Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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☐
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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FOR THE
ANNUAL PERIOD ENDED April 30, 2018
OR
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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FOR THE
TRANSITION PERIOD FROM _______________ TO
_______________
COMMISSION
FILE NUMBER: 000-51126
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BLOCKCHAIN INDUSTRIES, INC.
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(Exact
Name of Registrant as Specified in Its Charter)
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NEVADA
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88-0355407
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification
No.)
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730 Arizona Ave., Suite 220,
Santa Monica, California
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90401
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(Address
of principal executive offices)
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(Zip
Code)
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(866) 995-7521
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(Registrant’s
telephone number, including area code)
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Securities
Registered pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name of
Exchange on Which Registered
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Securities
Registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ☐ No
☒
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934. Yes ☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ☒ No
☐
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data 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 ☒ No ☐
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ☒
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 the definitions of “large accelerated
filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated filer
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☐
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting company
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☒
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Emerging
growth company
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☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
State
the aggregate market value of the voting common equity held by
non-affiliates computed by reference to the price at which the
common equity was last sold as of the last business day of the
registrant’s most recently completed second fiscal quarter
(for purposes of determining this amount, only directors, executive
officers and, based on Schedule 13(d) filings as of September 30,
2017, 10% or greater stockholders, and their respective affiliates,
have been deemed affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other
purposes).
As of October 26 2018, the registrant
had 41,984,355 shares of its
common stock, par value $0.001 per share,
outstanding.
1
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K and the documents incorporated
herein contain “forward-looking statements”. Such
forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of the Company, or industry results, to
be materially different from any future results, performance or
achievements expressed or implied by such forward-looking
statements. When used in this report, statements that are not
statements of current or historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the
words “plan”, “intend”, “may,”
“will,” “expect,” “believe”,
“could,” “anticipate,”
“estimate,” “forecast”,
“contemplate”, “envisage”, or
“continue” or similar expressions or other variations
or comparable terminology are intended to identify such
forward-looking statements. All statements other than statements of
historical fact included in this report regarding our financial
position, business strategy and plans or objectives for future
operations are forward-looking statements.
2
Table of Contents
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PART
1
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3
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ITEM
1
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BUSINESS
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3
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ITEM
1A
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RISK
FACTORS
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12
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ITEM
1B
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UNRESOLVED
STAFF COMMENTS
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27
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ITEM
2
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PROPERTIES
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28
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ITEM
3
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LEGAL
PROCEEDINGS
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28
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ITEM
4
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MINE
SAFETY DISCLOSURES
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28
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PART
II
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29
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ITEM
5
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MARKET
FOR COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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29
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ITEM
6
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SELECTED
FINANCIAL DATA
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30
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ITEM
7
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
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30
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ITEM
7A
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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44
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ITEM
8
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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44
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ITEM
9
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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44
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ITEM
9A
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CONTROLS
AND PROCEDURES
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44
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ITEM
9B
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OTHER
INFORMATION
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44
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PART
III
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45
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ITEM
10
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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45
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ITEM
11
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EXECUTIVE
COMPENSATION
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47
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ITEM
12
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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49
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ITEM
13
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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50
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ITEM
14
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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51
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PART
IV
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52
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ITEM
15
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EXHIBITS,
FINANCIAL STATEMENTS AND SCHEDULES
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52
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SIGNATURES
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55
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3
FORWARD LOOKING STATEMENTS
Except for historical information, this document contains various
“forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). These forward-looking statements
involve risks and uncertainties, including, among other things,
statements regarding our revenue mix, anticipated costs and
expenses, development, relationships with strategic partners and
other factors discussed under “Business” and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations”. These forward-looking
statements may include declarations regarding our belief or current
expectations of management, such as statements indicating that
“we expect,” “we anticipate,” “we
intend,” “we believe,” and similar language. We
caution that any forward-looking statement made by us in this Form
10-K or in other announcements made by us are further qualified by
important factors that could cause actual results to differ
materially from those projected in the forward-looking statements,
including without limitation the risk factors set forth in this
Form 10-K.
History
Blockchain
Industries, Inc. (“BCII”, the “Company”,
“we”, “our” or “us”) was
originally formed on September 15, 1995 as Interactive Processing,
Inc. under the laws of the State of Nevada to market high-tech
consumer electronics through television home-shopping networks,
retail stores, catalog companies and their website
remotecontrols.com. In March 1999, the Company changed its name to
Worldtradeshow.com, Inc. (“WTS”). In April 1999, the
Company acquired intellectual property rights to a database from
Chaiisai Tora, Inc., an unaffiliated third party, and significantly
changed its business plan to develop tradeshow software and market
both physical and virtual tradeshow space through the Company's
website.
The
Company’s business involved the operation of Hotels.com.vn,
tour companies and restaurants, to sell the WTS Discount Card in
Vietnam in order to serve as an online vehicle for Vietnamese
companies to promote themselves, using the largest travel and
tourism online website in, as well as being recognized as the
official travel/tourism website of, Vietnam.
On
March 26, 2007, the Company acquired assets from Business.com.vn, a
Vietnamese company, which assets consisted of a database of 300,000
Vietnamese companies, marketing software, trademarks and
intellectual property, with the intention of developing a directory
of companies. The plan included offering such companies
opportunities to market themselves through domain registration,
website development, and online marketing expertise to help these
Vietnamese companies market themselves directly and/or on the
Company’s BVNI web portal. In June 2007, the Company changed
its name to Business.vn, Inc.
From
October 2008 through early 2016, the Company’s operations
were limited due to a lack of capital resources. However, during
this time, the Hotel.vn website was still operational. On May 15,
2016, the Company was placed under the control of a Receiver in
Nevada’s Eighth Judicial District (the
“Receiver”). From May 15, 2016 through March 22, 2017,
while under the control of the Receiver, the Company continued to
incur expenses to maintain its corporate existence as a public
company. On November 18, 2016, the Company changed its name to Omni
Global Technologies, Inc. and on May 23, 2017, the Company entered
into a Share Purchase Agreement with JOJ Holdings, LLC
(“JOJ”), pursuant to which JOJ: (i) purchased
40,000,000 restricted shares of common stock, $0.001 par value (the
“Control Shares”); (ii) assumed the liabilities of a
judgement creditor in the amount of approximately $25,000; and
(iii) paid the Receiver $150,000 for the Receiver’s and other
Company expenses (the “Share Purchase Agreement”).
Additionally, and concurrent with the execution of the Share
Purchase Agreement, the Receiver resigned, and Olivia Funk was
appointed as the sole officer and director of the
Company.
On
November 13, 2017, the Company filed Certificate of Amendment to
its Articles of Incorporation with the State of Nevada for the
purpose of changing its name from Omni Global Technologies, Inc. to
Blockchain Industries, Inc. to more accurately reflect its new
business strategy. Since that time the
Company has taken steps to become a next generation
blockchain-powered, financial technology and advisory company. In
this regard the Company’s business can be divided into the
following four verticals:
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Investment
Management
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Digital Asset
Advisory Services
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Media and
Education
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Digital Asset
Mining
4
Our Business
Our
initial plan to develop a blockchain business with a new domain
called hotelsinvietnam.net has been discontinued. We intend to
target and acquire or build a broad portfolio of Digital Assets
within our four business verticals. The Company’s mission is
to provide products and services related to Digital Assets. We
intend to target and acquire or build a broad portfolio of Digital
Assets by building an ecosystem within the Digital Asset industry.
Our ecosystem will include four major verticals: investment
management, digital asset advisory services, media & education,
and digital asset mining. In the future, we also plan to establish
auxiliary businesses such as OTC (over-the-counter) trading,
exchanges.
1.
Investment Management
One of our main lines of business will be investment management of
blockchain-related assets. We are seeking to provide services to
traditional investment management companies, with a focus on
blockchain technology. Our thesis in this business will focus on
new or traditional businesses that have already integrated or have
reasonably viable plans to implement blockchain-technology into
their business model.
This business vertical will be operated through our wholly-owned
subsidiary, BCI Investment Management, LLC, a Delaware limited
liability company. We expect to begin the process to register this
entity with the Securities and Exchange Commission as a registered
investment company under the Investment Company Act of 1940 by the
end of the calendar year 2018, although we do not expect to
complete the process by the end of calendar year 2018. The Company
expects to seed the funds with its own capital and subsequently
obtain outside investment capital from non-related third parties.
We expect to generate revenues by charging a combination of
management and performance fees. Our preference is to invest in
businesses whereby blockchain is required to make the business
practical. However, we will assess and potentially invest in
opportunities where blockchain technology can enhance business
operations, although it may not be necessary for the business to
succeed. We are in the process of establishing the following three
alternative investment vehicles in furtherance of the
foregoing:
5
a. Blockchain Industries Global Opportunity Fund
This
fund will seek to invest in exchange-traded tokens. This fund will
employ two primary investment strategies (i)
algorithmic/high-frequency trading (“HFT”); and (ii)
small/mid-cap fundamental trading. The HFT component seeks to
capture inefficiencies in market structure and provide liquidity to
other market participants. The small/mid-cap fundamental strategy
would seek to invest tokens that are outside of the top fifteen
high market-capitalization tokens. We aim to invest in tokens that
we believe are mispriced and overlooked after deep fundamental due
diligence.
b. Blockchain Industries ICO Access Fund
This
fund will seek to invest in early-stage Initial Coin Offerings
(“ICO”), Security Token Offerings (“STO”)
and private token sales. Utilizing our business network, we believe
that we can differentiate against competitors to access deals that
are unavailable to most investors and often at favorable terms. We
will frequently seek to add value to the companies we invest in
through providing them access to our ecosystem (exposure to media,
technical advisory, capital raising strategy, treasury management,
and various partnership opportunities). We expect significant
overlap between our portfolio companies and our advisory
clients.
c. Blockchain Industries Venture Fund
This
fund will seek to invest in early-stage equity of blockchain and
blockchain related companies. and will make equity investments in
fiat-generating businesses in the blockchain space (e.g. exchanges,
trading tool providers) and in companies developing
blockchain-native technologies who may or may not have token
offerings. We will take a similar value-add approach as we will in
our Blockchain Industries ICO Access Fund and expect significant
overlap between our portfolio companies and our advisory
clients.
2.
Advisory Services
We
believe that incorporating a blockchain into a traditional business
model can add value not only from raising capital, but also
transparency and efficiency. Our advisory service seeks to offer
clients a complete solution including, but not limited to,
architecting their token structure and issuance, crypto-economic
design (assessing economic benefits of utilizing a blockchain-based
token), technology/engineering, consulting, generating whitepapers,
software development, marketing and eventually making capital
introductions via the use of a broker-dealer, which we are actively
seeking. In addition, we aim to use our reputation and media &
education business to help our clients establish a meaningful
understanding of blockchain technologies and services, establish
partnerships and provide them with media exposure and informative
literature. The Company is remunerated through a combination of
upfront compensation (generally in U.S. Dollars), equity and/or
tokens of the companies we advise. Lastly, we eventually intend to
form or purchase a broker-dealer to help us maintain compliance and
execute our business in the emerging token capital markets. We are
currently actively seeking partnership and coverage from existing
broker-dealers.
The
Company continues to examine a wide array of potential companies
that we believe will benefit from our consulting and other services
related to their planned ICO or STO, and we will continue to
contract with customers that we feel have a high-value utility in
their underlying business model.
6
3.
Media and Education
Blockchain technology is fairly nascent and most educated investors
are unaware of its broad use cases or how the technology works.
Education is going to be a large part of the technology’s
success and we believe there is a market to develop educational and
other content for professionals, students, investors or other
potential users of the technology.
We have
developed a business to help promote the awareness, growth, and
education of blockchain technology and Digital Assets. Our goals
are (1) to invest in, partner with or acquire media streams, news
outlets or other methods of content distribution focused on the
marketing of blockchain technologies and Digital Asset economies
and their impact on the future and (2) partner with educational
institutions to help train the next generation of blockchain
developers. We have begun executing our goal to hold conferences
around the world with strategic partners that attract key sponsors
and influential speakers from the blockchain industry, local
governments and educators on an ongoing basis. In 2018 we held two
conference, one in San Juan, Puerto Rico and the other in Tokyo,
which focused on bringing together regulators, investors,
technologists, media and other blockchain stakeholders to discuss
the evolution of blockchain technology and its impact on industries
such as government, finance, technology and more. The conference in
San Juan Puerto Rico was held under the name
“Blockchain Unbound”, for which we submitted an
application in April 2018 to the U.S. Patent and Trademark Office
(the “USPTO”) for trademark registration. Our
application was received by and is currently pending before the
USPTO. The application has been initially refused due to a prior
filed application by another applicant seeking registration of the
trademark “Unbound” to be used in manner that the
examiner considers to be confusingly similar to ours. Pending the
resolution of the prior filed application, we will determine
whether to continue our pursuit of the trademark
registration.
We
promote our brand primarily through the use of our network,
bringing on speakers that are influencers, which we feel will draw
crowds. We do anticipate a small amount of advertising on social
media or news websites. The Company was responsible for organizing
media, security, entertainment, and booking guest speakers and
travel for certain guests.
The
Company expects to hold these conferences at least annually or hold
smaller events throughout the coming years. Pricing for our
conferences is typically at different levels and stages. For
example, we hold early-bird pricing with discounts. We also offer
different levels of pricing, which include negotiated hotel rate
with the venue where we host the conference. Further, we also offer
discount codes for certain participant groups, which are typically
negotiated for larger or strategic groups.
4.
Digital Asset Mining
“Mining”
for Digital Assets is the process by which a node on a blockchain
network is rewarded with the coin or token from that blockchain for
providing resources to the blockchain. For example, Bitcoin, a
popular cryptocurrency, uses a proof-of-work method to add blocks
to the blockchain. Specialized computers solve complex mathematical
problems to validate transaction and post them to the blockchain.
For successfully solving the problems, and providing power to the
network, the computer is rewarded with coins or tokens inherent to
that blockchain. There are other methods of validation and
verification such as, proof-of-stake and proof-of-space, hybrid
methods, among others. It is the intention of BCII to build a data
center that houses the specialized computers or other resources on
behalf of clients. We intend to rent space or resources (power,
bandwidth, etc.) to client for a fee.
The
Company intends to set up mining facilities with access to
inexpensive energy and lease these facilities to experienced
digital asset miners. The Company previously intended to enter into
an agreement to purchase land and build a tier-2 data center in
upstate New York. The Company entered into several agreements with
independent contractors to assess the design, feasibility and
profitability of this endeavor. The Company incurred costs for the
project which was paid to services professionals for their work in
connection therewith. As of April 30, 2018, the Company has
withdrawn from that opportunity. The Company is now focused on a
potential site in Virginia Beach, VA and expects to incur
additional costs on the assessment of this opportunity. Our goal is
to start by purchasing land in Virginia Beach, VA and build a data
center and lease space or power to tenants. We are negotiating with
a local economic development agency for the development of the
site. As of October 2018, their request is to build a full data
center. The Company is seeking additional capital to proceed with
this potential investment.
7
5.
Future Plans
The
following businesses are areas that the Company has invested time
and capital but has not yet pursued to a point where they have been
able to generate revenues or believe they will generate any
significant revenues in the immediate future. The Company is
actively seeking to build these business units or merge them with
existing business units at the appropriate time. No guarantee can
be made that we will continue to pursue these opportunities or that
we will have the capital in order to do so in a timely manner or at
all.
a. Merchant Banking
The
Company has explored developing merchant banking operations to (1)
help broker off-exchange transactions in Bitcoin, Ethereum and
other Digital Assets, (2) perform Digital Asset custody service,
(3) provide financing for ICO’s or STO’s, acquisitions
or other services related to traditional merchant banking, but
related to the Digital Asset industry. We believe there is great
potential in this business as Digital Asset exchanges are
fragmented and cannot provide enough liquidity, the buyers and
sellers inherently do not trust each other, and many of the
transactions are not up to standards in terms of regulatory
requirements. The Company plans to leverage its reputation to offer
a global, scalable solution to this market. Our solution is planned
to consist of a client portal, streamlined KYC/AML procedure, coin
verification, third-party escrow, and institutional-caliber
service. Although this is a relatively new initiative for the
Company, we believe that we would be well positioned to be a market
leader as we have negotiating to engage one of the most experienced
OTC agents in the industry and are building the platform to scale
his expertise. We are planning to set up our operations in
international jurisdictions and are aware that there will be
regulatory agencies that will require applications for licensing
which will increase the time and costs to complete. We currently do
not have an estimated time that the Company feels it will complete
this potential business, if ever. The success of this business will
rely on maintaining experienced or training employees with
necessary licenses in order to develop and maintain the operation
of this business, which may be difficult or impossible to achieve.
This business’ success will also rely on the Digital Asset
market to at least maintain its market capitalization, as a decline
in the value of these assets will inhibit our ability to find the
necessary volume and prices for this business to be
successful.
b. Digital Asset Exchange
The
Company is currently in the initial stages of performing diligence
to establish a Digital Asset exchange. We are partnering with
high-frequency trading and technology specialists to develop a
global exchange with the intention of uniting the fragmented
liquidity pools on the hundreds of Digital Asset exchanges. We
believe that this platform would be able to provide the robust
infrastructure and market depth to support institutional investors.
There will be regulatory agencies that will have oversight on this
business, which will require us to apply and successfully receive,
in order to operate legally in the jurisdictions where we plan to
operate and where our clients are located. We will be required to
adhere to strict standards of security and compliance, which will
make this business costly and difficult to operate. The success of
our Digital Asset Exchange will require partnerships with key
vendors, experienced technical and financial expertise, regulatory
and compliance in various jurisdictions, all of which will require
significant capital, there can be no guarantee that we would be
able to raise such capital on favorable terms or at
all.
8
Intellectual Property
In
April 2018, we applied for a trademark on “Blockchain
Unbound”. Our application was
received by and is currently pending before the USPTO. The
application has been initially refused due to a prior filed
application by another applicant seeking registration of the
trademark “Unbound” to be used in manner that the
examiner considers to be confusingly similar to ours. Pending the
resolution of the prior filed application, we will determine
whether to continue our pursuit of the trademark registration and
how to best proceed.
The
Company will assess all possible patents, trademarks or other
intellectual property in all business opportunities. Intellectual
property rights may be required to be successful and maintain
competitive advantages. However, at this time the Company does not
maintain any Patents or Trademarks and does not have any Patents
pending. We currently rely on our trade secrets and know-how. As
our business expands we expect to make significant investments in
technology, some of which we expect to be proprietary and will
necessitate the filing of patents and or trademarks.
Growth Strategy
We
expect to seed our funds with our own capital by the end of the
2018 calendar year. With that capital, we expect to find Digital
Asset investments that we feel will have a high return,
prioritizing opportunities that already generate revenue. BCII will
build upon our seed capital, seeking additional, third party
investment into our funds. We expect to launch more funds as AUM
continues to grow, potentially forming an exchange-listed
fund.
BCII
will utilize its network to seek and contract with clients looking
for advisory services. Initially, we feel starting with white
papers and engineering of blockchain architecture will be our first
opportunities. Upon successfully establishing a relationship with a
broker-dealer, we expect to grow the business with capital raising
and utilize an expanding network to offer additional
services.
Our
Education and Media business, which includes our conferences, we
believe there are opportunities to expand the Blockchain Unbound
brand to other media sources, developing content not only from our
conferences. We do expect to have at least one conference per year
in a major domestic city. Content created from the conferences may
be used to build educational or promotional videos on YouTube or
internal sites. We may also create free or subscription-based
platforms to specialized written or video content from industry
experts, drawing attention to the Digital Asset progress and
current events.
