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 June 30, 2017

 ☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____________ to____________

Commission File Number: 000-53661

BLACKRIDGE TECHNOLOGY INTERNATIONAL, INC.
(Exact name of issuer as specified in its charter)

Nevada
20-1282850
(State or Other Jurisdiction of incorporation or organization)
(I.R.S. Employer I.D. No.)

10615 Professional Circle, Suite 201
Reno, NV 89521
(Address of Principal Executive Offices)

(855) 807-8776
(Registrant's Telephone Number, Including Area Code)

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 checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X . No      .

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 ☐
Accelerated filer
 ☐
Non-accelerated filer
 ☐  (Do not check if a smaller reporting company)
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(aq) of the Exchange Act. 
Yes ☐  . No ☒

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 CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

The number of shares outstanding of each of the Registrant's classes of common equity, as of the latest practicable date:
 
Class
Outstanding as of August 14, 2017
Common Capital Voting Stock, $0.001 par value per share
32,060,577 shares

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, Financial Statements and Notes to Financial Statements contain forward-looking statements that discuss, among other things, future expectations and projections regarding future developments, operations and financial conditions. All forward-looking statements are based on management's existing beliefs about present and future events outside of management's control and on assumptions that may prove to be incorrect. If any underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or intended.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

June 30, 2017

C O N T E N T S

PART I - Financial Information
 
   
Item 1.  Financial Statements  (Unaudited)
Page
   
 
Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016
 3
     
 
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016
 4
     
 
Consolidated Statements of Changes in Stockholder's Deficit
 5
     
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016
 6
     
 
Notes to Consolidated Financial Statements
 7
     
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations 
 14
   
Item 3.  Quantitative and Qualitative Disclosures About Market Risk 
 22
   
Item 4.  Controls and Procedures 
 22
 
 
 
 PART II - Other Information 
 
   
Item 1.  Legal Proceedings 
 23
   
Item 1A.  Risk Factors 
 23
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 
 23
   
Item 3.  Defaults upon Senior Securities 
 23
   
Item 4.  Mine Safety Disclosures 
 23
   
Item 5.  Other Information 
 23
   
Item 6.  Exhibits 
 24
   
Signatures 
 25


2

BLACKRIDGE TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)

   
June 30,
   
December 31,
 
   
2017
   
2016
 
             
ASSETS
           
Current Assets
           
Cash
 
$
1,218,241
   
$
57,033
 
Inventory
   
14,731
     
-
 
Prepaid expenses
   
197,629
     
100,954
 
Total Current Assets
   
1,430,601
     
157,987
 
                 
Intangible assets, net
   
6,402,456
     
5,923,543
 
Total Assets
 
$
7,833,057
   
$
6,081,530
 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Current Liabilities
               
Accounts payable and accrued expenses
 
$
2,110,533
   
$
2,038,273
 
Accounts payable and accrued expenses – related party
   
478,544
     
709,725
 
Accrued interest
   
54,098
     
52,888
 
Accrued interest – related party
   
1,576,402
     
1,241,911
 
Advances – related party
   
225,000
     
110,000
 
Wages payable
   
13,077,733
     
10,696,311
 
Deferred revenue
   
15,095
     
19,988
 
Notes payable
   
52,732
     
89,221
 
Current portion of long term debt
   
400,000
     
400,000
 
Convertible notes, short term – related party
   
284,172
     
284,172
 
Short term portion of convertible notes, long term – related party
   
3,712,638
     
-
 
Total Current Liabilities
   
21,986,947
     
15,642,489
 
                 
Noncurrent Liabilities
               
Contingent liability
   
37,500
     
37,500
 
Notes payable
   
566,658
     
800,000
 
Convertible notes payable, long term – related party
   
-
     
3,712,638
 
Total Liabilities
   
22,591,105
     
20,192,627
 
                 
Stockholders' Deficit
               
Preferred Stock, Par Value $0.001, 5,000,000 shares authorized; 3,783,818 and 3,671,316 issued and outstanding as June 30, 2017 and December 31, 2016, respectively
   
3,784
     
3,671
 
Common Stock, Par Value $0.001, 100,000,000 shares authorized; 32,060,577 and 13,325,681 issued and outstanding as of June 30, 2017 and December 31, 2016, respectively
   
32,061
     
13,326
 
Additional paid-in capital
   
25,729,705
     
20,287,638
 
Accumulated deficit
   
(40,578,598
)
   
(34,550,732
)
Subscription payable
   
55,000
     
135,000
 
Total Stockholders' Deficit
   
(14,758,048
)
   
(14,111,097
)
Total Liabilities and Stockholders' Deficit
 
$
7,833,057
   
$
6,081,530
 

See accompanying notes to the unaudited consolidated financial statements.
3


BLACKRIDGE TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
 
For the Three Months Ended
   
For the Six Months Ended
 
 
 
June 30,
   
June 30,
   
June 30,
   
June 30,
 
 
 
2017
   
2016
   
2017
   
2016
 
 
                       
Revenues
 
$
8,961
   
$
55,035
   
$
37,702
   
$
57,578
 
Cost of Goods Sold
   
258
     
-
     
258
     
-
 
Gross Profit
   
8,703
     
55,035
     
37,444
     
57,578
 
                                 
Operating Expenses:
                               
Engineering
   
25,884
     
5,656
     
66,123
     
23,976
 
Sales and marketing
   
42,127
     
16,136
     
42,127
     
25,740
 
General and administrative
   
3,499,788
     
1,090,673
     
5,056,297
     
2,188,049
 
Total operating expenses
   
3,567,799
     
1,112,456
     
5,164,547
     
2,237,765
 
 
                               
Loss From Operations
   
(3,559,096
)
   
(1,057,421
)
   
(5,127,103
)
   
(2,180,187
)
                                 
Other Income (Expense)
                               
Interest income
   
-
     
82
     
-
     
205
 
Interest expense
   
(6,866
)
   
(450,837
)
   
(72,608
)
   
(896,294
)
Interest expense – related party
   
(173,653
)
   
(163,754
)
   
(334,491
)
   
(321,033
)
Total other income (expense)
   
(180,519
)
   
(614,509
)
   
(407,099
)
   
(1,217,122
)
                                 
Net Loss Before Income Taxes
   
(3,739,615
)
   
(1,671,930
)
   
(5,534,202
)
   
(3,397,309
)
                                 
Income Tax
   
-
     
-
     
-
     
-
 
                                 
Net Loss From Continuing Operations
   
(3,739,615
)
   
(1,671,930
)
   
(5,534,202
)
   
(3,397,309
)
                                 
Discontinued Operations
                               
Loss on disposal of discontinued operations
   
-
     
-
     
(484,927
)
   
-
 
Loss from discontinued operations
   
-
     
-
     
(8,737
)
   
-
 
Loss on discontinued operations
   
-
     
-
     
(493,664
)
   
-
 
 
                               
Net Loss
 
$
(3,739,615
)
 
$
(1,671,930
)
 
$
(6,027,866
)
 
$
(3,397,309
)
                                 
Loss From Continuing Operations per Common Share - Basic and Diluted
 
$
(0.12
)
 
$
(0.13
)
 
$
(0.23
)
 
$
(0.25
)
Loss From Discontinued Operations per Common Share - Basic and Diluted
 
$
-
   
$
-
   
$
(0.02
)
 
$
-
 
                                 
Weighted Average Shares Outstanding - Basic and Diluted
   
31,035,764
     
13,325,681
     
24,079,781
     
13,325,681
 
 
See accompanying notes to the unaudited consolidated financial statements.
4

BLACKRIDGE TECHNOLOGY INTERNATIONAL, INC
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

   
Shares Outstanding - Preferred
   
Preferred Stock
   
Shares Outstanding - Common
   
Common Stock
   
Additional Paid-in
Capital
   
Subscriptions Payable
   
Accumulated Deficit
   
Total Stockholders' Deficit
 
Balance as of December 31, 2015
   
9,804
   
$
10
     
13,325,681
   
$
13,326
   
$
3,110,821
   
$
-
   
$
(27,334,912
)
 
