sobr_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended March 31, 2023

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________.

Commission file number: 000-53316

SOBR SAFE, INC.

(Exact name of registrant as specified in its charter)

Delaware		26-0731818
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6400 S. Fiddlers Green Circle, Suite 1400 Greenwood Village, Colorado		80111
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (844) 762-7723

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

Title of each class		Trading Symbol(s)			Name of each exchange on which registered
Common Stock, $0.00001 par value		SOBR			The Nasdaq Market (NASDAQ)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated Filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

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

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

Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 15, 2023, there were 18,394,570 shares of common stock, $0.00001 par value, issued and outstanding.

SOBR SAFE, INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1	Condensed Consolidated Financial Statements	4

ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

ITEM 3	Quantitative and Qualitative Disclosures About Market Risk	33

ITEM 4	Controls and Procedures	34

PART II – OTHER INFORMATION

ITEM 1	Legal Proceedings	35

ITEM 1A	Risk Factors	35

ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	35

ITEM 3	Defaults Upon Senior Securities	35

ITEM 4	Mine Safety Disclosures	35

ITEM 5	Other Information	35

ITEM 6	Exhibits	36

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PART I – FINANCIAL INFORMATION

Forward-Looking Statement Disclaimer

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

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

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ITEM 1 Condensed Consolidated Financial Statements

The condensed consolidated balance sheets as of March 31, 2023, and December 31, 2022, the condensed consolidated statements of operations for the three months ended March 31, 2023, and 2022, the condensed consolidated statements of changes in stockholders’ equity (deficit) for the three months ended March 31, 2023, and 2022, and the condensed consolidated statements of cash flows for the three months ended March 31, 2023, and 2022, follow. The unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal and recurring nature.

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SOBR SAFE, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2023			2022
ASSETS	(Unaudited)			(Audited)

Current assets
Cash	$	8,290,003		$	8,578,997
Accounts receivable		30,088			30,322
Inventory		249,732			215,493
Prepaid expenses		412,409			200,905
Total current assets		8,982,232			9,025,717

SOBR Safe Intellectual Technology, net of accumulated amortization of $1,092,148 and $995,782 at March 31, 2023 and December 31, 2022, respectively		2,762,527			2,858,893

Other assets		27,427			27,427
Total Assets	$	11,772,186		$	11,912,037

LIABILITIES & STOCKHOLDERS' EQUITY

Current liabilities
Accounts payable	$	341,124		$	142,965
Accrued expenses		304,296			392,282
Accrued interest payable		280,489			469,691
Related party payables		1,887			1,887
Notes payable - related parties
* Includes unamortized debt discount related to warrants and beneficial conversion features of $19,754 and $145,548 at March 31, 2023 and December 31, 2022, respectively		442,056	*		866,262	*
Notes payable - non-related parties
* Includes unamortized debt discount related to warrants and beneficial conversion feature of $14,151 and $144,878 at March 31, 2023 and December 31, 2022		467,532	*		948,597	*
Total current liabilities		1,837,384			2,821,684

Notes payable - non-related parties - less current portion
* Includes unamortized debt discount related to original issue discount, warrants and costs of issuance of $1,433,312 and none at March 31, 2023 and December 31, 2022, respectively		2,096,101	*		-
Accrued interest payable		11,275			-

Total Liabilities		3,944,760			2,821,684
Stockholders' Equity
Preferred stock, $0.00001 par value; 16,300,000 shares authorized, no shares issued or outstanding at March 31, 2023 and December 31, 2022		-			-
Series A Convertible Preferred stock, $0.00001 par value; 3,000,000 shares authorized, no shares issued or outstanding at March 31, 2023 and December 31, 2022		-			-
Series A-1 Convertible Preferred stock, $0.00001 par value; 2,700,000 shares authorized, no shares issued or outstanding at March 31, 2023 and December 31, 2022		-			-
Series B Convertible Preferred stock, $0.00001 par value; 3,000,000 shares authorized, 3,000,000 shares issued and outstanding at March 31, 2023 and December 31, 2022		30			30
Common stock, $0.00001 par value; 100,000,000 shares authorized, 17,209,570 and 16,984,570 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively		172			170
Treasury stock, at cost; 12,329 shares at March 31, 2023 and December 31, 2022		(38,015	)		(38,015	)
Additional paid-in capital		88,071,861			87,509,666
Accumulated deficit		(80,152,964	)		(78,327,845	)
Total SOBR Safe, Inc. stockholders' equity		7,881,084			9,144,006
Noncontrolling interest		(53,658	)		(53,653	)