In
addition to foregoing, the Company will continue to explore other
synergistic business opportunities related to blockchain
technologies and Digital Assets. The analysis of business
opportunities, as it relates to our market verticals, will be
undertaken by or under the supervision of the officers and
directors of the Company. In particular, we are keenly focused on
acquiring businesses in the blockchain space or have an obvious
blockchain use-case that (1) currently or will, in the near-term,
generate positive cash flow; and (2) integrates well into our
ecosystem. In its efforts to analyze potential business
opportunities, the Company will consider factors including, but not
limited to, the list below:
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potential
for organic growth in revenue and cash flow, indicated by
technology, anticipated market expansion or new
products;
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competitive
position as compared to other firms of similar size and experience
within the industry verticals as well as within the industry as a
whole;
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strength
and diversity of management, either in place or scheduled for
recruitment;
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capital
requirements and anticipated availability of required funds, to be
provided by the Company or from operations, through the sale of
additional securities, through joint ventures or similar
arrangements or from other sources;
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the
cost of participation by the Company as compared to the perceived
tangible and intangible values and potentials;
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the
extent to which the business opportunity can be advanced and
incorporated into our ecosystem;
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the
accessibility of required management expertise, personnel, raw
materials, services, professional assistance and other required
items.
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In
applying the foregoing criteria, none of which will be controlling,
management will attempt to analyze all factors and circumstances
and decide based upon reasonable investigative measures and
available data. Additionally, management will investigate an entity
to engage a potential acquisition through reviewing available
financial statements, interviewing a potential acquisition’s
primary vendors and customers as well as financial
advisors.
Industry Overview
Our
business model now focuses on blockchain technology. A blockchain
is a decentralized, distributed ledger. As opposed to a centralized
database whereby an entire database, or full copies of that
database, remains in the control of one person or entity stored on
a computer that is controlled or owned by that same person or
entity, a blockchain ledger typically has partial copies of itself
across various nodes, or computers, in the network. Each new block
requires a method of consensus between nodes of the network in
order for the block to post to the ledger and become permanent.
There are various methods being developed for executing a
consensus. Currently, the most popular blockchain is Bitcoin, a
cryptocurrency, which uses a mathematical problem to be solved
before it can be confirmed and added to its
blockchain.
Cryptocurrencies
are a medium of exchange that are transacted through and recorded
on a blockchain and therefore within our scope of business. The
term “mining” is used to define a process which the
blockchain consensus is formed. The Bitcoin consensus process, for
example, entails solving complex mathematical problems using custom
designed computers. However, many more public and private
blockchains are being developed with different algorithms or
consensus models, which can use different hardware and methods for
performing function of adding blocks to their
blockchains.
Digital Assets Value
Cryptocurrencies
are currencies that are not backed by a central bank or a national,
supra-national or quasi-national organization and are not typically
backed by hard assets or other credit. Cryptocurrencies are
typically used as a medium of exchange, similar to fiat currencies
like the U.S. Dollar. In addition to cryptocurrencies, there are
other assets such as contracts or other information that reside on
a blockchain that represent a form of ownership. Examples may
include insurance contracts, deeds, wills, health data, or
securities. Together with cryptocurrencies, these other assets,
which also include virtual currencies, digital coins
and tokens, and other blockchain assets, make up a class of assets
called “Digital Assets”. The value of Digital Assets is
determined by the value that various market participants place on
them through their transactions, for example, via peer-to-peer
transactions, e-commerce, or exchanges.
Form Digital Assets
Bitcoin
is one form of a Digital Asset. Digital Assets are all electronic
representations or claims on other assets, which is not much
different than today. U.S. dollars may now be digital, deeds may
now be digital, health records may now be digital or stored
electronically, signatures are now capable of being digital and so
on. The difference between today’s digitized assets and
Digital Assets that BCII is focusing on revolves around the use of
blockchain to maintain trust and increase efficiencies of currently
centralized systems. U.S. Dollars are controlled by one entity, the
Federal Reserve System (the “Fed”). The Fed is
responsible for many aspects of the United States’ banking
system such as (1) ensuring that all member banks do not
double-spend any money, (2) settling transactions between member
banks, (3) creating or destroying credit by setting reserve
requirements, setting interest rate targets and entering into
transactions that will increase or decrease the supply of U.S.
Dollars. They do all of this digitally. The purpose of blockchain,
specifically related to banking and the use of money, is to have a
self-governing system that prevents double-spending of money,
settling transactions, and manipulating the supply of money. The
form of our assets, or proof of ownership of those assets, are
digital today. Our goal is to simply invest in the technology that
is eliminating bureaucracy, “middle men”, and other
inefficiencies that increase the costs of our world through the use
of a database that is distributed on various nodes of a network,
rather than centrally controls by one or a few entities or
individuals.
Storage of Digital Assets
Bitcoin
is called a cryptocurrency because it is used as a medium of
exchange. People can trade Bitcoin on an exchange, similar to
buying U.S. Dollars futures contracts on an exchange. People also
use Bitcoin via e-commerce platforms such as Overstock.com, or
smaller retailers that have integrations with wallets. Bitcoin,
like most cryptocurrencies, are stored in a digital wallet, similar
to a traditional bank account today, except the code behind the
Bitcoin is not controlled by a central bank. A wallet that holds a
Digital Asset can be stored in an online exchange like Coinbase,
which is similar to Bank of America holding your U.S. Dollars. This
is called “hot storage”. Digital Assets can also be
held in “cold storage”, which is similar to having your
money in a safety deposit box. A cold storage wallet is a wallet on
a separate physical device such as a cell phone, a USB drive or a
special encrypted device to hold Digital Assets.
Competition
Our
industry is extremely new and subject to rapid change and constant
innovation. We face significant competition, including from
companies that have entered this space much earlier than us and are
better capitalized, with vertically integrated business
models.
We will
encounter competition in the area of portfolio investment
opportunities and enforcement. There are existing companies that
have developed and have publicly declared to develop an investment
management strategy similar to ours. Existing, non-practicing
entities compete in acquiring rights to intellectual property
assets, and more entities may enter the market in future periods.
Although traditional investment management companies do not
presently offer much exposure to Digital Assets, growth in the
blockchain technology may create competition with larger, more
mature firms. As such, the Company may compete with existing
investment management firms, mutual fund complexes, insurance
companies, banks, brokerage firms and other financial institutions
that may offer products that are similar to, or alternatives to,
those offered by us.
In
order to grow our business, we must be able to compete effectively
for Assets under Management. Key competitive factors include
investment performance track records, the efficient delivery of
beta for index products, investment style and discipline, price,
client service and brand name recognition.
Our
Advisory Services business has competition from several places. The
demand for Digital Asset developers is high and has become costly,
so we would be competing with engineering firms for talent. In
addition, as more traditional financial institutions may see the
benefit in raising capital for clients in the Digital Asset
industry, we may be forced to compete with larger, established
institutions with long, successful track records.
There
are a number of Digital Assets conferences throughout the world,
one of the larger brands being Consensus. In order to compete with
our conference business, we need to maintain a strong group of
speakers. We believe that we have a strong competitive position in
our Media and Education Vertical with our current conferences and
we expect them to continue to take place in well-known major cities
across the world throughout the year and beyond. Our strategy of
providing multiple conferences per year enables us to market our
events year-round, create a large amount of high-quality content
that can be distributed through our digital media outlets, and
market in not only the regional consumer areas, but nationally as
well. Thus far we believe our conferences have been well received
and demonstrate an ability to retain quality content and key note
speakers.
We will
need to compete to attract, engage, and retain personnel, educated
and skilled in the Digital Asset mining space. Specifically, we
will compete with vertically integrated companies such as Genesis
Mining and Coinmint that operate Digital Asset mining. Our
competitors may be larger than us, have more access to capital and
have lower operating costs than we do.
9
Regulation
Regulatory
agencies that regulate investment advisers, investment funds, trust
banks and bank holding companies and other individuals and entities
have broad administrative powers, including the power to limit,
restrict or prohibit the regulated entity or person from carrying
on business if it fails to comply with such laws and regulations.
Possible sanctions for significant compliance failures include the
suspension of individual employees, limitations on engaging in
certain lines of business for specified periods of time, revocation
of investment adviser and other registrations or bank charters,
censures and fines both for individuals and BCII.
BCII’s
investment management business will be impacted primarily by the
Securities and Exchange Commission (the “SEC”) and the
Financial Industry Regulatory Authority (“FINRA”)
regulatory initiatives. The SEC, FINRA and their staff are engaged
in various initiatives and reviews that seek to improve and
modernize the regulatory structure governing the asset management
industry, and registered investment companies in particular. In so
doing, it has adopted rules that include (i) new monthly and annual
reporting requirements for certain U.S. registered funds; (ii)
enhanced reporting regimes for investment advisers; and (iii)
implementing liquidity risk management programs for ETFs and
open-end funds, other than money market funds. The rules, many of
which are currently in an implementation period, will increase
BCII’s public reporting and disclosure requirements, which
could be costly and may impede BCII’s growth. We will also be
subject to various anti-terrorist financing, privacy, anti-money
laundering and economic sanctions laws and regulations established
by various agencies. The Investment Advisers Act of 1940 (the
“Advisers Act”) imposes numerous obligations on
registered investment advisers such as our investment management
subsidiaries, including record-keeping, operational and marketing
requirements, disclosure obligations and prohibitions on fraudulent
activities.
The Office of Financial Assets Control of the US Department of
Treasury requires us to comply with its sanction program and not
conduct business with persons named on its specially designated
nationals ("SDN") list. This will impact mostly our
investment management business, but also has an impact on our due
diligence if we intend to raise more investment capital because of
the Anti-Money Laundering and Know-Your-Customer
laws.
State
level regulation through Attorneys General, Insurance Commissioners
and other state level agencies will also apply to certain BCII
investment management activities.
The
Investment Company Act of 1940 (the “Investment Company
Act”) imposes stringent governance, compliance, operational,
disclosure and related obligations on registered investment
companies and their investment advisers and distributors, such as
BCII and its affiliated subsidiaries. The SEC is authorized to
institute proceedings and impose sanctions for violations of the
Advisers Act and the Investment Company Act, ranging from fines and
censure to termination of an investment adviser’s
registration. Investment advisers also are subject to certain state
securities laws and regulations. Non-compliance with the Advisers
Act, the Investment Company Act or other federal and state
securities laws and regulations could result in investigations,
sanctions, disgorgement, fines and reputational
damage.
BCII’s
trading and investment activities for client accounts will be
regulated under the Securities Exchange Act of 1934 (the
“Exchange Act”), as well as the rules of various
securities exchanges and self-regulatory organizations, including
laws governing trading on inside information, market manipulation
and a broad number of technical requirements (e.g., short sale
limits, volume limitations and reporting obligations) and market
regulation policies. Violation of any of these laws and regulations
could result in fines or sanctions, as well as restrictions on our
activities and damage to its reputation.
As a
participant in the securities, banking and financial services
industries, we would be subject to extensive regulation under both
federal and state laws by governmental agencies, supervisory
authorities, and self-regulatory organizations (SROs). We would
also be subject to oversight by regulatory bodies in other
countries in which we plan to operate. These regulations materially
affect our business operations and impose capital, client
protection, and market conduct requirements.
As a
result of the enactment of the Dodd-Frank Wall Street Reform and
Consumer Protection Act in 2010 (Dodd-Frank), the adoption of
implementing regulations by the federal regulatory agencies, and
other recent regulatory reforms, we have experienced significant
changes in the laws and regulations that apply to us, how we are
regulated, and regulatory expectations in the areas of compliance,
risk management, corporate governance, operations, capital, and
liquidity.
Typically,
we do not have to obtain permits to operate conferences. The hotels
at which such events occur obtain any required permits and cover
fire safety and occupancy matters as part of the rental agreement.
Crowd control varies by location and is either provided by the
hotel’s personnel or by a third-party security service. We
have hired security teams for each of our conferences thus far. We
utilize tax counsel to determine if a Physical Establishment is
formed for any international conferences. If Physical Establishment
is determined to be formed, we may be subject to additional
regulations and income or value-added taxes in the international
jurisdiction where we hold the conference.
The
Digital Asset markets have grown rapidly in both popularity and
market size. These markets are local, national and international
and include an ever-broadening range of products and participants.
The SEC, and other governmental agencies around the world, are
evaluating these markets and are likely to institute new rules and
regulations within this market to protect investors and such
regulations could result in the restriction of the acquisition,
ownership, holding, selling, use or trading of our common stock.
The mining of Digital Assets does not currently have significant
regulation, but with a larger adoption of Digital Assets,
regulations on the mining for Digital Assets may increase the costs
of running this business.
10
Potentially
available business opportunities may occur at various stages of
development, all of which may be expected to make the task of
comparative investigation and analysis of such business
opportunities difficult, complex, time-consuming and costly.
Capital limitations always limit a company’s ability to
pursue some potential opportunities. Investments in this emerging
space are more speculative in nature than traditional industries.
Every reasonable attempt to conduct proper due diligence will be
made, but we can make no warranties or guarantees about the
outcomes.
Employees
As of
October 26, 2018, we employ a total of 6 full-time employees, of
whom all are based in the United States. As of October 26, 2018, we
rely on 4
part-time independent contractors that are based in North America.
We had 3 part-time independent contractors based in Japan as of
April 30, 2018, but these contractors are no longer with the
Company as of the date of this filing.
We
believe that our future success depends on attracting and retaining
highly skilled personnel. We may be unable to attract and retain
high-caliber employees. Our employees are not represented by any
collective bargaining unit. We have never experienced a work
stoppage and consider our employee relations to be
good.
Available Information
We file
our annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K pursuant to Section 13(a) or 15(d) of
the Exchange Act electronically with the Securities and Exchange
Commission, or SEC. The public may read or copy any materials we
file with the SEC at the SEC’s Public Reference Room at 100 F
Street, NE, Washington, DC 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains
reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The
address of that site is http://www.sec.gov.
You should carefully consider the risks described below, together
with all of the other information included in this report, in
considering our business and prospects. The risks and uncertainties
described below are not the only ones facing the Company.
Additional risks and uncertainties not presently known to us or
that we currently deem immaterial also may impair our business
operations. The occurrence of any of the following risks could harm
our business, financial condition or results of
operations.
Unfavorable general economic conditions in the U.S. and globally
can adversely affect our business and our ability to obtain future
financing.
Our business could be materially adversely affected by unfavorable
general economic conditions, including effects of weak domestic and
world economies. Future volatility and disruption in worldwide
capital and credit markets and any declines in economic conditions
in the U.S., Europe or in other parts of the world could adversely
impact our business and results of operations, particularly if the
availability of financing for us is limited.
We have an evolving business model.
As Digital Assets and blockchain technologies become more widely
available, we expect the services and products associated with them
to evolve. In order to stay current with the industry, our business
model may need to evolve as well. From time to time, we may modify
aspects of our business model relating to our product mix and
service offerings. We cannot offer any assurance that these or any
other modifications will be successful or will not result in harm
to our business. We may not be able to manage growth effectively,
which could damage our reputation, limit our growth and negatively
affect our operating results. Such circumstances could have a
material adverse effect on our ability to continue as a going
concern or to pursue our new strategy at all, which could have a
material adverse effect on our business, prospects or
operations.
If we fail to maintain the value and reputation of our brand, our
value is likely to decline.
Our success depends on the value and reputation of our brand. Our
name is integral to our business as well as to the implementation
of our strategies for expanding business. Maintaining, promoting
and positioning our reputation will depend largely on our ability
to distinguish ourselves from other public cryptocurrency mining
and trading companies and build public trust. We be adversely
affected by recent negative publicity of the Digital Asset
industry, specifically around cryptocurrencies.
11
We will not be able to successfully execute our business strategy
if we are deemed to be an investment company under the Investment
Company Act of 1940.
U.S. companies that have more than 100 shareholders or are publicly
traded in the U.S. and are, or hold themselves out as being,
engaged primarily in the business of investing, reinvesting or
trading in securities are subject to regulation under the
Investment Company Act. Unless a substantial part of our assets
consists of, and a substantial part of our income is derived from,
interests in majority-owned subsidiaries and companies that we
primarily control, we may be required to register and become
subject to regulation under the Investment Company Act. If certain
Digital Assets, such as Bitcoin and other cryptocurrencies, were to
be deemed securities for purposes of the Investment Company Act, we
would have difficulty avoiding classification and regulation as an
investment company.
If we were deemed to be, and were required to register as, an
investment company, we would be forced to comply with substantive
requirements under the Investment Company Act, including
limitations on our ability to borrow, limitations on our capital
structure; restrictions on acquisitions of interests in associated
companies, prohibitions on transactions with affiliates,
restrictions on specific investments, and compliance with
reporting, record keeping, voting, proxy disclosure and other rules
and regulations. If we were forced to comply with the rules and
regulations of the Investment Company Act, our operations would
significantly change, and we would be prevented from successfully
executing our business strategy. To avoid regulation under the
Investment Company Act and related SEC rules, we may need to sell
Digital Assets and other assets which we would otherwise want to
retain and could be unable to sell assets which we would otherwise
want to sell. In addition, we could be forced to acquire
additional, or retain existing, income-generating or
loss-generating assets which we would not otherwise have acquired
or retained and could need to forgo opportunities to acquire
Digital Assets and other assets that would benefit our business. If
we were forced to sell, buy or retain assets in this manner, we
could be prevented from successfully executing our business
strategy.
The Company may have become subject to the Investment Company Act
of 1940 (the “40 Act”). In order to alleviate such
concerns, the Company is actively seeking to sell investment
holdings in one of two ways in order to relieve any doubt that the
Company is subject to 40 Act reporting requirements: The Company is
looking (1) to sell most or all of its investments to a third party
through an over-the-counter market, (since there is no active
market for the investments the Company currently holds) and (2) to
sell most or all of its investments to the Company's investment
management subsidiary BCI Investment Management LLC
(“BCIM”), or one of the fund entities that BCIM manages
because it is the Company's intention that BCIM will eventually
perform services that would require it to be subject to the 40
Act.
We may be classified as an investment company.
We believe that we are not engaged in the business of investing,
reinvesting, or trading in securities, and we do not hold ourselves
out as being engaged in those activities. However, under the
Investment Company Act a company may be deemed an investment
company under section 3(a)(1)(C) if the value of its investment
securities is more than 40% of its total assets (exclusive of
government securities and cash items) on a consolidated
basis.
As a result of our investments and our mining activities,
including investments in which we do not have a controlling
interest, the investment securities we hold could exceed 40% of our
total assets, exclusive of cash items and, accordingly, we could
determine that we have become an investment company. The Digital
Assets we own, acquire or mine may be deemed an investment security
by the SEC. An investment company can avoid being classified as an
investment company if it can rely on one of the exclusions under
the 1940 Act. One such exclusion, Rule 3a-2 under the 1940 Act,
allows an investment company a grace period of one year from the
earlier of (a) the date on which an issuer owns securities and/or
cash having a value exceeding 50% of the issuer's total assets on
either a consolidated or unconsolidated basis and (b) the date on
which an issuer owns or proposes to acquire investment securities
having a value exceeding 40% of the value of such issuer's total
assets (exclusive of government securities and cash items) on an
unconsolidated basis. As of April 30, 2018, we do not believe we
are an investment company, however resolution of pending comments
received from the SEC have not been concluded and this issue has
not been resolved by SEC rules or regulations. For us, any grace
period would be unknown until these issues are resolved or the SEC
issues rules and regulations concerning cryptocurrency treatment.
We may take actions to cause the investment securities held by us
to be less than 40% of our total assets, which may include
acquiring assets with our cash and cryptocurrency on hand or
liquidating our investment securities, Digital Assets or seeking a
no-action letter from the SEC if we are unable to acquire
sufficient assets or liquidate sufficient investment securities in
a timely manner.