$
(24,210,755
)
                                                                 
Issuance of preferred stock
   
608,922
     
609
     
-
     
-
     
3,130,395
     
135,000
     
-
     
3,266,004
 
Note conversions
   
3,052,590
     
3,052
     
-
     
-
     
14,046,422
     
-
     
-
     
14,049,474
 
Net loss
   
-
     
-
     
-
     
-
     
-
     
-
     
(7,215,820
)
   
(7,215,820
)
                                                                 
Balance as of December 31, 2016
   
3,671,316
     
3,671
     
13,325,681
     
13,326
     
20,287,638
     
135,000
     
(34,550,732
)
   
(14,111,097
)
                                                                 
Share conversion
   
50,000
     
50
     
(500,000
)
   
(500
)
   
450
     
-
     
-
     
-
 
Issuance of preferred stock
   
62,502
     
63
     
-
     
-
     
374,937
     
(100,000
)
   
-
     
275,000
 
Issuance of common stock
   
-
     
-
     
10,269,896
     
10,270
     
4,522,182
     
20,000
     
-
     
4,552,452
 
Business acquisition
   
-
     
-
     
8,695,000
     
8,965
     
485,551
     
-
     
-
     
494,516
 
Issuance of warrants in conjunction with debt
   
-
     
-
     
-
     
-
     
31,002
     
-
     
-
     
31,002
 
Issuance of warrants in conjunction with advances
   
-
     
-
     
-
     
-
     
27,945
     
-
     
-
     
27,945
 
Net loss
   
-
     
-
     
-
     
-
     
-
     
-
     
(6,027,866
)
   
(6,027,866
)
                                                                 
Balance as of June 30, 2017
   
3,783,818
   
$
3,784
     
32,060,577
   
$
32,061
   
$
25,729,705
   
$
55,000
   
$
(40,578,598
)
 
$
(14,758,048
)

See accompanying notes to unaudited consolidated financial statements.
5

BLACKRIDGE TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Six Months Ended June 30,
 
   
2017
   
2016
 
Cash Flows From Operating Activities
           
Net loss
 
$
(6,027,866
)
 
$
(3,397,309
)
Net loss from discontinued operations
   
493,664
     
-
 
Net loss from continuing operations
   
(5,534,202
)
   
(3,397,309
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
   
163,196
     
152,224
 
Amortization of debt discounts
   
31,002
     
10,424
 
Warrants issued in conjunction with advances
   
27,945
     
-
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
-
     
980
 
Inventory
   
(14,731
)
   
-
 
Prepaid expenses
   
(96,675
)
   
(1,639
)
Accounts payable and accrued liabilities
   
72,260
     
477,587
 
Accounts payable and accrued liabilities – related party
   
(231,181
)
   
50,972
 
Accrued interest
   
1,210
     
885,870
 
Accrued interest – related party
   
334,491
     
321,032
 
Deferred revenue
   
(4,893
)
   
(4,237
)
Wages payable
   
2,156,317
     
483,896
 
Net Cash Used in Operating Activities, Continuing Operations
   
(3,095,261
)
   
(1,020,200
)
Net Cash Provided by Operating Activities, Discontinued Operations
   
45,028
     
-
 
Net Cash Used in Operating Activities
   
(3,050,233
)
   
(1,020,200
)
                 
Cash Flows From Investing Activities
               
Proceeds from business acquisition
   
10,559
     
-
 
Purchases of intangible assets
   
(417,004
)
   
(237,953
)
Net Cash Used in Investing Activities, Continuing Operations
   
(406,445
)
   
(237,953
)
Net Cash Used in Investing Activities, Discontinued Operations
   
-
     
-
 
Net Cash Used in Investing Activities
   
(406,445
)
   
(237,953
)
                 
Cash Flows From Financing Activities
               
Proceeds from sale of common stock
   
4,532,452
     
-
 
Proceeds from sale of preferred stock
   
275,000
     
833,000
 
Proceeds from subscriptions payable
   
20,000
     
460,000
 
Proceeds from issuance of short term convertible notes
   
100,000
     
-
 
Proceeds from advances – related party
   
115,000
     
-
 
Repayments of short term notes
   
(36,489
)
   
-
 
Repayments of short term convertible notes
   
(100,000
)
   
-
 
Repayments on long term debt
   
(233,342
)
   
-
 
Net Cash Provided by Financing Activities, Continuing Operations
   
4,672,621
     
1,293,000
 
Net Cash Used in Financing Activities, Discontinued Operations
   
(54,735
)
   
-
 
Net Cash Provided by Financing Activities
   
4,617,886
     
1,293,000
 
                 
Net Increase In Cash
   
1,161,208
     
34,847
 
Cash, Beginning of Period
   
57,033
     
3,020
 
Cash, End of Period
 
$
1,218,241
   
$
37,867
 
                 
Non-Cash Investing and Financing Activities
               
Wages payable included in capitalized intangible assets
 
$
225,105
   
$
258,104
 
Common stock converted to preferred stock
 
$
500
   
$
-
 
Business acquisition
 
$
483,957
   
$
-
 
Warrants issued in conjunction with debt agreements
 
$
31,002
   
$
-
 
Warrants issued and expensed in conjunction with advances
 
$
27,945
   
$
-
 
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash paid for interest
 
$
14,597
   
$
-
 
Cash paid for income taxes
 
$
-
   
$
-
 

See accompanying notes to the unaudited consolidated financial statements.
6

BLACKRIDGE TECHNOLOGY INTERNATIONAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016 AND THE YEAR ENDED DECEMBER 31, 2016

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization  BlackRidge Technology International, Inc. (the "Company") was incorporated under the laws of the State of Nevada on March 15, 2004 under the name "Grote Molen, Inc."  The Company sells identity based network security to protect hybrid cloud and mainframe workloads from cyber-attacks and insider threats.

On September 6, 2016, the Company entered into an agreement and plan of reorganization with BlackRidge Technology International, Inc., a Delaware corporation, and Grote Merger Co., a Delaware corporation providing for the Company's acquisition of BlackRidge in exchange for a controlling number of shares of the Company's preferred and common stock pursuant to the merger of Grote Merger Co. with and into BlackRidge, with BlackRidge continuing as the surviving corporation.    The transaction contemplated in the agreement closed on February 22, 2017.

On July 2, 2017, the Company filed a Certificate to Accompany Restated Articles or Amended and Restated Articles with the Secretary of State of Nevada to, among other things, change the Company's name to BlackRidge Technology International, Inc.

Principles of Consolidation - The Company and its subsidiaries consist of the following entities, which have been consolidated in the accompanying financial statements:

BlackRidge Technology International, Inc.
BlackRidge Technology Holding, Inc.
BlackRidge Technology, Inc.
BlackRidge Technology Government, Inc.

All intercompany balances have been eliminated in consolidation.

Basis of Presentation – The accompanying consolidated financial statements as of June 30, 2017 and for the three and six months ended June 30, 2017 and 2016 are unaudited.  In the opinion of management, all adjustments have been made, consisting of normal recurring items, that are necessary to present fairly the consolidated financial position as of June 30, 2017 as well as the consolidated results of operations and cash flows for the six months ended June 30, 2017 and 2016 in accordance with U.S. generally accepted accounting principles.  The results of operations for any interim period are not necessarily indicative of the results expected for the full year.  The interim consolidated financial statements and related notes thereto should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended December 31, 2016.

Interim Financial Statements – The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, the financial statements include all adjustments (consisting of normal recurring accruals) necessary in order to make the financial statements not misleading. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the final results that may be expected for the year ended December 31, 2017. For more complete financial information, these unaudited financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2016 filed with the SEC.

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimated by management.

