SOBR SAFE, INC. Disclaimer Regarding Forward Looking Statements
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations contains not only statements that are historical facts, but also
statements that are forward-looking. Forward-looking statements are, by their
very nature, uncertain and risky. These risks and uncertainties include
international, national and local general economic and market conditions;
demographic changes; our ability to sustain, manage, or forecast growth; our
ability to successfully make and integrate acquisitions; raw material costs and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other risks that might be detailed from time to time in our
filings with the
Although the forward-looking statements in this Annual Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.
Overview
We provide organizations with non-invasive technology to identify the presence of alcohol quickly and safely with its employees, contractors, participants or patients. These technologies are integrated within our robust and scalable data platform, producing statistical and measurable user and business data. Our mission is to save lives, increase productivity, create significant economic benefits and positively impact behavior. To that end, we developed the scalable, patent-pending SOBRsafe™ software platform for non-invasive alcohol detection and identity verification, a solution that has applications in probation management, fleet & facility, and for outpatient alcohol rehabilitation and youth drivers in a wearable form. We believe that uniform daily use of our device could result in material insurance savings across Workers' Compensation, general liability, umbrella and fleet policies.
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We are now in commercial production and sale of our SOBRcheck™ solution. We have executed customer agreements and have had revenue since the first quarter 2022.
Our second device, a wearable wristband SOBRsure™, utilizes the same SOBRsafe™ hardware/software platform. The primary intended applications include probation management, fleet & facility, outpatient alcohol rehabilitation and youth drivers. The wearable band will be commercially available in the second quarter of 2023.
Design, manufacturing, quality testing and distribution for all SOBRsafe™
devices will take place in
Our SOBRsafe™ technology can also be deployed across numerous additional devices for various uses; among those we are currently exploring include possible integrations with existing telematics systems, and it could be licensed by non-competitive third parties.
Recent Developments
During the year ended
· Received an aggregate of $10.0 million in proceeds from Nasdaq uplist
offering of 2,352,942 units consisting of one share of common stock and
two warrants.
· Received an aggregate of $6.0 million in proceeds from a PIPE offering of
4,054,045 units consisting of one share of common stock and one warrant.
· Received an aggregate of $3.5 million in proceeds from the exercise of
1,647,564 common warrants and 2,128,378 pre-funded warrants.
· Paid off $3.0 million of convertible debt.
· Began first commercial sales of SOBRcheck™ device.
· Awarded the Occupational Health & Safety (OH&S) new product of the year in
the Safety Monitoring Devices category.
· Awarded the Safe Family Seal of Approval by the Child Safety Network.
Business Outlook and Challenges
Our products continue to gain awareness and recognition through trade shows, media exposure, social media and product demonstrations. To generate sales, we have a three-part strategy: 1) direct sales, 2) distributors and 3) licensing & integration. We currently employ four highly experienced sales professionals. We have signed nine distributors, representing an additional 29 sales professionals actively introducing our solutions to established drug and alcohol testing buyers. Finally, initial licensing & integration discussions are underway, and we anticipate hiring an expert in this field in 2023 to formulate and execute a global expansion plan.
We anticipate that our outsourced manufacturers can adequately support an increase in sales for the foreseeable future. We expect that we will need to continue to evolve our products and software to meet diverse customer requirements across varied markets.
Since inception in
Impact of COVID-19 on our Business
We are closely monitoring the coronavirus and the directives from federal and local authorities regarding not only our workforce, but how it impacts companies we work with for the development of our SOBRSafe™ technology and the devices that deploy that technology. The extent to which the COVID-19 continues to impact our financial conditions and results of operations, or those of our third-party suppliers, will depend on future developments, which are highly uncertain and cannot be predicted with confidence at this time, including the duration of new outbreaks, information which may emerge concerning the severity of COVID-19 and the actions being taken to contain COVID-19 or treat its impact, among others. Governmental agencies can fluctuate in their implementation of social distancing and "work from home" regulations. If those regulations increase then the chances increase that more and more companies may be forced to either shut down, slow down or alter their work routines. Since the development and testing of our SOBR technologies and the potential platform devices is a "hands on" process, these alternative work arrangements could significantly slow down our anticipated schedules for the marketing and sale of our SOBR devices, which could have a negative impact on our business. Given the daily evolution of the COVID-19 variants and the global responses to curb its spread, we are not able to estimate the effects of the COVID-19 on our results of operations, financial condition, or liquidity for fiscal year 2023. However, as the COVID-19 variants continue, it could have an adverse effect on our results of future operations, financial position and liquidity in fiscal year 2023.