As Rule 3a-2 is available to a company no more than once every
three years, and assuming no other exclusion were available to us,
we would have to keep within the 40% limit for at least three years
after we cease being an investment company. This may limit our
ability to make certain investments or enter into joint ventures
that could otherwise have a positive impact on our earnings.
However, we do not intend to become an investment company engaged
in the business of investing and trading securities.
Classification as an investment company under the Investment
Company Act requires registration with the SEC. If an investment
company fails to register, it would have to stop doing almost all
business, and its contracts would become voidable. Registration is
time consuming and restrictive and would require a restructuring of
our operations, and we may be constrained in the kind of business
we could do as a registered investment company. Further, we would
become subject to substantial regulation concerning management,
operations, transactions with affiliated persons and portfolio
composition, and would need to file reports under the Investment
Company Act. The cost of such compliance would result in the
Company incurring substantial additional expenses, and the failure
to register if required would have a materially adverse impact on
our operations.
12
We could face a variety of risks of expanding into a new
business.
The
Company is expanding into new lines of business. Risks of our entry
into the new business lines include, without limitation: (i)
potential diversion of management’s attention and other
resources, including available cash, from our existing businesses;
(ii) unanticipated liabilities or contingencies; (iii) the need for
additional capital and other resources to expand into this new line
of business; and (iv) inefficient combination or integration of
operational and management systems and controls. Entry into a new
line of business may also subject us to new laws and regulations
with which we are not familiar, and may lead to increased
litigation and regulatory risk. Further, our business model and
strategy are still evolving and are continually being reviewed and
revised, and we may not be able to successfully implement our
business model and strategy. We may not be able to attract a
sufficiently large number of audience or customers, or recover
costs incurred for developing and marketing these products or
services. If we are unable to successfully implement our growth
strategies, our revenue and profitability may not grow as we
expect, our competitiveness may be materially and adversely
affected, and our reputation and business may be
harmed.
We recently engaged in debt financings that are secured by the
grant of a security interest in all of our assets and upon a
default the lender may foreclose on all of our assets.
In
August 2018, we entered into a loan and security agreement
(the
“Loan and Security Agreement”) with an
accredited investor (the “August Investor”) and issued
the Note in connection therewith (the “Note” together
with the Loan and Security Agreement, the
“Obligations”). The Obligations, which have an
outstanding balance of principal and interest in the aggregate of
$275,000 as of October 19, 2018, are secured by the grant of a
security interest in substantially all of the Company’s
assets. In the event of the Company’s failure to make such
payments or to comply with the terms of the Loan and Security
Agreement or the Notes, the August Investor can declare a default
and seek to foreclose on the Company’s
assets.
Additionally,
in September 2018, we entered into a loan and security agreement
(the
“Loan and Security Agreement”) with an
accredited investor (the September Investor”) and issued the
Note in connection therewith (the “Note” together with
the Loan and Security Agreement, the “Obligations”).
The Obligations, which have an outstanding balance of principal and
interest in the aggregate of $110,000 as of October 19, 2018, are
secured by the grant of a security interest in the Company’s
assets. In the event of the Company’s failure to make such
payments or to comply with the terms of the Loan and Security
Agreement or the Notes, the September Investor can declare a
default and seek to foreclose on the Company’s
assets.
If the Company is unable to repay or refinance its indebtedness it
may be forced to cease operations and the holders of the
Company’s Common Stock may lose a significant portion, or
all, of their investment.
Our Principal Financial Officer is not a full-time
employee.
Our
Principal Financial Officer is an independent contractor and shares
time with other clients. The ability to retain a full-time Chief
Financial Officer, Principal Financial Officer or governor of the
financial responsibilities of the Company may impair our ability to
meet our reporting obligations and implement financial controls to
protect the Company.
Cryptocurrency-Related Risks
Regulatory changes or actions may alter the nature of an investment
in us or restrict the use of cryptocurrencies in a manner that
adversely affects our business, prospects or
operations.
As cryptocurrencies have grown in both popularity and market size,
governments around the world have reacted differently to
cryptocurrencies, with certain governments deeming them illegal,
and others allowing their use and trade but, in some jurisdictions,
such as in the U.S., subject to extensive, and in some cases
overlapping, regulatory requirements, as well as unclear and
evolving requirements. Ongoing and future regulatory actions may
impact our ability to continue to operate, and such actions could
affect our ability to continue as a going concern or to pursue our
new strategy at all, which could have a material adverse effect on
our business, prospects or operations.
In addition, the Company is subject to changing regulatory and tax
environments. These events are beyond the Company’s control,
and the likelihood that they may occur cannot be
predicted.
Our change in our business strategy and name could subject us to
increased SEC scrutiny.
The SEC has announced that it is scrutinizing public companies that
change their name or business model in a bid to capitalize upon the
hype surrounding blockchain technology and has suspended trading of
certain of such companies. SEC Chairman, Jay Clayton, warned that
it is not acceptable for companies without a meaningful track
record in the sector to dabble in blockchain technology, change
their name and immediately offer investors securities without
providing adequate disclosures about the risks involved. As a
result, we could be subject to substantial SEC scrutiny that could
require devotion of significant management and other resources and
potentially have an adverse impact on the trading of our
stock.
Banks and financial institutions may not provide banking services,
or may cut off services, to businesses that provide
cryptocurrency-related services or that accept cryptocurrencies as
payment, including financial institutions of investors in our
securities.
A number of companies, including our own, that provide
cryptocurrency-related services have been unable to find banks or
financial institutions that are willing to provide them with bank
accounts and other services. Similarly, a number of companies,
including our own, and individuals or businesses associated with
cryptocurrencies may have had and may continue to have their
existing bank accounts closed or services discontinued with
financial institutions. We also may be unable to obtain or maintain
these services for our business. The difficulty that many
businesses that provide derivatives on other cryptocurrency-related
services have and may continue to have in finding banks and
financial institutions willing to provide them services may be
decreasing the usefulness of cryptocurrencies as a payment system
and harming public perception of cryptocurrencies and could
decrease their usefulness and harm their public perception in the
future. Similarly, the usefulness of cryptocurrencies as a payment
system and the public perception of cryptocurrencies could be
damaged if banks or financial institutions were to close the
accounts of businesses providing cryptocurrency-related services.
This could occur as a result of compliance risk, cost, government
regulation or public pressure. The risk applies to securities
firms, clearance and settlement firms, national stock and
derivatives on commodities exchanges, the over-the-counter market,
and the Depository Trust Company, which, if any of such entities
adopts or implements similar policies, rules or regulations, could
negatively affect our relationships with financial institutions and
impede our ability to convert cryptocurrencies to fiat currencies.
Such factors could have a material adverse effect on our ability to
continue as a going concern or to pursue our new strategy at all,
which could have a material adverse effect on our business,
prospects or operations and harm investors.
13
We may face risks of Internet disruptions, which could have an
adverse effect on the price of cryptocurrencies.
A disruption of the Internet may affect the use of cryptocurrencies
and subsequently the value of our securities. Generally,
cryptocurrencies are dependent upon the Internet. A significant
disruption in Internet connectivity could disrupt a
cryptocurrency's network operations until the disruption is
resolved and have an adverse effect on the price of
cryptocurrencies.
The impact of geopolitical events on the supply and demand for
cryptocurrencies is uncertain.
Crises may motivate large-scale purchases of cryptocurrencies,
which could increase the price of cryptocurrencies rapidly. This
may increase the likelihood of a subsequent price decrease as
crisis-driven purchasing behavior wanes, adversely affecting the
value of our inventory. Such risks are similar to the risks of
purchasing commodities in general uncertain times, such as the risk
of purchasing, holding or selling gold.
As an alternative to gold, currencies that are backed by central
governments, cryptocurrencies, which are relatively new, are
subject to supply and demand forces. How such supply and demand
will be impacted by geopolitical events is largely uncertain but
could be harmful to us and investors in our securities. Political
or economic crises may motivate large-scale acquisitions or sales
of cryptocurrencies either globally or locally. Such events could
have a material adverse effect on our ability to continue as a
going concern or to pursue our new strategy at all, which could
have a material adverse effect on our business, prospects or
operations and potentially the value of any cryptocurrencies we
mine or otherwise acquire or hold for our own account.
Acceptance or widespread use of cryptocurrency is
uncertain.
Currently, there is a relatively limited use of any cryptocurrency
in the retail and commercial marketplace, thus contributing to
price volatility that could adversely affect an investment in our
securities. Banks and other established financial institutions may
refuse to process funds for cryptocurrency transactions, process
wire transfers to or from cryptocurrency exchanges,
cryptocurrency-related companies or service providers, or maintain
accounts for persons or entities transacting in cryptocurrency.
Conversely, a significant portion of cryptocurrency demand is
generated by investors seeking a long-term store of value or
speculators seeking to profit from the short- or long-term holding
of the asset. Price volatility undermines any cryptocurrency's role
as a medium of exchange, as retailers are much less likely to
accept it as a form of payment. Market capitalization for a
cryptocurrency as a medium of exchange and payment method may
always be low.
The relative lack of acceptance of cryptocurrencies in the retail
and commercial marketplace, or a reduction of such use, limits the
ability of end users to use them to pay for goods and services.
Such lack of acceptance or decline in acceptances could have a
material adverse effect on our ability to continue as a going
concern or to pursue our new strategy at all, which could have a
material adverse effect on our business, prospects or operations
and potentially the value of bitcoin or any other cryptocurrencies
we mine or otherwise acquire or hold for our own
account.
Transactional fees may decrease demand for bitcoin and prevent
expansion.
As the number of bitcoin awarded for solving a block in a
blockchain decreases, the incentive for miners to continue to
contribute to the bitcoin network will transition from a set reward
to transaction fees. Either the requirement from miners of higher
transaction fees in exchange for recording transactions in a
blockchain or a software upgrade that automatically charges fees
for all transactions may decrease demand for bitcoin and prevent
the expansion of the bitcoin network to retail merchants and
commercial businesses, resulting in a reduction in the price of
bitcoin that could adversely impact an investment in our
securities.
In order to incentivize miners to continue to contribute power,
space, or another resource to certain cryptocurrency networks, the
network may either formally or informally transition from a set
reward to transaction fees earned upon solving a block. This
transition could be accomplished by miners independently electing
to record in the blocks they solve only those transactions that
include payment of a transaction fee. If transaction fees paid for
cryptocurrency transactions become too high, the marketplace may be
reluctant to accept that cryptocurrency as a means of payment and
existing users may be motivated to switch from that cryptocurrency
to another cryptocurrency or to fiat currency. Decreased use and
demand for a particular cryptocurrency may adversely affect its
value and result in a reduction in the price of that cryptocurrency
and the value of our securities.
14
We face risks from the lack of clarity in the corporate governance
of many cryptocurrency systems.
Lack of clarity in the corporate governance of many cryptocurrency
systems may lead to ineffective decision making that slows
development or prevents a network from overcoming important
obstacles. Governance of many cryptocurrency systems is by
voluntary consensus and open competition. To the extent lack of
clarity in corporate governance of cryptocurrency systems leads to
ineffective decision making that slows development and growth, the
value of our securities may be adversely affected.
Political or economic crises may motivate large-scale sales of
Bitcoin or other cryptocurrencies, which could result in a
reduction in value and adversely affect us.
As an alternative to fiat currencies that are backed by central
governments, Digital Assets such as Bitcoin and Ether, which are
relatively new, are subject to supply and demand forces based upon
the desirability of an alternative, decentralized means of buying
and selling goods and services, and it is unclear how such supply
and demand will be impacted by geopolitical events. Nevertheless,
political or economic crises may motivate large-scale acquisitions
or sales of Bitcoin, Ether and other cryptocurrencies either
globally or locally. Large-scale sales of Bitcoin and Ether or
other cryptocurrencies would result in a reduction in their value
and could adversely affect us. Such circumstances could have a
material adverse effect on our ability to continue as a going
concern or to pursue our new strategy at all, which could have a
material adverse effect on our business, prospects or operations
and potentially the value of any Bitcoin or other cryptocurrencies
we mine or otherwise acquire or hold for our own account and harm
investors.
It may be illegal now, or in the future, to acquire, own, hold,
sell or use Bitcoin, ether, or other cryptocurrencies, participate
in blockchains or utilize similar digital assets in one or more
countries, the ruling of which would adversely affect
us.
Although currently cryptocurrencies generally are not regulated or
are lightly regulated in most countries, one or more countries such
as China and Russia may take regulatory actions in the future that
could severely restrict the right to acquire, own, hold, sell or
use these Digital Assets or to exchange for fiat currency. Such
restrictions may adversely affect us. Such circumstances could have
a material adverse effect on our ability to continue as a going
concern or to pursue our new strategy at all, which could have a
material adverse effect on our business, prospects or operations
and potentially the value of any bitcoin or other cryptocurrencies
we mine or otherwise acquire or hold for our own account and harm
investors.
There is a lack of liquid markets, and possible manipulation of
blockchain or cryptocurrency-based assets.
Digital Assets that are represented and trade on an exchange may
not necessarily benefit from viable trading markets. Traditional
stock exchanges, such as the New York Stock Exchange or Nasdaq,
have listing requirements, vet issuers, requiring them to be
subjected to rigorous listing standards and rules, and monitor
investors transacting on such platform for fraud and other
improprieties. These conditions may not necessarily be replicated
on exchanges that list cryptocurrencies, depending on the
platform's controls and other policies. The less stringent an
exchange is about vetting issuers of Digital Assets or users that
transact on the platform, the higher the potential risk for fraud
or the manipulation of Digital Assets. These factors may decrease
liquidity or volume or increase volatility of digital securities or
other assets trading on a non-traditional exchanges, which may
adversely affect us. Such circumstances could have a material
adverse effect on our ability to continue as a going concern or to
pursue our new strategy at all, which could have a material adverse
effect on our business, prospects or operations and potentially the
value of any Digital Assets we mine or otherwise acquire or hold
for our own account and harm investors.
Our operations, investment strategies and profitability may be
adversely affected by competition from other methods of investing
in cryptocurrencies.
We compete with other users and/or companies that are mining
cryptocurrencies and other potential financial vehicles, including
securities backed by or linked to cryptocurrencies through entities
similar to us. Market and financial conditions, and other
conditions beyond our control, may make it more attractive to
invest in other financial vehicles, or to invest in
cryptocurrencies directly, which could limit the market for our
shares and reduce their liquidity. The emergence of other financial
vehicles and exchange-traded funds have been scrutinized by
regulators and such scrutiny and negative impressions or
conclusions could be applicable to us and impact our ability to
successfully pursue our new strategy or operate at all, or to
establish or maintain a public market for our securities. Such
circumstances could have a material adverse effect on our ability
to continue as a going concern or to pursue our new strategy at
all, which could have a material adverse effect on our business,
prospects or operations and potentially the value of any Bitcoin or
other cryptocurrencies we mine or otherwise acquire or hold for our
own account and harm investors.
The development and acceptance of competing blockchain platforms or
technologies may cause consumers to use alternative distributed
ledgers or other alternatives.
The development and acceptance of competing blockchain platforms or
technologies may cause consumers to use alternative distributed
ledgers or an alternative to distributed ledgers altogether. This
may adversely affect us and our exposure to various blockchain
technologies and prevent us from realizing the anticipated profits
from our investments. Such circumstances could have a material
adverse effect on our ability to continue as a going concern or to
pursue our new strategy at all, which could have a material adverse
effect on our business, prospects or operations and potentially the
value of any Bitcoin or other cryptocurrencies we mine or otherwise
acquire or hold for our own account and harm
investors.
Our operations, investment strategies and profitability may be
adversely affected by competition from other methods of investing
in cryptocurrencies.
We compete with other users and/or companies that mine
cryptocurrencies and other potential financial vehicles, possibly
including securities backed by or linked to cryptocurrencies
through entities similar to us. Market and financial conditions,
and other conditions beyond our control, may make it more
attractive to invest in other financial vehicles, or to invest in
cryptocurrencies directly, which could limit the market for our
shares and reduce their liquidity.
15
Our cryptocurrency holdings may be subject to loss, theft or
restriction on access.
There is currently no clearing house for Digital Assets, nor is
there a central or major depository for the custody of Digital
Assets. There is a risk that some or all of the Company’s
Digital Assets could be lost or stolen. The Company does not have
insurance protection on its Digital Assets, which exposes the
Company to the risk of loss of its Digital Assets. Further, Digital
Asset transactions are irrevocable and stolen or incorrectly
transferred Digital Assets may be irretrievable.
To the extent private keys for Digital Asset addresses are lost,
destroyed or otherwise compromised, and no backups of the private
keys are accessible, the Company may be unable to access the
Digital Assets held in the associated addresses, and the private
key will not be capable of being restored by the Digital Asset
networks. The processes by which Digital Asset transactions are
settled are dependent on the Digital Asset peer-to-peer networks,
and as such, the Company is subject to operational
risk.
There is a risk that some or all of our cryptocurrency holdings
could be lost or stolen. Access to our coins could also be
restricted by cybercrime (such as a denial of service attack)
against a service at which we maintain a hosted hot wallet. A hot
wallet refers to any cryptocurrency wallet that is connected to the
Internet. Generally, hot wallets are easier to set up and access,
but they are also more susceptible to hackers and other technical
vulnerabilities. Cold storage refers to any cryptocurrency wallet
that is not connected to the Internet. Cold storage is generally
more secure but is not ideal for quick or regular transactions. We
expect to hold the majority of our cryptocurrencies in cold storage
to reduce the risk of malfeasance, but this risk cannot be
eliminated.
Hackers or malicious actors may launch attacks to steal, compromise
or secure cryptocurrencies, such as by attacking the cryptocurrency
network source code, exchange servers, third-party platforms, cold
and hot storage locations or software, or by other means. We may be
in control and possession of one of the more substantial holdings
of cryptocurrency. As we increase in size, we may become a more
appealing target of hackers, malware, cyber-attacks or other
security threats. Any of these events may adversely affect our
operations and, consequently, our investments and profitability.
The loss or destruction of a private key required to access our
digital wallets may be irreversible and we may be denied access for
all time to our cryptocurrency holdings or the holdings of others.
Our loss of access to our private keys or our experience of a data
loss relating to our digital wallets could adversely affect our
investments and assets.
Cryptocurrencies are controllable only by the possessor of both the
unique public and private keys relating to the local or online
digital wallet in which they are held, which wallet's public key or
address is reflected in the network's public blockchain. We will
publish the public key relating to digital wallets in use when we
verify the receipt of transfers and disseminate such information
into the network, but we will need to safeguard the private keys
relating to such digital wallets. To the extent such private keys
are lost, destroyed or otherwise compromised, we will be unable to
access our cryptocurrency coins and such private keys may not be
capable of being restored by any network. Any loss of private keys
relating to digital wallets used to store our or our client's
cryptocurrencies could have a material adverse effect on our
ability to continue as a going concern or to pursue our new
strategy at all, which could have a material adverse effect on our
business, prospects or operations and potentially the value of any
bitcoin or other cryptocurrencies we mine or otherwise acquire or
hold for our own account.
Incorrect or fraudulent coin transactions may be
irreversible.
Cryptocurrency transactions are irrevocable and stolen or
incorrectly transferred coins may be irretrievable. As a result,
any incorrectly executed or fraudulent coin transactions could
adversely affect our investments and assets.
