and vest quarterly over a two-year period commencing January 1, 2020. The stock options have a five-year term. On termination of services in June of 2020 the vesting period ceased and the period to exercise the vested options expired in 2021 without the vested options being exercised. The options to acquire 8,018 shares were forfeited and cancelled in 2021.
On October 25, 2019, the Company entered into an Employment Agreement with Kevin Moore to serve as the Company’s Chief Executive Officer which was amended when he resigned from that position in October 2021. Under the terms of the agreement, the Company granted Kevin Moore stock options under the Plan to acquire 352,776 shares of its common stock at an exercise price of $0.7905. The stock options vest in 36 equal monthly installments of 9,799 shares during the term of his Employment Agreement. A total of 254,783 and 137,191 stock options were vested as of December 31, 2021 and December 31, 2020, respectively. None of the vested stock options have been exercised and no shares have been issued as of December 31, 2021 or December 31, 2020. In September 2021, 20,959 RSUs were granted under the Plan for executive services bonus. The RSUs per share weighted average fair value at grant date was $8.85 with a weighted average vesting period of 1 year as of December 31, 2021. The RSUs vest the earlier of the expiration of any lock-up period that includes the securities of the Company owned by the Plan participant after the up lift of the Company to a national exchange or January 1, 2023.
On October 25, 2019, the Company entered into an Employment Agreement with David Gandini to serve as the Company’s Chief Revenue Officer and subsequently as the Company’s Chief Executive Office effective October 2021. Under the terms of the agreement, the Company granted David Gandini stock options under its 2019 Equity Compensation Plan to acquire 240,529 shares of its common stock at an exercise price of $0.7905. The stock options vest in 36 equal monthly installments of 6,681 shares during the three-year term of his Employment Agreement. David Gandini was also granted an aggregate of 80,176 additional option shares (the “Pre-Vesting Option Shares”) to vest as follows: (i) 66,813 Pre-Vesting Option Shares representing the monthly vesting option shares for the ten months ended October 31, 2019 to vest on November 1, 2019; and (ii) the remaining 13,363 Pre-Vesting Option Shares representing the monthly vesting option shares for the two months ended December 31, 2019 shall vest on January 1, 2020. The stock options have a ten-year term. A total of 253,892 and 173,715 stock options were vested as of December 31, 2021 and December 31, 2020, respectively. None of the vested stock options have been exercised and no shares have been issued as of December 31, 2021 or December 31, 2020. In September 2021, 20,959 RSUs were granted under the Plan for executive services bonus. The RSUs per share weighted average fair value at grant date was $8.85 with a weighted average vesting period of 1 year as of December 31, 2021. The RSUs vest the earlier of the expiration of any lock-up period that includes the securities of the Company owned by the Plan participant after the up lift of the Company to a national exchange or January 1, 2023.
On August 17, 2021, the Company entered into an Employment Agreement with Scott Bennett to serve as the Company’s Executive Vice President of Business Operations beginning on October 18, 2021. Under the terms of the agreement, the Company granted Scott Bennett under the Plan stock options to acquire 33,333 shares of our common stock at an exercise price of $9.21 per share and 16,667 RSUs. The stock options vest in equal quarterly installments over a two-year period during the term of his Employment Agreement. The RSUs per share weighted average fair value at grant date was $8.40. Prior to his hiring as an executive officer, under a prior employment agreement with the Company he was granted in May 2021 under the Plan stock options to acquire 33,333 shares of our common stock at an exercise price of $10.14 and 3,333 RSUs pursuant to a prior consulting arrangement with the Company. The stock options vest in equal monthly installments over a three-year period. The RSUs per share weighted average fair value at grant date was $10.14. A total of 12,500 stock options were vested as of December 31, 2021. None of the vested stock options have been exercised and no shares have been issued as of December 31, 2021. The RSUs weighted average vesting period is 1 year as of December 31, 2021. The RSUs vest the earlier of the expiration of any lock-up period that includes the securities of the Company owned by the Plan participant after the up lift of the Company to a national exchange or January 1, 2023.
On October 18, 2021, the Company entered into an Employment Agreement with Michael Watson to serve as the Company’s Executive Vice President of Sales and Marketing and Revenue Officer. Under the terms of the agreement, the Company granted Michael Watson under the Plan stock options to acquire 83,333 shares of our common stock at an exercise price of $9.21 per share. The stock options vest in equal quarterly installments over a two-year period during the term of his Employment Agreement. A total of 10,417 stock options were vested as of December 31, 2021. None of the vested stock options have been exercised and no shares have been issued as of December 31, 2021.
NOTE 16. COMMITMENTS AND CONTINGENCIES
Operating Leases
On October 15, 2019, the Company entered into a short-term lease agreement that is between $2,800 - $2,900 per month and ended on October 31, 2020. The lease was renewed for another twelve months under the same general terms and conditions. The lease was subsequently canceled to accommodate additional space, and a new lease was executed February 26, 2021, effective for a 12-month term beginning March 1, 2021. The lease requires monthly base rent payments of $6,000 and the issuance of 5,333 shares of the Company’s common stock. The value of the common stock of $49,600 is amortized to rent expense on a monthly basis over the lease term. The Company also leases office space for approximately $5,000 per month on a short-term (month to month) basis through a related party that terminates at any time. Rent expense under office leases, including CAM charges, was $158,096 and $63,978 for the years ended December 31, 2021 and 2020, respectively.
Legal Proceedings
On December 6, 2006, Orange County Valet and Security Patrol, Inc. filed a lawsuit against us in Orange County California State Superior Court for Breach of Contract in the amount of $11,164. A default judgment was taken against us in this matter. In mid-2013, we learned the Plaintiff’s perfected the judgment against us, but we have not heard from the Plaintiffs as of December 2021. As of December 31, 2021, the Company has accrued $11,164 plus accrued interest of approximately $18,000. In the event we pay any money related to this lawsuit, IDTEC agreed, in connection with us closing the asset purchase transaction with IDTEC, to pay the amount for us in exchange for shares of our common stock.
We had one outstanding judgment against us involving a past employee of the Company. The matter was under the purview of the State of California, Franchise Tax Board, Industrial Health and Safety Collections. We owed $28,786 plus accrued interest of approximately $53,000, which had been accrued as of December 31, 2020, to our ex-employee for unpaid wages under these Orders. On March 8, 2021, we received an Acknowledgement of Satisfaction of Judgement-Full by the California Court that the judgement has been settled with a payment of approximately $85,000 including accrued interest through settlement date and legal fees of approximately $3,000. IDTEC agreed, in connection with us closing the asset purchase transaction with IDTEC, to pay the amounts for us in exchange for shares of our common stock.
NOTE 17. INCOME TAXES
Deferred income taxes arise from the temporary differences between financial statement and income tax recognition of net operating losses. These loss carryovers are limited under the Internal Revenue Code should a significant change in ownership occur.
For the years ended December 31, 2021 and 2020, the Company incurred net losses and therefore has no tax liability. The Company began operations in 2007 and has net operating loss carry-forwards of approximately $18,300,000 that will be carried forward and can be used through the year 2040 and beyond to offset future taxable income. In the future, the cumulative net operating loss carry forward for income tax purposes may differ from the cumulative financial statement loss due to timing differences between financial and tax reporting.
At December 31, 2021 and 2020, the Company has net operating loss carry forwards of approximately $18,300,000 and $13,300,000, respectively, that may be offset against future taxable income, if any. These carry-forwards are subject to review by the Internal Revenue Service. As of December 31, 2021 and 2020, the deferred tax asset of approximately $4,129,000 and $2,830,000, respectively, created by the net operating losses has been offset by a 100% valuation allowance because the likelihood of realization of the tax benefit cannot be determined. The change in the valuation allowance in 2021 and 2020 was approximately $1,299,000 and $998,000, respectively.
There is no current or deferred tax expense for the years ended December 31, 2021 and 2020. The Company has not filed its tax returns for the years ended 2012 through 2021; however, management believes there are no taxes due as of December 31, 2021 and 2020.
The Company includes interest and penalties arising from the underpayment of income taxes in general and administrative expense in the consolidated statements of operations.
The provision for Federal income tax consists of the following for the years ended December 31, 2021 and 2020:
| | December 31, 2021 | | | December 31, 2020 | |
Income tax benefit attributable to: | | | | | | |
Net loss | | $ | (7,870,378 | ) | | $ | (29,982,222 | ) |
Permanent differences | | | 2,924,431 | | | | 1,830,697 | |
Valuation allowance | | | 4,945,947 | | | | 28,151,525 | |
Net provision for income tax | | $ | - | | | $ | - | |
The cumulative tax effect at the expected federal tax rate of 21% of significant items comprising our net deferred tax amount is as follows on December 31, 2021 and 2020:
| | December 31, 2021 | | | December 31, 2020 | |
Deferred tax asset attributable to: | | | | | | |
Net operating loss carry forward | | $ | 3,212,000 | | | $ | 2,163,000 | |
Valuation allowance | | | ( 3,212,000 | ) | | | (2,163,000 | ) |
Net deferred tax asset | | $ | - | | | $ | - | |
The cumulative tax effect at the expected state tax rate of 5% of significant items comprising our net deferred tax amount is as follows on December 31, 2021 and 2020:
| | December 31, 2021 | | | December 31, 2020 | |
Deferred tax asset attributable to: | | | | | | |
Net operating loss carry forward | | $ | 917,000 | | | $ | 667,000 | |
Valuation allowance | | | ( 917,000 | ) | | | (667,000 | ) |
Net deferred tax asset | | $ | - | | | $ | - | |
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards of approximately $18,300,000 for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry forwards may be further limited to use in future years.
The Company has identified the United States Federal tax returns as its “major” tax jurisdiction. The United States Federal tax return years 2012 – 2021 are still subject to tax examination by the United States Internal Revenue Service; however, we do not currently have any ongoing tax examinations.
NOTE 18. SUBSEQUENT EVENTS
The Company has evaluated subsequent events for recognition and disclosure through March 11, 2022, which is the date the consolidated financial statements were available to be issued.
Effective January 1, 2022, the Company entered into an Executive Employment Agreement with Jerry Wenzel to serve as our Chief Financial Officer. Under the terms of his Employment Agreement, Mr. Wenzel will perform services that are customary and usual for a chief financial officer, in exchange for: (i) an annual base salary of $175,000, (ii) incentive stock options under our 2019 Equity Incentive Plan to acquire 66,667 shares of our common stock, at an exercise price of $7.755, which is equal to 110% of the fair market value of our common stock on January 10, 2022 (the date the options were eligible to be issued under Mr. Wenzel’s Employment Agreement), with the stock options to vest in 8 equal quarterly installments of 8,333 shares during the two-year term of the Employment Agreement, with a ten year term, and (iii) 16,667 RSUs under our 2019 Equity Incentive Plan, which vest the earlier of the expiration of any lock-up period that includes the securities of the Company owned by the Plan participant after the up lift of the Company to a national exchange or January 1, 2023.
On January 7, 2022, our stockholders approved an amendment to our Articles of Incorporation to effect a reverse stock split of our outstanding common stock at a ratio between of 1-for-2 and 1-for-3 in connection with our planned listing on Nasdaq. On March 4, 2022 the Board of Directors approved the reverse split ratio of 1-for-3 with the anticipated effective date of the reverse split on or about March 28, 2022 (see Note 19), Also on January 7, 2022, our stockholders also approved an amendment to our 2019 Equity Incentive Plan to increase the shares authorized to be issued under the Plan from 1,282,823 shares to 1,733,333 shares.