Concentrations - Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The cash balance at times may exceed federally insured limits. Management believes the financial risk associated with these balances is minimal and has not experienced any losses to date.  At June 30, 2017, the Company had cash balances in excess of FDIC insured limits of $928,504.  At December 31, 2016, the Company did not have any cash balances in excess of FDIC insured limits.
7

Significant customers are those which represent more than 10% of the Company's revenue for each period presented, or the Company's accounts receivable balance as of each respective balance sheet date. For each significant customer, revenue as a percentage of total revenue and accounts receivable as a percentage of total net accounts receivable are as follows:


 
Revenue
 
Accounts Receivable
 
 
Six Months Ended June 30,
 
June 30,
 
Customers
2017
 
2016
 
2017
 
2016
 
Customer A
   
78
%
   
8
%
   
-
     
-
 
Customer B
   
9
%
   
0
%
   
-
     
-
 
Customer C
   
13
%
   
92
%
   
-
     
-
 

 
Revenue
 
 
Three Months Ended June 30,
 
Customers
2017
 
2016
 
Customer A
   
38
%
   
8
%
Customer B
   
33
%
   
0
%
Customer C
   
28
%
   
89
%

Inventory - Inventory is valued at the lower of cost or market value. Product-related inventories are primarily maintained using the average cost method.  When market value is determined to be less than cost, the Company records an allowance for obsolescence.  The company's inventory assets at June 30, 2017 and December 31, 2016 consisted primarily of hardware appliances valued as follows:

 
 
As of
June 30,
2017
   
As of
December 31,
2016
 
Inventory
 
$
350,386
   
$
335,655
 
Less: allowance for obsolescence
   
(335,655
)
   
(335,655
)
 
 
$
14,731
   
$
-
 

Earnings (Loss) Per Share - The basic computation of loss per share is based on the weighted average number of shares outstanding during the period presented in accordance with ASC 260, "Earnings Per Share".  The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the period plus the common stock equivalents which would arise from the exercise of stock options and warrants outstanding using the treasury stock method and the average market price per share during the period.  Common stock equivalents are not included in the diluted earnings per share calculation when their effect is antidilutive.

Reclassification – Certain December 31, 2016 amounts disclosed in prior periods have been reclassified to conform to the current period presentation. Such reclassifications are for presentation purposes only and have no effect on the Company's net loss or financial position in any of the periods presented

Recently Enacted Accounting Standards - From time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date.  If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company's financial statements upon adoption.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases ("ASU 2016-02"). The guidance in this new standard requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to the current accounting and eliminates the current real estate-specific provisions for all entities. The guidance also modifies the classification criteria and the accounting for sales-type and direct financing leases for lessors. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-02.

NOTE 2 –GOING CONCERN

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, during the six months ended June 30, 2017 the Company incurred a net loss of $6,027,866 and inception to date losses are equal to $40,578,598.  These factors raise substantial doubt about the ability of the Company to continue as a going concern.  In this regard, management is proposing to raise any necessary additional funds not provided by operations through investment capital.  There is no assurance that the Company will be successful in raising this additional capital or in achieving profitable operations.  The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
8

NOTE 3 – INTANGIBLE ASSETS
 
In accordance with ASC 350-40, ASC 350-50, and ASC 985-20, during the six months ended June 30, 2017 and 2016, the Company capitalized $642,109 and $496,057, respectively, towards the development of software, intellectual property, and patent expenses.
    
The Company amortizes these costs over their related useful lives (approximately 7 to 20 years), using a straight-line basis. Fair value is determined through various valuation techniques, including market and income approaches as considered necessary. The Company recorded amortization of $163,196 and $152,224 related to intangible assets during the six months ended June 30, 2017 and 2016, respectively.

NOTE 4 – NOTES PAYABLE

Short term notes

At June 30, 2017 and December 31, 2016, the Company had outstanding short term debt totaling $52,732 and $89,221, respectively.  These notes bear interest at the rates of between 10% and 12% annually and have maturity dates ranging from January 1, 2012 through December 31, 2014.  As some of these notes have exceeded their initial maturity dates, they are subject to the default interest rate of 18% per annum.

The following table summarizes the Company's short term notes payable for the six months ended June 30, 2017 and the year ended December 31, 2016:
 
   
June 30,
2017
   
December 31,
2016
 
Beginning Balance
 
$
89,221
   
$
89,221
 
Notes acquired in business acquisition
   
208,811
     
-
 
Repayments – continuing operations
   
(36,489
)
   
-
 
Repayments – discontinued operations
   
(53,132
)
   
-
 
Notes divested in disposal of discontinued operations
   
(155,679
)
   
-
 
Ending Balance
 
$
52,732
   
$
89,221
 
 
Long term notes

On November 2, 2016 the Company entered into settlement agreements with two holders of convertible debt and other payables in which the Company agreed to issue new long-term debt agreements as settlement of amounts due.  Pursuant to these agreements, the Company issued two non-interest bearing $600,000 notes payable in 36 equal installments of 16,667 beginning on January 1, 2017 and Maturing on December 1, 2019.

The following table summarizes the Company's long term notes payable for the six months ended June 30, 2017 and the year ended December 31, 2016:
 
   
June 30,
2017
   
December 31,
2016
 
Beginning Balance
 
$
1,200,000
   
$
-
 
Notes acquired in business acquisition
   
136,830
     
1,200,000
 
Repayments – continuing operations
   
(233,342
)
   
-
 
Repayments – discontinued operations
   
(1,603
)
   
-
 
Notes divested in disposal of discontinued operations
   
(135,227
)
   
-
 
Ending Balance
 
$
966,658
   
$
1,200,000
 
Short Term Portion of Long Term Debt
 
$
400,000
   
$
400,000
 
Long Term Debt
 
$
566,658
   
$
800,000
 
 
9

NOTE 5 – CONVERTIBLE NOTES

Short term convertible notes

On February 2, 2017, the Company issued a $100,000 convertible note bearing interest at 10% per annum.  The note matures on March 31, 2018 and is convertible at a price of $0.66 per share at the holder's request.  The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 166,667 shares of the company's common stock at an exercise price of $0.60 per share.  The warrants were valued at $31,002 using the Black-Scholes pricing model and were recorded as a discount to the debt agreement.  The note was repaid in full on April 4, 2017 along with $1,785 in accrued interest.
Short term convertible notes – related party

On October 31, 2013, the Company agreed to convert balances owed to the Company's Corporate Council (as defined below) in the amount of $183,172 into a 42 month convertible note bearing interest at 12% annually and convertible into 203,525 shares of convertible preferred stock at the rate of $0.90 per share.  At June 30, 2017 and December 31, 2016, the principal balance was still outstanding, and the Company had accrued interest for this note in the amount of $109,153 and $84,172, respectively, which is included in accrued interest – related party on the Company's consolidated balance sheets.  The note carries a default rate of 18% for any principal not paid by the maturity date.

On November 30, 2015, the Company's Chief Technology Officer and significant shareholder invested $101,000 via a one year convertible note bearing interest at 12% annually and convertible into 112,223 shares of convertible preferred stock at the rate of $0.90 per share.  At June 30, 2017 and December 31, 2016, the Company has accrued interest for this note in the amount of $24,688 and $13,947, respectively, which is included in accrued interest – related party on the Company's consolidated balance sheets. The note carries a default rate of 18% for any principal not paid by the maturity date.

Long term convertible notes – related party

During 2011 to 2014, the Company's Chief Technology Officer and significant shareholder of the Company loaned a total of $2,673,200 to the Company.  On October 1, 2014, all prior notes including accrued interest were combined into a single $3,712,637 convertible note bearing interest at 12% annually and convertible into 4,125,154 shares of preferred stock at the rate of $0.90 per share.  At June 30, 2017 and December 31, 2016, the Company had accrued interest for this note in the amount of $1,442,561 and $1,143,791, respectively, which is included in accrued interest – related party on the Company's consolidated balance sheets.  The note matures on October 1, 2017 if the officer elects not to convert. The note carries a default rate of 18% for any principal not paid by the maturity date.