Coin transactions are not, from an administrative perspective,
reversible without the consent and active participation of the
recipient of the transaction. In theory, cryptocurrency
transactions may be reversible with the control or consent of a
majority of processing power on the network. Once a transaction has
been verified and recorded in a block that is added to a
blockchain, an incorrect transfer of a coin or a theft of coin
generally will not be reversible, and we may not be capable of
seeking compensation for any such transfer or theft. It is possible
that, through computer or human error, or through theft or criminal
action, our coins could be transferred in incorrect amounts or to
unauthorized third parties, or to uncontrolled accounts. Further,
at this time, there is no U.S. or foreign governmental, regulatory,
investigative or prosecutorial authority or mechanism through which
to bring an action or complaint regarding missing or stolen
cryptocurrency. To the extent that we are unable to seek redress
for such action, error or theft, such events could have a material
adverse effect on our ability to continue as a going concern or to
pursue our new strategy at all, which could have a material adverse
effect on our business, prospects or operations of and potentially
the value of any bitcoin or other cryptocurrencies we mine or
otherwise acquire or hold for our own account.
Our interactions with a blockchain may expose us to SDN or blocked
persons or cause us to violate provisions of law that did not
contemplate distribute ledger technology.
The Office of Financial Assets Control of the US Department of
Treasury requires us to comply with its sanction program and not
conduct business with persons named on its specially designated
nationals ("SDN") list. However, because of the pseudonymous nature
of blockchain transactions we may inadvertently without our
knowledge engage in transactions with persons named on OFAC's SDN
list. Moreover, federal law prohibits any US person from knowingly
or unknowingly possessing any visual depiction commonly known as
child pornography. Recent media reports have suggested that persons
have imbedded such depictions on one or more blockchains. Because
our business requires us to download and retain one or more
blockchains to effectuate our ongoing business, it is possible that
such digital ledgers contain prohibited depictions. To the extent
government enforcement authorities or regulators literally enforce
these and other laws and regulations that are impacted by
decentralized distributed ledger technology, we may be subject to
investigation, administrative or court proceedings, and civil or
criminal monetary fines and penalties, all of which could harm our
reputation and affect the value of our securities.
16
Cryptocurrencies face significant scaling obstacles that can lead
to high fees or slow transaction settlement times.
Cryptocurrencies face significant scaling obstacles that can lead
to high fees or slow transaction settlement times and attempts to
increase the volume of transactions may not be effective. Many
cryptocurrency networks face significant scaling challenges. For
example, cryptocurrencies are limited with respect to how many
transactions can occur per second. Participants in the
cryptocurrency ecosystem debate potential approaches to increasing
the average number of transactions per second that the network can
handle and have implemented mechanisms or are researching ways to
increase scale, such as increasing the allowable sizes of blocks,
and therefore the number of transactions per block, and sharding,
which would not require every single transaction to be included in
every single miner's or validator's block. However, there is no
guarantee that any of the mechanisms in place or being explored for
increasing the scale of settlement of cryptocurrency transactions
will be effective, or how long they will take to become effective,
which could adversely affect an investment in our
securities.
The price of coins may be affected by the sale of coins by other
investment vehicles investing in coins or tracking cryptocurrency
markets.
The global market for cryptocurrency is characterized by supply
constraints that differ from those present in the markets for
commodities or other tangible assets such as gold and silver. The
mathematical protocols under which certain cryptocurrencies are
mined permit the creation of a limited, predetermined amount of
currency, while others have no limit established on total supply.
To the extent that other vehicles investing in coins or tracking
cryptocurrency markets form and come to represent a significant
proportion of the demand for coins, large redemptions of the
securities of those vehicles and the subsequent sale of coins by
such vehicles could negatively affect cryptocurrency prices and
therefore affect the value of the inventory we hold. Such events
could have a material adverse effect on our ability to continue as
a going concern or to pursue our new strategy at all, which could
have a material adverse effect on our business, prospects or
operations and potentially the value of any Bitcoin or other
cryptocurrencies we mine or otherwise acquire or hold for our own
account.
Because there has been limited precedent set for financial
accounting of Bitcoin and other Digital Assets, the determination
that we have made for how to account for Digital Assets
transactions may be subject to change.
Because there has been limited precedent set for the financial
accounting of Digital Assets and related revenue recognition and no
guidance has yet been provided by the Financial Accounting
Standards Board or the SEC, it is unclear how companies may in the
future be required to account for Digital Asset transactions and
assets and related revenue recognition. A change in regulatory or
financial accounting standards could result in the necessity to
change our accounting methods and restate our financial statements.
Such a restatement could adversely affect the accounting for our
newly mined coins and more generally negatively impact our
business, prospects, financial condition and results of operation.
Such circumstances would have a material adverse effect on our
ability to continue as a going concern or to pursue our new
strategy at all, which would have a material adverse effect on our
business, prospects or operations and potentially the value of any
cryptocurrencies we hold or expects to acquire for our own account
and harm investors.
We must comply with applicable laws, rules and regulations; the
effect of any future regulatory change that affects us, our
business or any cryptocurrency that we may mine or hold for others
is impossible to predict, and such change could have a material
adverse effect on our ability to continue as a going concern or to
pursue our new strategy at all, which could have a material adverse
effect on our business, prospects or operations.
Regulation of cryptocurrencies and cryptocurrency exchanges is
currently undeveloped and likely to evolve rapidly, vary
significantly among international, federal, state and local
jurisdictions and is subject to significant uncertainty. Failure by
our company to comply with any laws, rules and regulations, some of
which may not exist yet or are subject to interpretation and may be
subject to change, could result in a variety of adverse
consequences, including civil penalties and fines imposed by
governmental authorities, including the SEC, the FTC, the FinCEN
and one or more state regulatory authorities. Under certain
circumstances, such failure by our company could also result in
criminal sanctions.
As blockchain networks and Digital Assets have grown in popularity
and in market size, governments and regulatory agencies have begun
to take interest in, and in some cases regulate, their use and
operation to the extent that a government or quasi-governmental
agency exerts regulatory authority over a blockchain network or
asset upon which our business relies, our business could be
adversely affected. Blockchain networks currently face an uncertain
regulatory landscape in many jurisdictions. The effect of any
future legal or regulatory change is impossible to predict, but
such laws, regulations or directives may directly and negatively
impact our business.
17
Governments may in the future curtail or outlaw the acquisition,
use or redemption of cryptocurrencies. Ownership of, holding or
trading in cryptocurrencies may then be considered illegal and
subject to sanction. Governments may also take regulatory action
that may increase the cost and/or subject cryptocurrency companies
to additional regulation. Judicial determinations may also have an
adverse impact on the trading of cryptocurrencies.
On July 25, 2017, the SEC released an investigative report which
states that the United States would, in some circumstances,
consider the offer and sale of cryptocurrencies pursuant to an
initial coin offering (“ICO”) subject to federal
securities laws. Thereafter, China released statements and took
similar actions, but subsequently blocked ICOs and cryptocurrency
exchanges. Although we do not currently participate in ICOs, our
potential clients and customers related to our cryptocurrency
exchange business, if and when we launch such an exchange, may
participate in ICOs and these actions may be a prelude to further
action that chills widespread acceptance of blockchain and
cryptocurrency adoption and have a material adverse effect on our
ability to continue as a going concern or to pursue our new
strategy at all, which could have a material adverse effect on our
business, prospects or operations. In particular, China is a large
market that might indicate larger worldwide trends, so its
restrictions related to ICOs and domestic and foreign exchanges may
have wider implications for the cryptocurrency industry. Moreover,
in the United States some cryptocurrencies that we may wish to
offer, such as ether, may have been issued in whole or part as part
of an ICO. It is unclear what view the SEC might ultimately take
with regard to cryptocurrencies that are of the character of
cryptocurrencies if they were initially issued in whole or part as
part of an ICO. If the SEC were to deem all cryptocurrencies issued
as part of ICOs as securities, we may be required to seek certain
licenses we currently are not intending to acquire, and this could
have an adverse impact on our operations.
Governments may in the future take regulatory actions that prohibit
or severely restrict the right to acquire, own, hold, sell, use or
trade cryptocurrencies or to exchange cryptocurrencies for fiat
currency. Similar actions by governments or regulatory bodies (such
as an exchange on which our securities are listed, quoted or
traded) could result in restriction of the acquisition, ownership,
holding, selling, use or trading in our securities. Such a
restriction could result in us liquidating our inventory at
unfavorable prices and may adversely affect our shareholders and
have a material adverse effect on our ability to continue as a
going concern or to pursue our new strategy at all, raise new
capital or maintain a securities listing with an exchange, which
could have a material adverse effect on our business, prospects or
operations and harm investors in our securities.
Risks Related to Our Investment Management Business
Adverse changes in market and economic conditions could lower
demand for the Company’s investment management
services.
The
Company provides its products and services to individual investors,
financial advisors, companies and institutional clients. Adverse
conditions in the financial and securities markets may have an
impact on the Company’s revenues, income, and fees which
could adversely affect the Company’s results of operations
and financial condition. Adverse conditions in the financial and
securities markets could also have an adverse effect on our
investment management revenues and reduce the amount of cash flow
that the Company receives from such services, which reduction could
adversely affect the Company’s financial
condition.
The Company faces significant competition.
The
investment information and investment management conducted by the
Company are very competitive. There are many competing firms and a
wide variety of product offerings. Some of the firms in these
industries are substantially larger and have greater financial
resources than the Company. With regard to the investment
information, barriers to entry have been reduced by the minimal
cost structure of the Internet and other technologies. With regard
to the investment management business, the absence of significant
barriers to entry by new investment management firms in the fund
industry increases competitive pressure. Competition in the
investment management business is based on various factors,
including business reputation, investment performance, quality of
service, marketing, distribution services offered, the range of
products offered and fees charged. Access to fund distribution
channels has also become increasingly competitive.
Difficult market conditions, market disruptions and volatility have
adversely affected, and may in the future adversely affect, the
Company's businesses, results of operations and financial
condition.
The
Company's businesses, by their nature, do not produce predictable
earnings, and all of the Company's businesses may be materially
affected by conditions in the global financial markets and by
global economic conditions, such as interest rates, the
availability of credit, inflation rates, economic uncertainty,
changes in laws, commodity prices, asset prices (including real
estate), currency exchange rates and controls and national and
international political circumstances (including wars, terrorist
acts, protests or security operations). Challenging market
conditions could affect the level and volatility of securities
prices and the liquidity and the value of investments in the
Company's funds or other investments in which the Company has
investments of its own capital, and the Company may not be able to
effectively manage its investment management business's exposure to
challenging market conditions. Challenging market conditions can
also adversely affect the Company's broker-dealer business as
increased volatility and lower stock prices can make companies less
likely to conduct transactions.
18
Volatility in the value of the Company's investments and securities
portfolios or other assets and liabilities, including funds, or
negative returns from the investments made by the Company could
adversely affect the Company's results of operations and statement
of financial condition.
The
Company will invest a significant portion of its capital base to
help drive results and facilitate growth of its investment
management and broker-dealer businesses. As of April 30, 2018, the
Company's invested capital amounted to a net value $3,916,477
million, representing approximately 121% of our stockholders'
equity presented in accordance with accounting principles generally
accepted in the United States of America ("US GAAP"). In accordance
with US GAAP, we define fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date. US GAAP also establishes a framework for measuring fair value
and a valuation hierarchy based upon the transparency of inputs
used in the valuation of an asset or liability. Changes in fair
value are reflected in the statement of operations at each
measurement period. Therefore, continued volatility in the value of
the Company's investments and securities portfolios or other assets
and liabilities, including funds, will result in volatility of the
Company's results. In addition, the investments made by the Company
may not generate positive returns. As a result, changes in value or
negative returns from investments made by the Company may have an
adverse effect on the Company's financial condition or operations
in the future.
Limitations on access to capital by the Company and its
subsidiaries could impair its liquidity and its ability to conduct
its businesses.
Liquidity,
or ready access to funds, is essential to the operations of
financial services firms. Failures of financial institutions have
often been attributable in large part to insufficient liquidity.
Liquidity is of particular importance to the Company's trading
business and perceived liquidity issues may affect the willingness
of the Company's broker-dealer clients and counterparties to engage
in brokerage transactions with the Company. The Company's liquidity
could be impaired due to circumstances that the Company may be
unable to control, such as a general market disruption or an
operational problem that affects the Company, its trading clients
or third parties. Furthermore, the Company's ability to sell assets
may be impaired if other market participants are seeking to sell
similar assets at the same time.
The
Company's investment management and broker-dealer businesses’
subsidiaries may become subject to additional regulations which
could increase the costs and burdens of compliance or impose
additional restrictions which could have a material adverse effect
on the Company's businesses and the performance of the Company's
funds. Market disruptions
like those experienced in 2008 have led to an increase in
governmental as well as regulatory scrutiny from a variety of
regulators, including the SEC, CFTC, FINRA, NFA, U.S. Treasury, the
NYSE, or other stock exchange, and state attorneys general.
Penalties and fines sought by regulatory authorities have increased
substantially over the last several years. In light of current
conditions in the global financial markets and the global economy,
regulators have increased their focus on the regulation of the
financial services industry. The Company may be adversely affected
by changes in the interpretation or enforcement of existing laws
and rules by these governmental authorities and self-regulatory
organizations. The Company also may be adversely affected as a
result of new or revised legislation or regulations imposed by the
SEC, other U.S. or foreign governmental regulatory authorities or
self-regulatory organizations that supervise the financial markets.
The Company could be fined, prohibited from engaging in some of its
business activities or subjected to limitations or conditions on
its business activities. In addition, the Company could incur
significant expense associated with compliance with any such
legislation or regulations or the regulatory and enforcement
environment generally. Substantial legal liability or significant
regulatory action against the Company could have a material adverse
effect on the financial condition and results of operations of the
Company or cause significant reputational harm to the Company,
which could seriously affect its business prospects.
The
activities of certain of the Company's subsidiaries and affiliates
will be regulated primarily within the U.S. by the SEC, FINRA, the
NFA, the CFTC and other self-regulatory organizations, as well as
various state agencies, and may be also subject to regulation by
other agencies in various jurisdictions in which we intend to
operate and expect to offer services. Certain legislation proposing
greater regulation of the industry is regularly considered by the
U.S. Congress - as well as by the governing bodies of non-U.S.
jurisdictions - and from time to time adopted as in the case of the
Dodd-Frank Act in the U.S. and MiFID II in the E.U.
The
investment advisers responsible for the Company's investment
management business will register as investment advisers with the
SEC or rely upon the registration of an affiliated
adviser.
It is
difficult to predict what other changes may be instituted in the
future in the regulation of the Company or the markets in which we
intend to invest, or the counterparties with which it does
business, in addition to those changes already proposed or adopted
in the U.S. or other countries. Any such regulation could have a
material adverse effect on the profit potential of the
Company’s operations.
Finally,
financial services firms are subject to numerous perceived or
actual conflicts of interest, which have drawn and which we expect
will continue to draw scrutiny from the SEC and other federal and
state regulators. For example, the research areas of investment
banks have been and remain the subject of heightened regulatory
scrutiny, which has led to increased restrictions on the
interaction between equity research analysts and investment banking
personnel at securities firms. Regulations have also been focusing
on potential conflicts of interest or issues relating to
impermissible disclosure of material nonpublic information.
Appropriately dealing with conflicts of interest is complex and
difficult, and our reputation could be damaged if it fails to do
so. Such policies and procedures to address or limit actual or
perceived conflicts may also result in increased costs, additional
operational personnel and increased regulatory risk. Failure to
adhere to these policies and procedures may result in regulatory
sanctions or client litigation.
19
We are subject to risk of litigation by investors in the investment
management line of business.
In
general, the Company is exposed to risk of litigation by investors
in its investment management business if the management of any of
its funds is alleged to have been grossly negligent or fraudulent.
Investors or beneficial owners of the Company’s funds could
sue to recover amounts lost due to any alleged misconduct, up to
the entire amount of the loss. In addition, the Company faces the
risk of litigation from investors and beneficial owners of any of
its funds if applicable restrictions are violated. In addition, the
Company is exposed to risks of litigation or investigation relating
to transactions that presented conflicts of interest that were not
properly addressed. In the majority of such actions the Company
would be obligated to bear legal, settlement and other costs, which
may be in excess of any available insurance coverage. In addition,
although the Company is contractually entitled to indemnification
from its funds, our rights to indemnification may be challenged. If
the Company is required to incur all or a portion of the costs
arising out of litigation or investigations as a result of
inadequate insurance proceeds, if any, or is not wholly
indemnified, our business, results of operations and financial
condition could be materially adversely affected. In its investment
management business, the Company is exposed to the risk of
litigation if a fund suffers catastrophic losses due to the failure
of a particular investment strategy or due to the trading activity
of an employee who has violated market rules or regulations. Any
litigation arising in such circumstances is likely to be
protracted, expensive and surrounded by circumstances which are
materially damaging to the Company's reputation and
businesses.
Risks Related to Our Advisory Services Business
Failure to Anticipate and Respond to Market Trends.
Our
success depends in part upon our ability to anticipate rapidly
changing technologies and market trends and to adapt our research,
data, advisory services, and other related products and services to
meet the changing needs of our clients. The technology and commerce
sectors that we analyze undergo frequent and often dramatic
changes. The environment of rapid and continuous change presents
significant challenges to our ability to provide our clients with
current and timely analysis, strategies and advice on issues of
importance to them. Meeting these challenges requires the
commitment of substantial resources. Any failure to continue to
provide insightful and timely analysis of developments,
technologies, and trends in a manner that meets market needs could
have an adverse effect on our market position and results of
operations.
We face increased competition.
We
compete principally in the market for research, data and advisory
services, with an emphasis on customer behavior and customer
experience, and the impact of business technology on our
clients’ business and service models. Our principal direct
competitors include other independent providers of research and
advisory services, as large as companies like IBM and Ernst &
Young, to smaller entrepreneurial startups, as well as marketing
agencies, general business consulting firms, survey-based general
market research firms, providers of peer networking services, and
digital media measurement services. Some of our competitors have
substantially greater financial and marketing resources than we do.
In addition, our indirect competitors include the internal planning
and marketing staffs of our current and prospective clients, as
well as other information providers such as electronic and print
publishing companies. We also face competition from free sources of
information available on the Internet, such as Google. Our indirect
competitors could choose to compete directly against us in the
future. In addition, there are relatively few barriers to entry
into certain segments of our market, and new competitors could
readily seek to compete against us in one or more of these market
segments. Increased competition could adversely affect our
operating results through pricing pressure and loss of market
share. There can be no assurance that we will be able to continue
to compete successfully against existing or new
competitors.
20
We depend on project-based advisory engagements, and our failure to
secure new engagements could lead to a decrease in our
revenues.
Advisory
engagements typically are project-based. Our ability to attract
advisory engagements is subject to numerous factors, including the
following:
●
delivering
consistent, high-quality advisory services to our
clients;
●
tailoring our
advisory services to the changing needs of our
clients;
●
matching the skills
and competencies of our advisory staff to the skills required for
the fulfillment of existing or potential advisory engagements;
and
●
maintaining a
global business operation.
Any
material decline in our ability to secure new advisory arrangements
could have an adverse impact on our revenues and financial
condition.
If we
are unable to achieve or maintain adequate utilization for our
consultants, our operating results could be adversely
impacted.
We could lose money on our fixed-fee contracts.
As part
of our strategy, from time to time, we may enter into fixed fee
contracts, in addition to contracts based on payment for time and
materials. Because of the complexity of many of our client
engagements, accurately
estimating the cost, scope and duration of a particular engagement
can be a difficult task. If we fail to make accurate estimates, we
could be forced to devote additional resources to these engagements
for which we will not receive additional compensation. To the
extent that an expenditure of additional resources is required on
an engagement, this could reduce the profitability of, or result in
a loss on, the engagement.
Our contracts with contingent-based revenue may cause unusual
variations in our operating results.