On January 12, 2022 the Company issued 16,667 shares of its common stock for RSUs vested (see Note 15) during 2021.
On January 18 and 21, 2022 the Company entered into consulting agreements to provide strategic advisory and digital marketing services. In addition to the cash payment requirements for services provided, the agreements include the issuance of 175,000 and 98,000 shares of common stock, respectively, on a post reverse split basis within 15 days of our stock being listed on Nasdaq.
On March 1, 2022 the Board of Directors approved the designation of 3,000,000 shares of the Company’s Preferred Stock as “Series B Convertible Preferred Stock”. The Series B Convertible Preferred Stock shares are to be issued in exchange for 333,333 shares of the Company’s common stock held by the Company’s CEO David Gandini and 666,667 shares of the Company’s common stock held by IDTEC SPV, LLC, an entity controlled by a beneficial owner of the Company. The Company entered into the Share Exchange Agreements to provide certain changes to its capital structure in connection with the planned underwriting offering and potential listing on Nasdaq. The rights and preferences of the Series B Convertible Preferred Stock are as follows: (a) dividends shall not be mandatory or cumulative, (b) liquidation preference over the Company’s common stock, (c) each share of Series B Convertible Preferred Stock shall be convertible, at the option of the holder, beginning on the date that is six months from the date the Holder acquired the shares of Series B Convertible Preferred Stock, and without the payment of additional consideration by the holder , into one share of common stock, (d) no redemption rights by the Company, (e) no call rights by the Company, and (f) each share of Series B Convertible Preferred Stock will vote on an “as converted” basis.
On March 3, 2022 the Company authorized the issuance of 7,917 shares of common stock under the terms of a $47,500 convertible note payable (see Note 10) issued March 6, 2020 with interest at 5%, due March 6, 2022 and convertible at $6 per share.
NOTE 19. REVERSE STOCK SPLIT
The 1-for-3 reverse stock split (see note 18) went effective with the State of Delaware, FINRA and OTC Markets on April 28, 2022. All share and per share amounts have been adjusted in these consolidated financial statements to reflect the effect of the reverse stock split.
SOBR SAFE, Inc. |
CONDENSED CONSOLIDATED BALANCE SHEETS |
| | June 30, | | | December 31, | |
| | 2022 | | | 2021 | |
ASSETS | | (Unaudited) | | | (Audited) | |
| | | | | | |
Current assets | | | | | | |
Cash | | $ | 3,751,391 | | | $ | 882,268 | |
Accounts receivable | | | 1,250 | | | | - | |
Inventory | | | 172,310 | | | | 39,461 | |
Prepaid expenses | | | 1,275,094 | | | | 12,553 | |
Total current assets | | | 5,200,045 | | | | 934,282 | |
| | | | | | | | |
SOBR Safe Intellectual Technology, net of accumulated amortization of $803,050 and $610,318 at June 30, 2022 and December 31, 2021, respectively | | | 3,051,625 | | | | 3,244,357 | |
| | | | | | | | |
Other assets | | | 33,727 | | | | 30,576 | |
Total Assets | | $ | 8,285,397 | | | $ | 4,209,215 | |
| | | | | | | | |
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT) | | | | | | | | |
| | | | | | | | |
Current liabilities | | | | | | | | |
Accounts payable | | $ | 275,040 | | | $ | 270,150 | |
Accrued expenses | | | 366,384 | | | | 463,900 | |
Accrued interest payable | | | 365,561 | | | | 252,110 | |
Related party payables | | | 21,907 | | | | 82,883 | |
Derivative liability | | | - | | | | 1,040,000 | |
Convertible debenture payable | | | | | | | | |
* Includes unamortized debt discount related to warrants, beneficial conversion feature and embedded conversion feature of none and $1,291,882 at June 30, 2022 and December 31, 2021, respectively | | | - | * | | | 1,756,899 | * |
Current portion notes payable - related parties | | | | | | | | |
* Includes unamortized debt discount related to warrants and beneficial conversion features of $397,603 and none at June 30, 2022 and December 31, 2021, respectively | | | 614,207 | * | | | 11,810 | * |
Current portion notes payable - non-related parties | | | | | | | | |
* Includes unamortized debt discount related to warrants and beneficial conversion features of $400,160 and none at June 30, 2022 and December 31, 2021, respectively | | | 881,029 | * | | | 104,183 | * |
Total current liabilities | | | 2,524,128 | | | | 3,981,935 | |
| | | | | | | | |
Notes payable -related parties-less current portion | | | | | | | | |
* Includes unamortized debt discount related to warrants and beneficial conversion features of none and $645,547 at June 30, 2022 and December 31, 2021, respectively | | | - | * | | | 354,453 | * |
Notes payable -non-related parties-less current portion | | | | | | | | |
* Includes unamortized debt discount related to warrants and beneficial conversion features of none and $648,580 at June 30, 2022 and December 31, 2021, respectively | | | - | * | | | 356,420 | * |
| | | | | | | | |
Total Liabilities | | | 2,524,128 | | | | 4,692,808 | |
Stockholders' Equity (Deficit) | | | | | | | | |
Preferred stock, $0.00001 par value; 16,300,000 and19,300,000 shares authorized at June 30, 2022 and December 31, 2021, respectively, no shares issued or outstanding at June 30, 2022 and December 31, 2021 | | | - | | | | - | |
Series A Convertible Preferred stock, $0.00001 par value; 3,000,000 shares authorized, no shares issued or outstanding at June 30, 2022 and December 31, 2021 | | | - | | | | - | |
Series A-1 Convertible Preferred stock, $0.00001 par value; 2,700,000 shares authorized, no shares issued or outstanding as of June 30, 2022 and December 31, 2021 | | | - | | | | - | |
Series B Convertible Preferred stock, 3,000,000 shares authorized, 3,000,000 shares issued and outstanding at June 30, 2022 and none at December 31, 2021, respectively | | | 30 | | | | - | |
Common stock, $0.00001 par value; 100,000,000 shares authorized; 10,973,759 and 8,778,555 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively | | | 110 | | | | 88 | |
Additional paid-in capital | | | 69,044,321 | | | | 57,041,447 | |
Accumulated deficit | | | (63,229,547 | ) | | | (57,471,492 | ) |
Total SOBR Safe, Inc. stockholders' equity (deficit) | | | 5,814,914 | | | | (429,957 | ) |
Noncontrolling interest | | | (53,645 | ) | | | (53,636 | ) |
| | | | | | | | |
Total Stockholders' Equity (Deficit) | | | 5,761,269 | | | | (483,593 | ) |
| | | | | | | | |
Total Liabilities and Stockholders' Equity (Deficit) | | $ | 8,285,397 | | | $ | 4,209,215 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
SOBR SAFE, Inc. |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
| | For The Three Months Ended June 30, | | | For The Six Months Ended June 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | |
Revenues | | $ | 1,500 | | | $ | - | | | $ | 3,000 | | | $ | - | |
Cost of Goods Sold | | | - | | | | - | | | | 1,100 | | | | - | |
Gross Profit | | | 1,500 | | | | - | | | | 1,900 | | | | - | |
| | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | |
General and administrative | | | 878,861 | | | | 831,781 | | | | 3,148,035 | | | | 1,608,642 | |
Stock-based compensation expense | | | 308,823 | | | | 168,375 | | | | 751,607 | | | | 187,065 | |
Research and development | | | 485,184 | | | | 314,532 | | | | 532,644 | | | | 485,995 | |
Total operating expenses | | | 1,672,868 | | | | 1,314,688 | | | | 4,432,286 | | | | 2,281,702 | |
| | | | | | | | | | | | | | | | |
Loss from operations | | | (1,671,368 | ) | | | (1,314,688 | ) | | | (4,430,386 | ) | | | (2,281,702 | ) |
| | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | |
Other income (expense), net | | | 216,402 | | | | - | | | | 216,429 | | | | - | |
Gain on debt extinguishment, net | | | 1,109,105 | | | | - | | | | 245,105 | | | | - | |
Gain on fair value adjustment – derivatives, net | | | 1,380,000 | | | | - | | | | 1,040,000 | | | | - | |
Interest expense | | | (1,111,671 | ) | | | (146,028 | ) | | | (2,138,142 | ) | | | (171,906 | ) |
Amortization of interest - beneficial conversion feature | | | (110,849 | ) | | | (82,001 | ) | | | (691,071 | ) | | | (91,543 | ) |
Total other income (expense), net | | | 1,482,987 | | | | (228,029 | ) | | | (1,327,679 | ) | | | (263,449 | ) |
| | | | | | | | | | | | | | | | |
Loss before provision for income taxes | | | (188,381 | ) | | | (1,542,717 | ) | | | (5,758,065 | ) | | | (2,545,151 | ) |
| | | | | | | | | | | | | | | | |
Provision for income tax | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Net loss | | | (188,381 | ) | | | (1,542,717 | ) | | | (5,758,065 | ) | | | (2,545,151 | ) |
Net loss attributable to noncontrolling interest | | | 5 | | | | 4 | | | | 9 | | | | 98 | |
Net loss attributable to SOBR Safe, Inc. | | $ | (188,376 | ) | | $ | (1,542,713 | ) | | $ | (5,758,056 | ) | | $ | (2,545,053 | ) |
| | | | | | | | | | | | | | | | |
Basic and diluted loss per common share | | $ | (0.02 | ) | | $ | (0.18 | ) | | $ | (0.66 | ) | | $ | (0.29 | ) |
| | | | | | | | | | | | | | | | |
Weighted average number of common shares outstanding | | | 8,998,031 | | | | 8,659,463 | | | | 8,776,000 | | | | 8,656,801 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
SOBR SAFE, Inc. |
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (Unaudited) |
| | Common Stock | | | Preferred Stock | | | | | | | | | | | | | | | | |
| | Shares | | | Amount ($0.00001 Par) | | | Shares | | | Amount ($0.00001 Par) | | | Additional Paid-in Capital | | | Accumulated Deficit | | | Stockholders' Equity (Deficit) SOBR Safe, Inc. | | | Noncontrolling Interest | | | Total Stockholders’ Equity (Deficit) | |
Balances at January 1, 2021 | | | 8,640,678 | | | $ | 86 | | | | - | | | $ | - | | | $ | 52,694,148 | | | $ | (49,601,220 | ) | | $ | 3,093,014 | | | $ | (53,530 | ) | | $ | 3,039,484 | |
Common stock issued to settle dividends - Series A-1 Convertible Preferred stock | | | 14,390 | | | | - | | | | - | | | | - | | | | 107,880 | | | | - | | | | 107,880 | | | | - | | | | 107,880 | |
Paid-in capital - fair value of stock options and restricted stock units vested | | | - | | | | - | | | | - | | | | - | | | | 105,013 | | | | - | | | | 105,013 | | | | - | | | | 105,013 | |
Paid-in capital - relative fair value of stock warrants granted | | | - | | | | - | | | | - | | | | - | | | | 619,381 | | | | - | | | | 619,381 | | | | - | | | | 619,381 | |
Paid-in capital - beneficial conversion feature | | | - | | | | - | | | | - | | | | - | | | | 480,619 | | | | - | | | | 480,619 | | | | - | | | | 480,619 | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,002,340 | ) | | | (1,002,340 | ) | | | (94 | ) | | | (1,002,434 | ) |