Total Stockholders' Equity		7,827,426			9,090,353

Total Liabilities and Stockholders' Equity	$	11,772,186		$	11,912,037

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

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SOBR SAFE, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	For The Three Months Ended March 31,
	2023			2022
	(Unaudited)			(Unaudited)
Revenues	$	47,868		$	1,500
Cost of sales		30,064			1,100
Gross profit		17,804			400

Operating expenses:
General and administrative		1,584,950			863,100
Stock-based compensation expense		698,913			934,225
Research and development		180,918			47,459
Total operating expenses		2,464,781			1,844,784

Loss from operations		(2,446,977	)		(1,844,384	)

Other income (expense):
Other income		70,470			27
Loss on debt extinguishment		-			(864,000	)
Loss on fair value adjustment - derivatives		-			(340,000	)
Interest expense		(225,185	)		(1,941,105	)
Amortization of interest - beneficial conversion feature		-			(580,221	)
Total other expense, net		(154,715	)		(3,725,299	)

Loss before provision for income taxes		(2,601,692	)		(5,569,683	)

Provision for income taxes		-			-

Net loss		(2,601,692	)		(5,569,683	)
Net loss attributable to noncontrolling interest		5			4
Net loss attributable to SOBR Safe, Inc.	$	(2,601,687	)	$	(5,569,679	)

Basic and diluted loss per common share	$	(0.15	)	$	(0.65	)

Weighted average number of common shares outstanding		17,092,070			8,550,490

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

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SOBR SAFE, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

(UNAUDITED)

																							Stockholders’
	Common Stock						Preferred Stock				Treasury Stock												Equity						Total
				Amount					Amount								Additional						(Deficit)						Stockholders’
				($0.00001					($0.00001					Amount			Paid-in			Accumulated			SOBR Safe,			Noncontrolling			Equity
	Shares			Par)			Shares		Par)		Shares			(at cost)			Capital			Deficit			Inc.			Interest			(Deficit)

Balances at January 1, 2022		8,778,555		$	88			-	$	-		-		$	-		$	57,041,447		$	(57,471,492	)	$	(429,957	)	$	(53,636	)	$	(483,593	)
Common stock issued for restricted stock units		16,667			-			-		-		-			-			-			-			-			-			-
Common stock issued for convertible debt		7,917			-			-		-		-			-			47,500			-			47,500			-			47,500
Common stock exchanged 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		-			-			-		-		-			-			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		7,803,139		$	78			3,000,000	$	30		-		$	-		$	58,887,152		$	(63,041,171	)	$	(4,153,911	)	$	(53,640	)	$	(4,207,551	)
Balances at January 1, 2023		16,984,570		$	170			3,000,000	$	30		(12,329	)	$	(38,015	)	$	87,509,666		$	(78,327,845	)	$	9,144,006		$	(53,653	)	$	9,090,353
Cumulative effect of adopting ASU 2020-06		-			-			-		-		-			-			(909,214	)		776,568			(132,646	)		-			(132,646	)
Common stock issued for services		225,000			2			-		-		-			-			211,498			-			211,500			-			211,500
Warrants issued for services		-			-			-		-		-			-			162,481			-			162,481			-			162,481
Paid-in capital – fair value of stock options and restricted stock units		-			-			-		-		-			-			698,913			-			698,913			-			698,913
Paid in capital - relative fair value of stock warrants granted, net of issuance costs		-			-			-		-		-			-			398,517			-			398,517			-			398,517
Net loss		-			-			-		-		-			-			-			(2,601,687	)		(2,601,687	)		(5	)		(2,601,692	)
Balances at March 31, 2023		17,209,570		$	172			3,000,000	$	30		(12,329	)	$	(38,015	)	$	88,071,861		$	(80,152,964	)	$	7,881,084		$	(53,658	)	$	7,827,426

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

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SOBR SAFE, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
	For The Three Months Ended
	March 31,
	2023			2022
	(Unaudited)			(Unaudited)
Operating Activities:
Net loss	$	(2,601,692	)	$	(5,569,683	)

Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of intangible assets		96,366			96,366
Amortization of interest - conversion features		-			580,221
Amortization of interest		21,644			423,782
Loss on extinguishment of debt		-			864,000
Change in fair value of derivative liability		-			340,000
Bad debt expense		882			-
Stock warrants expense		134,598			540,176
Stock-based compensation expense		698,913			934,225
Changes in assets and liabilities:
Accounts receivable		(648	)		(500	)
Inventory		(34,239	)		(65,489	)
Prepaid expenses		162,477			(16,733	)
Accounts payable		198,159			96,886
Accrued expenses		(87,986	)		931,796
Accrued interest payable		(177,927	)		57,696
Related party payables		-			12,437

Net cash used in operating activities		(1,589,453	)		(774,820	)

Financing Activities:
Proceeds from notes payable - non-related parties		3,000,001			-
Repayments of notes payable - related parties		(550,000	)		-
Repayments of notes payable - non-related parties		(611,792	)		-
Debt issuance costs		(537,750	)		-
Net cash provided by financing activities		1,300,459			-

Net Change In Cash		(288,994	)		(774,820	)

Cash At The Beginning Of The Period		8,578,997			882,268

Cash At The End Of The Period	$	8,290,003		$	107,448

Schedule Of Non-Cash Investing And Financing Activities:
Issuance of common stock and warrants for prepaid services	$	373,981		$	-
Non-related party debt converted to capital	$	-		$	47,500

Supplemental Disclosure:
Cash paid for interest	$	245,822		$	4,816
Cash paid for income taxes	$	-		$	-

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

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SOBR SAFE, Inc.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SOBR Safe, Inc., a Delaware corporation, (the “Company”, “we”, “us”, and “our”) is a hardware and software company headquartered in Greenwood Village, Colorado. Our company integrates proprietary software with our patented touch-based alcohol detection products, SOBRcheck™ and SOBRsure™, enabling non-invasive alcohol detection, biometric identity verification, and real-time cloud-based alerts and reporting. Currently our principal markets are located in North America.

On April 28, 2022, we effected a 1-for-3 reverse stock split with our planned listing on Nasdaq. All share and per share amounts have been adjusted in these condensed consolidated financial statements to reflect the effect of the reverse stock split.

On May 16, 2022, our common stock began trading on the Nasdaq exchange under the ticker symbol “SOBR.” Prior to this, our common stock was quoted on the “OTCQB” tier of the OTC Markets, also under the ticker symbol “SOBR.”

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, 2022, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2023.

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 March 31, 2023 and December 31, 2022, and results of operations and cash flows for the three-month periods ended March 31, 2023 and 2022.

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its majority owned subsidiary, TransBiotec-CA, of 98.6%. 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

The Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The 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. The Company prioritizes the inputs into three levels that may be used to measure fair value:

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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, and other liabilities. 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.

At March 31, 2023 and December 31, 2022, the Company did not have financial instruments requiring valuation from observable or unobservable inputs to determine fair value on a recurring basis.

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 at March 31, 2023 and December 31, 2022.

Accounts Receivable

Accounts receivable is derived from sales to a limited number of customers. 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 March 31, 2023 and December 31, 2022.

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 component parts and finished products. The Company evaluates the need for reserves for excess or obsolete inventory primarily based upon estimates of future demand for the Company’s products. The Company had no reserves for excess inventory or obsolescence at March 31, 2023 and December 31, 2022.

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

As discussed under “Recently Adopted Accounting Standards” in Note 1, the Company adopted ASU 2020-06 effective January 1, 2023, which, among other things, eliminated the beneficial conversion feature model applicable to certain convertible instruments. Prior to the adoption of ASU 2020-06, a beneficial conversion feature existed 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 was recorded as a debt discount with a corresponding amount to additional paid-in capital. The debt discount was amortized to interest expense over the life of the note using the effective interest method.

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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 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.

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

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 classify our preferred shares in stockholders’ equity.

Minority Interest (Noncontrolling Interest)

A subsidiary of the Company has minority members representing ownership interests of 1.4% at March 31, 2023 and December 31, 2022. The Company accounts for these minority, or noncontrolling interests 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 three-month periods ended March 31, 2023 and 2022, respectively.

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 the Company’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.

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The Company determines revenue recognition through five steps which include (1) 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, physical possession or the risks and rewards of ownership 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 is 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 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.

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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 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

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.

Advertising and Marketing Costs

Advertising and marketing costs are charged to operations as incurred. Advertising and marketing costs were $21,301 and $30,185 during the three-month periods ended March 31, 2023 and 2022, respectively.