As part
of our strategy, from time to time, we may earn incremental
revenues, in addition to hourly or fixed fee billings, which are
contingent on the attainment of certain contractual milestones or
objectives. Because it is uncertain when the milestones or
objectives will be achieved, if ever, any such incremental revenues
may cause unusual variations in quarterly revenues and operating
results. Also, whether any contractual milestones or objectives are
achieved may become subject to dispute.
21
Our contracts with Digital Asset compensation may cause unusual
variations in our operating results.
As part
of our strategy, from time to time, we may earn revenues via
Digital Assets such as Bitcoin or less liquid tokens or coin. In
addition, compensation may be delayed due to lockup provisions.
Because it is uncertain whether or not the Digital Asset
compensation will have liquid markets, stable markets now or in the
future, our operating results may vary due to the ability to
recognize revenue or maintain the valuation of the Digital Assets
on our balance sheet, which may cause us to impair the valuation or
unable to recognize any revenue from these
engagements.
Risks Relating to our Media and Education Business
If we do not compete successfully against new and existing
competitors, we may lose our market share, and our operating
results may be adversely affected.
We
compete with other advertising service providers that may reach our
target audience by means that are more effective than our
conferences, digital media and crypto currency services. Further,
if such other providers of advertising have a long operating
history, large product and service suites, more capital resources
and broad international or local recognition, our operating results
may be adversely affected if we cannot successfully
compete.
If we do not maintain and develop our Blockchain Unbound brand, we
will not be able to attract an audience to the
conferences.
We attract audiences and advertisers partly through brand name
recognition. We believe that establishing, maintaining and
enhancing our portfolio of conferences and the brands of our
strategic partners will enhance our growth prospects. The promotion
of our Blockchain Unbound brand and those of our strategic partners
will depend largely on our success in maintaining a sizable and
loyal audience, providing high-quality content and organizing
effective marketing programs. If we fail to meet the standards to
which our consumers are accustomed, our reputation will be harmed
and we may lose market share.
Our future success depends on attracting sponsors and advertisers
who will advertise at our conferences. If we fail to attract a
sufficient number of sponsors and advertisers, our operating
results and revenues may not meet expectations.
Advertisers
may find that our targeted demographic does not consist of their
desired consumers or a critical mass of consumers, decide to use a
competitor’s services or decide not to use our services for
other reasons. If the sponsors and advertisers decide against
advertising with us, we may not realize our growth potential or
meet investor expectations. Our future operating results and
business prospects could be adversely affected.
22
We rely on key contracts and business relationships, and if our
current or future business partners or contracting counterparties
fail to perform or terminate any of their contractual arrangements
with us for any reason or cease operations, or should we fail to
adequately identify key business relationships, our business could
be disrupted and our reputation may be harmed.
If any of our business partners or contracting counterparties fails
to perform or terminates their agreement(s) with us for any reason,
or if our business partners or contracting counterparties with
which we have short-term agreements refuse to extend or renew the
agreement or enter into a similar agreement, our ability to carry
on operations and cross-sell sales and marketing services among
different platforms may be impaired. If one of our partners or
counterparties is unable (including as a result of bankruptcy or a
liquidation proceeding) or unwilling to continue operating in the
line of business that is the subject of our contract, we may not be
able to obtain similar relationships and agreements on terms
acceptable to us or at all. If a partner or counterparty fails to
perform or terminates any of the agreements with us or discontinues
operations, and we are unable to obtain similar relationships or
agreements, such events could have an adverse effect on our
operating results and financial condition. Further, if we are
unable to timely produce our conferences or produce the same
quality of conferences to which our target demographic has been
accustomed, the consequences could be far-reaching and harmful to
our reputation, existing business relationships and future growth
potential.
We may also need to form new strategic partnerships or joint
ventures to access appropriate assets and industry know-how.
Failing to identify, execute and integrate such future partnerships
or joint ventures may have an adverse effect on our business,
growth, financial condition, and cash flow from
operations.
The advertising market is particularly volatile and we may not be
able to effectively adjust to such volatility.
Advertising
spending is volatile and sensitive to changes in the economy. Our
advertising customers may reduce the amount they spend on our media
for a number of reasons, including, without
limitation:
●
a downturn in
economic conditions;
●
a deterioration of
the ratings of their programs; or
●
a decline in
advertising spending in general.
We may
be unable to maintain or increase our advertising fees and sales,
which could negatively affect our ability to generate revenues in
the future. A decrease in demand for advertising in general, and
for our advertising services in particular, could materially and
adversely affect our operating results.
Risks Related to Our Digital Asset Mining Business
Commencement of Digital Asset mining.
Although
we have not commenced Digital Asset mining, we have spent $452,800
assessing the viability of building a data center for our Digital
Asset Mining Business. We may never commence operations and spend
significantly more capital in our assessment of the business. If or
when we do commence Digital Asset mining, the output of which is
typically cryptocurrencies, which the Commission has indicated it
deems a security, may open the Company to other risks found in
these Risk Factors.
Our future success will depend in large part upon the value of
Bitcoin and other cryptocurrencies; the value of Bitcoin and other
cryptocurrencies may be subject to pricing risk and has
historically been subject to wide swings.
Our
operating results will depend in large part upon the value of
bitcoin and other cryptocurrencies. Specifically, our revenues from
our Digital Asset mining operations will be based upon two factors:
(1) the number of cryptocurrencies we mine and (2) the value of
these cryptocurrencies. In addition, our operating results will be
directly impacted by changes in the value of these
cryptocurrencies, because under the value measurement model, both
realized and unrealized changes will be reflected in our statement
of operations). This means that our operating results will be
subject to swings based upon increases or decreases in the value of
the cryptocurrencies we mine.
Bitcoin
and other cryptocurrency market prices, which have historically
been volatile and are impacted by a variety of factors (including
those discussed below), are determined primarily using data from
various exchanges, over-the-counter markets and derivative
platforms. Furthermore, such prices may be subject to factors such
as those that impact commodities, more so than business activities,
which could be subjected to additional influence from fraudulent or
illegitimate actors, real or perceived scarcity, and political,
economic, regulatory or other conditions. Pricing may be the result
of, and may continue to result in, speculation regarding future
appreciation in the value of cryptocurrencies, or our share price,
inflating and making their market prices more volatile or creating
“bubble”-type risks.
23
There is a possibility of cryptocurrency mining algorithms
transitioning to proof of stake validation and other mining-related
risks, which could make us less competitive and ultimately
adversely affect our business and the value of our
stock.
Proof
of stake is an alternative method in validating cryptocurrency
transactions. Should the algorithm shift from a proof-of-work
validation method to a proof-of-stake method, a hybrid or other
consensus method, mining would require less energy and may render
any company that maintains advantages in the current climate (for
example, from lower-priced electricity, processing, real estate, or
hosting) less competitive. We, as a result of our potential
cryptocurrency mining operations, may be exposed to risk in the
future as a result, and may be negatively impacted if a switch to
proof of stake validation were to occur. This may additionally have
an impact on other various investments of ours, including how it
may potentially affect transactional volume on exchanges or affect
our strategy for investigating the launch of a cryptocurrency
exchange in the United States. Such events could have a material
adverse effect on our ability to continue as a going concern or to
pursue our new strategy at all, which could have a material adverse
effect on our business, prospects or operations and potentially the
value of any Bitcoin or other cryptocurrencies we mine or otherwise
acquire or hold for our own account.
If a malicious actor or botnet obtains control of more than 50% of
the processing power on a cryptocurrency network, such actor or
botnet could manipulate blockchains to adversely affect us, which
would adversely affect an investment in us or our ability to
operate.
If a
malicious actor or botnet (a volunteer or hacked collection of
computers controlled by networked software coordinating the actions
of the computers) obtains a majority of the processing power, or
consensus method, dedicated to mining a cryptocurrency, it may be
able to alter blockchains on which transactions of cryptocurrency
reside and rely by constructing fraudulent blocks or preventing
certain transactions from completing in a timely manner, or at all.
The malicious actor or botnet could control, exclude or modify the
ordering of transactions, though it could not generate new units or
transactions using such control. The malicious actor could
“double-spend” its own cryptocurrency (i.e., spend the
same bitcoin in more than one transaction) and prevent the
confirmation of other users' transactions for so long as it
maintained control. To the extent that such malicious actor or
botnet does not yield its control of the processing power on the
network or the cryptocurrency community does not reject the
fraudulent blocks as malicious, reversing any changes made to
blockchains may not be possible. The foregoing description is not
the only means by which the entirety of blockchains or
cryptocurrencies may be compromised, but is only an
example.
Although
there are no known reports of malicious activity or control of
blockchains achieved through controlling over 50% of the processing
power on the network, it is believed that certain mining pools may
have exceeded the 50% threshold in Bitcoin. The possible crossing
of the 50% threshold indicates a greater risk that a single mining
pool could exert authority over the validation of Bitcoin
transactions. To the extent that the Bitcoin ecosystem, and the
administrators of mining pools, do not act to ensure greater
decentralization of bitcoin mining processing power, the
feasibility of a malicious actor obtaining control of the
processing power will increase, which may adversely affect an
investment in us. Such lack of controls and responses to such
circumstances could have a material adverse effect on our ability
to continue as a going concern or to pursue our new strategy at
all, which could have a material adverse effect on our business,
prospects or operations and potentially the value of any Bitcoin or
other cryptocurrencies we mine or otherwise acquire or hold for our
own account, and harm investors.
Cryptocurrency inventory, including that maintained by or for us,
may be exposed to cybersecurity threats and hacks.
As with
any computer code generally, flaws in cryptocurrency codes may be
exposed by malicious actors. Several errors and defects have been
found previously, including those that disabled some functionality
for users and exposed users' information. Exploitations of flaws in
the source code that allow malicious actors to take or create money
have previously occurred. Despite our efforts and processes to
prevent breaches, our devices, as well as our servers, computer
systems and those of third parties that we use in our operations,
are vulnerable to cyber security risks, including cyber-attacks
such as viruses and worms, phishing attacks, denial-of-service
attacks, physical or electronic break-ins, employee theft or
misuse, and similar disruptions from unauthorized tampering with
our servers and computer systems or those of third parties that we
use in our operations. Such events could have a material adverse
effect on our ability to continue as a going concern or to pursue
our new strategy at all, which could have a material adverse effect
on our business, prospects or operations and potentially the value
of any Bitcoin or other cryptocurrencies we mine or otherwise
acquire or hold for our own account.
We are subject to risks associated with our need for significant
electrical power. Government regulators may potentially restrict
the ability of electricity suppliers to provide electricity to
mining operations, such as ours.
The
operation of a cryptocurrency mine can require massive amounts of
electrical power. Further, our mining operations can only be
successful and ultimately profitable if the costs, including
electrical power costs, associated with mining a Bitcoin are lower
than the price of a Bitcoin. As a result, any mine we establish can
only be successful if we can obtain sufficient electrical power for
that mine on a cost-effective basis, and our establishment of new
mines requires us to find locations at which that is the case.
There may be significant competition for suitable mine locations,
and government regulators may potentially restrict the ability of
electricity suppliers to provide electricity to mining operations
in times of electricity shortage, or may otherwise potentially
restrict or prohibit the provision or electricity to mining
operations. For example, the board of commissioners of Chelan
County Public Utility District in Washington voted to stop
reviewing applications for mining facilities following a review of
the impact of existing operations. Additionally, our mines could be
materially adversely affected by a power outage. Given the power
requirement, it would not be feasible to run miners on back-up
power generators in the event of a government restriction on
electricity or a power outage.
24
Risks Associated with our Exploratory Efforts to Launch a U.S.
Cryptocurrency Exchange and Related Businesses
We may not successfully develop, market and launch any
cryptocurrency exchange.
We are
only in the early stages of investigating and planning the
establishment of a cryptocurrency exchange. For a variety of
reasons, we could suffer significant delays in our efforts to
establish such an exchange, and may ultimately not be successful in
doing so. We will need to obtain additional management, regulatory
compliance and technical expertise and devote substantial time and
effort to this project. We also expect to need to raise additional
funds (which may be seek by offering direct investments in this
business) to pursue development of the exchange, and we may not be
successful in raising that capital. It is possible that the launch
of our cryptocurrency exchange may never occur, and even if it is
successfully developed, it is possible that it will not be accessed
or utilized by a large number of users or will otherwise not
achieve market acceptance.
Risks Related to Our Securities
We are subject to the “penny stock rules” which will
make our securities more difficult to sell.
We are subject to the SEC’s “penny stock” rules
because our securities sell below $5.00 per share. The penny stock
rules require broker-dealers to deliver a standardized risk
disclosure document prepared by the SEC which provides information
about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer must also provide the customer with
current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson, and monthly
account statements showing the market value of each penny stock
held in the customer’s account. In addition, the bid and
offer quotations, and the broker-dealer and salesperson
compensation information must be given to the customer orally or in
writing prior to completing the transaction and must be given to
the customer in writing before or with the customer’s
confirmation.
Furthermore, the penny stock rules require that prior to a
transaction, the broker dealer must make a special written
determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser’s written agreement to
the transaction. The penny stock rules are burdensome and may
reduce purchases of any offerings and reduce the trading activity
for our securities. As long as our securities are subject to the
penny stock rules, the holders of such securities will find it more
difficult to sell their securities.
We are not likely to pay cash dividends in the foreseeable
future.
We currently intend to retain any future earnings for use in the
operation and expansion of our business. Accordingly, we do not
expect to pay any cash dividends in the foreseeable future but will
review this policy as circumstances dictate.
Our stock price is likely to be highly volatile because of our
limited public float.
The market price of our common stock is likely to be highly
volatile because there has been a relatively thin trading market
for our stock, which causes trades of small blocks of stock to have
a significant impact on our stock price. You may not be able to
resell shares of our common stock following periods of volatility
because of the market’s adverse reaction to volatility. Other
factors that could cause such volatility may include, among other
things: actual or anticipated fluctuations in our operating
results; the absence of securities analysts covering us and
distributing research and recommendations about us; overall stock
market fluctuations; economic conditions generally; announcements
concerning our business or those of our competitors; our ability to
raise capital when we require it, and to raise such capital on
favorable terms; conditions or trends in the industry; litigation;
changes in market valuations of other similar companies;
announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships or joint ventures; future
sales of common stock; actions initiated by the SEC or other
regulatory bodies; and general market conditions. Any of these
factors could have a significant and adverse impact on the market
price of our common stock. These broad market fluctuations may
adversely affect the trading price of our common
stock.
25
In order to raise sufficient funds to expand our operations, we may
have to issue additional securities at prices which may result in
substantial dilution to our shareholders.
If we raise additional funds through the sale of equity or
convertible debt, our current stockholders’ percentage
ownership will be reduced. In addition, these transactions may
dilute the value of our common shares outstanding. We may also have
to issue securities that may have rights, preferences and
privileges senior to our common stock.
Our stock is thinly traded, so an investor may be unable to sell at
or near ask prices or at all.
The
shares of our common stock are traded on the OTC Pink Sheets and
are thinly traded, meaning that the number of persons interested in
purchasing our common stock at or near ask prices at any given time
may be relatively small or non-existent. This situation is
attributable to a number of factors, including the fact that we are
a smaller reporting company that is relatively unknown to stock
analysts, stock brokers, institutional investors and others in the
investment community who generate or influence sales volume. Even
in the event that we come to the attention of such persons, they
would likely be reluctant to follow an unproven company such as
ours or purchase or recommend the purchase of our shares until such
time as we become more seasoned and viable. As a consequence, our
stock price may not reflect an actual or perceived value. Also,
there may be periods of several days or more when trading activity
in our shares is minimal or non-existent, as is currently the case,
as compared to a seasoned issuer that has a large and steady volume
of trading activity that will generally support continuous sales
without an adverse effect on share price. A broader or more active
public trading market for our common shares may not develop or if
developed, may not be sustained. Due to these conditions, you may
not be able to sell your shares at or near ask prices or at all if
you need money or otherwise desire to liquidate your
shares.
Currently, there is a limited public market for our securities, and
there can be no assurances that any public market will ever develop
and, even if developed, it is likely to be subject to significant
price fluctuations.
We have a trading symbol for our common stock, namely
‘BCII’. However, our stock has been thinly traded, if
at all. Consequently, there can be no assurances as to
whether:
●
any
market for our shares will develop;
●
the
prices at which our common stock will trade; or
●
the
extent to which investor interest in us will lead to the
development of an active, liquid trading market.
Active trading markets generally result in lower price volatility
and more efficient execution of buy and sell orders for
investors.
Until our common stock is fully distributed and an orderly market
develops in our common stock, if ever, the price at which it trades
is likely to fluctuate significantly. Prices for our common stock
will be determined in the marketplace and may be influenced by many
factors, including the depth and liquidity of the market for shares
of our common stock, developments affecting our business, including
the impact of the factors referred to elsewhere in these risk
factors, investor perception of our Company and general economic
and market conditions. No assurances can be given that an orderly
or liquid market will ever develop for the shares of our common
stock.
ITEM 1B UNRESOLVED STAFF COMMENTS
On
May 21, 2018 and July 31, 2018, the Company received a comment
letter from the staff of the SEC's Division of Corporation Finance
as part of its review of the Company's Form 10-K for the year ended
April 30, 2017 and the 10-Q for the fiscal quarter ended January
31, 2018. The staff requested additional information and provided
comments relating to various sections of the above-mentioned
documents. The Company responded to the outstanding comment letters
through this 10-K and believes that it had addressed the
staff’s comments appropriately.
26
ITEM 2 PROPERTIES
Our principal executive offices are located in Santa Monica, CA. We
lease two office units at a co-working location. One unit, which is
approximately 400 square feet, is used by the Company and costs
$10,244.10 per month. The other unit is approximately 100 square
feet and costs $2,888 per month for LegatumX. We also leased an
office in San Juan, Puerto Rico. The space was approximately 80
square feet and cost $1,815.00 per month. During September 2018, we
cancelled the month-to-month lease of this space.
ITEM 3 LEGAL PROCEEDINGS
We are
not a party to any legal proceeding, action, suit, proceeding,
inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending, to
the knowledge of the executive officers of our company, that we
believe will have a material adverse effect upon our business or
financial position and no such action has been
threatened.
However,
from time to time, we may become involved in various lawsuits and
legal proceedings which arise in the ordinary course of business.
Litigation is subject to inherent uncertainties, and an adverse
result in these or other matters may arise from time to time that
may harm our business.
Not
Applicable.
27
ITEM 5 MARKET FOR
COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our
Common Stock is quoted on the Over-the-Counter Bulletin Board under
the ticker symbol “BCII”. The following table shows,
for the periods indicated, the high and low bid prices per share of
our Common Stock as by OTC Bulletin Board. Over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual
transactions.
|
Quarter
Ended
|
High
|
Low
|
|
Fiscal
Year Ending April 30, 2018
|
|
|
|
October 31, 2018
(through October 26, 2018)
|
$5.00
|
$2.15
|
|
July 31,
2018
|
$10.99
|
$3.02
|
|
|
|
|
|
Fiscal
Year Ending April 30, 2018
|
|
|
|
April 30,
2018
|
$15.00
|
$7.61
|
|
January 31,
2018
|
$14.00
|
$11.25
|
|
October 31,
2017
|
$0.11
|
$0.11
|
|
July 31,
2017
|
$0.01
|
$0.01
|
|
|
|
|
|
Fiscal
Year Ending April 30, 2017
|
|
|
|
April 30,
2017
|
$0.20
|
$0.08
|
|
January 31,
2017
|
$0.55
|
$0.08
|
|
October 31,
2016
|
$N/A
|
$N/A
|
|
July 31,
2016
|
$N/A
|
$N/A
|
Holders
As of
October 26, 2018, there were, respectively, approximately 233 and 2
holders of record of our Common Stock and Series A Preferred Stock,
respectively.