Balances at March 31, 2021 | | | 8,655,068 | | | $ | 86 | | | | - | | | $ | - | | | $ | 54,007,041 | | | $ | (50,603,560 | ) | | $ | 3,403,567 | | | $ | (53,624 | ) | | $ | 3,349,943 | |
Common stock issued for facility lease | | | 5,333 | | | | - | | | | - | | | | - | | | | 49,600 | | | | - | | | | 49,600 | | | | - | | | | 49,600 | |
Paid-in capital - fair value of stock options and RSU vested | | | - | | | | - | | | | - | | | | - | | | | 138,010 | | | | - | | | | 138,010 | | | | - | | | | 138,010 | |
Paid-in capital - relative fair value of stock warrants granted | | | - | | | | - | | | | - | | | | - | | | | 473,327 | | | | - | | | | 473,327 | | | | - | | | | 473,327 | |
Paid-in capital - beneficial conversion feature | | | - | | | | - | | | | - | | | | - | | | | 428,595 | | | | - | | | | 428,595 | | | | - | | | | 428,595 | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,542,713 | ) | | | (1,542,713 | ) | | | (4 | ) | | | (1,542,717 | ) |
Balances at June 30, 2021 | | | 8,660,401 | | | $ | 86 | | | | - | | | $ | - | | | $ | 55,096,573 | | | $ | (52,146,273 | ) | | $ | 2,950,386 | | | $ | (53,628 | )) | | $ | 2,896,758 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | Preferred Stock | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shares | | | Amount ($0.00001 Par) | | | Shares | | | Amount ($0.00001 Par) | | | Additional Paid-in Capital | | | Accumulated Deficit | | | Stockholders' Equity (Deficit) SOBR Safe, Inc. | | | Noncontrolling Interest | | | Total Stockholders’ Equity (Deficit) | |
Balances at January 1, 2022 | | | 8,779,567 | | | $ | 88 | | | | - | | | $ | - | | | $ | 57,041,447 | | | $ | (57,471,492 | ) | | $ | (429,957 | ) | | $ | (53,636 | ) | | $ | (483,593 | ) |
Common stock issued for restricted stock units vested | | | 16,667 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Common stock issued for convertible debt | | | 7,917 | | | | - | | | | - | | | | - | | | | 47,500 | | | | - | | | | 47,500 | | | | - | | | | 47,500 | |
Common stock exchange for convertible preferred stock | | | (1,000,000 | ) | | | (10 | ) | | | 3,000,000 | | | | 30 | | | | (20 | ) | | | - | | | | - | | | | - | | | | - | |
Paid-in capital - fair value of stock options and restricted stock units vested | | | - | | | | - | | | | - | | | | - | | | | 934,225 | | | | - | | | | 934,225 | | | | - | | | | 934,225 | |
Paid-in capital - relative fair value of stock warrants granted | | | - | | | | - | | | | - | | | | - | | | | 864,000 | | | | - | | | | 864,000 | | | | - | | | | 864,000 | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (5,569,679 | ) | | | (5,569,679 | ) | | | (4 | ) | | | (5,569,683 | ) |
Balances at March 31, 2022 | | | 7,803,109 | | | $ | 78 | | | | 3,000,000 | | | $ | 30 | | | $ | 58,887,152 | | | $ | (63,041,171 | ) | | $ | (4,153,911 | ) | | $ | (53,640 | )) | | $ | (4,207,551 | ) |
Common stock and warrants issued in equity offering, net of issuance costs | | | 2,352,942 | | | | 24 | | | | - | | | | - | | | | 8,694,339 | | | | - | | | | 8,694,363 | | | | - | | | | 8,694,363 | |
Additional common stock issued upon reverse stock split | | | 1,012 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Common stock issued for professional services | | | 800,000 | | | | 8 | | | | - | | | | - | | | | 718,992 | | | | - | | | | 719,000 | | | | - | | | | 719,000 | |
Common Stock issued for restricted stock units vested | | | 16,666 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Paid-in capital - fair value of stock options and restricted stock units vested | | | - | | | | - | | | | - | | | | - | | | | 761,437 | | | | - | | | | 761,437 | | | | - | | | | 761,437 | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (188,376 | ) | | | (188,376 | ) | | | (5 | ) | | | (188,381 | ) |
Balances at June 30, 2022 | | | 10,973,759 | | | $ | 110 | | | | 3,000,000 | | | $ | 30 | | | $ | 69,044,321 | | | $ | (63,229,547 | ) | | $ | 5,814,914 | | | $ | (53,645 | ) | | $ | 5,761,269 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
SOBR SAFE, Inc. |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | For The Six Months Ended | |
| | June 30, | |
| | 2022 | | | 2021 | |
| | (Unaudited) | | | (Unaudited) | |
Operating Activities: | | | | | | |
Net loss | | $ | (5,758,065 | ) | | $ | (2,545,151 | ) |
| | | | | | | | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Amortization | | | 192,732 | | | | 192,732 | |
Amortization of interest - conversion features | | | 709,121 | | | | 91,543 | |
Amortization of interest | | | 423,782 | | | | 111,655 | |
Gain on extinguishment of debt | | | (245,105 | ) | | | - | |
Change in fair value of derivative liability | | | (1,040,000 | ) | | | - | |
Stock warrants expense | | | 655,346 | | | | - | |
Stock options expense | | | 926,456 | | | | 140,726 | |
Stock-based compensation expense | | | 751,607 | | | | 187,065 | |
Changes in assets and liabilities: | | | | | | | | |
Accounts Receivable | | | (1,250 | ) | | | - | |
Inventory | | | (132,849 | ) | | | - | |
Prepaid expenses | | | (243,952 | ) | | | 13,517 | |
Other assets | | | (3,151 | ) | | | - | |
Accounts payable | | | (20,109 | ) | | | 114,809 | |
Accrued expenses | | | 1,011,586 | | | | (13,344 | ) |
Accrued interest payable | | | 113,451 | | | | (217 | ) |
Related party payables | | | (66,976 | ) | | | (10,120 | ) |
Stock subscriptions payable | | | - | | | | 88,469 | |
| | | | | | | | |
Net cash used in operating activities | | | (2,721,376 | ) | | | (1,628,316 | ) |
| | | | | | | | |
Financing Activities: | | | | | | | | |
Proceeds from public equity offering | | | 10,004,245 | | | | - | |
Cost of public equity offering | | | (1,309,882 | ) | | | - | |
Repayments of convertible debenture payable | | | (3,048,781 | ) | | | - | |
Proceeds from notes payable - related parties | | | - | | | | 1,030,000 | |
Repayments of notes payable - related parties | | | - | | | | (30,000 | ) |
Proceeds from notes payable - non-related parties | | | - | | | | 1,005,000 | |
Repayments of notes payable - non-related parties | | | (55,083 | ) | | | - | |
Net cash provided by financing activities | | | 5,590,499 | | | | 2,005,000 | |
| | | | | | | | |
Net Change In Cash | | | 2,869,123 | | | | 376,684 | |
| | | | | | | | |
Cash At The Beginning Of The Period | | | 882,268 | | | | 232,842 | |
| | | | | | | | |
Cash At The End Of The Period | | $ | 3,751,391 | | | $ | 609,526 | |
| | | | | | | | |
Schedule Of Non-Cash Investing And Financing Activities: | | | | | | | | |
Derecognition of convertible debenture | | $ | 3,048,781 | | | $ | - | |
Reacquisition value of convertible debenture | | $ | (3,912,781 | ) | | $ | - | |
Fair value of shares issued for services | | $ | (719,000 | ) | | $ | - | |
Financing of insurance | | $ | (274,589 | ) | | $ | - | |
Non-related party debt converted to capital | | $ | 47,500 | | | $ | - | |
Reclassification of common shares from reverse stock split | | $ | 155 | | | $ | - | |
Reclassification of elective shareholder conversion of common shares to preferred shares | | $ | 30 | | | $ | - | |
Relative fair value of stock warrants granted | | $ | - | | | $ | 1,092,708 | |
Intrinsic value-beneficial conversion feature | | $ | - | | | $ | 909,214 | |
Issuance of common stock for prior year accrued dividends | | $ | - | | | $ | 107,880 | |
Issuance of common stock for rent | | $ | - | | | $ | 49,600 | |
| | | | | | | | |
Supplemental Disclosure: | | | | | | | | |
Cash paid for interest | | $ | 10,379 | | | $ | 62,491 | |
Cash paid for income taxes | | $ | - | | | $ | - | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
SOBR SAFE, Inc.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SOBR Safe, Inc. (“SOBR Safe”), formerly TransBiotec, Inc., was incorporated as Imagine Media LTD. in August 2007 in the State of Delaware. A corporation also named TransBiotec, Inc. (“TransBiotec – CA”) was formed in the state of California July 4, 2004. Effective September 19, 2011, TransBiotec was acquired by TransBiotec - CA in a transaction classified as a reverse acquisition as the shareholders of TransBiotec - CA retained the majority of the outstanding common stock of TransBiotec after the share exchange. The consolidated financial statements represent the activity of TransBiotec - CA from July 4, 2004 forward, and the consolidated activity of SOBR Safe and TransBiotec - CA from September 19, 2011 forward. SOBR Safe and TransBiotec - CA are hereinafter referred to collectively as the “Company” or “We”. The Company has developed and began selling a non-invasive alcohol sensing device in 2022.
On January 7, 2022, our stockholders approved an amendment to our Articles of Incorporation to effect a reverse stock split of our outstanding common stock at a ratio between of 1-for-2 and 1-for-3 in connection with our planned listing on Nasdaq. On March 4, 2022 the Board of Directors approved the reverse split ratio of 1-for-3 with the anticipated effective date of the reverse split on or about March 28, 2022. The 1-for-3 reverse stock split went effective with the State of Delaware, FINRA and OTC Markets on April 28, 2022. All share and per share amounts have been adjusted in these condensed consolidated financial statements to reflect the effect of the reverse stock split.
Also on January 7, 2022, our stockholders also approved an amendment to our 2019 Equity Incentive Plan to increase the shares authorized to be issued under the Plan from 1,282,823 shares to 1,733,333 shares.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles (“GAAP”) as promulgated in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements and the notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2022.
In management’s opinion, the unaudited condensed consolidated financial statements reflect all adjustments (including reclassifications and normal recurring adjustments) necessary to present fairly the financial position as of June 30, 2022 and December 31, 2021, the results of operations for the three and six-month periods ended June 30, 2022 and 2021, and statement of cash flows for the six-month period ended June 30, 2022 and 2021.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its majority owned subsidiary, TransBiotec-CA. We have eliminated all intercompany transactions and balances between entities consolidated in these unaudited condensed financial statements.
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect 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 revenues and expenses during the reporting period. Specifically, such estimates were made by the Company for the recoverability and useful lives of long-lived assets, the intellectual technology, the valuation of the derivative liabilities, beneficial conversion feature expenses, stock-based compensation and the valuation allowance related to deferred tax assets. Actual results could differ from those estimates.
