SOBR Safe, Inc.: Form 10-Q for the period ended Jun 30, 2024

Disclaimer Regarding Forward Looking Statements

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

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

Corporate Overview

On September 19, 2011, we, as Imagine Media, Ltd., a Delaware corporation, acquired approximately 52% of the outstanding shares of TransBiotec, Inc. (“TBT”), a California corporation, from TBT’s directors in exchange for 124,439 shares of our common stock. In January 2012, our Board of Directors amended our Certificate of Incorporation changing our name from Imagine Media, Ltd. to TransBiotec, Inc., and we acquired approximately 45% of the remaining outstanding shares of TBT in exchange for 109,979 shares of our common stock. With the acquisitions in September 2011 and January 2012 of TBT common stock, we own approximately 99% of the outstanding shares of TBT. As a result of the acquisitions, TBT’s business is our business, and, unless otherwise indicated, any references to “we” or “us” include the business and operations of TBT.

On March 9, 2020, our Board of Directors approved the amendment to our Certificate of Incorporation and stockholders holding 52% of our then outstanding voting stock approved an amendment to our Articles of Incorporation. The Certificate of Amendment to our Certificate of Incorporation was for the purpose of, among other things, changing our name from “TransBiotec, Inc.” to “SOBR Safe, Inc.” The Certificate of Amendment to our Certificate of Incorporation became effective with the State of Delaware on April 24, 2020.

Pursuant to approval of an application with Nasdaq to uplist our common stock to their exchange under the ticker symbol “SOBR,” our common stock began trading and quoted on the Nasdaq exchange on May 16, 2023. Prior to this uplist to the Nasdaq exchange, our common stock was quoted on the “OTCQB” tier of the OTC Markets under the ticker symbol “SOBR.”

Our corporate offices are located at 6400 South Fiddlers Green Circle, Suite 1400, Greenwood Village, Colorado 80111, telephone number (844) 762-7723.

The following discussion:

• summarizes our plan of operation; and
• analyzes our financial condition and the results of our operations for the six months ended June 30, 2024.

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This discussion and analysis should be read in conjunction with our financial statements included as part of this Quarterly Report on Form 10-Q, as well as our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023.

Business Operations, Outlook and Challenges

We provide non-invasive technologies to quickly and humanely identify the presence of alcohol in individuals. Our mission is to save lives, positively impact behavioral outcomes and individual wellness, increase workplace safety and productivity, and create significant economic benefits. Our non-invasive technologies are integrated within our scalable and patent-pending software platform, SOBRsafe™, producing statistical, measurable business and user data. To that end, our SOBRsafe™ software platform, along with our integrated hardware devices used to provide non-invasive alcohol detection and identity verification, combine to create a robust solution that has current and potential applications in:

• Behavioral health and wellness
• Judicial administrative applications
• Licensing and integration
• Commercial environments, including but not limited to oil and gas, fleet management, telematics, ride share programs, and general workplace safety
• Individual consumer use, including co-parenting trust, personal accountability, and teen driver safety

Our SOBRcheck™ device is a patent-pending, touch-based identity verification and alcohol detection solution. Users place two fingers on the device sensors, one compares biometric data points from the finger to confirm identity, while the other senses alcohol released through the pores of the fingertip. The touch-based device connects to the SOBRsafe™ software solution to collect, present and communicate data collected to subscribed parties. The SOBRcheck™ device has been in commercial production since the first quarter of 2022 and we have executed customer agreements since that time.

Our SOBRsure™ device is a patent-pending, fitness-style wearable band with an alcohol detection solution intended for discrete, low-profile and voluntary use providing real-time alcohol monitoring and GPS tracking. The wearable band is a device which includes a contained sensor which senses alcohol released through the pores of the skin. The wearable band connects to a mobile device via Bluetooth communication where the SOBRsafe™ mobile application collects and transmits data to the SOBRsafe™ software solution. The SOBRsure™ device provides passive, real-time alcohol insights to administrators, clinicians, parents and more, and also includes device removal and service interruption notifications. The SOBRsure™ is in commercial production and became available for sale in late September 2023.

Our SOBRsafe™ technology can also be deployed across numerous additional devices for various uses. We are currently exploring possible integrations with existing telematics systems and licensing by non-competitive third parties.