Income Tax

Deferred taxes are provided on an asset and 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 March 31, 2023 and December 31, 2022 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 two domestic financial institutions. The Company is exposed to credit risk in the event of a default by the financial institutions to the extent that cash balances are in excess of the amount insured by the Federal Deposit Insurance Corporation of up to $250,000 per institution. 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 sales during the three-months ending March 31, 2023 and 2022, to a limited number of 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.

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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.

Recently Adopted Accounting Standards

In August 2020, the FASB issued 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 (“ASU 2020-06”) which simplifies the accounting for convertible instruments by eliminating the beneficial conversion and cash conversion accounting models. In addition, ASU 2020-06 removes certain settlement conditions required for equity contracts to qualify for the derivative scope exception and simplifies the diluted earnings per share calculation in certain areas.

The Company early adopted ASU 2020-06 effective January 1, 2023 using the modified retrospective method whereby the cumulative effect of the change is recognized as an adjustment to the opening balance of retained earnings at the date of adoption. On January 1, 2023, the Company recorded an increase to retained earnings (accumulated deficit) of $776,569 and a decrease to additional paid-in-capital of $909,214 to fully remove the unamortized debt discount related to beneficial conversion features of $132,646.

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.

Reclassifications

Certain prior period amounts have been reclassified to conform with the current period presentation.

NOTE 2. GOING CONCERN

The Company has incurred recurring losses from operations. Future capital requirements will depend on many factors, including the Company’s ability to sell and develop products, generate cash flow from operations, and assess competing market developments. The Company may need additional capital in the future.

As of March 31, 2023, the Company has an accumulated deficit of approximately ($80,200,000). During the three months ended March 31, 2023, the Company experienced negative cash flows from operating activities of approximately ($1,600,000) and has $905,000 of convertible notes payable due in various amounts between April and May 2023.

On March 9, 2023, the Company received approximately $2,500,000 of net proceeds from a Debt Offering (see Note 9).

On April 12, 2023, the Company prepaid the principal and all accrued interest for the convertible notes due in April and May 2023.

Management believes that cash balances of approximately $8,300,000 and positive working capital of $7,100,000 at March 31, 2023 provide adequate working capital for operating activities for the next twelve months after the date these financial statements are issued. Further, actions presently being taken to generate product and services revenues in addition to working capital provide the opportunity for the Company to continue as a going concern as of March 31, 2023.

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NOTE 3. INVENTORY

Inventory consisted of the following:

	March 31,		December 31,
	2023		2022
Component parts	$	88,517	$	68,643
Finished goods		161,215		146,850
Inventory	$	249,732	$	215,493

NOTE 4. PREPAID EXPENSES

Prepaid expenses consisted of the following:

	March 31,		December 31,
	2023		2022
Insurance	$	60,397	$	150,344
Deposit		15,736		15,736
Consulting services		216,991		-
Other		119,285		34,825
Prepaid expenses	$	412,409	$	200,905

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 to be held by the lessor for the term of the lease.

On January 1, 2023, the Company entered into a 6-month agreement for investor relations services in exchange for the issuance of 225,000 common shares and 225,000 warrants to purchase shares of common stock at $1.35 per share. The shares and warrants had an aggregate fair value of $373,981 on the date of issuance which is recognized over the period of service. The Company recorded $186,991 of professional services expense related to the agreement for the three-month period ending March 31, 2023.

NOTE 5. INTANGIBLE ASSETS

Intangible assets consist of the following:

	March 31,			December 31,
	2023			2022
Gross carrying amount	$	3,854,675		$	3,854,675
Accumulated amortization		(1,092,148	)		(995,782	)
Intangible asset, net	$	2,762,527		$	2,858,893

Amortization period (in years)		10			10

Amortization expense was $96,366 for each of the three-month periods ended March 31, 2023 and 2022 and is included in general and administrative expenses in the condensed consolidated statements of operations.

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As of March 31, 2023, estimated future amortization expense for device technology intangible assets is as follows:

2023				2024				2025				2026				2027				Thereafter
$	289,098			$	385,464			$	385,464			$	385,464			$	385,464			$	931,573

NOTE 6. RELATED PARTY TRANSACTIONS

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 15).

NOTE 7. ACCRUED EXPENSES

Accrued expenses consist of the following:

	March 31, 2023		December 31, 2022
Consulting services		163,647		197,897
Other		140,649		194,385
Accrued expenses	$	304,296	$	392,282

NOTE 8. CONVERTIBLE DEBENTURE PAYABLE

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 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 due date was March 27, 2022, does 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 related costs of approximately $192,399 were recognized during the three-month period ended March 31, 2022.