Financial Instruments
Pursuant to Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures, and ASC 825, Financial Instruments, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 and 825 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 and 825 prioritizes the inputs into three levels that may be used to measure fair value:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets: quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The Company’s financial instruments consist primarily of cash, accounts receivable, accounts payable, accrued expenses, accrued interest payable, related party payables, notes payable, convertible debentures, and other liabilities. Pursuant to ASC 820 and 825, the fair value of our derivative liabilities is determined based on “Level 3” inputs. We believe that the recorded values of all of our other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.
The following table presents assets and liabilities that are measured on a recurring basis and recognized at fair value as of June 30, 2022 and December 31, 2021:
June 30, 2022 | | Level 1 | | | Level 2 | | | Level 3 | |
Derivative liabilities | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | |
December 31, 2021 | | Level 1 | | | Level 2 | | | Level 3 | |
Derivative liabilities | | $ | - | | | $ | - | | | $ | 1,040,000 | |
Cash
The Company considers all highly liquid investments with an original maturity of three months or less as cash equivalents. The Company does not have any cash equivalents as of June 30, 2022 and December 31, 2021.
Accounts Receivable
Accounts receivable is derived from sales to a limited number of customers at June 30, 2022. Customer accounts are monitored for potential credit losses based upon management’s assessment of expected collectability and the allowance for doubtful accounts is reviewed periodically to assess the adequacy of the allowance. In making this assessment, management takes into consideration any circumstances of which the Company is aware regarding a customer’s inability to meet its financial obligations to the Company, and any potential prevailing economic conditions and their impact on the Company’s customers. The Company had no allowance for doubtful accounts at June 30, 2022 and December 31, 2021.
Inventory
Inventory is valued at the lower of cost or net realizable value. The cost of the Company’s inventory is determined by the FIFO cost method. Inventory is comprised primarily of finished products intended for sale to customers. The Company evaluates the need for reserves for excess or obsolete inventory determined primarily based upon estimates of future demand for the Company’s products. At June 30, 2022 and December 31, 2021 the Company had no reserves for obsolescence.
Prepaid Expenses
Amounts incurred in advance of contractual performance or coverage periods are recorded as prepaid assets and recognized as expense in the period service or coverage is provided.
Beneficial Conversion Features
From time to time, the Company may issue convertible notes that may contain a beneficial conversion feature. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining unallocated proceeds of the note after first considering the allocation of a portion of the note proceeds to the fair value of the warrants, if related warrants have been granted. The intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid-in capital. The debt discount is amortized to interest expense over the life of the note using the effective interest method.
Derivative Instruments
The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instruments are initially recorded at their fair values and are then re-valued at each reporting date, with changes in the fair value reported in the unaudited condensed consolidated statements of operations under other income (expense). The accounting treatment of derivative financial instruments requires that the Company record the embedded conversion option at its fair value as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. As a result of entering into warrant agreements, for which such instruments contained a variable conversion feature with no floor, the Company has adopted a sequencing policy in accordance with ASC 815-40-35-12 whereby all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation issued to employees or directors. For stock-based derivative financial instruments, the Company uses a Monte Carlo Simulation model to value the derivative instruments at inception and on subsequent valuation dates.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Debt Issuance Costs
Debt issuance costs incurred in connection with the issuance of debt are capitalized and amortized to interest expense over the term of the debt using the effective interest method. The unamortized amount is presented as a reduction of debt on the balance sheet.
Preferred Stock
We apply the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity” when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. We classify conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control, as temporary equity. At all other times, we classified our preferred shares in stockholders’ equity.
Noncontrolling Interest
A subsidiary of the Company has minority members representing ownership interests of 1.38% at June 30, 2022 and December 31, 2021. The Company accounts for these minority, or noncontrolling interests, pursuant to ASC 810-10-65 whereby gains and losses in a subsidiary with a noncontrolling interest are allocated to the noncontrolling interest based on the ownership percentage of the noncontrolling interest, even if that allocation results in a deficit noncontrolling interest balance.
Impairment of Long-Lived Assets
Long-lived assets and identifiable intangibles held for use are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of undiscounted expected future cash flows is less than the carrying amount of the asset or if changes in facts and circumstances indicate, an impairment loss is recognized and measured using the asset’s fair value. No impairment loss was recognized during the six-month periods end June 30, 2022 and 2021.
Revenue Recognition
The Company enters contracts with customers and generates revenue through various combinations of software products and services which include the sale of cloud-based software solutions, detection and data collection hardware devices, and cloud-based data reporting and analysis services. Depending on the combination of products and services detailed in the respective customer contract, the identifiable components may be highly interdependent and interrelated with each other such that each is required to provide the substance of the value of SOBR’s offering and accounted for as a combined performance obligation, or the specific components may be generally distinct and accounted for as separate performance obligations. Revenue is recognized when control of these software products and/or services are transferred to the customer in an amount that reflects the consideration the Company expects to be entitled in exchange for these respective services and devices.
Revenue is recognized in conjunction with guidance provided by Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”) issued by the Financial Accounting Standards Board. The company determines revenue recognition through five steps outlined in ASC 606 which include (1) the identification of the contract or contracts with a customer, (2) identification of individual or combined performance obligations contained in the contract, (3) determination of the transaction price detailed within the contract, (4) allocation of the transaction price to the specific performance obligations, and (5) finally, recognition of revenue as the Company’s performance obligations are satisfied according to the terms of the contract.
Contracts with a Single License/Service Performance Obligation
For contracts with a single performance obligation consisting of a license and/or data services, the entire transaction price is allocated to the single performance obligation. Where the Company provides a performance obligation as licensed software or data services, revenue is recognized upon delivery of the software or services ratably over the respective term of the contract.
Contracts for Purchase of Hardware Devices Only
Where hardware devices are sold separately by the Company, the entire transaction price is allocated to the device as an individual performance obligation and revenue recognized at a point in time when either legal title or physical possession have transferred to the customer. Generally, these requirements are satisfied at the point in time the Company ships the product, as this is when the customer obtains control of the asset under SOBR’s standard terms and conditions of the purchase.
Contracts with Multiple Performance Obligations
Where a Company’s contract with a respective customer contains multiple performance obligations and due to the interdependent and interrelated nature of the licensed software, hardware devices and data reporting services, the Company accounts for the individual performance obligations if they are distinct in nature and the transaction price is allocated to each distinct performance obligations on a directly observable standalone sales price basis. Determining whether products and services are distinct performance obligations that should be accounted for separately or combined as one unit of accounting may require significant judgment. Standalone selling prices are primarily based upon the price at which the performance obligation is sold separately. The Company may be able to establish a standalone sales price based upon observable products or services sold or priced separately in comparable circumstances, competitor pricing or similar customers. Where the performance obligations are either not distinct or directly observable, the Company estimates the standalone sales price of the performance obligations based upon the overall pricing objectives taking into consideration the value of the contract arrangement, number of licenses, number and types of hardware devices and the length of term of the contract. Professional judgement may be required to determine the standalone sales price for each performance obligation where not directly observable. Revenue for Contracts with multiple performance obligations are recognized on a ratable basis for each respective performance obligation as allocated under the prescribed Transaction Price identification model applied.
The Company requires customers to make payments related to subscribed software licenses and data services on a monthly basis via authorized bank account ACH withdrawal or an automatic credit card charge during the approved term of the respective agreement. The collectability of future cash flows are reasonably assured with any potential non-payment easily identified with future services being discontinued or suspended due to non-payment.
The Company’s contracts are generally twelve to thirty-six months in duration, are billed monthly in advance and are non-cancelable. The timing of revenue recognition may differ from the timing of invoicing to customers. The Company generally has an unconditional right to consideration when customers are invoiced and a receivable is recorded. A contract asset (unbilled revenue) is recognized when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue will be recognized subsequent to invoicing.
The Company has elected to charge shipping, freight and delivery to customers as a source of revenue to offset respective costs when control has transferred to the customer. We report revenue net of sales and other taxes collected from customers to be remitted to government authorities.
Estimated costs for the Company’s standard one-year warranty are charged to cost of products sold when revenue is recorded for the related product. Royalties are also charged to cost of products sold.
Stock-based Compensation
The Company follows the guidance of the accounting provisions of ASC 718, Share-based Compensation, which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (warrants, options, and restricted stock units). The fair value of each warrant and option is estimated on the date of grant using either the Monte Carlo simulation model or the Black-Scholes options pricing model, which ever is applicable and uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. The Company has not paid dividends historically and does not expect to pay them in the future. Expected volatilities are based on weighted averages of the historical volatility of the Company’s common stock estimated over the expected term of the awards. The expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus the contract term as historically the Company had limited activity surrounding its awards. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term. The grant date fair value of a restricted stock unit equals the closing price of our common stock on the trading day of the grant date.
Research and Development
The Company accounts for its research and development costs pursuant to ASC 730, whereby it requires the Company to disclose the amounts of costs for company and customer-sponsored research and development activities, if material. Research and development costs are expensed as incurred. The Company incurred research and development costs as it acquired new knowledge to bring about significant improvements in the functionality and design of its SOBR product. Research and development costs were $532,644 and $485,995 during the six-month periods ended June 30, 2022 and 2021, respectively. Research and development costs were $485,184 and $314,532 during the three-month periods ended June 30, 2022 and 2021, respectively.
Advertising and Marketing Costs
Advertising and marketing costs are charged to operations as incurred and are included in general and administrative expenses in the consolidated statements of operations. Advertising and marketing costs were $45,519 and $59,500 during the six-month periods ended June 30, 2022 and 2021, respectively. Advertising and marketing costs were $30,185 and $35,654 during the three-month periods ended June 30, 2022 and 2021, respectively.
Income Tax
The Company accounts for income taxes pursuant to ASC 740. Under ASC 740 deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company has not recorded any deferred tax assets or liabilities at June 30, 2022 and December 31, 2021 as these have been offset by a 100% valuation allowance.
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share gives the effect to all dilutive potential common shares outstanding during the period, including stock options, warrants and convertible instruments. Diluted net loss per share excludes all potentially issuable shares if their effect is anti-dilutive. Because the effect of the Company’s dilutive securities is anti-dilutive, diluted net loss per share is the same as basic loss per share for the periods presented.
Concentration of Credit Risk
Credit Risk – Financial instruments that potentially subject the Company to concentration of credit risk consisted primarily of cash. The Company maintains its cash at one domestic financial institution. The Company is exposed to credit risk in the event of a default by the financial institution to the extent that cash is in excess of the amount insured by the Federal Deposit Insurance Corporation. The Company places its cash with high-credit quality financial institutions and are managed within established guidelines to mitigate risk. To date, the Company has not experienced any loss on its cash.
Concentration of Customers – The Company has conducted limited sales during the six-months ending June 30, 2022 to two customers. Should the Company continue to conduct sales to a limited number of customers and remain highly concentrated, revenue may experience significant period to period shifts and may decline if the Company were to lose one or more of its customers, or if the Company were unable to obtain new customers upon the completion of sales agreements.
Concentration of Suppliers – The Company relies on a limited number of components and contract suppliers to assemble its product. If supplier shortages occur, or quality problems arise, production schedules could be significantly delayed or costs significantly increased, which could in turn have a material adverse effect on the Company’s financial condition, results of operations and cash flow.
Related Parties
Related parties are any entities or individuals that, through employment, ownership, or other means, possess the ability to direct or cause the direction of the management and policies of the Company.