Convertible debt holders are entitled, at their option, to convert all or part of the principal and accrued interest into shares of the Company's common stock at the conversion prices and terms discussed above. The Company has determined that any embedded conversion options do not possess a beneficial conversion feature, and therefore has not separately accounted for their value.
 
The following table summarizes the Company's convertible notes payable for the six months ended June 30, 2017 and the year ended December 31, 2016:

   
June 30,
2017
   
December 31,
2016
 
Beginning Balance
 
$
3,996,810
   
$
13,815,094
 
Proceeds from issuance of convertible notes, net of issuance discounts
   
68,998
     
-
 
Repayments
   
(100,000
)
   
-
 
Conversion of notes payable into preferred stock
   
-
     
(9,452,000
)
Conversion of related party notes payable into preferred stock
   
-
     
(230,763
)
Settlement agreements
   
-
     
(145,945
)
Amortization of discounts
   
31,002
     
10,424
 
Ending Balance
 
$
3,996,810
   
$
3,996,810
 
Convertible notes, short term, net of issuance discounts
 
$
-
   
$
-
 
Convertible notes, short term – related party
 
$
284,172
   
$
284,172
 
Short term portion of convertible notes, long term – related party
 
$
3,712,638
   
$
-
 
convertible notes, long term – related party
 
$
-
   
$
3,712,638
 

10

NOTE 6 – COMMITMENTS AND CONTINGENCIES

Operating Leases
 
The Company leases approximately 6,818 square feet of office space under a 64 month operating lease which expires during April 2020. The amounts reflected in the table below are for the aggregate future minimum lease payments under the non-cancelable facility operating leases.  Under lease agreements that contain escalating rent provisions, lease expense is recorded on a straight-line basis over the lease term.

The Company also leases approximately 202 square feet of office space under 12 month operating lease which expired in 2016.  The lease is renewable at the Company's option annually at a flat monthly amount of $400.  The amounts reflected in the table below are for the aggregate future minimum lease payments under the non-cancelable facility operating leases.
 
Rent expense was $93,756 and $113,786 for the six months ended June 30, 2017 and 2016, respectively.

As of June 30, 2017, future minimum lease payments are as follows:
 
Year Ending December 31,
     
2017 (six months)
 
$
89,125
 
2018
   
179,950
 
2019
   
183,609
 
2020
   
78,612
 
Total minimum lease payments
 
$
531,296
 

Restricted Stock Commitments

The Company has committed to settling a significant portion of its current accounts payable and wages payable balances through the future issuance of restricted stock units.  While the terms of these agreements have not yet been formalized with employees and outside contractors, they could have a potentially dilutive effect to current shareholders.

Contingent Liability

On October 15, 2011, the Company entered into an agreement with a consultant by which the consultant's invoices for the previous four months would be accrued as a liability to be paid out upon (a) the Company's successful raising of $10,000,000 in capital funding, or (b) the Company reaching total revenues of $10,000,000.  The Company has a balance due under this agreement of $37,500 at June 30, 2017 and December 31, 2016, respectively.

Legal Proceedings

On December 2, 2016, AltEnergy Cyber, LLC ("Plaintiff") instituted a legal action in Connecticut against the Company and Robert Zahm.  The complaint alleged that (i) the Company improperly extended the maturity date of the Plaintiff's convertible note in the amount of $1,500,000 and (ii) improperly converted the loan into the Company's stock. The Complaint alleges that the Company is liable to the Plaintiff for $4,500,000 plus interest.  The Company believes this claim to be without merit, and intends to vigorously defend itself against it.

NOTE 7 ‑ RELATED PARTY TRANSACTIONS

During the six months ended June 30, 2017, the Company incurred interest expense on notes to related parties in the aggregate amount of $334,491.

During six months ended June 30, 2017, the Company incurred professional expenses in the amount of $75,000 pursuant to a consulting contract with a business owned by Jay Wright, the Company's Corporate Counsel.  Unpaid amounts due under this contract are included in Jay Wright's payable balances in the chart below.

Accounts payable related party

At June 30, 2017 and December 31, 2016, the Company had a balance in related party accounts payable and of $478,544 and $709,725, respectively, which consisted of the following:

       
June 30,
   
December 31,
 
Party Name:
Relationship:
Nature of transactions:
 
2017
   
2016
 
Jay Wright
Corporate Counsel
Consulting fees
 
$
222,045
   
$
355,795
 
John Hayes
Chief Technology Officer
Expense reimbursement
   
227,527
     
308,485
 
Robert Graham
Chairman and Chief Executive Officer
Expense reimbursement
   
19,972
     
45,445
 
Robert Graham
Chairman and Chief Executive Officer
Rent
   
9,000
     
-
 
 
 
   
 
$
478,544
   
$
709,725
 

11

NOTE 8 ‑ STOCKHOLDERS' EQUITY

The Company has authorized 100 million shares of common stock, $0.001 par value, and 5 million shares of preferred stock, $0.001 par value.  Each share of the Company's preferred stock is convertible into 10 shares of common stock, subject to adjustment, has voting rights equal to its common stock equivalent, 7% cumulative dividend rights, and has liquidation rights that entitle the recipient to the receipt of net assets on a pro-rata basis.  The Company has 32,060,577 and 13,325,681 common shares issued and outstanding and 3,783,818 and 3,671,316 preferred shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively.

On February 22, 2017, we completed the actions contemplated by the Reorganization Agreement (see note 9 – Business Acquisitions/Dispositions) and merged with and into BlackRidge with BlackRidge continuing as the surviving corporation. Upon completion of the Agreement, the Company issued 3,783,791 shares of its newly designated Series A Preferred Stock and 12,825,683 shares of common stock to the stockholders of BlackRidge in exchange for all the issued and outstanding shares of Series A Preferred Stock and Common Stock of BlackRidge.  Because BlackRidge continues as the surviving entity, the net effect from this transaction on the outstanding stock of the Company was the addition of 8,965,000 shares of common stock held by the investors of the Company at the time of the acquisition.

Between January 13, 2017 and February 27, 2017, the Company issued 625,000 shares of the Company's preferred stock along with 5 year warrants to purchase 625,000 shares of the Company's common stock at an exercise price per share of $0.70 to several investors for aggregate proceeds of $375,000, or $0.60 per share.  The warrants were valued at $104,765 using the Black-Scholes pricing model.

Between February 27, 2017 and June 2, 2017, the Company issued 10,269,896 shares of the Company's common stock and 5 year warrants to purchase 6,640,846 shares of the Company's common stock at an average exercise price per share of $0.51 to several investors for aggregate proceeds of $4,532,452. The warrants were valued at $1,227,398 using the Black-Scholes pricing model. The Company paid consultant and business development fees of $89,000 related to these issuances.
   
On February 2, 2017, the Company issued warrants to purchase 166,667 shares of the Company's common stock at an exercise price of $0.60 per share in conjunction with a debt agreement.  The warrants were valued at $31,002 using the Black-Scholes pricing model and were recorded as a discount to the debt agreement.

Between February 9, 2017 and March 6, 2017, the Company issued warrants to purchase 150,001 shares of the Company's common stock at an exercise price per share of $0.60 to several parties in conjunction with short term notes and advances.  The warrants were valued at $27,945 using the Black-Scholes pricing model and were recorded to additional paid in capital.

The significant assumptions used in the Black-Scholes valuation of the warrants are as follows:

Stock price on the valuation date
 
$
0.45
 
Warrant exercise price
 
$
0.10 - 0.70
 
Dividend yield
   
0.00
%
Years to maturity
   
5.0
 
Risk free rate
   
1.50 – 2.02
%
Expected volatility
   
55.43
%

NOTE 9 – BUSINESS ACQUISITION

On September 6, 2016, the Company and BlackRidge entered into an Agreement and Plan of Reorganization (the "Reorganization Agreement") originally dated as of September 6, 2016, and amended on February 22, 2017 to update the number of common shares, warrants, and options granted and outstanding as of the closing date.