We believe our device portfolio approach could yield a substantial repository of user data – a potentially monetizable asset for statistical analytics. The opportunity to collect data points over time could enable the development of business and insurance liability benchmarking, through artificial intelligence (AI), powerful guidance for perpetual safety improvement and associated cost savings capture. By demonstrating substance-free environments, organizations could deliver a data-driven argument for lowering insurance premiums. We could potentially partner with insurance providers to mandate use of the SOBRsafe™ devices and/or technology.

Design, manufacturing, quality testing and distribution for all SOBRsafe™ integrated devices takes place in the United States.

Our products continue to gain awareness and recognition through trade shows, media exposure, social media and product demonstrations. To generate sales, we have a three-part strategy: 1) direct sales to businesses and consumers, 2) enter into agreements with channel partners and 3) enter into licensing and integration agreements. We currently employ four highly experienced sales professionals facilitating direct sales and channel partner relationships. Licensing and integration opportunities with non-competitive third parties continue in preliminary stages. We anticipate hiring an expert in licensing and integrations in 2024 to formulate and execute an expansion plan.

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We anticipate that our outsourced manufacturers can adequately support an increase in sales for the foreseeable future. We expect that we will need to continue to evolve our products and software to meet diverse customer requirements across varied markets.

Since inception we have generated significant losses from operations and anticipate that we will continue to generate significant losses for the foreseeable future. Our success is dependent on our ability to access additional capital. Additional capital will be required under the following circumstances: 1) to offset negative cash flows from operations, 2) to accelerate customer acquisition, thereby increasing capital outlay, 3) for advanced purchasing of materials, 4) for the acquisition of new technology, 5) for potential acquisition of a key asset, and 6) for sales expansion.

Recent Developments

During the six-months ended June 30, 2024, the following developments occurred:

• We entered into inducement offer letter agreements (the “Inducement Letters”) on March 4, 2024, with each holder (collectively, the “Holders”, and individually, a “Holder”) of the Company’s Convertible Notes issued on March 9, 2023. The inducement offer to the Holders provided an opportunity to reduce the Company’s debt payment obligation at the future maturity date in March 2025. On March 5, 2024, the Holders elected to convert a total of $804,695 (the “Conversion Amount”) pertaining to the 2023 Debt Offering into 1,297,895 shares of the Company’s common stock at $0.62 per share. As provided for in the Agreement, the Conversion Amount included original Note principal of $772,896, as well as accrued interest of $31,799.
• The Company entered into a Warrant Inducement with a certain holder of its existing warrants to exercise for cash an aggregate of 10,319,163 shares of the Company’s common stock at a reduced exercise price of $0.27 per share. As part of the Warrant Inducement, the Company agreed to issue new unregistered warrants to purchase up to 20,638,326 shares of Common Stock. The warrants are exercisable upon the Company obtaining shareholder approval for purposes of complying with applicable Nasdaq rules with an exercise price of $0.27 per share. The warrants will expire five years following the issuance date. The total gross proceeds from the Warrant Inducement was $2,786,174 with net proceeds of $2,425,418 after deducting $360,756 in commissions and transaction costs.
• The Company eliminated its March 2025 debt obligation due to noteholders converting the remaining debt which totaled $3,556,233 (the “Conversion Amount”) pertaining to the 2023 Debt Offering into 5,735,860 shares of the Company’s common stock at $0.62 per share. As provided for in the Agreement, the Conversion Amount included original Note principal of $3,219,724, as well as accrued interest of $336,509.
• On June 3, 2024, shareholders approved the Company’s certificate of incorporation to implement a reverse stock split of the outstanding shares of common stock in a range from one-for-two (1:2) up to one-for-one hundred fifty (1:150), or anywhere between, as may be determined by the Board of Directors on or before December 31, 2024.

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Results of Operations for Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

Summary of Results of Operations

Revenue

The Company progressed to commercial production of its SOBRsureTM device in the third quarter of 2023 and began executing customer agreements. Revenues of $54,191 for the three-month period ended June 30, 2024, have increased by $16,590 as compared to the prior year period of $37,601. This increase is primarily driven by increased sales of our SOBRsureTM device of $21,993, offset by decreased sales of our SOBRcheckTM device of $2,163.