Recently Issued Accounting Guidance
The Company has reviewed recently issued, but not yet effective, accounting pronouncements and does not believe the future adoptions of any such pronouncements will be expected to cause a material impact on its financial condition or the results of operations.
NOTE 2. GOING CONCERN
The Company has incurred recurring losses from operations and has limited cash liquidity and capital resources. Future capital requirements will depend on many factors, including the Company’s ability to sell and develop products, cash flow from operations, and competing market developments. The Company will need additional capital in the near future. Sources of debt financing may result in high interest expense. Any financing, if available, may be on unfavorable terms.
As of June 30, 2022, the Company has an accumulated deficit of approximately ($63,230,000). During the six-months ended June 30, 2022, the Company also experienced negative cash flows from operating activities of approximately ($2,721,000). It appears these principal conditions or events, considered in the aggregate, indicate it is probable that the Company will be unable to meet its obligations as they become due within one year after the date the financial statements are issued. As such, there is substantial doubt about the entity’s ability to continue as a going concern.
The Company has identified factors that mitigate the probable conditions that have raised substantial doubt about the entity’s ability to continue as a going concern.
Underwritten Public Offering
On May 13, 2022, the Company entered into an Underwriting Agreement in which the Company agreed to complete an underwritten public offering to sell 2,352,942 units (Units) at a public offering price of $4.25 per Unit, with each Unit consisting of one share of the Company’s Common Stock and two warrants (the “Common Warrants) each to purchase one share of Common Stock. The Common Warrants are exercisable immediately and have an exercise price of $4.25 per share (100% of the price per Unit sold in the offering). The Company’s Common Stock began trading on the Nasdaq Capital Market under the symbol “SOBR” on May 16, 2022. The Common Warrants have not been listed for trading and will expire five years from the date of their issuance. Further, pursuant to the terms of the Underwriting Agreement and related “lock-up” agreements, the Company, each director and executive officer of the Company, and certain stockholders have agreed not to offer for sale, issue, sell, contract to sell, pledge or otherwise dispose of any of our Common Stock or securities convertible into Common Stock for a period of 180 days (24 months for the Company) commencing on the May 13, 2022, the date of the final prospectus.
On May 18, 2022, the Underwriter to the public offering was granted a 45-day option, exercisable in one or more times in whole or in part, to purchase up to an additional 352,941 shares of Common Stock and/or up to an additional 705,882 Warrants (the “Underwriter Warrants”) solely to cover over-allotments. The over-allotment shares of Common Stock can be purchased at the public offering price of the Units ($4.25), less the underwriting discounts payable by the Company, and the Underwriter Warrants can be purchased for $0.01 per Warrant. Each purchased Underwriter Warrant can be exercised at the public offering price of the Units ($4.25). As of June 30, 2022, the Underwriter purchased 424,116 Underwriter Warrants. The 45-day option expired on July 2, 2022.
Further on May 18, 2022, pursuant to the Underwriting Agreement, the Company issued Representative’s Warrants to purchase up to an aggregate of 141,177 shares of Common Stock (the “Representative’s Warrants”). The Representative’s Warrants are exercisable beginning on November 17, 2022, until May 17, 2027. The initial exercise price of Representative's Warrants is $5.3125 per share, which is equivalent to 125% of the public offering price per Unit in the public offering.
On May 18, 2022, the Company received approximately $8,779,000 of net proceeds from the underwritten public offering.
On May 19, 2022, pursuant to an arrangement with the Debenture holder, the principal balance of the Armistice Capital Master Fund, Ltd 18% Original Issue Discount Convertible Debenture in default at March 31, 2022 of $3,048,781, was paid in full satisfying all amounts due under the debenture, including any accrued penalty, damages and interest provisions of the loan agreement (see Note 8).
Management believes that the net offering proceeds of approximately $5,729,000, after the payment of the defaulted loan balance of $3,048,781, which equates to a cash balance at June 30, 2022 of approximately $3,750,000 provides adequate working capital for operating activities for the next twelve months after the date the financial statements are issued. However, the Company is responsible for convertible notes payable plus interest at 12% per annum due 24 months from issuance in the first half of 2021. Total principal balances of the convertible notes at June 30, 2022 are $2,005,000 and are due $1,100,000, $155,000 and $750,000 in March 2023, April 2023 and May 2023, respectively. The notes are convertible at $9 per share into shares of the Company’s common stock. The notes contain both voluntary and automatic conversion features. The notes may be convertible at any time, by the holders, beginning on the date of issuance. The notes automatically convert into shares of the Company’s common stock if the Company’s common stock closes at or above $6 per share for five (5) consecutive trading days while listed on Nasdaq. Should the notes not automatically convert or a significant portion of the note holders elect not to convert the notes into shares of our common stock, we will need additional funds beyond the funds raised in the underwritten public offering.
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak and related variants continues to evolve as of the date of this report. Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak, its variants and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2022. However, if the pandemic continues, it may have an adverse effect on the Company’s results of future operations, financial position, and liquidity in fiscal year 2022.
Management believes the net proceeds received from the underwritten public offering and actions presently being taken to generate product and services revenues provide the opportunity for the Company to continue as a going concern; however, these plans are contingent upon actions to be performed by the Company and these conditions have not been met on or before June 30, 2022. Additionally, the COVID-19 outbreak could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown, which could impair the Company’s ability to raise needed funds to continue as a going concern. As such, substantial doubt about the entity’s ability to continue as a going concern was not alleviated as of June 30, 2022.
NOTE 3. INVENTORY
Inventory at June 30, 2022 and December 31, 2021 consisted of the following:
| | June 30, | | | December 31, | |
| | 2022 | | | 2021 | |
Raw materials | | $ | 63,960 | | | $ | - | |
Work in process | | | - | | | | - | |
Finished goods | | | 108,350 | | | | 39,461 | |
Inventory, net | | $ | 172,310 | | | $ | 39,461 | |
NOTE 4. PREPAID EXPENSES
Prepaid expenses at June 30, 2022 and December 31, 2021 consist of the following:
| | June 30, | | | December 31, | |
| | 2022 | | | 2021 | |
Insurance | | $ | 328,872 | | | $ | 4,286 | |
Deposits | | | 57,236 | | | | - | |
Rent | | | 15,736 | | | | - | |
Consulting services | | | 873,250 | | | | 8,267 | |
Prepaid expenses | | $ | 1,275,094 | | | $ | 12,553 | |
On February 26, 2021, the Company entered into a lease agreement for use of an office facility for a 12-month term beginning March 1, 2021 through February 28, 2022. In addition to monthly base rent of $6,000, the agreement required the issuance of 5,333 shares of its common stock valued at $49,600. Stock-based compensation expense related to this agreement for the six-month periods ending June 30, 2022 and 2021 are $8,267 and $16,533, respectively.
On May 31, 2022, the Company entered into a new office facility lease agreement for a 12-month term beginning July 1, 2022 through June 30, 2023 with a monthly base rent of $15,736. The lease agreement required a deposit equivalent to one month’s base rent and first month’s base rent paid in advance as of June 30, 2022.
On May 25, 2022, the Company purchased Directors & Officers insurance prepaying annual premiums of $349,455 through a nine-month financing arrangement (see Note 9). The Company recorded $33,942 of insurance expense related to the prepaid insurance for the six-month period ending June 30, 2022.
On April 1, 2022, the Company made a payment of $300,000 to a consultant as a prepayment for strategic advisory and digital marketing services to be provided during a six-month period beginning on May 16, 2022 through November 15, 2022. In addition, the Company issued 500,000 common shares on June 29, 2022 to the consultant as additional compensation for the services to be provided at $0.91 per share with a fair value on the date of issuance of $455,000. The Company recorded professional consulting service expense of $188,750 for the three and six-month periods ending June 30, 3022.
On May 16, 2022, the Company made a payment of $100,000 to a consultant as prepayment for business development consulting services to be provided during a six-month period beginning on May 16, 2022 through November 15, 2022. In addition, the Company issued 300,000 common shares on June 8, 2022 to the consultant as additional compensation for services to be provided at $0.88 per share with a fair value on the date of issuance of $264,000. The Company recorded professional consulting service expense of $91,000 for the three and six-month periods ending June 30, 3022.
NOTE 5. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 2021:
| | Gross Carrying | | | Accumulated | | | Net Intangible | | | Amortization Period | |
| | Amount | | | Amortization | | | Asset | | | (in years) | |
SOBR Safe | | | | | | | | | | | | |
Intellectual Technology | | $ | 3,854,675 | | | $ | 610,318 | | | $ | 3,244,357 | | | | 10 | |
Intangible assets consist of the following at June 30, 2022:
| | Gross Carrying | | | Accumulated | | | Net Intangible | | | Amortization Period | |
| | Amount | | | Amortization | | | Asset | | | (in years) | |
SOBR Safe | | | | | | | | | | | | |
Intellectual Technology | | $ | 3,854,675 | | | $ | 803,050 | | | $ | 3,051,625 | | | | 10 | |
Amortization expense for the six-month period ended June 30, 2022 and 2021 was $192,732 and $192,732, respectively, and is included in general and administrative expenses in the condensed consolidated statements of operations.
Estimated future amortization expense for device technology intangible assets is as follows:
2023 | | | 2024 | | | 2025 | | | 2026 | | | 2027 | | | Thereafter | |
$ | 385,467 | | | $ | 385,467 | | | $ | 385,467 | | | $ | 385,467 | | | $ | 385,467 | | | $ | 1,124,290 | |
NOTE 6. RELATED PARTY TRANSACTIONS
On February 12, 2021, the Company entered into a note payable agreement with David Gandini, an officer and shareholder, under which Mr. Gandini advanced the Company $30,000 for working capital purposes. The unsecured note carried interest at 0% and was paid in April 2021.
On March 30, 2021, the Company received notification from IDTEC that it was exercising a portion of the 106,667 warrants issued resulting from the 2020 Waiver Under Asset Purchase Agreement and Post-Closing Covenant Agreement with IDTEC. The warrant exercise price was $1.50 per share. With the proceeds of the exercise, the Company paid $88,469 during the three-month period ended December 31, 2021 to settle an outstanding judgement against the Company which was considered as a non-permitted liability under the Post-Closing Covenant Agreement. We issued 58,980 shares of our common stock for the $88,470 we received from IDTEC to pay the settlement. As the shares had not been issued by March 31, 2021, the amount received from IDTEC was included in the common stock subscriptions payable balance at March 31, 2021.
On March 3 and 31, 2021, the Company issued convertible notes payable (see Note 9) totaling $350,000 to existing shareholders holding a direct or indirect interest in the Company and $200,000 to a Company’s director and another director’s family member. The principal amount of the secured convertible debentures are convertible at $9 per share, and include warrants to purchase in total 91,667 shares of the Company’s common stock at $9 per share.
On May 31, 2021, the Company issued convertible notes payable (see Note 9) totaling $400,000 to existing shareholders holding a direct or indirect interest in the Company and $50,000 to a Company’s officer. The principal amount of the secured convertible debentures are convertible at $9 per share, and include warrants to purchase in total 75,000 shares of the Company’s common stock at $9 per share.
On March 1, 2022 the Board of Directors approved the designation of 3,000,000 shares of the Company’s Preferred Stock as “Series B Convertible Preferred Stock”. The Series B Convertible Preferred Stock shares were issued in exchange for 333,333 shares of the Company’s common stock held by the Company’s CEO David Gandini and 666,667 shares of the Company’s common stock held by IDTEC SPV, LLC, an entity controlled by a beneficial owner of the Company (see Note 12).