On February 22, 2017, we completed the actions contemplated by the Reorganization Agreement and merged with and into BlackRidge with BlackRidge continuing as the surviving corporation ("Reorganization"). Upon completion of the Agreement, we issued 3,783,791 shares of our newly designated Series A Preferred Stock and 12,825,683 shares of Common Stock to the stockholders of BlackRidge in exchange for all the issued and outstanding shares of Series A Preferred Stock and Common Stock of BlackRidge.  Additionally, certain stockholders of BlackRidge returned for cancellation a total of 16,284,330 shares of our Common Stock.  Upon the completion of the Reorganization, BlackRidge became a wholly-owned subsidiary of the Company and the Company had a total of 3,783,791 shares of Series A Preferred Stock and 21,790,683 shares of Common Stock outstanding, with the former BlackRidge stockholders owning 3,783,791 shares or 100% of Series A Preferred Stock and 12,825,683 shares or approximately 58.9% of Common Stock.  Upon completion of the Reorganization, we also had outstanding warrants entitling the holders to acquire a total of 18,541,579 shares of the Company's Common Stock at an average exercise price of $0.46 per share.  The Reorganization resulted in a change of control of the Company.  For accounting purposes, BlackRidge was treated as the acquirer and the historical financial statements of BlackRidge became the Company's historical financial statements.  The acquisition is intended to constitute a tax-free reorganization pursuant to the applicable provisions of the Internal Revenue Code of 1986, as amended.
12

NOTE 10 – DISCONTINUED OPERATIONS

On March 31, 2017, the Company completed the sale of substantially all the assets, other than cash, used in or connection with the Company's home grain mill and kitchen mixer business to John Hofman and Bruce Crane, former officers and directors of the Company, in consideration for the assumption by such persons of substantially all the liabilities incurred by the Company in connection with such business.  The assets divested consisted of the non-cybersecurity assets of the Company and included accounts receivable, inventory, deposits, property and equipment and intangible assets.  The liabilities divested included the non-cybersecurity liabilities of the Company and included accounts payable and accrued expenses and long and short-term notes payable and accrued interest thereon.  Upon completion of the divestiture, the Company recognized a $484,927 loss on disposal.  Additionally, during the period from February 22, 2017 through March 31, 2017, the Company incurred a loss from discontinued operations of $8,737.

The following table shows the value of assets and liabilities divested:
 
Assets
     
Accounts receivable
 
$
40,044
 
Deposits and prepaid expenses
   
90,559
 
Inventory
   
1,157,555
 
Property and equipment
   
117,254
 
Intangible assets
   
62,820
 
Total Assets
   
1,468,232
 
         
Liabilities
       
Accounts payable and accrued expenses
   
692,399
 
Notes payable – short term
   
64,000
 
Notes payable – short term, related party
   
91,679
 
Line of credit
   
135,227
 
Total Liabilities
   
983,305
 
         
Loss on disposal
 
$
484,927
 
 
NOTE 11 - SUBSEQUENT EVENTS

We have evaluated all events that occurred after the balance sheet date through the date when our financial statements were issued to determine if they must be reported.  Management has determined that other than as disclosed below, there were no additional reportable subsequent events to be disclosed.
13

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-looking Statements

Statements made in this Quarterly Report which are not purely historical are forward-looking statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and our business, including, without limitation, (i) our ability to raise capital, and (ii) statements preceded by, followed by or that include the words "may," "would," "could," "should," "expects," "projects," "anticipates," "believes," "estimates," "plans," "intends," "targets" or similar expressions.

Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following: general economic or industry conditions, nationally and/or in the communities in which we may conduct business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, our ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting our current or potential business and related matters.

Accordingly, results actually achieved may differ materially from expected results in these statements. Forward-looking statements speak only as of the date they are made. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.

General

BlackRidge Technology International, Inc., formerly known as Grote Molen, Inc., ("the Company") was incorporated under the laws of the State of Nevada on March 15, 2004.

We develop and market next generation cyber defense solutions that stop cyber-attacks and block unauthenticated access. Our network and server security products are based on our patented Transport Access Control technology and are designed to isolate, cloak and protect servers and cloud services and segment networks for regulatory compliance. BlackRidge products are used in enterprise and government computing environments, the industrial Internet of Things ("IoT"), and other cloud service provider and network systems.

Reorganization Agreement

On September 6, 2016, the Company and BlackRidge Technology Holdings, Inc., a Delaware corporation ("BlackRidge") entered into an Agreement and Plan of Reorganization (the "Reorganization Agreement") originally dated as of September 6, 2016, and amended on February 22, 2017 to update the number of common shares, warrants, and options granted and outstanding as of the closing date.

On February 22, 2017, we completed the actions contemplated by the Reorganization Agreement and merged with and into BlackRidge with BlackRidge continuing as the surviving corporation ("Reorganization"). Upon completion of the Agreement, we issued 3,783,791 shares of our newly designated Series A Preferred Stock and 12,825,683 shares of Common Stock to the stockholders of BlackRidge in exchange for all the issued and outstanding shares of Series A Preferred Stock and Common Stock of BlackRidge.  Additionally, certain stockholders of the Company returned for cancellation a total of 16,284,330 shares of our Common Stock.  Upon the completion of the Reorganization, BlackRidge became a wholly-owned subsidiary of the Company and the Company had a total of 3,783,791 shares of Series A Preferred Stock and 21,790,683 shares of Common Stock outstanding, with the former BlackRidge stockholders owning 3,783,791 shares or 100% of Series A Preferred Stock and 12,825,683 shares or approximately 58.9% of Common Stock.  Upon completion of the Reorganization, we also had outstanding warrants entitling the holders to acquire a total of 18,541,579 shares of the Company's Common Stock at an average exercise price of $0.46 per share.  The Reorganization resulted in a change of control of the Company.  For accounting purposes, BlackRidge will be treated as the acquirer and the historical financial statements of BlackRidge will become the Company's historical financial statements.  The acquisition is intended to constitute a tax-free reorganization pursuant to the applicable provisions of the Internal Revenue Code of 1986, as amended.

At the closing of the Reorganization, Robert Graham was appointed as President, and John Bluher was appointed Chief Financial Officer, Treasurer and Secretary.  In addition, Bruce Crane resigned from his position as a director and Robert Graham was appointed as a director of the Company to fill the vacancy created by such resignation.  John Hofman, our remaining director, resigned from such position effective following our compliance with rule 14f-1 promulgated under the Exchange Act, and John Hayes and Robert Lentz were appointed as directors of the Company effective at such time as Mr. Hofman's resignation became effective.

On March 31, 2017, the Company completed the sale of substantially all assets, other than cash, used in or connection with the Company's home grain mill and kitchen mixer business to John Hofman and Bruce Crane, former officers and directors of the Company, in consideration for the assumption by such persons of substantially all the liabilities incurred by the Company in connection with such business.  The assets divested consisted of the non-cybersecurity assets of the Company and included accounts receivable, inventory, deposits, property and equipment and intangible assets.  The liabilities divested included the non-cybersecurity liabilities of the Company and included accounts payable and accrued expenses and long and short-term notes payable and accrued interest thereon. 
14

On July 2, 2017, the Company filed a Certificate to Accompany Restated Articles or Amended and Restated Articles with the Secretary of State of Nevada to, among other things, change the Company's name to BlackRidge Technology International, Inc.

Business

The Company develops, markets and supports a family of products that provide a next generation cyber security solution for protecting enterprise networks and cloud services. With our patented technology, network and server resources located in the enterprise, datacenters and cloud systems, are better protected, less expensive to protect, and less vulnerable to compromise from cyber-attacks. We believe that our identity-based approach to network and cloud security offers superior performance compared to legacy network security approaches, and reduces the total cost of ownership for organizations by eliminating malicious and unwanted traffic from their networks and systems.