Dividends
We have
not paid any dividends on our common stock and do not anticipate
paying dividends in the foreseeable future. We plan to retain
earnings, if any, to finance the development and expansion of our
business.
Securities Authorized for Issuance Under Equity Compensation
Plans
We currently do not have an equity compensation plan but the
Company intends to adopt one in the future.
Transfer Agent
Our transfer agent is American Stock Transfer. Their telephone
number is (800) 937-5449.
Recent Sales of Unregistered Securities
During the year ended April 30, 2018, we sold 14,194,700 shares of
common stock, converted 12,944,660 shares of common stock into
323,617 shares of Series A preferred stock, issued 653,333 shares
of restricted common stock for services, retired 5,000,000 shares
of common stock, converted 45,195 shares of Series A preferred
stock into 1,807,800 shares of common stock and issued 100,000
shares of common stock in connection with an
acquisition.
Rule 10B-18 Transactions
During the year ended April 30, 2018, there were no repurchases of
the Company’s common stock by the Company.
28
As a “smaller reporting company”, we are not required
to provide information required by this item.
The following discussion should be read in conjunction with our
financial statements and notes thereto included herein. In
connection with, and because we desire to take advantage of, the
“safe harbor” provisions of the Private Securities
Litigation Reform Act of 1995, we caution readers regarding certain
forward-looking statements in the following discussion and
elsewhere in this report and in any other statement made by, or on
our behalf, whether or not in future filings with the Securities
and Exchange Commission. Forward looking statements are statements
not based on historical information and which relate to future
operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and
assumptions that are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of
which are beyond our control and many of which, with respect to
future business decisions, are subject to change. These
uncertainties and contingencies can affect actual results and could
cause actual results to differ materially from those expressed in
any forward-looking statements made by, or on our behalf. We
disclaim any obligation to update forward looking
statements.
Background
Blockchain
Industries, Inc. (“BCII”, “Blockchain”, the
“Company”, “we”, “our” or
“us”) was originally formed under the laws of the State
of Nevada on September 15, 1995, as Interactive Processing, Inc. to
market high-tech consumer electronics through television
home-shopping networks, retail stores, catalog companies and their
website, remotecontrols.com. In March 1999, the Company changed its
name to Worldtradeshow.com, Inc. (“WTS”). In April
1999, the Company acquired intellectual property rights to a
database from Chaiisai Tora, Inc., an unaffiliated third party, and
significantly changed its business plan to develop tradeshow
software and market both physical and virtual tradeshow space
through the Company's website.
The Company’s
business involved the operation of Hotels.com.vn, tour companies
and restaurants and marketing of the WTS Discount Card in Vietnam
in order to serve as an online vehicle for Vietnamese companies to
promote themselves, using the largest travel and tourism online
website in, as well as being recognized as the official
travel/tourism website of, Vietnam.
On March 26, 2007,
the Company acquired assets from Business.com.vn, a Vietnamese
company, which assets consisted of a database of 300,000 Vietnamese
companies, marketing software, trademarks and intellectual
property, with the intention of developing a directory of
companies. The plan included offering such companies opportunities
to market themselves through domain registration, website
development, and online marketing expertise to help these
Vietnamese companies market themselves directly and/or on the
Company’s BVNI web portal. In June 2007, the Company changed
its name to Business.vn, Inc.
However, from
October 2008 through early 2016, the Company’s operations
were limited as a result of limited capital resources.
Nevertheless, the Company continued operations of the Hotel.vn
website. On May 15, 2016, the Company was placed under the control
of a Receiver in Nevada’s Eighth Judicial District. From May
15, 2016 through March 22, 2017, while under the control of the
Receiver, the Company continued to incur expenses to maintain its
corporate existence as a public company and maintain its
web-related business. On November 18, 2016, the Company changed its
name to Omni Global Technologies, Inc. and on May 23, 2017, the
Company entered into a Share Purchase Agreement with JOJ Holdings,
LLC (“JOJ”), pursuant to which JOJ: (i) purchased
40,000,000 restricted shares of common stock, $0.001 par value (the
“Control Shares”) from the Company by the authority of
the Receiver; (ii) assumed the liabilities of a judgement creditor
in the amount of approximately $25,000; and (iii) paid the Receiver
$150,000 which monies were used to cover the Receiver’s and
other company expenses. Additionally, and concurrent with the
execution of the Share Purchase Agreement, the Receiver resigned,
and Olivia Funk was appointed as the sole officer and director of
the Company.
On November 13,
2017, the Company filed a Certificate of Amendment to its Articles
of Incorporation with the State of Nevada for the purpose of
changing its name from Omni Global Technologies, Inc. to Blockchain
Industries, Inc. On November 15, 2017, Mr. Patrick Moynihan was
appointed as the Company’s Chief Executive Officer, Chief
Financial Officer and Chairman/sole director and, on the same date,
Ms. Funk resigned all positions as an executive officer and
director of the Company. On December 1, 2017, the Company announced
Mr. Zack Pontgrave as President, although a formal agreement was
never signed, and Mr. Bryan Larkin as Chief Technology Officer,
respectively, joining Mr. Moynihan as part of the Company’s
management team. As of April 2018, the Company has withdrawn the
offer to Mr. Pontgrave and, although the Company tried negotiating
a settlement agreement, Mr. Pontgrave has not been responsive to
the Company’s communications.
29
Recent Developments
KinerjaPay ICO (KPAY)
On
January 11, 2018, the Company entered into an advisory agreement to
provide Initial Coin Offering (“ICO”) services to PT
KinerjaPay Indonesia, an Indonesian company and a wholly-owned
subsidiary of KinerjaPay Corp., a Delaware corporation (OTCQB:
KPAY) (“KPAY”). As consideration for entering into the
advisory agreement and providing services related to administering
the KinerjaPay ICO and establishing a Digital Asset Exchange in
Indonesia, we were paid $250,000 in cash, and received 1,000,000
restricted shares of KinerjaPay’s common stock, having a
market value approximately $1,800,000 based upon the closing price
of the KPAY shares on the OTCQB of $1.80 on January 11, 2018. In
addition, we shall receive a 50% equity ownership in an
Indonesian-based Digital Asset Exchange which has yet to be formed.
Per the advisory agreement, the Company, in conjunction with
Fintech Financial Consultants, Inc. (“FFCI”) shall
provide to the Company the following Advisory Services
(“Services”):
● Consulting
related to the launch of the ICO and the establishment of a market
on the Exchange for which to trade and transfer digital
tokens;
●
Introductions to third parties with marketing and advisory
experience potentially relevant to the ICO; and
● Creation of
the Exchange and a full complement of related pre-sale support,
functionality and acquisitions concerning digital
tokens.
As part
of the Services, the Company and FFCI will formulate, develop,
structure, establish, administer and operate the Exchange. Such
Services may include but shall not be limited to consulting and
advisory services regarding trading, price discovery and
settlement/clearing, as well as, due diligence, escrow,
underwriting and providing communication platforms to enable the
adoption of new products and technologies and to attract investors.
The Company
was previously working through its Japanese partner to assist KPAY
with its coin offering. A visit was made to Indonesia to
collect additional data and develop strategy, however due to a
sharp reduction in demand for Digital Assets, the advisory work is
still underway and will resume at the appropriate time in the
future. There are no disagreements between KPAY and
Blockchain Industries and we anticipate being able to assist them
in the future with the KPAY's contemplated ICO.
The
equity interests of the Exchange Entity shall be beneficially owned
one-half (50%) by KPAY and one-half (50%) by the Company. The
Company and FFCI having made other arrangements between themselves,
and FFCI acknowledges and agrees that FFCI shall have no equity
interest in the Exchange Entity.
The
Exchange Entity shall initially be funded pursuant to a
contribution by KPAY of Two Hundred Fifty Thousand U.S. Dollars
($250,000 USD) from the proceeds generated by the ICO (the
“Startup Contribution”). KPAY and the Company shall
contribute such additional capital to the Exchange Entity as
mutually agreed upon to be necessary and appropriate for the
operation of the Exchange and in proportion to their respective
ownership interests in the Exchange Entity. If the Company and/or
FFCI advance funds to the Exchange Entity prior to KPAY’s
funding of the Startup Contribution, the Company and/or FFCI, as
the case may be, shall be entitled to prompt reimbursement for the
entire amount of such funds so advanced.
Chimes ICO
On
December 19, 2017 and February 5, 2018, the Company entered into
two agreements with Chimes Broadcasting, Inc.
(“Chimes”) to purchase 500,000 equity tokens for
$400,000 (the “Chimes Equity Tokens”). As of the year
ended April 30, 2018, the Company has disbursed $400,000 to Chimes
in exchange for 500,000 Chimes Equity Tokens, to be issued at a
later date, representing less than 1% (0.5%) ownership in Chimes.
There are 100,000,000 authorized Chimes Equity Tokens, which share
the same economic benefits to common shareholders of Chimes,
however, the Chimes Equity Tokens are non-voting
shares.
In
addition, the Company entered into two Simple Agreements for Future
Tokens (“SAFTs”) with Chimes Broadcasting, Inc. which
grants us the option to purchase future utility tokens for use on
the Chimes network platform. To date, the Company has disbursed
$100,000 to Chimes for an amount of CHIME tokens yet to be
determined. The Company has not been issued or received any CHIME
tokens to date.
AutoLotto
On
January 17, 2018, the Company entered into a Promissory Note
Agreement (“AutoLotto Agreement”) with AutoLotto, Inc.,
a Delaware corporation. Under the terms of the AutoLotto Agreement,
the Company will pay to AutoLotto $1.5 million (the
Principal”) in exchange for a promissory note that will
accrue interest at one percent per annum (the
“Interest”). All unpaid Principal and Interest are due
and payable to the Company at the earlier of (i) the closing of
AutoLotto’s initial coin offering of at least $20,000,000 or
(ii) AutoLotto’s issuance of equity securities (excluding any
conversion or issuance of any note or other convertible security)
of at least $20,000,000. In the event AutoLotto does not raise
$20,000,000 through an initial coin offering or issuance of equity
noted above, any unpaid Principal and Interest will convert to
equity at a rate of $250,000,000 divided by the number of common
shares outstanding immediately prior to January 17, 2020. As part
of the AutoLotto Agreement, the Company also received an option to
purchase tokens of the AutoLotto initial coin offering (the
“Option”) equal to two times the outstanding unpaid
Principal and Interest under the AutoLotto Agreement. The exercise
price of the Option will be an undisclosed private pre-sale price,
and the Option is exercisable within ten days of AutoLotto
providing notice to the Company of its initial coin offering. The
Option expires on January 16, 2020.
30
Academy
On
January 30, 2018, the Company invested $250,000 into Academy Token,
a utility token that will be used as a means of paying for
immersive training programs, educational offerings, and to access
online content related to blockchain technology. Academy intends to
address the shortfall in the supply of blockchain developers due to
the increasing demand of blockchain technology.
Coral Health
On
January 31, 2018, the Company invested $250,000 into the Coral
Health utility token. Coral Health aims to align the interests of
different players in the healthcare ecosystem. Coral Health intends
to utilize blockchain technology to accelerate the uptake of
personalized medicine, incorporating all levels of healthcare from
patient records, payments, insurance, prescriptions, clinical
trials and monitoring.
Basecoin & Origin Protocol
On
February 13, 2018 and February 20, 2018, the Company entered into
two separate subscription agreements with KR CRYPTO SPE, LLC, a
special-purpose entity, for the purpose of acquiring tokens of
Basecoin and Origin Protocol, respectively. The Company invested
$100,000 and $50,000 into the subscription agreements for Basecoin
and Origin Protocol, respectively. Basecoin’s token will be
utilized as a form of controlling the supply and demand of
fiat-based currencies to expand or contract the money-supply,
similar to how current central banks attempt to maintain a
normalized supply and demand of their respective fiat currencies.
The Origin Protocol utilizes the Ethereum blockchain, allowing
developers to build decentralized marketplaces to facilitate the
shared economy, such as home rentals, ride share and bike share,
without intermediary companies such as Airbnb and
Uber.
BlockEx
On
February 16, 2018, we entered into a Private Token Purchase
Commitment Form (“BlockEx Agreement”) with BlockEx
Limited (“BlockEx”) a privately held limited liability
company incorporated under the laws of Gibraltar. Under the terms
of the BlockEx Agreement, the Company agreed to purchase up to
5,714,285.71 Digital Asset Exchange Tokens (“DAXT”)
from the Company for 2,000,000 Euros, or at the time of the
purchase, approximately $2,481,600 USD. As of the date of this
Report, the Company has purchased tokens amounting to approximately
1,428,571 tokens for a purchase price of 395,069.53 Euros,
approximately $500,000 USD. The tokens were issued to the Company
in June 2018. The Company filled the 2,000,000 Euro obligation for
the BlockEx Agreement by pooling with other investors for the
remaining 1,604,930 Euros. The remaining 4,285,714.71 DAXT will be
issued to the investor pool.
This
investment provides the Company with exposure to a digital asset
exchange platform. The BlockEx platform provides an institutional
exchange, white-labeled brokerage software, and the ability to
launch ICO’s. DAXT is BlockEx’s ICO. It is a utility
token. Only holders of DAXT will be able to access the pre-sale
feature of ICOs in BlockEx Markets. DAXT must be burnt each time a
customer uses it to purchase ICOs on a pre-sale basis.
Wireline
On
February 6, 2018, the Company invested $20,000 into Wireline tokens
(“WRL”). These tokens are offered by Wireline Developer
Fund, Inc., a Cayman Islands company established to launch a
network platform that enables developers to create applications and
services that dynamically discover, interact, and trade with each
other using smart contracts. Wireline is the decentralized network
and registry for serverless cloud computing. Services running on
Wireline benefit from the scaling and high-availability guarantees
of internet-scale serverless architecture; the blockchain-backed
registry provides a decentralized mechanism for service discovery
and coordination.
31
VideoCoin
On
January 23, 2018, the Company invested $50,000 into VideoCoin
tokens. These tokens are offered by VideoCoin Development
Association, LTD which develops and operates VideoCoin Network, a
decentralized platform for video encoding, video storage, and video
distribution. The company's platform turns cloud-based video
services into an algorithmic market running on a blockchain with a
VideoCoin token. The platform also captures unused computing
capacity while providing tokenized rewards for users that
participate in decentralizing video content processing through the
network. The company is based in Los Angeles,
California.
LegatumX
On
February 19, 2018, the Company entered into a Stock Purchase
Agreement (“LegatumX Agreement”) with LegatumX, Inc.
(“LegatumX”). This investment will provide us with a
market share into the legal industry for the storage,
authentication and validation of legal documents such as wills,
trusts, deeds, mortgages, and more. We expect that the Media and
Education segment of our business will be able to assist this
company in marketing their products to consumers worldwide,
although we will be starting with U.S. consumers. Under the terms
of the LegatumX Agreement, we will initially receive 30% of
LegatumX’s common stock calculated on a fully diluted basis
for a purchase price of $1,300,000:
|
Amount paid by Company
|
Paid or Due on
|
|
$100,000
|
February 19, 2018
|
|
$200,000
|
May 20, 2018
|
|
100,000 shares of our Common Stock (1)
|
March 1, 2018
|
(1) The
value of our Common Stock for this agreement was valued at $10 per
share.
The
Company may earn an additional (i) 5%, for a total of 35%, of
LegatumX’s common stock if LegatumX realizes $2.3 million in
gross proceeds from the sale of the 100,000 shares of our common
stock within the 12-month period following the effective date of
the Company’s filing of a Form 10 with the SEC (the
“Form 10”), or (ii) an additional 10%, for a total of
40%, of LegatumX’s common stock if LegatumX realizes $10.1
million in gross proceeds from the sale of the 100,000 shares of
our common stock within the 12-month period following the effective
date of the Form 10. As of April 30, 2018, the Company paid
$100,000 to LegatumX in exchange for 20% ownership in LegatumX. As
of the date of this Report, the Company has paid an additional
$20,000 (for a total of $120,000) and issued 100,000 to LegatumX
for a total of 25.5% ownership in in LegatumX.
32
Results of Operations:
Years Ended April 30, 2018 and 2017
Service Revenue
Revenue
was $1,582,483 and $0 for the year ended April 30, 2018 and 2017,
respectively. As aforementioned, the Company was under the control
of a Court appointed Receiver during the 2017 period. For the
period ended April 30, 2018 the Company primarily focused on
generating revenue from the Digital Asset market. The revenue
recorded during this period relates to (1) the agreement it signed
with KPAY for ICO consulting services and (2) the conference held
in San Juan, Puerto Rico on March 2018.
Under
the terms of the agreement with the customer, the value of the
contract was comprised of $250,000 in cash and 1,000,000 shares of
stock valued at $1.80 per share, or $1,800,000, and was paid in
full to the Company prior to the commencement of services. The
total value of the contract was $2,050,000. The Company or customer
may cancel this agreement at any time for any reason whatsoever
without an obligation to return any of the consideration received.
In the event that occurs, the Company would immediately record the
entire deferred liability balance as service revenue. The Company
intends to continue to work with KPAY throughout the term of the
contract and recognize monthly service income on a pro rata basis.
Since the common stock from KPAY is restricted, it cannot be traded
for a period of at least six months. There can be no assurances
that KPAY will be worth a $1.80 per share, or have any value
whatsoever, at the time we decide to sell our shares. As of April
30, 2018, the value of the KPAY stock was $0.760 per share, or the
equivalent of an unrealized loss of $1,040,000. As of April 30,
2018, the Company has recorded $620,695 in revenue from the KPAY
contract.
During
March 14-16, 2018 we held a conference in San Juan, Puerto Rico
under our brand name Blockchain Unbound. The conference centered
around blockchain technology, Digital Assets, the regulatory and
compliance issues governing the industry and general industry
challenges, future and benefits. Net of chargebacks, refunds and
merchant fees, we recorded $959,768 in revenue for the San Juan
conference, which consisted of $467,000 in sponsorship fees where
companies paid for promotional material or events, and $492,768 in
sales from registrations from individuals attending the
conference.
|
|
For the
Years Ended April 30,
|
Change
|
||
|
|
2018
|
2017
|
Dollars
|
Percentage
|
|
Revenue
|
$1,582,483
|
$-
|
$1,582,483
|
100%
|
|
|
|
|
|
|
|
Cost of goods
sold
|
$328,785
|
$-
|
$328,785
|
100%
|
|
|
|
|
|
|
|
Gross
margin
|
$1,253,698
|
$-
|
$1,253,698
|
100%
|
|
|
|
|
|
|
|
Operating
expenses
|
2,894,882
|
148,000
|
2,746,882
|
1,856%
|
|
|
|
|
|
|
|
Loss from
operations
|
(1,641,184)
|
(148,000)
|
(1,493,184)
|
1,009%
|
|
|
|
|
|
|
|
Other income
(expense), net
|
846,397
|
(5,913)
|
852,310
|
-14,414%
|
|
|
|
|
|
|
|
Net
loss
|
$(794,787)
|
$(153,913)
|
$(640,874)
|
416%
|
33
Operating expenses:
|
|
Years Ended April
30,
|
Change
|
||
|
|
2018
|
2017
|
Dollars
|
Percentage
|
|
Operating
expenses:
|
|
|
|
|
|
Professional
fees
|
$1,760,703
|
$117,420
|
$1,643,283
|
1399%
|
|
General and
administrative expense
|
1,134,179
|
30,580
|
1,103,599
|
3,609%
|
|
Total operating
expenses
|
$2,894,882
|
$148,000
|
$2,746,882
|
1,856%
|
Operating
expenses for the years ended April 30, 2018 and 2017 were
$2,894,882 and $148,000, respectively. The increase is attributable
to the commencement of significant operations, primarily in the
form of professional fees and administrative fees. These expenses
include $1,760,703 in legal and professional services and
$1,134,179 in general and administrative expenses. The general and
administrative expenses consist of primarily travel expenses,
advertising and marketing for the Puerto Rico conference, rent,
office supplies and other miscellaneous office
expenses.