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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”). As the default had not been cured through the Waiver date, mandatory default penalties of $914,634 are included in interest expense in the condensed consolidated statement of operations for the three months ended March 31, 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.

As a result of the change in the Original Warrant extended termination date and the New Warrant issued in exchange for the Waiver, the Company evaluated the reacquisition price of the Debenture to be $3,912,781. As the net carrying amount of the Debenture is $3,048,781, a loss on extinguishment of debt of $864,000 was recognized during the three-month period ended March 31, 2022.

The debt discount amortization expense recorded as amortization of interest in the condensed consolidated statement of operations was $465,635 for the three-month period ended March 31, 2022. Stock warrants amortization expense recorded as interest expense was $ 402,465 for the three-month periods ended March 31, 2023 and 2022, respectively.

The Company incurred $548,781 of Original Issue Discount and $275,000 of debt issuance costs related to the Debenture which was 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 $423,782 for the three-month period ended March 31, 2022.

NOTE 9. NOTES PAYABLE

RELATED PARTIES

Related party notes payable consist of the following:

	March 31, 2023			December 31, 2022
Convertible Notes Payable with Warrants - 2021 Debt Offering	$	450,000		$	1,000,000
Non-Convertible Note Payable		11,810			11,810
Unamortized Debt Discount		(19,754	)		(145,548	)
Net Related Party Notes Payable	$	442,056		$	866,262
Current Portion		(442,056	)		(866,262	)
Net Long-Term Portion	$	-		$	-

Total interest expense for related party notes was $25,742 and $385,889 for the three-month periods ended March 31, 2023 and 2022, respectively.

Related Party Convertible Notes Payable with Warrants - 2021 Debt Offering

The Company had four and thirteen convertible notes payable to related parties with total principal balances of $450,000 and $1,000,000 at March 31, 2023 and December 31, 2022, respectively. The notes were issued in March, April, and May 2021 as part of a 2021 debt offering. Each of the notes were issued with detached free-standing warrants to purchase the Company’s common stock at $9 per share. The notes, secured by the Company’s patents and patent 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 noteholders 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.

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The notes contain both voluntary and automatic conversion features. The notes may be converted 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 embedded derivatives and beneficial conversion features and 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 is recorded as amortization of interest – beneficial conversion feature in the condensed consolidated statements of operations and was none and $55,356 for the three-month periods ended March 31, 2023 and 2022, respectively. The unamortized debt discount related to the beneficial conversion feature was $66,843 at December 31, 2022. This balance was eliminated upon adoption of ASU 2020-06 effective January 1, 2023 (see Note 1).

At the time of issuance, a portion of the proceeds from the 2021 debt offering was allocated to the stock warrants issued with the notes based on their relative fair value, resulting in a debt discount of $551,001 which is amortized over the life of the notes. Amortization of the debt discount related to the stock warrants is recorded as interest expense and was $58,951 and $67,932 for the three-month periods ended March 31, 2023 and 2022, respectively. The unamortized debt discount related to the warrants was $19,754 and $78,705 at March 31, 2023 and December 31, 2022, respectively.

Related Party Non-Convertible Note Payable

The Company has one non-convertible note payable to a related party that has a principal balance of $11,810 as of March 31, 2023 and December 31, 2022. 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 consist of the following:

	March 31, 2023			December 31, 2022
Convertible Notes Payable with Warrants - 2023 Debt Offering	$	3,529,413		$	-
Convertible Notes Payable with Warrants - 2021 Debt Offering		455,000			1,005,000
Convertible Notes Payable		9,183			9,183
Non-Convertible Notes Payable		17,500			17,500
Premium Financing Note Payable		-			61,792
Unamortized Debt Discount		(1,447,463	)		(144,878	)
Net Non-Related Party Notes Payable	$	2,563,633		$	948,597
Current Portion		(467,532	)		(948,597	)
Net Long-Term Portion	$	2,096,101		$	-

Total interest expense for non-related party notes was $41,126 and $129,009 for the three-month periods ended March 31, 2023 and 2022, respectively.

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Convertible Notes Payable with Warrants - 2023 Debt Offering

On March 7, 2023, the Company entered into a Debt Offering (the “2023 Debt Offering”) pursuant to a Purchase Agreement (the “Agreement”) and Registration Rights Agreement with institutional investors. The 2023 Debt Offering closed on March 9, 2023. The 2023 Debt Offering includes

SEC Form 10-Q filed by SOBR Safe Inc.