BlackRidge products provide advanced capabilities compared to advanced firewalls in applications such as network segmentation and isolating cloud services.  BlackRidge also cloaks protected network resources from network mapping, reconnaissance and other forms of unauthorized access and attacks which cannot be blocked by advanced firewalls.

Our proprietary technology, BlackRidge Transport Access Control ("TAC"), authenticates user or device identity and applies security policies across networks and cloud services before application sessions are established. Underlying BlackRidge TAC is our patented First Packet Authentication™ which conveys and authenticates identity in the "first packet" of a TCP network session request. This fundamental invention addresses a security gap in how the Internet operates: the inability to authenticate network traffic sources. Without authentication, unidentified and unauthorized users and devices can scan, probe and access networks and cloud services. This security gap is exploited in all cyber-attacks through the process of network scanning and reconnaissance, and it has been further exposed and magnified by cloud services, mobile connectivity, and the IoT.
   
The Company's technology is first to market with this approach of enforcing security policy based on cryptographically secured identity on every TCP/IP session.

Our products are protected by multiple U.S. Patents including "First Packet Authentication," "Concealing a Network Connected Device," "Digital Identity Authentication," and "Statistical Object Identification."

Products

BlackRidge and our partners sell network security products and solutions based on our proprietary BlackRidge TAC software technology. BlackRidge TAC provides high throughput and low latency network security that operates pre-session, in real time, before other security defenses engage. BlackRidge products can be deployed inside a network to cloak and protect servers and segment networks, in front of existing security stacks to filter anonymous traffic, or as part of service provider or OEM (as defined below) solution.

The BlackRidge solution is available in the following product configurations, with additional platform support under development:

·
1U rack-mountable 1GbE or 10GbE network appliance
·
1GbE fanless desktop appliance
·
VMware ESXi™ virtual appliance
·
IBM z Systems™ LPAR and IBM z/VM® software appliances
·
Amazon Web Services appliances

BlackRidge products are priced on a per appliance or gateway and on the total number of user and device identities supported in an implementation. Enterprise and OEM licensing along with subscription pricing are available. BlackRidge appliances can support up to 100,000 identities and 4,000,000 sessions, providing a highly scalable enterprise solution that operates with low latency and high throughput compared to current network security devices

Network and cloud deployments options include deploying in-line as a Layer 2 transparent bridge or logically inline as a Layer 3 gateway for cloud deployments.  BlackRidge software and systems are designed to be highly resilient and can be configured for high availability and failover. Security policies can be verified during deployment with progressive modes of bridge, monitor and audit, and then enforce policy.
15

Support and Maintenance

BlackRidge offers standard and premium support to our end-customers and channel partners, where our channel partners typically deliver level one support and we provide level two and level three support. The support for our end customers includes ongoing maintenance services for both hardware and software to receive software upgrades, bug fixes, and repairs. End customers typically purchase these services for a one year or longer term at the time of the initial product sale and typically renew for successive one year or longer periods.

Professional Services. 

Professional services are primarily delivered through our channel partners and include experts who plan, design, and deploy effective security solutions tailored to our end-customers' specific requirements. These services include solution design and planning, configuration, and installation. Our education services provide online and classroom-style training and are also primarily delivered through our internal team.

Technology Alliance Partners

BlackRidge participates in an ecosystem of technology alliance partners to extend the breadth and depth of our products and partner solutions. By helping to ease the complications that organizations face when implementing multi-layered security solutions, our technology alliances facilitate integrated solution design, accelerate the time to realize value, and enhance our role as a strategic security partner.

Markets, Customers and Distribution Channels

The BlackRidge network security and cyber defense solution is broadly applicable to virtually all enterprise and government market segments.  Whether deployed directly in a customer's environment or consumed as part of cloud service or solution, BlackRidge provides a new level of cyber defense not available in the market today.

BlackRidge markets and sells its products through multiple channels, including direct sales, integrator and reseller channel partners, cloud and managed service providers, and through strategic Original Equipment Manufacturer ("OEM") partners to both government and commercial users. The initial sales focus and market entry strategy for BlackRidge was originally the US Department of Defense, which is a key leverage point for the company's current commercial and government sales efforts. Our customers and partners include IBM, Ciena, Crimson Logic, the US Department of Defense, the US Department of Energy, Marist College, Splunk and mid-market and large financial institutions.

Within the commercial markets, BlackRidge sells both direct and through our strategic partners to large enterprise accounts, and indirectly through certain channel partners to specific verticals and international market segments. Our initial market entry strategy for the commercial market is to sell directly in order to establish customer and analyst references with large enterprises in North America that have high security and compliance requirements.  These include more complex regulated enterprises such as Financial Services and Insurance companies. Our channel partners are recruited to assist with expanding enterprise sales, commercializing specific vertical markets, and penetrating the international markets. Revenue from commercial sales includes product licensing fees, installation services, and annual support based on a standard price list.

In the government markets, BlackRidge sells its standard commercial products through a wholly owned subsidiary, BlackRidge Technology Government, to government integrators and contractors who re-sell to the Department of Defense (DOD) and civilian agencies. BlackRidge has been involved with the DOD for over five years, including our initial product development funding which was provided by the U.S. DOD. The BlackRidge products have been designed for several large DOD programs and they have been extensively tested and validated for use by the Defense Information Systems Agency labs. The timing of the DOD adoption of BlackRidge products depends on approval of budgets and final product testing approvals from the DOD. BlackRidge Government revenue is net of government discounts, contracting fees, and channel and service partner discounts.

The BlackRidge OEM and service provider partnership strategy is to make targeted investments to capitalize on opportunities in specific market segments such as the industrial Internet of Things (IoT), Blockchain network and server equipment providers, and cloud solution providers. For these markets and our partners, BlackRidge TAC is deployed as an integrated or embedded capability in the partners' vertical market solutions, and our technology will be sold and supported by our partner. BlackRidge provides unique, integrated identity-based cyber defense for these OEM products or service offerings that provides our end user customer with a competitive market advantage in the face of today's advanced cyber threats. Revenue from OEM offerings flows from embedded product licensing fees and support fees that are somewhat unique to each OEM offering.
 
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Marketing

Our marketing is focused on building our brand reputation and market awareness for our platform, driving customer demand and building a strong sales pipeline, and working with our channel and OEM partners. Our marketing team when fully developed will consist of corporate marketing, channel marketing, lead development, operations, and corporate communications. Marketing activities include demand generation, digital marketing programs, product launch activities, managing our corporate and investor website, trade shows and conferences, and press and analyst relations.

Research and Development

We continue to enhance our BlackRidge TAC software, the core software used in the BlackRidge products. This software is responsible for the TAC token generation, token validation, the token cache, packet processing and the insertion of TAC tokens into TCP connection requests. The TAC software has been developed domestically within the U.S. using only U.S. citizens. This software includes implementations of granted and pending patents owned by BlackRidge.

We continue to pursue research and development to improve our existing products. These improvements include making our products easier to manage, easier to deploy in large numbers, and improvements in our integrations with 3rd party products that communicate with BlackRidge products.

Our product development efforts release software with new features from time to time.  When a new feature is significant enough, we produce a major software release.  In between major software releases, there may be one or more minor software releases that also introduce less significant new features.

Intellectual Property

BlackRidge focuses on developing patent protection for products it develops and for products and features that are anticipated. We constantly perfect and file new applications.  We continue to develop our products; we will continue to file additional patent applications where appropriate.

The granted patents focus on the communication of identity tokens at the network layer (6,973,496, 8,346,951), combining Identity authentication at different security layers (8,281,127, 8,635,445), insuring the integrity of token authentication (8,572,697) and using identity to select amongst a set of trusted resources (9,118,644). The pending applications focus on extending the above protections (13/987,747, 14/544,987, 14/998,645), using network identity in a firewall (14/545,988), making network routing policy decisions using identity (14/999,317) and detecting tampering of hardware and software systems (13/199,050).