NOTE 7. ACCRUED EXPENSES
Accrued expenses at June 30, 2022 and December 31, 2021 consist of the following:
| | June 30, 2022 | | | December 31, 2021 | |
Registration rights and default damages and penalties (see Note 8) | | $ | - | | | $ | 189,663 | |
Consulting services | | | 256,366 | | | | 163,647 | |
Taxes and other | | | 110,018 | | | | 110,590 | |
Accrued expenses | | $ | 366,384 | | | $ | 463,900 | |
NOTE 8. CONVERTIBLE DEBENTURE PAYABLE
Convertible debenture payable at June 30, 2022 and December 31, 2021 consist of the following:
| | June 30, 2022 | | | December 31, 2021 | |
| | | | | | |
Convertible Debenture Payable with Detached Free-standing Warrant | | $ | - | | | $ | 3,048,781 | |
Unamortized Debt Discount | | | - | | | | (1,291,882 | ) |
Net Convertible Debenture Payable | | $ | - | | | $ | 1,756,899 | |
On September 28, 2021, (the “Closing Date”) the Company completed a financing transaction under a Securities Purchase Agreement (the “SPA”) and corresponding 18% Original Issue Discount Convertible Debenture (the “Debenture”), Common Stock Purchase Warrant (the “Original Warrant”) and Registration Rights Agreement (“RRA”). Under the terms of the SPA, the Company received $2,500,000 from the Purchaser and in exchange issued the Debenture in the principal amount of $3,048,781 and Original Warrants to purchase up to 406,504 shares of the Company’s common stock. The Debenture was convertible voluntarily by the Purchaser at any time into shares of our common stock, at the lesser of $7.50, representing 100% of the closing price of our common stock on the trading day immediately prior to the Closing Date, or 75% of the average VWAP of our common stock during the 5 trading day period immediately prior to the conversion date (the “Conversion Price”), or automatically upon the occurrence of a single public offering of our common stock which results in the listing of our common stock on a national securities exchange as defined in the Exchange Act (the “Qualified Offering”) into shares of our common stock at the lesser of the Conversion Price, or 75% of the offering price of the securities offered in the Qualified Offering. The Debenture due date was March 27, 2022, did not accrue interest unless there is an event of default under the terms of the Debenture. The Original Warrant is exercisable at any time through September 28, 2026 into shares of our common stock at an exercise price of $6.00 per share, unless an event of default occurs, at which time the exercise price will adjust to $3.00 per share. The Original Warrant contains a cashless exercise provision but only in the event the Company fails to have an effective registration statement registering the common shares underlying the Original Warrant at any time beginning six months from the Closing Date The RRA requires the Company to register for resale and maintain effectiveness of such Registration Statement for such all of the registrable securities under the terms of the Debenture and Original Warrant, within defined time frames. Should the Company fail to meet the RRA requirements, until the date causing such event of noncompliance is cured, Company shall pay to the Purchaser as partial liquidated damages equal to the product of 2% of the principal amount not to exceed 24% of the aggregate principal. If the Company fails to pay of the liquidated damages within seven days after the date payable, the Company will pay interest at 18% until such amounts are paid in full. The filing date requirements were cured in February 2022. Total RRA damages and estimated related costs are approximately $195,000. Damages and accrued interest expense are included in general and administrative expenses in the Condensed Consolidated Statement of Operations. The Company recorded interest expense of $5,405 and none for the six-months ended June 30, 2022 and 2021.
The Debenture matured on March 27, 2022 and the Company did not make the required principal payment putting the Company in default under the terms of the Debenture. On March 30, 2022, we entered into a Waiver Agreement with the Purchaser, under which the Purchaser granted the Company a waiver of the default penalties under the Debenture such that any default penalties will not be charged and/or due until April 17, 2022 (the “Waiver”). Default penalties at the Purchaser’s election are due and payable at the Mandatory Default Amount defined as the sum of (a) the greater of (i) the outstanding principal amount of this Debenture, plus all accrued and unpaid interest hereon, divided by the Conversion Price on the date the Mandatory Default Amount is either (A) demanded or otherwise due or (B) paid in full, whichever has a lower Conversion Price, multiplied by the VWAP on the date the Mandatory Default Amount is either (x) demanded or otherwise due or (y) paid in full, whichever has a higher VWAP, or (ii) 130% of the outstanding principal amount of this Debenture, plus 100% of accrued and unpaid interest hereon, and (b) all other amounts, costs, expenses and liquidated damages due in respect of this Debenture, As the default had not been cured through the Waiver date, mandatory default penalties of $914,634 are included in general and administrative expense in the Condensed Consolidated Statement of Operations for the six-months ended June 30, 2022.
In exchange for the Waiver of the default penalties the Company agreed to: (i) amend that certain Common Stock Warrant (the “Original Warrant”) issued by the Company to the Purchaser dated September 27, 2021 to extend the Termination Date (as defined in the Original Warrant) from September 28, 2026 to September 28, 2028; and (ii) issue the Purchaser a second Common Stock Purchase Warrant (the “New Warrant”) entitling the Purchaser to subscribe for and purchase up to an additional 101,626 shares of our common stock, expiring March 29, 2029, with all other terms of the warrant the same as the Original Warrant. We also agreed, within thirty (30) days of the date of the Waiver, to file a Registration Statement on Form S-1 (or, if such form is unavailable for such a registration, on such other form as is available for such registration), covering the resale of all of the shares underlying the New Warrant. As a result of the default event, Debenture’s automatic conversion features upon the occurrence of a Qualified Offering no longer apply and interest accrues at 18% per annum on the principal amount.
The Company evaluated the Debenture for derivative embedded and beneficial conversion features and determined that its embedded conversion feature carried a debt discount. The total conversion feature debt discount of $980,000 is amortized over the life of the convertible debenture. The debt discount amortization expense recorded as amortization of interest in the Condensed Consolidated Statements of Operations was $465,635 and none for the six-month periods ended June 30, 2022 and 2021, respectively.
As of June 30, 2022, the debenture carries outstanding warrants of 508,130. The relative fair market value of the related stock warrants granted during the six-month periods ended June 30, 2022 and 2021 was $864,000 and none, respectively. The unamortized discount at June 30, 2022 and December 31, 2021 was none and $402,465, respectively. Stock warrants amortization expense recorded as interest expense was $465,635 and none for the six-month periods ended June 30, 2022 and 2021, respectively.
The Company incurred $548,781 of Original Issue Discount and $275,000 of debt issuance costs related to the Debenture which is being amortized to interest expense over the term of the debt using the effective interest method. The unamortized discount and issuance costs at June 30, 2022 and December 31, 2021 was none and $423,782, respectively. Interest expense related to the Original Issue Discount and debt issuance costs was $423,782 and none for the six-month periods ended June 30, 2022 and 2021, respectively.
On May 19, 2022, pursuant to an arrangement with the Debenture holder, the principal balance of the Debenture in default of $3,048,781, was paid in full satisfying all amounts due and accrued under the default, including penalty, damages and interest provisions of the agreement. Where the Company was not required to pay the penalty, damages and interest provision of the agreement, which were recorded as interest expense, a gain on extinguishment of debt of $1,109,105 was recorded during the three-month period ending June 30, 2022.
NOTE 9. NOTES PAYABLE
RELATED PARTIES
Related party notes payable at June 30, 2022 and December 31, 2021 consist of the following:
| | June 30, 2022 | | | December 31, 2021 | |
Convertible Notes Payable with Detached Free-standing Warrants | | $ | 1,000,000 | | | $ | 1,000,000 | |
Conventional Non-Convertible Notes Payable | | | 11,810 | | | | 11,810 | |
Unamortized Debt Discount | | | (397,603 | ) | | | (645,547 | ) |
Net Related Party Notes Payable | | $ | 614,207 | | | $ | 366,263 | |
Current Portion | | | (614,207 | ) | | | (11,810 | ) |
Net Long-Term Portion | | $ | - | | | $ | 354,453 | |
Total interest expense for related party notes was $59,507 and $24,904 for the six-month periods ended June 30, 2022 and 2021, respectively.
Convertible Notes Payable with Detached Free-standing Warrants
The Company has thirteen convertible notes payable to related parties, each with detached free-standing warrants to purchase the Company’s common stock at $9 per share, that have a total principal balance of $1,000,000 as of June 30, 2022. The notes, secured by the Company’s patents and patents applications, include interest at 12%, are convertible at $9 per share of the Company’s common stock and are due 24 months after issuance. The note holders may elect to have the interest paid in cash monthly or have the interest accrue and be payable on the maturity date. Interest elected to be accrued will be paid in cash or may be converted into shares of our common stock under the same terms as the principal amount on the maturity date. The notes contain both voluntary and automatic conversion features. The notes will be convertible at any time, by the holders, beginning on the date of issuance. However, the holders may not convert any outstanding amounts due under the note if at the time of such conversion the amount of common stock issued for the conversion, when added to other shares of Company common stock owned by the holders or which can be acquired by holders upon exercise or conversion of any other instrument, would cause the holder to own more than 4.9% of the Company’s outstanding common stock. Beginning on the issuance date, the outstanding principal amount of the note, and any accrued interest, will automatically convert into shares of the Company’s common stock if the Company’s common stock closes at or above $6 per share for five (5) consecutive trading days while listed on NASDAQ. The Company evaluated the convertible notes payable for derivative embedded and beneficial conversion features. The Company determined that there were beneficial conversion features to record. The total beneficial conversion feature debt discount of $448,999 is amortized over the life of the convertible notes payable.
The debt discount amortization expense recorded as amortization of interest – beneficial conversion feature in the Condensed Consolidated Statements of Operations was $111,328 and $46,155 for the six-month periods ended June 30, 2022 and 2021, respectively. The unamortized beneficial conversion feature was $180,015 and $291,343 at June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022, these notes carry outstanding warrants of 166,667. The relative fair market value of the related stock warrants granted during the six-month periods ended June 30, 2022 and December 31, 2021 was none and $551,001, respectively. Stock warrants amortization expense recorded as interest expense was $136,629 and $56,242 for the six-month periods ended June 30, 2022 and 2021, respectively. The unamortized discount at June 30, 2022 and December 31, 2021 is $217,587 and $354,205, respectively.
Conventional Non-Convertible Notes Payable
The Company has one non-convertible note payable to a related party that has a principal balance of $11,810 as of June 30, 2022 and December 31, 2021. The note carries an interest rate at 0%. The note payable had a due date of December 31, 2012 and is currently in default.
NON-RELATED PARTIES
Non-related party notes payable at June 30, 2022 and December 31, 2021 consist of the following:
| | June 30, 2022 | | | December 31, 2021 | |
Convertible Notes Payable with Detached Free-Standing Warrants | | $ | 1,005,000 | | | $ | 1,005,000 | |
Convertible Notes Payable | | | 9,183 | | | | 56,683 | |
Non-Convertible Notes Payable | | | 267,006 | | | | 47,500 | |
Unamortized Debt Discount | | | (400,160 | ) | | | (648,580 | ) |
Net Non-Related Party Notes Payable | | $ | 881,029 | | | $ | 460,603 | |
Current Portion | | | (881,029 | ) | | | (104,183 | ) |
Net Long-Term Portion | | $ | - | | | $ | 356,420 | |
Total interest expense for non-related party notes was $248,421 and $31,614 for the six-month periods ended June 30, 2022 and 2021, respectively.