Gross Profit

The cost of goods and services for the three months ended June 30, 2024, was $41,156 resulting in a gross profit of $13,035 and a gross margin of 24%. The increased cost of goods and services for the period was due to one-time write-offs of defective SOBRcheckTM devices of $17,434. Without these one-time write-offs, the normalized gross margin would be 56%. Due to the limited history of generating revenue, the gross profit and gross margin for the three months ended June 30, 2024, and 2023 may not be indicative of future planned or actual performance of the Company, its product lines or services.

General and Administrative Expenses

General and administrative expenses decreased by $503,450, from $1,899,383 for the three-month period ended June 30, 2023, to $1,395,933 for the three-month period ended June 30, 2024. This decrease is primarily attributable to a decrease in professional services spend by $317,188 a decrease in payroll costs by $88,125, and a decrease in travel expense by $41,172.

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Stock-Based Compensation Expense

The Company had stock-based compensation expense of $185,910 for the three months ended June 30, 2024, compared to $627,762 for the three months ended June 30, 2023. The reduction in stock-based compensation expense is due to previously issued awards becoming fully vested and no issuance of new awards in 2024.

Research and Development

Research and development expenses increased by $115,252, to $308,427 for the three months ended June 30, 2024, compared to $193,175 for the three months ended June 30, 2023. The increase in research and development is due to the Company making improvements to its existing SOBRsafe™ software platform and other device functionality improvements.

Other Income, net

Other income, net decreased by $47,430 from $60,587 for the three months ended June 30, 2023 to $13,157 for the three months ended June 30, 2024. Other income consists primarily of interest income earned on cash deposits. The decrease is due to less cash on hand in 2024 when compared to 2023.

Gain (Loss) on Extinguishment of Debt, net

During the three months ended June 30, 2023, the Company recorded a loss on extinguishment of debt of $26,125 which related to the early payoff of convertible notes issued in 2021.

Notes Payable – Conversion Expense

The Company had no notes payable conversion expense for the three months ended June 30, 2024.

Interest Expense

Interest expense was relatively consistent for the three-month periods ended June 30, 2024, and 2023, increasing by $4,171, from $209,125 for the three months ended June 30, 2023, to $213,296 for the three months ended June 30, 2024.

Operating Loss; Net Loss

Our operating loss decreased by $822,060 from $2,699,295 for the three months ended June 30, 2023, to $1,877,235 for the three months ended June 30, 2024. The change in our operating loss for the three months ended June 30, 2024, compared to the same prior year period, is primarily a result in a reduction in general and administrative expense due to less spend on travel, professional services, and payroll. Stock-based compensation expense also decreased due to rewards fully vesting.

Our net loss decreased by $796,584 from $2,873,958 for the three-month period ended June 30, 2023, to $2,077,374 for the three-month period ended June 30, 2024. This change was primarily driven by a reduction in general and administrative expenses and stock-based compensation expense as detailed above. This has been slightly offset by a reduction in interest income as detailed above.

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Results of Operations for Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023

Summary of Results of Operations

Revenue

The Company progressed to commercial production of its SOBRsureTM device in the third quarter of 2023 and began executing customer agreements. Revenues of $102,181 for the six-month period ended June 30, 2024, have increased by $16,712 as compared to the prior year period of $85,469. This increase is primarily driven by increased sales of our SOBRsureTM device of $35,257, offset by decreased sales of our SOBRcheckTM device of $13,458.

Gross Profit

The cost of goods and services for the six months ended June 30, 2024 was $65,937 resulting in a gross profit of $36,244 and a gross margin of 35%. The cost of goods and services for the six months ended June 30, 2023, was $46,640 resulting in a gross profit of $38,829 and a gross margin of 45%. The increased cost of goods and services for the period was due to one-time write-offs of defective SOBRcheckTM devices of $21,284. Without these one-time write-offs, the normalized gross margin would be 58%. Due to the limited history of generating revenue, the gross profit and gross margins for the six months ended June 30, 2024, and 2023 may not be indicative of future planned or actual performance of the Company, its product lines or services.