As of release 3.0, our products use the technology described in patents 6,973,496, 8,346,951 and 8,572,697 as well as technology described in some of our pending applications.  As we continue to add products and features, we will be incorporating technology described in additional patents and applications. All patents and completed applications are assigned to BlackRidge Technology Holdings, Inc.

Granted Patents
Concealing a Network Connected Device US Patent number 6,973,496, Patent Application U.S. Ser. No. 10/094,425. Filed 5 March 2002, Granted 6 December 2005, 1 Claim.

Method for Digital Identity Authentication US Patent number 8,281,127, Patent Application U.S. Ser. No. 12/658,113. Filed 1 February 2010, Granted 2 October 2012, 20 Claims.

Method for First Packet Authentication US Patent number 8,346,951, Patent Application U.S. Ser. No. 11/242,637.  Filed 30 Sept 2005, Granted 1 January 2013, 25 Claims.

Method for Statistical Object Identification US Patent number 8,572,697, Patent Application U.S. Ser. No. 13/373,586.  Filed 18 November 2011, Granted 29 October 2013, 43 Claims.

Method for Digital Identity Authentication US Patent number 8,635,445, Patent Application U.S. Ser. No. 13/573,077.  Filed 16 August 2012, Granted 21 January 2014, 23 Claims.

Method for Directing Requests to Trusted Resources US Patent number 9,118,644, Patent Application U.S. Ser. No. 13/573,238.  Filed 30 August 2012, Granted 25 August 2015, 27 Claims.
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Published Pending Applications
Method for Statistical Object Identification Patent Application U.S. Ser. No. 13/987,747, filed 27 August, 2013, continuation-in-part of Patent 8,572,697.

Unpublished Pending Applications
U.S. Patent Applications are published by the patent office 18 months after filing.

Method for Network Security Using Statistical Object Identification Patent Application U.S. Ser. No. 14/544,987, filed 11 March 2015, continuation-in-part of Patent 8,572,697.

Method for Attribution Security System Patent Application U.S. Ser. No. 14/545,988, filed 13 July 2015.

Method for Statistical Object Identification Patent Application U.S. Ser. No. 14/998,645, filed 16 January 2016, continuation-in-part of Patent 8,572,697.

Method for Using Authenticated Requests to Select Network Routes Patent Application U.S. Ser. No. 14/999,317, filed 22 April, 2016.

Secure Cloud Computing System Patent Application U.S. Ser. No. pending, filed 6 August 2016, continuation-in-part of Patent Applications U.S. Ser. No. 13/199,050 and 13/999,757.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:

Accounts Receivable

Trade accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts. We determine the allowance for doubtful accounts by identifying potential troubled accounts and by using historical experience and future expectations applied to an aging of accounts. Trade accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded as income when received. We determined that no allowance for doubtful accounts was required at June 30, 2017 and December 31, 2016.

Intangible Assets

Acquired intangible assets are recorded at estimated fair value, net of accumulated amortization. Costs incurred in obtaining certain patents and intellectual property as well as software development expenses, are capitalized and amortized over their related estimated useful lives, using a straight-line basis consistent with the underlying expected future cash flows related to the specific intangible asset. Costs to renew or extend the life of intangible assets are capitalized and amortized over the remaining useful life of the asset. Amortization expenses are included as a component of selling, general and administrative expenses in the consolidated statements of operations.  The Company's continued ability to extend and/or renew the rights associated with these intangible assets may have an impact on future cash flows.
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Useful life estimates for the Company's significant intangible asset classes are as follows:

 
Useful Life
Patent Costs
20 years
Software Licenses
7 years
Software Development Costs
15 years

Impairment of Long-Lived Assets

The Company reviews long-lived assets, at least annually, to determine if impairment has occurred and whether the economic benefit of the asset (fair value of assets to be used and fair value less disposal cost for assets to be disposed of) is expected to be less than the carrying value.  Triggering events, which signal further analysis, consist of a significant decrease in the asset's market value, a substantial change in the use of an asset, a significant physical change in the asset, a significant change in the legal or business climate that could affect the asset, an accumulation of costs significantly in excess of the amount originally expected to acquire or construct the asset, or a history of losses that imply continued loss associated with assets used to generate revenue.

Revenue Recognition

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. Revenue generally is recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities.

Revenue recognition for multiple-element arrangements requires judgment to determine if multiple elements exist, whether elements can be accounted for as separate units of accounting, and if so, the fair value for each of the elements.

The Company may enter into arrangements that can include various combinations of software, services, and hardware. Where elements are delivered over different periods of time, and when allowed under U.S. GAAP, revenue is allocated to the respective elements based on their relative selling prices at the inception of the arrangement, and revenue is recognized as each element is delivered. We use a hierarchy to determine the fair value to be used for allocating revenue to elements: (i) vendor-specific objective evidence of fair value ("VSOE"), (ii) third-party evidence, and (iii) best estimate of selling price ("ESP"). For software elements, we follow the industry specific software guidance which only allows for the use of VSOE in establishing fair value. Generally, VSOE is the price charged when the deliverable is sold separately or the price established by management for a product that is not yet sold if it is probable that the price will not change before introduction into the marketplace. ESPs are established as best estimates of what the selling prices would be if the deliverables were sold regularly on a stand-alone basis. Our process for determining ESPs requires judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable.

Any revenue received that does not yet meet the above recognition standards is recorded to unearned revenue, and held as a liability until recognition occurs.

Income Taxes

We account for income taxes in accordance with FASB ASC Topic 740, Income Taxes, using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective 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.

FASB ASC Topic 740, Income Taxes, requires us to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, we must measure the tax position to determine the amount to recognize in our consolidated financial statements. We performed a review of our material tax positions in accordance with recognition and measurement standards established by ASC Topic 740 and concluded we had no unrecognized tax benefit that would affect the effective tax rate if recognized for the six months ended June 30, 2017 and 2016.

We include interest and penalties arising from the underpayment of income taxes, if any, in our consolidated statements of operations in general and administrative expenses. As of June 30, 2017 and December 31, 2017, we had no accrued interest or penalties related to uncertain tax positions.
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Fair Value of Financial Instruments

The Company's financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses, notes payable and convertible debt.  The carrying amount of these financial instruments approximates fair value because of the short-term nature of these items.

Results of Operations

Three Months Ended June 30, 2017 Compared to the Three Months Ended June 30, 2016

Sales

Total sales during the three months ended June 30, 2017 were $8,961, as compared to sales during the three months ended June 30, 2016 of $55,035, a decrease of $46,074.  This decrease was due to a reduction in one time sales.

Operating Expenses

Our selling, general and administrative expenses were $3,567,779 for the three months ended June 30, 2017, compared to $1,112,456 for the three months ended June 30, 2016, an increase of $2,455,323, or approximately 221%.  The increase in selling, general and administrative expenses in the current year is primarily attributable to an approximate $800,000 increase in professional fees incurred in conjunction with our acquisition and reorganization coupled with an increase in general and administration costs related to our increased activity as we implement our business plan and an increase of approximately 1,100,000 in non-cash stock compensation accruals.  We expect that these onetime professional fee and stock compensation expenses will not continue in future periods.
Interest Income (Expense)

Other expense includes interest expense on our indebtedness, a portion of which is indebtedness to related parties.  Total net interest expense was $180,519 and $614,509 for the three months ended June 30, 2017 and 2016, respectively.  The decrease in interest expense of $433,990 in the current year is attributable primarily to the conversion of approximately $14 million of convertible debt into equity in the prior year.

Six Months Ended June 30, 2017 Compared to the Six Months Ended June 30, 2016

Sales

Total sales during the six months ended June 30, 2017 were $37,702, as compared to sales during the six months ended June 30, 2016 of $57,578, a decrease of $20,134.  This decrease was due to a reduction in one time sales.