Convertible Notes Payable with Detached Free-Standing Warrants
The Company has sixteen convertible notes payable to non-related parties, each with detached free-standing warrants to purchase the Company’s common stock at $9 per share, that have a total principal balance of $1,005,000 as of June 30, 2022 and December 31, 2021. The notes, secured by the Company’s patents and patents applications, include interest at 12%, are convertible at $9 per share of the Company’s common stock and are due 24 months after issuance. The note holders may elect to have the interest paid in cash monthly or have the interest accrue and be payable on the maturity date. Interest elected to be accrued will be paid in cash or may be converted into shares of our common stock under the same terms as the principal amount on the maturity date. The notes contain both voluntary and automatic conversion features. The notes will be convertible at any time, by the holders, beginning on the date of issuance. However, the holders may not convert any outstanding amounts due under the note if at the time of such conversion the amount of common stock issued for the conversion, when added to other shares of Company common stock owned by the holders or which can be acquired by holders upon exercise or conversion of any other instrument, would cause the holder to own more than 4.9% of the Company’s outstanding common stock. Beginning on the issuance date, the outstanding principal amount of the note, and any accrued interest, will automatically convert into shares of the Company’s common stock if the Company’s common stock closes at or above $6 per share for five (5) consecutive trading days while listed on NASDAQ. The Company evaluated the convertible notes payable for derivative embedded and beneficial conversion features. The Company determined that there were beneficial conversion features to record. The total beneficial conversion feature debt discount of $460,215 is amortized over the life of the convertible notes payable.
The debt discount recorded as amortization of interest – beneficial conversion feature in the consolidated statements of operations was $114,108 and $45,388 for the six-month periods ended June 30, 2022 and 2021. The unamortized beneficial conversion feature was $183,048 and $297,155 at June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022, these notes carry outstanding warrants of 167,500. The relative fair market value of the related stock warrants granted during the six-month periods ended June 30, 2022 and 2021 was none and $541,707, respectively. Stock warrants amortization expense recorded as interest expense was $134,313 and $55,413 for the six-month periods ended June 30, 2022 and 2021. The unamortized discount at June 30, 2022 and December 31, 2021 was $217,112 and $351,425, respectively.
Convertible Notes Payable
The Company has two, unsecured convertible notes payable to non-related parties that have a principal balance of $9,183 as of June 30, 2022 and three convertible notes payable to non-related parties that have a principal balance of $56,683 as of December 31, 2021. These notes carry interest rates ranging from 5% - 12% and have due dates ranging from February 2013 to March 2022. These notes carry a conversion price of $6.00 to $32.29 per share. On March 3, 2022 the Company authorized the issuance of 7,917 shares of common stock under the terms of a $47,500 convertible note payable issued March 6, 2020 in satisfaction of one of the notes. Two of the remaining notes are in default. The Company evaluated these convertible notes payable for derivative embedded and beneficial conversion features. The Company determined that there were beneficial conversion features to record. The beneficial conversion features were either fully amortized upon grant or over the life of the convertible notes payable.
Non-Convertible Notes Payable
The Company has two non-convertible notes payable to non-related parties that have a principal balance of $17,500 as of June 30, 2022, and December 31, 2021. These notes carry interest rates ranging from 5% - 10% and have due dates ranging from December 2013 to June 2022. These notes are currently in default.
On May 25, 2022, the Company entered into a financing agreement for payment of annual Directors & Officers insurance premiums for coverage from May 2022 through May 2023 totaling $349,455. The financing agreement required an initial down payment of $74,866 with the remaining amount of $274,559 financed for a nine-month period at an annual interest rate of 4.37% with monthly payments of $31,068 beginning in June 2022 through February 2023. The Company recorded $33,942 of insurance expense related to the prepaid insurance for the three and six-month periods ending June 30, 2022.
The Company has one note payable to a non-related party that has a principal balance of $5,000 as of June 30, 2022 and December 31, 2021. This note carries an interest rate of 10% and had a due date of September 2014. This note is currently in default.
NOTE 10. DERIVATIVE LIABILITY
Warrants Issued with Convertible Debenture
In September 2021, the Company completed a financing transition and received $2,500,000 and issued an 18% Original Issue Discount Convertible Debenture in the principal amount of $3,048,781 (see Note 8). The Company analyzed the conversion features of the debenture agreement for derivative accounting consideration under ASU 2017-11 (ASC 815-15, Derivatives and Hedging), and determined the embedded conversion features should be classified as a derivative because the exercise price of the convertible note is subject to a variable conversion rate and should therefore be accounted for at fair value under ASC 820, Fair Value Measurements and Disclosures, and ASC 825, Financial Instruments. In accordance with ASC 815-15, the Company bifurcated the conversion feature of the debenture and recorded a derivative liability.
The embedded derivative is carried on the Company’s balance sheet at fair value. The derivative liability is marked to market each measurement period and any unrealized change in fair value is recorded as a component of the consolidated statement of operations and the associated fair value carrying amount on the balance sheet was adjusted by the change. The Company fair valued the embedded derivative using a Monte Carlo simulation model based on the following assumptions: (1) expected volatility of 120%, (2) risk-free interest rate of 0.05%, and (3) expected life from 4 to 6 months. On September 28, 2021, the Closing Date of the transaction, the fair value of the embedded derivative was $980,000.
Upon completing a cash payment of the principal balance of the Convertible Debenture on May 19, 2022, the voluntary and automatic conversion feature associated with the derivative liability no longer existed. Utilizing level 3 inputs, the Company recorded a fair market value net gain of $1,040,000 for the six-month period ended June 30, 2022. The fair value of the embedded derivative recorded on the balance sheet as a liability was none at June 30, 2022.
A summary of the activity of the derivative liability is shown below:
Balance at December 31, 2021 | | $ | 1,040,000 | |
Fair value of derivatives issued | | | - | |
Fair value adjustments, net | | | (1,040,000 | ) |
Balance at June 30, 2022 | | $ | - | |
NOTE 11. COMMON STOCK
The Company’s common stock transactions for the six-months ended June 30, 2021, consist of the following:
The Company issued 14,390 shares of its common stock to SOBR Safe, LLC, an entity controlled by a beneficial owner of the Company, in full satisfaction of $107,880 of accrued dividends resulting from the December 2020 conversion of the Series A-1 Convertible Preferred Stock into common shares.
The Company issued 5,333 shares of its common stock valued at $49,600 to its landlord under the terms of a lease agreement expiring in February 2022. The amount was recorded as prepaid expense and amortized monthly over the lease term as general and administrative expense in the consolidated statement of operations.
The Company’s common stock transactions for the six-months ended June 30, 2022, consist of the following:
The Company issued 33,333 shares of its common stock for RSUs vested during 2022.
The Company issued 7,917 shares of common stock under the terms of a $47,500 convertible note payable.
On March 1, 2022, the Company exchanged 1,000,000 shares of common stock for 3,000,000 shares of Series B convertible preferred stock (see Note 12).
On May 18, 2022, the Company issued 2,352,942 shares of common stock in connection with a completed public offering. The Company received $8,694,339 of net proceeds from the sale of an underwritten public offering of 2,352,942 units (Units) at a public offering price of $4.25 per Unit, with each Unit consisting of one share of our Common Stock and two warrants each to purchase one share of Common Stock.
The Company issued 500,000 shares of its common stock to a consultant as a prepayment for strategic advisory and digital marketing services. The common shares were issued at $0.91 per share with a fair value on the date of issuance of $455,000.
The Company issued 300,000 shares of its common stock to a consultant as prepayment for business development consulting services. The common shares were issued at $0.88 per share with a fair value on the date of issuance of $264,000.
NOTE 12. PREFERRED STOCK
On March 1, 2022 the Board of Directors approved the designation of 3,000,000 shares of the Company’s Preferred Stock as “Series B Convertible Preferred Stock”. The 3,000,000 Series B Convertible Preferred Stock shares were issued in exchange for 333,333 shares of the Company’s common stock held by the Company’s CEO David Gandini and 666,667 shares of the Company’s common stock held by IDTEC SPV, LLC, an entity controlled by a beneficial owner of the Company. The Company entered into the Share Exchange Agreements to provide certain changes to its capital structure in connection with the planned underwriting offering and listing on Nasdaq. The rights and preferences of the Series B Convertible Preferred Stock are as follows: (a) dividends shall not be mandatory or cumulative, (b) liquidation preference over the Company’s common stock, (c) each three shares of Series B Convertible Preferred Stock shall be convertible, at the option of the holder, beginning on the date that is six months from the date the Holder acquired the shares of Series B Convertible Preferred Stock, and without the payment of additional consideration by the holder, into one share of common stock, (d) no redemption rights by the Company, (e) no call rights by the Company, and (f) each share of Series B Convertible Preferred Stock will vote on an “as converted” basis.
NOTE 13. STOCK WARRANTS, STOCK OPTIONS AND RESTRICTED STOCK UNITS
The Company accounts for share-based compensation stock options and restricted stock units, and non-employee stock warrants under ASC 718, whereby costs are recorded based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable, utilizing the Black-Scholes pricing model for stock options and warrants, and the closing price of our common stock on the grant date for restricted stock units. Unless otherwise provided for, the Company covers equity instrument exercises by issuing new shares.
Stock Warrants
During March, April and May 2021, the Company issued through the Offering convertible notes payable with warrants, (see Note 9), to purchase up to 334,167 shares of our common stock at an exercise price of $9 per share. The warrants expire two years after the date of issuance.
On September 28, 2021 and March 30, 2022 the Company issued through the sale of the Debenture Original Warrants and New Warrants, (see Note 8), to purchase up to 406,504 and 101,626, respectively, shares of our common stock at an exercise price of $6 per share. The warrants expire seven years after the date of issuance.
On May 18, 2022, the Company issued through an underwritten public offering 4,705,884 warrants (the “Offering Warrants”), 424,116 Underwriter Warrants, and 141,177 Representative Warrants to purchase common stock of the Company at exercise prices of $4.25, $4.25 and $5.3125, respectively. The Offering Warrants and Underwriter Warrants expire five years from the date of issuance and were valued using the Monte Carlo simulation option pricing model. The Representative Warrants expire five years from the date of issuance and were valued using the Black-Scholes pricing model. The aggregate fair value of the Offering Warrants, Underwriter Warrants and Representative Warrants at June 30, 2022 are approximately $5,700,000.