Liquidity and Capital Resources
Capital Resources
|
|
April
30,
|
|
|
|
|
2018
|
2017
|
Change
|
|
Current
assets
|
$4,335,170
|
$-
|
$4,335,170
|
|
Current
liabilities
|
1,784,493
|
493,596
|
(1,290,897)
|
|
Working
capital
|
$2,550,677
|
$(493,596)
|
$3,044,273
|
We had
$518,960 in cash on hand as of April 30, 2018.
Summary of Cash Flows:
|
|
For the
Years Ended April 30,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
$4,481,169
|
$(150,000)
|
|
Net
cash used in investing activities
|
$(7,481,397)
|
$-
|
|
Net
cash provided by financing activities
|
$3,519,188
|
$150,000
|
Net cash provided by (used in) operating activities: Cash
provided by operating activities was $4,481,169 during the year
ended April 30, 2018 and we used $150,000 in cash for operating
activities during the year ended April 30, 2017. The increase is
mostly attributable to $5,049,131 of debt forgiveness, which was
mostly debt discharged by the State of Nevada, being offset by
$979,857 of unrealized losses. Cash used in operating activities
for the year ending April 30, 2017 was primarily due to
professional and legal expenses of $1,760,703 and general operating
expenses of $1,134,179.
Net cash used in investing activities: We used $7,481,397 in
investing activities during the year ended April 30, 2018 compared
to $0 during the year ended April 30, 2017. The increase is
attributable to payments to related parties of $3,981,423, the
purchase of $2,886,477 of investments, the purchase of property,
plant and equipment of $113,497 and the payment of a note
receivable of $500,000.
Net cash provided by financing activities: Cash provided by
financing activities was $3,519,188 during the year ended April 30,
2018 compared to $150,000 during the year ended April 30, 2017. The
increase is attributable to the issuance of common stock for
$4,073,300 and was offset by the repayment of a convertible note
for $53,000 and the repayment of a loan payable of $501,112
compared to proceeds from the issuance of common stock of $150,000
for the year ended April 30, 2017.
34
Inflation
Although our
operations may be influenced by general economic conditions, we do
not believe that inflation had a material effect on our results of
operations during the year ended April 30, 2018.
Off-Balance Sheet Arrangements
We have
not entered into any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues, or
expenses, results of operations, liquidity, capital expenditures,
or capital resources that would be considered material to
investors.
Critical Accounting Policies
Our
financial statements and accompanying notes have been prepared in
accordance with U.S. GAAP. The preparation of these financial
statements requires management to make estimates, judgments and
assumptions that affect reported amounts of assets, liabilities,
revenues and expenses. We continually evaluate the accounting
policies and estimates used to prepare the financial statements.
The estimates are based on historical experience and assumptions
believed to be reasonable under current facts and circumstances.
Actual amounts and results could differ from these estimates made
by management. Certain accounting policies that require significant
management estimates and are deemed critical to our results of
operations or financial position are discussed below and should be
read in reference to NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES below.
Basis of Presentation
The
accompanying consolidated financial statements for the years ended
April 30, 2018 and 2017 have been prepared in accordance and in
conformity with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) and applicable
rules and regulations of the Securities and Exchange Commission
(“SEC”) regarding consolidated financial
information.
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 certain estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and
expenses during the periods presented. Actual results could differ
from those estimates.
Significant
estimates made by management are, among others, realizability of
long-lived assets, deferred taxes and stock option valuation.
Management reviews its estimates on a quarterly basis and, where
necessary, makes adjustments prospectively.
35
Revenue Recognition
We
recognize revenue when the following criteria are met: (1)
persuasive evidence of an arrangement exists; (2) delivery has
occurred or services are rendered; (3) the price to the buyer is
fixed or determinable; and (4) collectability is reasonably
assured. During the year ended April 30, 2018, we had one contract
with a customer to provide services. The Company used the OTC
Market price of our customer because we felt the price was readily
available and volume of the common stock, which we received as
compensation, was fairly liquid to use the OTC Market price as an
appropriate valuation. The Company may enter into additional
agreements where we receive non-cash assets as compensation, which
will require us to use estimates on the value of our services,
which will be recorded as revenue. To the extent the Company
receives compensation of illiquid non-cash assets, or any asset
that may not have a readily determinable fair market value, we may
require the use of certain Level 3 fair value estimated as defined
by ASC 820.
Currently, the Company’s revenue is in the form of consulting
services provided to customers, sponsorship fees for promotional
material and events and event registration. Revenue is recognized
pro rata on a monthly basis over the term of the contractual
agreement for consulting services and on the day of the event for
promotional material and events and event
registration.
Stock-based Compensation
In
accordance with ASC 718, Compensation – Stock Based
Compensation, and ASC 505, Equity Based Payments to Non-Employees,
the Company accounts for share-based payment using the fair value
method. Common shares issued to third parties for non-cash
consideration are valued based on the fair market value of the
services provided or the fair market value of the common stock on
the measurement date, whichever is readily determinable. The
Company calculates the fair value of option grants utilizing the
Black-Scholes pricing model and estimates the fair value of the
stock based upon the estimated fair value of the common stock. The
amount of stock-based compensation recognized during a period is
based on the value of the portion of the awards that are ultimately
expected to vest. The result of the estimates used in our valuation
was approximately $3,222,436 million of stock-based compensation
expense for the year ended April 30, 2018, comprised of $2,460,083
of expense related to independent contractors and $762,353 of
expense related to options granted to independent
contractors.
Investments in Digital Currencies
The
Company uses fair value as its method of accounting for digital
currencies (also referred to herein as digital assets) in
accordance with the fair value election pursuant to FASB ASC 825,
Financial Instruments (“ASC 825”). The Company
considers its investments in digital currencies to be analogous to
commodities as the Commodity Futures Trading Commission
(“CFTC”) determined that Bitcoin and other digital
currencies are commodities in September 2015. On March 6, 2018, a
United States District Court of New York ruled that the CFTC has
standing to exercise its enforcement power over fraud related to
virtual currencies sold in interstate commerce. This ruling
affirmed the CFTC’s position that digital currencies are
subject to the anti-fraud and anti-manipulation enforcement
authority, thereby asserting jurisdiction over futures, swaps, and
other CFTC regulated derivatives that reference digital currencies.
Consistent with the recent ruling, the Company classifies its
investment in digital currencies as commodities and are held at
fair value. Changes in net unrealized gains or losses for these
digital currencies are included in realized and unrealized gains,
net on the Consolidated Statement of Income.
36
Principle Market and Fair Value Determination
In
determining which of the eligible digital currency exchanges is the
Company’s principal market for the purpose of determining
fair value of individual digital currencies, the Company considers
only digital currency exchanges that have an online platform and
publish transaction price and volume publicly. In determining which
of the eligible digital currency exchanges is the appropriate
principal market, the Company reviews these criteria in the
following order, for each digital currency being fair
valued:
First,
the Company prepares a list of eligible digital currency exchanges
and determines if any meet all of the following three criteria: (i)
the digital currency exchange has a USD pairing to allow for USD
liquidation to U.S. based customers, (ii) the Company has access to
the exchange as a U.S. based customer and can legally open an
account on the exchange platform, and (iii) the exchange complies
with federal and state licensing requirements and practices
regarding anti-money laundering procedures that are applicable to
the Company.
From
the list of eligible digital currency exchanges prepared in
accordance with the eligibility criteria noted above, the Company
selects the exchange with the highest trading volume and USD
pairing for the trailing twelve months, taking into consideration
intra-day pricing fluctuations and the degree of variances in price
on the digital currency exchanges.
Second,
if no digital currency exchange meets all of the above criteria,
the Company will filter each exchange that has a USD pairing,
regardless of whether it is accessible to U.S. based customers.
From this list, the Company selects the exchange with the highest
trading volume and USD pairing for the trailing twelve months,
taking into consideration intra-day pricing fluctuations and the
degree of variances in price.
Third,
if there are no exchanges with USD pairing, the Company will assess
exchanges for compliance with federal and state licensing
requirements that are applicable to the Company. The Company also
assesses each exchange’s practices regarding anti-money
laundering procedures. The Company then identifies the pairing with
the highest trading volume of the digital currency being fair
valued to the digital currency with the highest market
capitalization for the prior trailing twelve months, taking into
consideration intra-day pricing fluctuations and the degree of
variances in price on digital currency exchanges.
The
Company determines its principal market annually for each digital
currency held to determine if (i) there have been recent changes to
each digital currency exchange’s transaction volume in the
prior trailing twelve months, (ii) if any digital currency
exchanges have fallen out of, or come into, compliance with
applicable regulatory requirements, (iii) if there have been any
digital currency exchanges that have added a USD pairing, (iv) if
exchanges previously inaccessible to the Company are now
accessible, or (v) if recent changes to each exchange price
stability have occurred that would materially impact the selection
of the principal market and necessitate a change in the
Company’s determination of its principal market.
37
Investments in SAFTs and Pre-ICO Tokens
The
Company enters into simple agreements for future tokens
(“SAFT”) in which the Company invests in a company for
a promise of access to future product of the company. Investments
in SAFT agreements are carried at cost.
Fair Value Measurement
The
Company applies ASC 820, Fair
Value Measurement (‘‘ASC 820’’),
which establishes a framework for measuring fair value and
clarifies the definition of fair value within that framework. ASC
820 defines fair value as an exit price, which is the price that
would be received for an asset or paid to transfer a liability in
the Company’s principal or most advantageous market in an
orderly transaction between market participants on the measurement
date. The fair value hierarchy established in ASC 820 generally
requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
Observable inputs reflect the assumptions that market participants
would use in pricing the asset or liability and are developed based
on market data obtained from sources independent of the reporting
entity. Unobservable inputs reflect the entity’s own
assumptions based on market data and the entity’s judgments
about the assumptions that market participants would use in pricing
the asset or liability and are to be developed based on the best
information available in the circumstances.
The
valuation hierarchy is composed of three levels. The classification
within the valuation hierarchy is based on the lowest level of
input that is significant to the fair value measurement. The levels
within the valuation hierarchy are described below:
Level 1
— Assets and liabilities with unadjusted, quoted prices
listed on active market exchanges. Inputs to the fair value
measurement are observable inputs, such as quoted prices in active
markets for identical assets or liabilities.
Level 2
— Inputs to the fair value measurement are determined using
prices for recently traded assets and liabilities with similar
underlying terms, as well as direct or indirect observable inputs,
such as interest rates and yield curves that are observable at
commonly quoted intervals.
Level 3
— Inputs to the fair value measurement are unobservable
inputs, such as estimates, assumptions, and valuation techniques
when little or no market data exists for the assets or
liabilities.
Financial assets
are considered Level 3 when their fair values are determined using
pricing models, discounted cash flow methodologies or similar
techniques and at least one significant model assumption or input
is unobservable.
The
fair value hierarchy gives the highest priority to quoted prices
(unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used
to measure the financial assets and liabilities fall within more
than one level described above, the categorization is based on the
lowest level input that is significant to the fair value
measurement of the instrument.
The
carrying amounts of the Company’s financial assets and
liabilities, such as cash, prepaid expenses and other current
assets, accounts payable and accrued expenses approximate their
fair values due to the short-term nature of these
instruments.
The
Company had no Level 3 financial assets or liabilities as of April
30, 2018 and 2017.
The Company uses
Level 1 of the fair value hierarchy to measure the fair value of
investments in common equity securities. The Company uses Level 2
of the fair value hierarchy to measure the fair value of
investments in digital currencies. The Company revalues such assets
at every reporting period and recognizes gains or losses as revenue
and cost of revenue respectively in the consolidated statements of
operations that are attributable to the change in the fair value of
the digital currencies. Refer to the table below for a breakout of
the Company’s investments in digital currencies and
traditional securities as of April 30, 2018:
|
|
|
Fair Value Measurement Using
|
|||
|
|
Carrying value
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
April
30, 2018
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Investments
in digital currencies
|
$1,166,477
|
$-
|
$1,166,477
|
$-
|
$1,166,477
|
|
BNB
|
213
|
-
|
213
|
-
|
213
|
|
BTC
|
753,371
|
-
|
753,371
|
-
|
753,371
|
|
BTCP
|
19,992
|
-
|
19,992
|
-
|
19,992
|
|
EOS
|
108,292
|
-
|
108,292
|
-
|
108,292
|
|
ETH
|
149,190
|
-
|
149,190
|
-
|
149,190
|
|
NEO
|
57,713
|
-
|
57,713
|
-
|
57,713
|
|
OMG
|
22,018
|
-
|
22,018
|
-
|
22,018
|
|
QSP
|
14,968
|
-
|
14,968
|
-
|
14,968
|
|
QTUM
|
8,782
|
-
|
8,782
|
-
|
8,782
|
|
REP
|
31,938
|
-
|
31,938
|
-
|
31,938
|
|
Investments
in securities
|
780,000
|
780,000
|
-
|
-
|
780,000
|
|
KinerjaPay
|
780,000
|
780,000
|
-
|
-
|
780,000
|
|
|
$1,946,477
|
$780,000
|
$1,166,477
|
$-
|
$1,946,477
|
There were no financial securities or investments in digital assets
as of April 30, 2017.
The KinerjaPay Common Stock was received as compensation and, as
such, the Company did not use cash to acquire the
securities.
38
Deferred Revenue
The
Company has deferred revenue from its first consulting contract for
the KPAY agreement. The Company determined that its obligations
would be met evenly over the course of the contract and, as such,
will record revenue evenly over the course of the agreement.
Estimated used in the determination of value and duration may
change on a per-contract basis and, in addition, the Company could
change the original estimates used for a specific contract
depending on changes over the course of contracts with customers.
For example, the KPAY agreement is currently being recorded evenly
over one year, however, the Company may determine the obligations
to have all been met early and may decide to record the remaining,
unearned revenue immediately.
Going Concern
We will
need additional working capital for ongoing operations, which
raises substantial doubt about our ability to continue as a going
concern. Management of the Company is working on a strategy to meet
future operational goals which may include equity funding, short
term or long-term financing or debt financing, to enable the
Company to reach profitable operations, however, there can be no
assurances that the plan will succeed, nor that the Company will be
able to execute its plans.
39
Stock Purchase Warrants
The
Company accounts for warrants issued to purchase shares of its
Common Stock as equity in accordance with FASB ASC 480, Accounting
for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock, Distinguishing Liabilities
from Equity.
Cash and cash equivalents
The
Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash
equivalents. Cash and cash equivalents consist of cash on deposit
with banks and money market funds, the fair value of which
approximates cost. The Company maintains its cash balances with a
high-credit-quality financial institution. At times, such cash may
be in excess of the Federal Deposit Insurance Corporation-insured
limit of $250,000. The Company has not experienced any losses in
such accounts, and management believes the Company is not exposed
to any significant credit risk on its cash and cash
equivalents.
Property and equipment
Property and
equipment are stated at cost or fair value if acquired as part of a
business combination. Depreciation is computed by the straight-line
method and is charged to operations over the estimated useful lives
of the assets. Maintenance and repairs are charged to expense as
incurred. The carrying amount and accumulated depreciation of
assets sold or retired are removed from the accounts in the year of
disposal and any resulting gain or loss is included in results of
operations. The Company currently is in the process of building a
mining facility for Digital Assets. All cost associated with that
project, including the architectural, designs, and planning cost
are being capitalized until the completion of the project. Property
and equipment are stated at cost and depreciated on a straight-line
basis over their estimated useful lives. Useful lives are 10 years
for software and 10 years for buildings.
Basic and Diluted Net Loss Per Share
Net
earnings or loss per share is calculated in accordance with SFAS
No. 128, Earnings Per Share for the period presented. Basic
earnings, net loss per share is based upon the weighted average
number of common shares outstanding. Fully diluted earnings per
share is based on the assumption includes dilutive equivalents such
as warrants, stock options, and convertible preferred
stock.
40
Recently Adopted Accounting Standards
In
January 2017, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standard Update
(“ASU”) 2017-01, Business Combinations: Clarifying the
Definition of a Business, which amends the current
definition of a business. Under ASU 2017-01, to be considered a
business, an acquisition would have to include an input and a
substantive process that together significantly contributes to the
ability to create outputs. ASU 2017-01 further states that when
substantially all of the fair value of gross assets acquired is
concentrated in a single asset (or a group of similar assets), the
assets acquired would not represent a business. The new guidance
also narrows the definition of the term “outputs” to be
consistent with how it is described in Topic 606, Revenue from
Contracts with Customers. The changes to the definition of a
business will likely result in more acquisitions being accounted
for as asset acquisitions. The guidance is effective for the annual
period beginning after December 15, 2017, with early adoption
permitted. The Company has elected to early adopt ASU 2017-01 and
to apply it to any transaction, which occurred prior to the
issuance date that has not been reported in financial statements
that have been issued or made available for issuance.
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2014-09,
“Revenue from Contracts with Customers,” Topic 606.
This Update affects any entity that either enters into contracts
with customers to transfer goods or services or enters into
contracts for the transfer of nonfinancial assets, unless those
contracts are within the scope of other standards. The guidance in
this Update supersedes the revenue recognition requirements in
Topic 605, Revenue Recognition and most industry-specific guidance.
The core principle of the guidance is that an entity should
recognize revenue to illustrate the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services. The new guidance also includes a cohesive set of
disclosure requirements that will provide users of financial
statements with comprehensive information about the nature, amount,
timing, and uncertainty of revenue and cash flows arising from a
reporting organization’s contracts with customers. In April
2016, the FASB issued ASU No. 2016-10, “Revenue from
Contracts with Customers,” Topic 606: “Identifying
Performance Obligations and Licensing”. This Update clarifies
guidance related to identifying performance obligations and
licensing implementation guidance contained in the new revenue
recognition standard. The Update includes targeted improvements
based on input the Board received from the Transition Resource
Group for Revenue Recognition and other stakeholders. The update
seeks to proactively address areas in which diversity in practice
potentially could arise, as well as to reduce the cost and
complexity of applying certain aspects of the guidance both at
implementation and on an ongoing basis. In May 2016, the FASB
issued ASU No. 2016-12, “Revenue from Contracts with
Customers,” Topic 606: “Narrow-Scope Improvements and
Practical Expedients”. The amendments in this Update address
narrow-scope improvements to the guidance on collectability,
noncash consideration, and completed contracts at transition.
Additionally, the amendments in this Update provide a practical
expedient for contract modifications at transition and an
accounting policy election related to the presentation of sales
taxes and other similar taxes collected from customers. This ASU is
the final version of Proposed Accounting Standards Update 2015-320,
“Revenue from Contracts with Customers,” (Topic 606):
“Narrow-Scope Improvements and Practical Expedients,”
which has been deleted. In December 2016, the FASB issued ASU No.