General and Administrative Expenses

General and administrative expenses decreased by $672,838, from $3,484,333 for the six-month period ended June 30, 2023, to $2,811,495 for the six-month period ended June 30, 2024. This decrease is primarily attributable to a decrease in professional services spend by $416,404 a decrease in payroll costs by $147,674, and a decrease in travel expense by $74,124.

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Stock-Based Compensation Expense

The Company had stock-based compensation expense of $400,308 for the six months ended June 30, 2024, compared to $1,326,675 for the six months ended June 30, 2023. The reduction in stock-based compensation expense is due to previously issued awards becoming fully vested and no issuance of new awards in 2024.

Research and Development

Research and development expenses for the six months ended June 30, 2024, and 2023, increased by $36,368, from $374,093 for the six months ended June 30, 2023, to $410,461 for the six months ended June 30, 2024. The increase in research and development is due to the Company making improvements to its existing SOBRsafe™ software platform and other device functionality improvements.

Other Income, net

Other income, net decreased by $96,645 from $131,057 for the six months ended June 30, 2023 to $34,412 for the six months ended June 30, 2024. Other income consists primarily of interest income earned on cash deposits. The decrease is due to less cash on hand in 2024 when compared to 2023.

Gain (Loss) on Extinguishment of Debt, net

During the six months ended June 30, 2023, the Company recorded a loss on extinguishment of debt of $26,125 which related to the early payoff of convertible notes issued in 2021.

Notes Payable – Conversion Expense

Notes payable conversion expense was $585,875 for the six months ended June 30, 2024. This expense relates to the convertible debt inducement that occurred on March 4, 2024.

Interest Expense

Interest expense was relatively consistent for the six-month periods ended June 30, 2024, and 2023, increasing by $11,502 from $434,310 for the six months ended June 30, 2023, to $445,812 for the six months ended June 30, 2024.

Operating Loss; Net Loss

Our operating loss decreased by $1,560,252 from $5,146,272 for the six-month period ended June 30, 2023, compared to $3,586,020 for the six-month period ended June 30, 2024. The change in our operating loss for the six months ended June 30, 2024, compared to the same prior year period, is primarily a result in a reduction in general and administrative expense due to less spend on travel, professional services, and payroll. Stock-based compensation expense also decreased due to rewards fully vesting.

Our net loss decreased by $892,355 from $5,475,650 for the six-month period ended June 30, 2023, compared to $4,583,295 for the six-month period ended June 30, 2024. The decrease in the operating loss of $1,560,252 for the six-month period ended June 30, 2024, from the prior year period was offset by a one-time expense incurred for notes payable conversion as well as a reduction in interest income as detailed above.

Liquidity and Capital Resources for Six Months Ended June 30, 2024 Compared to December 31, 2023

Introduction

During the six-months ended June 30, 2024, and 2023, 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 will need additional capital in the near term. Our cash on hand as of June 30, 2024, was $2,166,404 and our current normalized operating cash flow burn rate is approximately $475,000 per month.

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Management believes that cash balances at June 30, 2024 do not provide adequate operating capital for operating activities for the twelve months from the date these financial statements are issued. However, management believes actions presently being taken to generate product and services revenues, and positive cash flows, in addition to the Company’s plans and ability to access capital sources and implement additional expense reduction tactics to preserve working capital, provide the opportunity for the Company to continue as a going concern. These plans are contingent upon the actions to be performed by the Company and these conditions have not been met on or before June 30, 2024. As such, substantial doubt about the entity’s ability to continue as a going concern has not been alleviated as of June 30, 2024.

Our cash, current assets, total assets, current liabilities, and total liabilities as of June 30, 2024, and as of December 31, 2023, respectively, are as follows:

Our total current assets and total assets decreased as of June 30, 2024, as compared to December 31, 2023, primarily due to use of cash to support our negative cash flow from operations.

Our total current liabilities and total liabilities decreased as of June 30, 2024, as compared to December 31, 2023. The decrease was due to the conversion of the entire convertible debt balance due in March 2025 to equity during the quarter.