The total outstanding balance of all stock warrants in the Company is 6,209,267 and 836,464 at June 30, 2022 and December 31 2021, respectively. There were 5,372,803 detached free-standing stock warrants granted during the six-month period ended June 30, 2022, and 334,167 detached free-standing stock warrants granted during the six-month period ended June 30, 2021. The fair value of these non-employee stock warrants granted during the six-month periods ended June 30, 2022 and 2021 totaled $6,441,108 and $1,092,708, respectively, and were determined using the Monte Carlo simulation and Black-Scholes option pricing models based on the following assumptions:
| | June 30, 2022 | | | June 30, 2021 | |
Exercise Price | | $ | 4.25-6.00 | | | $ | 9.00 | |
Dividend Yield | | | 0 | % | | | 0 | % |
Volatility | | 110–160 | % | | | 158 | % |
Risk-free Interest Rate | | | 2.45-2.89 | % | | | 0.14 | % |
Life of Warrants | | 5 – 7 Years | | | 2 Years | |
The following table summarizes the changes in the Company’s outstanding warrants during the six-month periods ended June 30, 2022 and 2021:
| | Warrants Outstanding Number of Shares | | | Exercise Price Per Share | | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price Per Share | | | Aggregate Intrinsic Value | |
Balance at December 31, 2020 | | | 194,772 | | | $ | 1.50– 6.00 | | | 3.80 Years | | $ | 2.82 | | | $ | 1,173,737 | |
Warrants Granted | | | 334,167 | | | $ | 9.00 | | | 1.79 Years | | $ | 9.00 | | | $ | 952,375 | |
Warrants Exercised | | | (58,979 | ) | | $ | 1.50 | | | | | $ | 1.50 | | | | | |
Warrants Expired | | | - | | | | | | | | | | | | | | | |
Balance at June 30, 2021 | | | 469,960 | | | $ | 1.50– 9.00 | | | 2.52 Years | | $ | 7.38 | | | $ | 2,099,093 | |
| | Warrants Outstanding Number of Shares | | | Exercise Price Per Share | | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price Per Share | | | Aggregate Intrinsic Value | |
Balance at December 31, 2021 | | | 836,464 | | | $ | 1.50– 9.00 | | | 3.04 Years | | $ | 6.78 | | | $ | 1,784,838 | |
Warrants Granted | | | 5,372,803 | | | $ | 4.25– 6.00 | | | 4.92 Years | | $ | 4.31 | | | $ | - | |
Warrants Exercised | | | - | | | | | | | | | | | | | | | |
Warrants Expired/Forfeited | | | - | | | | | | | | | | | | | | | |
Balance at June 30, 2022 | | | 6,209,267 | | | $ | 1.50– 9.00 | | | 4.74 Years | | $ | 4.64 | | | $ | - | |
Share-Based Compensation
On October 24, 2019, the Company’s 2019 Equity Incentive Plan (the “Plan”) went effective authorizing 1,282,823 shares of Company common stock for issuance as stock options and restricted stock units (“RSUs”) to employees, directors or consultants. The Plan was approved by the Company’s Board of Directors and the holders of a majority of the Company’s voting stock on September 9, 2019. In January 2022, the stockholders ratified a further authorization of shares of common stock for a total of 1,733,333 shares subject to the Plan.
The Company generally recognizes share-based compensation expense on the grant date and over the period of vesting or period that services will be provided.
Stock Options
As of June 30, 2022 and December 31, 2021, the Company has granted stock options to acquire 1,106,587 and 1,036,588 shares of common stock under the plan, respectively. As of June 30, 2022, the plan has 846,269 vested options and 277,087 non-vested options. As of December 31, 2021, the plan had 618,841 vested shares and 417,747 non-vested shares. The stock options are held by our officers, directors, employees, and certain key consultants.
In total for the six-months ended June 30, 2022 and 2021, the Company recorded in general and administrative expense $926,456 and $243,023, respectively, of share-based compensation expense related to stock options. The unrecognized compensation expense as of June 30, 2022, was approximately $1,707,554 for non-vested share-based awards to be recognized over periods of approximately four months to two years and seven months.
In applying the Black-Scholes options pricing model, assumptions used to compute the fair value of the stock options granted during the six-month periods ended June 30, 2022 and 2021 were as follows:
| | June 30, 2022 | | | June 30, 2021 | |
Exercise Price | | $ | 8.2500 – 9.0750 | | | $ | 8.3100 | |
Dividend Yield | | | 0 | % | | | 0 | % |
Volatility | | | 191% - 192% | % | | | 152%-158 | % |
Risk-free Interest Rate | | | 0.78% - 1.52 | % | | | 0.27%-0.34 | % |
Life of Options | | 2 – 3 Years | | | 2 – 5 Years | |
The following table summarizes the changes in the Company’s outstanding stock options during the six-month periods ended June 30, 2022 and 2021:
| | Options Outstanding Number of Shares | | | Exercise Price Per Share | | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price Per Share | | | Aggregate Intrinsic Value | |
Balance at December 31, 2020 | | | 857,409 | | | $ | 0.7902 – 9.9000 | | | 7.45 Years | | $ | 1.4997 | | | $ | 6,302,277 | |
Options Granted | | | 129,167 | | | | 8.3160 – 10.1310 | | | 2.94 Years | | | 9.8562 | | | | 257,540 | |
Options Exercised | | | - | | | | | | | | | | | | | | | |
Options Cancelled | | | - | | | | | | | | | | | | | | | |
Options Expired/Forfeited | | | - | | | | | | | | | | | | | | | |
Balance at June 30, 2021 | | | 986,576 | | | $ | 0.7902 – 10.1310 | | | 7.21 Years | | $ | 2.5938 | | | $ | 9,132,060 | |
| | Options Outstanding Number of Shares | | | Exercise Price Per Share | | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price Per Share | | | Aggregate Intrinsic Value | |
Balance at December 31, 2021 | | | 1,053,356 | | | $ | 0.7903 – 10.74 | | | 6.21 Years | | $ | 3.3900 | | | $ | 5,804,517 | |
Options Granted | | | 70,000 | | | $ | 8.25 – 9.0750 | | | 1.58 Years | | $ | 8.2893 | | | $ | - | |
Options Exercised | | | - | | | | | | | | | | | | | | | |
Options Cancelled | | | - | | | | | | | | | | | | | | | |
Options Expired/Forfeited | | | - | | | | | | | | | | | | | | | |
Balance at June 30, 2022 | | | 1,123,356 | | | $ | 0.7903 – 10.7250 | | | 5.46 Years | | $ | 3.7042 | | | $ | - | |
| | Options Outstanding Number of Shares | | | Exercise Price Per Share | | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price Per Share | | | Aggregate Intrinsic Value | |
Exercisable at December 31, 2021 | | | 635,609 | | | $ | 0.7903 - 10.7400 | | | 6.70 Years | | $ | 1.5861 | | | $ | 4,655,089 | |
Exercisable at June 30, 2022 | | | 846,269 | | | $ | 0.7903 – 10.7250 | | | 6.45 Years | | $ | 2.5032 | | | $ | - | |
Restricted Stock Units
The Plan provides for the grant of RSUs. RSUs are settled in shares of the Company’s common stock as the RSUs become vested. In January and February 2022, the Company granted 16,667 service based RSUs to an executive officer and 25,000 service based RSUs to a director, respectively. All RSUs granted in 2022 vest the earlier of the expiration of any lock-up period that includes the securities of the Company owned by the Plan participant after the up list of the Company to a national exchange or January 1, 2023. On January 12, 2022, 16,667 shares of the Company’s common stock were issued for the RSUs vested during 2021. On June 8, 2022, 16,666 shares of the Company’s common stock were issued to a consultant for RSUs vested in May 2022.
The following table summarizes RSU activity under the Plan for the six-month periods ended June 30, 2022 and 2021:
| | RSUs | | | Weighted Average Grant Date Fair Value Per Share | | | Weighted Average Vesting Period | |
Unvested at December 31, 2020 | | | 71,667 | | | $ | 8.7460 | | | 1.70 Years | |
Granted | | | 3,333 | | | | 9.2100 | | | 1.50 Years | |
Vested | | | - | | | | | | | | |
Unvested at June 30, 2021 | | | 75,000 | | | $ | 8.7667 | | | 1.21 Years | |
| | RSUs | | | Weighted Average Grant Date Fair Value Per Share | | | Weighted Average Vesting Period | |
Unvested at December 31, 2021 | | | 133,585 | | | $ | 8.56 | | | 0.97 Years | |
Granted | | | 41,667 | | | | 6.92 | | | 0.52 Years | |
Vested | | | (16,667 | ) | | | 7.50 | | | | |
Unvested at June 30, 2022 | | | 158,585 | | | $ | 8.17 | | | 0.49 Years | |
In total for the six-months ended June 30, 2022 and 2021, the Company recorded in general and administrative expense $751,607 and $102,297, respectively, of share-based compensation expense related to RSU’s. As of June 30, 2022, total estimated compensation costs of RSUs granted and outstanding but not yet vested was $515,941 which is expected to be recognized over the weighted average period of six-months.
Executive Officers Stock Options and RSUs
The Company has 387,404 and 823,482 outstanding executive officers stock options exercisable at $0.7902 to $10.1400 and $0.7902 to $10.1400 per share as of June 30, 2022 and December 31, 2021, respectively. The Company has 57,626 and 61,919 unvested RSUs granted to executive officers as of June 30, 2022 and December 31, 2021, respectively.
NOTE 14. COMMITMENTS AND CONTINGENCIES
Operating Leases
On February 26, 2021 the Company executed an office lease, effective for a 12-month term beginning March 1, 2021. The lease required monthly base rent payments of $6,000 and the issuance of 5,333 shares of the Company’s common stock. The value of the common stock of $49,600 was amortized to rent expense over the lease term. This lease was not renewed. The Company leased shared office space on a monthly basis with monthly rents approximating $4,500 through June 30, 2022. The Company also leased an office space for approximately $5,000 per month on a short-term (month to month) basis through a related party which terminated on June 30, 2022. The Company entered into a lease agreement to rent office space for a twelve-month period beginning July 1, 2022 with a monthly base rent of $15,736. Rent expense under office leases, including CAM charges, was $64,778 and $65,197 for the six-month periods ended June 30, 2022 and 2021, respectively.
Legal Proceedings
On December 6, 2006, Orange County Valet and Security Patrol, Inc. filed a lawsuit against the Company in Orange County California State Superior Court for Breach of Contract in the amount of $11,164. A default judgment was taken against the Company in this matter. In mid-2013 we learned the Plaintiff’s perfected the judgment against the Company, but we have not heard from the Plaintiffs as of the date of this report. As of June 30, 2022, and December 31, 2021, the Company has accrued $11,164 plus accrued interest of approximately $18,000. In the event we pay any money related to this lawsuit, IDTEC agreed to pay the amount for the Company in exchange for shares of our common stock.
NOTE 15. SUBSEQUENT EVENTS
The Company has evaluated subsequent events for recognition and disclosure through August 15, 2022, which is the date the condensed consolidated financial statements were available to be issued, and has determined the following are material subsequent events that require recognition or disclosure in the accompanying condensed consolidated financial statements.
On July 25, 2022, the Company entered into a Consulting Agreement with a Consultant for professional services primarily focused on business development opportunities to enhance exposure to the Company’s devices and detection systems. The Consultant is operated by a beneficial owner of the Company. The Consulting Agreement commenced on the effective date and will continue through March 31, 2023. The Company is committed to pay 75,000 restricted shares of the Company’s common stock to the Consultant for the professional services. The restricted shares are to be issued no later than 30-days from the signing of the Consulting Agreement, or August 24, 2022. At the date of filing of the Company’s June 30, 2022 Form 10-Q the restricted shares had not been issued.
On August 3, 2022, the Company entered into a Settlement Agreement with a former employee to resolve certain claims requiring the Company to pay $65,000 in cash consideration and a warrant to purchase 10,000 shares of the Company’s common stock at $4.25 per share in satisfaction of the agreed upon terms of the Settlement Agreement. The cash consideration was paid in full and the warrant was issued on August 10, 2022.