Selling, General and Administrative Expenses

Operating Expenses

Our selling, general and administrative expenses were $5,164,547 for the six months ended June 30, 2017, compared to $2,237,765 for the six months ended June 30, 2016, an increase of $2,926,782, or approximately 130%.  The increase in selling, general and administrative expenses in the current year is primarily attributable to an approximate $1,000,000 increase in professional fees incurred in conjunction with our acquisition and reorganization coupled with an increase in general and administration costs related to our increased activity as we implement our business plan and an increase of approximately 1,100,000 in non-cash stock compensation accruals.  We expect that these onetime professional fee and stock compensation expenses will not continue in future periods.
Interest Income (Expense)

Other expense includes interest expense on our indebtedness, a portion of which is indebtedness to related parties.  Total net interest expense was $407,099 and $1,217,122 for the six months ended June 30, 2017 and 2016, respectively.  The decrease in interest expense of $810,023 in the current year is attributable primarily to the conversion of approximately $14 million of convertible debt in the prior year.

Loss on disposal of discontinued operations

On March 31, 2017, the Company completed the sale of substantially all the assets, other than cash, used in or connection with the Company's home grain mill and kitchen mixer business to John Hofman and Bruce Crane, former officers and directors of the Company, in consideration for the assumption by such persons of substantially all the liabilities incurred by the Company in connection with such business.  The assets divested consisted of the non-cybersecurity assets of the Company and included accounts receivable, inventory, deposits, property and equipment and intangible assets.  The liabilities divested included the non-cybersecurity liabilities of the Company and included accounts payable and accrued expenses and long and short-term notes payable and accrued interest thereon.  Upon completion of the divestiture, the Company recognized a $484,927 non-cash loss on disposal.
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Loss from discontinued operations

During the period from February 22, 2017 through March 31, 2017, the Company recognized a loss from discontinued operations of $8,737.  This loss was primarily driven by lower than anticipated product sales of the entity that was eventually sold.

Liquidity and Capital Resources

At June 30, 2017, we had total current assets of $1,430,601, including cash of $1,218,241, and current liabilities of $21,986,947, resulting in working capital deficit of $20,556,346.  Our current assets and working capital included inventory of $14,731 and prepaid expenses of $197,629. 

In addition, as June 30, 2017, we had total stockholders' deficit of $14,758,048.  As we have worked toward our acquisition and new product launches, we have primarily financed recent operations, the development of technologies, and the payment of expenses through the issuance of our debt, common stock, preferred stock and warrants.

For the six months ended June 30, 2017, net cash used in operating activities was $3,050,233, as a result of our net loss from continued operations of $5,534,202 and increases in inventory of $14,731, prepaid expenses of $96,675, and decreases in deferred revenue of $4893, accounts payable and accrued expenses – related party of $231,181, partially offset by non-cash expenses totaling $222,143, and increases in accounts payable and accrued expenses of $72,260, accrued interest of $1,210, accrued interest - related party of $334,491, wages payable of $2,256,317, loss from discontinued operation of $493,664 and cash flows from discontinued operations of $45,028.
By comparison, for the six months ended June 30, 2016, net cash used in operating activities was $1,020,200, as a result of our net loss of $3,397,309 an increases in prepaid expense of $1,639 and a decrease in deferred revenue of $4,237, partially offset by non-cash expenses of $162,648, decreases in accounts receivable of $980, and increases in accounts payable and accrued expenses of $477,587, accounts payable – related party of $50,972, accrued interest of $855,870, accrued interest – related party of $321,032 and wages payable of $483,896.

Cash used in investing activities for the six months ended June 30, 2017 was $406,445 compared to $237,953 for the six months ended June 30, 2016.  The increase of $268,492 in the current period is due primarily to an increase in capitalized engineering costs related to the Company's technology development.

For the six months ended June 30, 2017, net cash provided by financing activities was $4,672,621, comprised of proceeds from the sale of common stock of $4,532,452, preferred stock of $275,000 and subscriptions payable of $20,000, proceeds from short term notes of $100,000 and advances – related party of $115,000, partially offset by the repayment of short-term notes of $36,489, repayments of short-term convertible notes of $100,000, repayments of long-term notes of $233,342 and cash outflows from discontinued operations of $54,735.

For the six months ended June 30, 2016, net cash provided by financing activities was $1,293,000, comprised of proceeds from the sale of preferred stock of $833,000 and proceeds from subscriptions payable of $460,000.

Based on our current business plan, we anticipate that our operating activities will use approximately $175,000 in cash per month over the next twelve months, or $2.1 million. Currently we do not have enough cash on hand to fully implement our business plan, and will require additional funds within the next year. We believe that our operations will not begin to generate significant cash flows until the fourth quarter of 2017.  

In order to remedy this liquidity deficiency, we are actively seeking to raise additional funds through the sale of equity and debt securities, and ultimately plan to generate substantial positive operating cash flows. Our internal sources of funds will consist of cash flows from operations, but not until we begin to realize substantial revenues from sales. If we are unable to raise additional funds in the near term, we may not be able to fully implement our business plan, and it is unlikely that we will be able to continue as a going concern.
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Off-balance Sheet Arrangements

None.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not required.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls over Procedures

Under the supervision and with the participation of our management, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("the Exchange Act") as of June 30, 2017, the end of the period covered by this report.  Based upon that evaluation, we have concluded that our disclosure controls and procedures as of June 30, 2017 were effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management as appropriate to allow timely decisions regarding disclosure.  A controls system cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Management's Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined under Exchange Act Rules 13a-15(f).  Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements.  Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting.  Based on our evaluation under that framework, management concluded that our internal control over financial reporting was not effective as of June 30, 2017.

Changes in Internal Control over Financial Reporting

None
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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

On December 2, 2016, AltEnergy Cyber, LLC ("Plaintiff") instituted a legal action in Connecticut against the Company and Robert Zahm.  The complaint alleged that (i) the company improperly extended the maturity date of the Plaintiff's convertible note in the amount of $1,500,000 and (ii) improperly converted the loan into the Company's stock. The Complaint alleges that the Company is liable to the Plaintiff for the $4,500,000 plus interest.  The Company believes this claim to be without merit, and intends to vigorously defend itself against it.

Item 1A. Risk Factors

Not required.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
      
Between February 27, 2017 and June 2, 2017, the Company issued 10,269,896 shares of the Company's common stock and 5 year warrants to purchase 6,640,846 shares of the Company's common stock at an average exercise price per share of $0.51 to several investors for aggregate proceeds of $4,532,452. The warrants were valued $1,227,398 using the Black-Scholes pricing model. The Company paid consultant and business development fees of $89,000 related to these issuances.
          
Item 3. Defaults upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

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Item 6. Exhibits

The following exhibits are filed as part of this report:

Identification of Exhibit

3.1
Amended and Restated Articles of Incorporation*
   
31.1
Section 302 Certification of Chief Executive Officer *
   
31.2
Section 302 Certification of Chief Financial Officer *
   
32.1
Section 1350 Certification of Chief Executive Officer *
   
32.2
Section 1350 Certification of Chief Financial Officer *
 
101 INS
XBRL Instance Document**
   
101 SCH
XBRL Schema Document**
   
101 CAL
XBRL Calculation Linkbase Document**
   
101 DEF
XBRL Definition Linkbase Document**
   
101 LAB
XBRL Labels Linkbase Document**
   
101 PRE
XBRL Presentation Linkbase Document**
 
* Filed herewith
 
**       The XBRL related information in Exhibit 101 shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
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SIGNATURES

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

BLACKRIDGE TECHNOLOGY INTERNATIONAL, INC.
(Issuer)

Date:
August 14, 2017
 
By:
/s/ Robert Graham
       
Robert Graham,
Chief Executive Officer and President

Date:
August 14, 2017
 
By:
/s/ John Bluher
       
John Bluher,
Chief Financial Officer
 
 
 
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