Sources and Uses of Cash

Operations

We had net cash used in operating activities of $3,049,161 for the six-month period ended June 30, 2024, as compared to net cash used in operating activities of $3,262,642 for the six-month period ended June 30, 2023. For the period in 2024, the net cash used in operating activities consisted primarily of our net loss of $4,583,295, offset by non-cash expense items including amortization of $192,732, amortization of debt discounts of $237,250, stock-based compensation expense of $400,307, non-cash interest expense of $336,510, non-cash lease expense of $44,284, non-cash conversion expense of $585,875 and changes in our assets and liabilities for accounts receivable of ($9,708), inventory of $60,844, prepaid expenses of $81,051, accrued expenses of ($208,212), accrued interest payable of ($128,214), and operating lease liabilities of ($46,872).

For the period in 2023, the net cash used in operating activities consisted primarily of our net loss of $5,475,650, offset by non-cash expense items including amortization of $192,732, amortization of interest of $286,346, loss on extinguishment of debt of $26,125, stock warrants expense of $182,901, stock-based compensation expense of $1,326,675, non-cash interest expense of $29,638, non-cash lease expense of $13,747, bad debt expense of $1,132 and changes in our assets and liabilities for accounts receivable of ($1,938), inventory of ($47,867), prepaid expenses of $398,521, other assets of ($15,931), accounts payable of $341,425, accrued expenses of $1,185, accrued interest payable of $(324,083), and operating lease liabilities of ($14,699).

Investments

We had no cash provided by or used in investing activities during the six-month periods ended June 30, 2024, or June 30, 2023.

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Financing

We received gross proceeds from the exercise of warrants of $2,786,174 during the six-month period ended June 30, 2024, which was offset by transactional costs of ($360,756).

During the six-month period ended June 30, 2023, we received gross proceeds from the issuance of convertible notes payable of $3,000,001 which was offset by issuance costs of $537,750. Payments of approximately $2,100,000 were made toward the principal and accrued interest amounts for matured convertible notes payable issued in 2021 to both related and non-related parties.

Contractual Obligations and Commitments

At June 30, 2024, the Company had contractual commitments to make payments under operating leases. Payments due under these commitments are as follows:

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements as of June 30, 2024, and December 31, 2023.

Effects of Inflation

We do not believe that inflation has had a material impact on our business, revenue or operating results during the periods presented. However, continued increases in inflation could have an adverse effect on our results of future operations, financial position, and liquidity in 2024.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements during the period ended June 30, 2024, or subsequently thereto, that we believe are of potential significance to our financial statements.

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On December 28, 2010, we borrowed $11,810 from a related party. The note payable carries an interest rate of 0% and matured on December 31, 2012. As of June 30, 2024 this note was in default.

On February 20, 2012, we borrowed $3,750 from a non-related party. The note payable carries an interest rate of 12% and matured on February 19, 2013. As of June 30, 2024 this note was in default.

On March 20, 2012, we borrowed $5,433 from a non-related party. The note payable carries an interest rate of 12% and matured on March 19, 2013. As of June 30, 2024 this note was in default.

On September 27, 2013, we borrowed $15,000 from a non-related party. The note payable carries an interest rate of 9% and matured on December 25, 2013. As of June 30, 2024 this note was in default.

On July 31, 2015, we borrowed $2,500 from a non-related party. The note payable carries an interest rate of 10% and matured on November 28, 2015. As of June 30, 2024 this note was in default.

(a) Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (our Principal Executive Officer) and Chief Financial Officer (our Principal Accounting Officer), of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a – 15(c) and 15d – 15(e)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer, who are our Principal Executive Officer and Principal Financial Officer, respectively, concluded that, as of the quarter ended June 30, 2024, our disclosure controls and procedures were effective.

In designing and evaluating the disclosure controls and procedures, management recognizes that there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their desired control objectives. Additionally, in evaluating and implementing possible controls and procedures, management is required to apply its reasonable judgment.

(b) Changes in Internal Controls over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies, which may be identified during this process.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

(c) Officer’s Certifications

Appearing as an exhibit to this quarterly report on Form 10-Q are “Certifications” of our Chief Executive and Financial Officer. The Certifications are required pursuant to Sections 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”). This section of the quarterly report on Form 10-Q contains information concerning the Controls Evaluation referred to in the Section 302 Certifications. This information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

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