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Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with
As part of the process of preparing our financial statements, we are required to estimate our provision for income taxes. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, tax contingencies, unrecognized tax benefits, and any required valuation allowance, including taking into consideration the probability of the tax contingencies being incurred. Management assesses this probability based upon information provided by its tax advisers, its legal advisers and similar tax cases. If later our assessment of the probability of these tax contingencies changes, our accrual for such tax uncertainties may increase or decrease. Our effective tax rate for annual and interim reporting periods could be impacted if uncertain tax positions that are not recognized are settled at an amount which differs from our estimates.
Some of our accounting policies require higher degrees of judgment than others in their application. These include share-based compensation and contingencies and areas such as revenue recognition, allowance for doubtful accounts, valuation of inventory and intangible assets, and impairments.
While our significant accounting policies are described in more detail in the notes to our audited consolidated financial statements appearing elsewhere in this annual report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
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
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Allowance for Doubtful Accounts
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.
Valuation of Inventory
Inventory is comprised primarily component parts and finished products. We periodically make judgments and estimates regarding the future utility and carrying value of our inventory. The carrying value of our inventory is periodically reviewed and impairments, if any, are recognized when the expected future benefit from our inventory is less than carrying value.
Financial Instruments
An entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy is 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.
The Company's financial instruments consist primarily of cash, accounts receivable, accounts payable, accrued expenses, accrued interest payable, notes payable, related party payables, convertible debentures, and other payables. 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.
Beneficial Conversion Features
From time to time, the Company may issue convertible notes that may contain an embedded 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 fair value of derivative instruments is recorded and shown separately under current liabilities. Changes in fair value are recorded in the consolidated statement 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 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.
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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.
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.
Stock-based Compensation
The Company uses 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 awards 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
Recent Accounting Pronouncements
New pronouncements issued for future implementation are discussed in Note 1 to our financial statements.
Effects of Inflation
We do not believe that inflation has had a material impact on our business, revenue or operating results during the periods presented. However, continued increases in inflation could have an adverse effect on our results of future operations, financial position, and liquidity in 2023.
The following discussion:
· summarizes our results of operations; and
· analyzes our financial condition and the results of our operations for the
year ended December 31, 2022 and year ended December 31, 2021 .
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Results of Operations for the Year Ended
Summary of Results of Operations
Year Ended
December 31,
2022 2021
Revenue $ 35,322 $ -
Cost of goods sold 19,315 -
Gross Profit 16,007 -
Operating expenses:
General and administrative 7,606,218 3,882,706
Stock-based compensation expense 1,426,178 473,748
Research and development 1,397,053 1,198,780
Total operating expenses 10,429,449 5,555,234
Loss from operations (10,413,442 ) (5,555,234 )
Other income (expense):
Other income (expense), net 230,414 -
Gain on debt extinguishment, net 245,105 -
Gain (loss) on fair value adjustment-derivatives, net 1,040,000 (60,000 )
Interest
expense (2,535,519 ) (1,420,063 ) Amortization of interest - debt discount (921,488 ) (835,081 ) Total other income (expense), net (1,941,488 ) (2,315,144 ) Net loss$ (12,354,930 ) $ (7,870,378 ) Operating Loss; Net Loss
Our net loss increased by
Revenue
Prior to the year ended
Gross Profit
The cost of goods sold for the year ended
General and Administrative Expenses
General and administrative expenses increased by
Stock-Based Compensation Expense
We had stock-based compensation expense of
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Research and Development
Research and development increased by
Other Income (Expense), net
Other income was
Gain on Extinguishment of Debt, net
Gain on extinguishment of debt, net was
Gain (loss) on Fair Value Adjustment - Derivatives, net
Fair value adjustment - derivatives, net was a loss of (
Interest Expense
Interest expense increased by
Amortization of Interest - Debt Discount
During the year ended
Liquidity and Capital Resources for the Year Ended
Introduction
During the years ended
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Management believes that the net offering proceeds, including warrants
exercised, of approximately
Our cash, current assets, total assets, current liabilities, and total
liabilities as of
December 31, December 31,
2022 2021 Change
Cash $ 8,578,997 $ 882,268 $ 7,696,729
Total Current Assets 9,025,717 934,282 8,091,435
Total Assets 11,912,037 4,209,215 7,702,822
Total Current Liabilities 2,821,684 3,981,935 (1,160,251 )
Total Liabilities 2,821,684 4,692,808 (1,871,123 )
Our current assets and total assets increased as of
Our current liabilities decreased as of
Sources and Uses of Cash Operations
We had net cash used in operating activities of
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Investments
We had no cash provided by or used for investing activities during the years
ended
Financing
Our net cash provided by financing activities for the year ended
Contractual Obligations and Commitments
At
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements as of
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