2016-20, “Revenue from Contracts with Customers,” Topic
606: “Technical Corrections and Improvements to Topic 606,
Revenue from Contracts with Customers”. The amendments in
this Update address narrow-scope improvements to the guidance on
loan guarantee fees, contract cost-impairment testing, contract
costs-interaction of impairment testing with guidance in other
topics, provision for losses on construction-type and
production-type contracts, scope of topic 606 to exclude all
contracts that are within the scope of Topic 944, disclosure of
remaining performance obligations, disclosure of prior-period
performance obligations, contract modifications, contract asset
versus receivable, refund liability, advertising costs, fixed-odds
wagering contracts in the casino industry and cost capitalization
for advisors to private funds and public funds. The Board decided
to issue a separate Update for technical corrections and
improvements to Topic 606 and other Topics amended by Update
2014-09 to increase stakeholders’ awareness of the proposals
and to expedite improvements to Update 2014-09. This ASU is
effective for fiscal years, and interim periods within those years
beginning after December 15, 2017 for public companies and 2018 for
non-public entities. We adopted the new standard effective May 1,
2018, using the modified retrospective transition
method.
We developed an implementation plan to adopt this new guidance,
which included an assessment of the impact of the new guidance on
our financial position and results of operations. We have
substantially completed our assessment and have determined that
this standard will not have a material impact on our financial
position or results of operations, except enhanced disclosure
regarding revenue recognition, including disclosures of revenue
streams, performance obligations, variable consideration and the
related judgments and estimates necessary to apply the new
standard. On May 1, 2018, we adopted the new accounting standard
ASC 606, Revenue from Contracts with Customers and for all open
contracts and related amendments as of May 1, 2018 using the
modified retrospective method. Results for reporting periods
beginning after May 1, 2018 will be presented under ASC 606, while
the comparative information will not be restated and will continue
to be reported under the accounting standards in effect for those
periods.
41
Recently Issued Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU
2016-02”), which is effective for annual reporting periods
beginning after December 15, 2018. Under ASU 2016-02, lessees will
be required to recognize the following for all leases (with the
exception of short-term leases) at the commencement date: 1) a
lease liability, which is a lessee’s obligation to make lease
payments arising from a lease, measured on a discounted basis, and
2) a right-of-use asset, which is an asset that represents the
lessee’s right to use, or control the use of, a specified
asset for the lease term. The Company is currently evaluating the
effects of ASU 2016-02 on its audited consolidated financial
statements.
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230)
Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”). ASU 2016-15 eliminates the diversity
in practice related to the classification of certain cash receipts
and payments for debt prepayment or extinguishment costs, the
maturing of a zero-coupon bond, the settlement of contingent
liabilities arising from a business combination, proceeds from
insurance settlements, distributions from certain equity method
investees and beneficial interests obtained in a financial asset
securitization. ASU 2016-15 designates the appropriate cash flow
classification, including requirements to allocate certain
components of these cash receipts and payments among operating,
investing and financing activities. The guidance is effective for
fiscal years beginning after December 15, 2017. The Company is
currently evaluating the effects of ASU 2016-15 on its audited
consolidated financial statements.
In May
2017, the FASB issued ASU No 2017-09 Compensation-Stock Compensation (Topic 718):
Scope of Modification Accounting (“ASU
2017-09”). ASU 2017-09 provides clarity and reduces both (i)
diversity in practice and (ii) cost and complexity when applying
the guidance in Topic 718, Compensation-Stock Compensation, to a
change to the terms or conditions of a share-based payment award.
The amendments in ASU 2017-09 provide guidance about which changes
to the terms or conditions of a share-based payment award require
an entity to apply modification accounting in Topic 718. An entity
should account for the effects of a modification unless all three
of the following are met: (1) The fair value (or calculated value
or intrinsic value, if such an alternative measurement method is
used) of the modified award is the same as the fair value (or
calculated value or intrinsic value, if such an alternative
measurement is used) of the original award immediately before the
original award is modified. If the modification does not affect any
of the inputs to the valuation technique that the entity uses to
value the award, the entity is not required to estimate the value
immediately before and after the modification. (2) The vesting
conditions of the modified award are the same as the vesting
conditions of the original award immediately before the original
award is modified. (3) The classification of the modified award as
an equity instrument or a liability instrument is the same as the
classification of the original award immediately before the
original award is modified. Note that the current disclosure
requirements in Topic 718 apply regardless of whether an entity is
required to apply modification accounting under the amendments in
ASU 2017-09. ASU 2017-09 is effective for all annual periods, and
interim periods within those annual periods, beginning after
December 15, 2017, with early adoption permitted. The Company is
currently evaluating the effects of ASU 2017-09 on its audited
consolidated financial statements.
In July
2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing
Liabilities from Equity (Topic 480) and Derivatives and Hedging
(Topic 815): I. Accounting for Certain Financial Instruments with
Down Round Features; II. Replacement of the Indefinite Deferral for
Mandatorily Redeemable Financial Instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Noncontrolling
Interests with a Scope Exception. Part I of this update
addresses the complexity of accounting for certain financial
instruments with down round features. Down round features are
features of certain equity-linked instruments (or embedded
features) that result in the strike price being reduced on the
basis of the pricing of future equity offerings. Current accounting
guidance creates cost and complexity for entities that issue
financial instruments (such as warrants and convertible
instruments) with down round features that require fair value
measurement of the entire instrument or conversion option. Part II
of this update addresses the difficulty of navigating Topic 480,
Distinguishing Liabilities from Equity, because of the existence of
extensive pending content in the FASB Accounting Standards
Codification. This pending content is the result of the indefinite
deferral of accounting requirements about mandatorily redeemable
financial instruments of certain nonpublic entities and certain
mandatorily redeemable noncontrolling interests. The amendments in
Part II of this update do not have an accounting effect. This ASU
is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2018. The Company is currently
assessing the potential impact of adopting ASU 2017-11 on its
audited consolidated financial statements and related
disclosures.
Management has
evaluated other recently issued accounting pronouncements and does
not believe that any of these pronouncements will have a
significant impact on our consolidated financial statements and
related disclosures.
42
Not
required for Smaller Reporting Company.
Attached hereto and
filed as a part of this Annual Report on Form 10-K are our
Consolidated Financial Statements, beginning on page
F-1.
None
Our management, with
the participation of our Chief Executive Officer and
Principal Financial Officer, has evaluated the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in the Securities Exchange Act
of 1934 Rule 13a-15 and Rule 15d-15, as amended (the
“Act”)) as of the end of the period covered by this
annual report on Form 10-K. Based on this evaluation, our Chief
Executive Officer and Principal Financial Officer
concluded
that, due to the material weaknesses in our internal control over
financial reporting as described below, our disclosure controls and
procedures were not effective as of April 30,
2018.
Management’s Report on Internal Control Over Financial
Reporting
Management is responsible for establishing and
maintaining adequate internal control over financial reporting.
Management evaluated the effectiveness of our internal control over
financial reporting as of April 30,
2018, based on criteria for
effective internal control over financial reporting described in
the 2013 Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, management has determined that as
of April 30,
2018, there were material
weaknesses in our internal control over financial reporting. The
material weaknesses identified during management’s assessment
were (i) a lack of sufficient internal accounting resources
resulting in a lack of segregation of duties to ensure adequate
review of financial statement preparation, and (ii) ineffective
management review of complex transactions to enable timely
decisions regarding required disclosures. As a result of these
material weaknesses, management has concluded that we did not
maintain effective internal control over financial reporting
at April 30,
2018.
Although a material weaknesses is defined as a
deficiency, or a combination of deficiencies in internal control
over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company’s
annual or interim financial statements will not be prevented or
detected on a timely basis, there material weaknesses did not
result in any material misstatements of the Company’s
consolidated financial statements and disclosures for any interim
periods during, or for the annual periods ended April 30,
2018.
Changes in internal control over financial reporting
During
the year ended April 30, 2018, there was no change in internal
control over financial reporting or in other factors that has
materially affected, or is reasonably likely to materially affect,
internal control over financial reporting.
Attestation report of Registered Public Accounting
Firm
This
Annual Report on Form 10-K does not include an attestation report
of the independent registered public accounting firm regarding
internal control over financial reporting because the Company is a
“smaller reporting company.” Management’s report
was not subject to attestation by the independent registered public
accounting firm pursuant to rules of the SEC that permit the
Company to provide only management’s report in this Annual
Report on Form 10-K.
None.
43
PART III
The
following sets forth biographical information about each of our
directors and executive officers as of the date of this
report:
|
Name
|
|
Age
|
|
Position
|
|
Director / Officer Since
|
|
Patrick
Moynihan
|
|
50
|
|
Chief
Executive Officer and Chairman
|
|
November 15, 2017
|
|
Robert
Kalkstein
|
|
36
|
|
Principal
Financial Officer
|
|
May 18, 2018
|
|
Max
Robbins
|
|
47
|
|
Director
|
|
February 1, 2018
|
Patrick Moynihan
Mr.
Moynihan brings to the position a deep understanding of the
blockchain and cryptocurrency industries and a global set of
relationships with software engineers, ICO originators and miners.
Mr. Moynihan served as Managing Director for Corona Associates
Capital Management from August 2015 through November 2017, Managing
Director at Ithaca Partners LLC from June 2011 through October
2017, and Founder & Chief Executive Officer at PayLock, Inc.
from April 2004 through January 2013.
Mr.
Moynihan holds an English Major and Business Minor from Ithaca
College in 1990.
Robert Kalkstein
Mr.
Kalkstein has served as the Chief Financial Officer of Conversion
Labs, Inc. (formerly Immudyne, Inc.) since October 2017 and
continues to split time with the Company. He has served as a
private consultant to emerging growth companies since July 2012,
providing services as a chief financial officer, chief operating
officer or other advisory positions to management. Previously, Mr.
Kalkstein held positions at Peerless System Corp. from October 2010
to June 2012, Jefferies & Co. from November 2009 to October
2010 and PricewaterhouseCoopers from April 2007 to October 2009. He
has more than 10 years of experience in the areas of accounting,
finance, SEC filings and operations.
Mr.
Kalkstein is a Certified Public Accountant (“CPA”) and
received a Bachelor of Engineering in Biomedical Engineering and a
Master of Engineering in Engineering Management at Stevens
Institute of Technology in Hoboken, NJ.
Max Robbins
Mr. Robbins is
the founder and principal of aiScaler since January 2008, a
software company specialized in web acceleration, DDos mitigation
and traffic management. From 2003 to 2006, he served as President
of McBride & Associates, a government contracting
organization. From
1993 to 1996, Mr. Robbins was the Chief Technical Officer for IDT
Corporation (“IDT”) where he created the internet
division, resulting in a successful public offering in 1997. IDT
trades under the symbol IDTC on the New York Stock
Exchange.
Mr.
Robbins is a serial entrepreneur with a wide gambit of experience
growing companies from concept to public offering. He is a speaker
on blockchain technology and advisor to fintech companies in the
blockchain space, such as Modex and Trakinvest.
44
Family Relationships
There
are no family relationships between any of our officers or
directors.
Compliance with Section 16(A) of the Exchange Act
Section 16(a) of the Exchange Act requires the
Company’s directors, executive officers and persons
who own more than ten percent of a class of equity securities
registered under Section 12 of the
Securities and Exchange Act of 1934, to file reports of beneficial
ownership and changes in beneficial ownership with the SEC.
Directors, executive officers and greater than 10% stockholders are
required by the rules and regulations of the SEC to furnish the
Company with copies of all reports filed by them in compliance with
Section 16(a).
Since
we currently do not have securities registered under Section 12 of
the Securities and Exchange Act of 1934, we are not subject to
Section 16(A) filing requirements.
Board Committees
We
have no audit, compensation or nominating committee. The functions
of these committees are performed by our Board. We do not have any
independent directors.
Code of Ethics
We
have not adopted a code of ethics as of the date of this report.
The Company has not created a timeline to develop a code of ethics
at this time.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive
officers has, during the past ten years:
●
been
convicted in a criminal proceeding or been subject to a pending
criminal proceeding (excluding traffic violations and other minor
offenses);
●
had
any bankruptcy petition filed by or against the business or
property of the person, or of any partnership, corporation or
business association of which he was a general partner or executive
officer, either at the time of the bankruptcy filing or within two
years prior to that time;
●
been
subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent
jurisdiction or federal or state authority, permanently or
temporarily enjoining, barring, suspending or otherwise limiting,
his involvement in any type of business, securities, futures,
commodities, investment, banking, savings and loan, or insurance
activities, or to be associated with persons engaged in any such
activity;
●
been
found by a court of competent jurisdiction in a civil action or by
the SEC or the Commodity Futures Trading Commission to have
violated a federal or state securities or commodities law, and the
judgment has not been reversed, suspended, or vacated;
●
been
the subject of, or a party to, any federal or state judicial or
administrative order, judgment, decree, or finding, not
subsequently reversed, suspended or vacated (not including any
settlement of a civil proceeding among private litigants), relating
to an alleged violation of any federal or state securities or
commodities law or regulation, any law or regulation respecting
financial institutions or insurance companies including, but not
limited to, a temporary or permanent injunction, order of
disgorgement or restitution, civil money penalty or temporary or
permanent cease-and-desist order, or removal or prohibition order,
or any law or regulation prohibiting mail or wire fraud or fraud in
connection with any business entity; or
●
been
the subject of, or a party to, any sanction or order, not
subsequently reversed, suspended or vacated, of any self-regulatory
organization (as defined in Section 3(a)(26) of the Exchange Act),
any registered entity (as defined in Section 1(a)(29) of the
Commodity Exchange Act), or any equivalent exchange, association,
entity or organization that has disciplinary authority over its
members or persons associated with a member.
Except as set forth in our discussion below in “Certain
Relationships and Related Transactions,” none of our
directors or executive officers has been involved in any
transactions with us or any of our directors, executive officers,
affiliates or associates which are required to be disclosed
pursuant to the rules and regulations of the
SEC.
45
ITEM 11 EXECUTIVE COMPENSATION
Compensation of named executive officers:
|
Name and Principal Position (1)
|
Fiscal Year
|
Base Salary ($)
|
Option Awards ($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
All Other Compensation ($)
|
Total ($)
|
|
Olivia Funk, Chief Executive Officer and
Chairman(2)
|
|
|
|
|
|
|
|
|
2018
|
—
|
—
|
—
|
—
|
$—
|
|
|
2017
|
—
|
—
|
—
|
—
|
$—
|
|
|
|
|
|
|
|
|
|
Patrick
Moynihan, Chief Executive Officer and Chairman
|
|
|
|
|
|
|
|
|
2018
|
120,000
|
—
|
—
|
$25,000 (4)
|
$145,000
|
|
|
2017
|
—
|
—
|
—
|
—
|
$—
|
|
|
|
|
|
|
|
|
|
Robert Kalkstein, Principal Financial
Officer (3)
|
|
|
|
|
|
|
|
|
2018
|
—
|
—
|
—
|
$63,000
|
$63,000
|
|
|
2017
|
—
|
—
|
—
|
—
|
$—
|
(1)
From
the period from May 15, 2016 through March 22, 2017 we were under
the control of a Receiver in Nevada’s Eighth Judicial
District pursuant to #A14- 715484-P. During that period the
Receiver ran the Company and incurred expenses to maintain its
status as public company and to locate a potential buyer for the
Company. On May 23, 2017 the Company entered into a Share Purchase
Agreement (“SPA”) with JOJ Holdings (the
“Purchaser”), LLC maintaining an address at 53 Calle
Palmeras, San Juan Puerto Rico. Under the terms of the SPA, the
Purchaser agreed to purchase 40,000,000 of our $0.001 par value
common stock; and to assume the liability of a judgement creditor
in the amount of $25,690.41. Additionally, and concurrent with the
signing of the SPA by the Company; the Receiver resigned from the
Company, and the Purchaser elected Olivia Funk as the sole officer
and director of the Company.
(2)
Olivia
Funk resigned as Chief Executive Officer and Chairman of the
Company on November 15, 2017.
(3)
The
noted compensation noted is the fair-value of the stock received
for services provided. Please refer to FN 12 for the detailed
description common stock issued in exchange for
services.
(4)
Mr. Moynihan
received performance compensation for the
new creation of the Investment Management business line for
the Company.
46
Executive Employment Contracts
The
Company entered into a consulting agreement with our Chief
Executive Officer, Patrick Moynihan, effective as of November 1,
2017. Pursuant to the terms of the agreement, the Company will pay
Mr. Moynihan an annual fee of $240,000, payable in equal monthly
installments. The Company will also reimburse Mr. Moynihan for all
reasonable expenses incurred in performing his responsibilities
under the agreement. The term of the agreement is for five (5)
years. Since August 2018, Mr. Moynihan has been paid, with the same
salary as his consulting agreement, as a full-time employee and is
no longer considered an independent contractor. The Company intends
to enter into a new employment agreement with Mr. Moynihan. Mr.
Moynihan will be eligible for any benefits once the Company
implements such benefit plans.
The
Company entered into a consulting agreement with our Principal
Financial Officer, Robert Kalkstein, effective as of December 1,
2017. Pursuant to the terms of the agreement, the Company will pay
Mr. Kalkstein with 1,000,000 shares of restricted stock, of which
500,000 shall vest on June 1, 2018 and the remaining 500,000 shall
vest on December 1, 2018. The term of the agreement is for two (2)
years. The Company will also reimburse Mr. Kalkstein for all
reasonable expenses incurred in performing his responsibilities
under the agreement. Mr. Kalkstein is not eligible for benefit
plans, severance or other compensation in the event of a change of
control.
Compensation of Directors
Director Agreement – Max Robbins
The
Company originally entered into a Director Agreement with Max
Robbins on February 1, 2018 whereby Mr. Robbins was to receive an
option to purchase 120,000 shares of the Company's common stock at
$1.00 per share. Both parties agreed to cancel that contract and,
on May 10, 2018, entered into a new Director Agreement. Pursuant to
the terms of the new agreement, the Director shall receive a
non-qualified stock option to purchase up to One Hundred Forty-Four
Thousand (144,000) shares of the Company’s common stock,
pursuant and subject to the Company’s Equity Incentive Plan,
at the following exercise prices and vesting schedule:
|
Exercise
Price
|
Quantity
Vested
|
Vesting
Date
|
Expiration
Date
|
|
$1.25
|
48,000
|
6/1/2018
|
12/31/2023
|
|
$1.25
|
48,000
|
6/1/2019
|
12/31/2023
|
|
$1.25
|
48,000
|
6/31/2020
|
12/31/2023
|
Mr.
Robbins shall hold office until such time that such
Director’s successor is duly elected and qualified, or until
such Director’s death or removal from office. The Director
will be automatically removed from the Board if such Director
resigns his office by writing delivered to the Board, becomes
prohibited by law from acting as a director or commits a material
breach of this Agreement.
Changes in Control
We
are not aware of any arrangements that may result in “changes
in control” as that term is defined by the provisions of Item
403(c) of Regulation S- K.
47
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
following sets forth information as of October 26, 2018, regarding
the number of shares of our common stock beneficially owned by (i)
each person that we know beneficially owns more than 5% of our
outstanding common stock, (ii) each of our directors and named
executive officer and (iii) all of our directors and named
executive officer as a group.
The
amounts and percentages of our common stock beneficially owned are
reported on the basis of SEC rules governing the determination of
beneficial ownership of securities. Under the SEC rules, a person
is deemed to be a “beneficial owner” of a security if
that person has or shares “voting power,” which
includes the power to vote or to direct the voting of such
security, or “investment power,” which includes the
power to dispose of or to direct the disposition of such security.
A person is also deemed to be a beneficial owner of any securities
of which that person has the right to acquire beneficial ownership
within 60 days through the exercise of any stock option, warrant or
other right. Under these rules, more than one person may be deemed
a beneficial owner of the same securities and a person may be
deemed to be a beneficial owner of securities as to which such
person has no economic interest. Unless otherwise indicated, each
of the shareholders named in the table below, or his or her family
members, has sole voting and investment power with respect to such
shares of our common stock. Except as otherwise indicated, the
address of each of the shareholders listed below is: c/o Blockchain
Industries, Inc., 730 Arizona Ave, Suite 220, Santa Monica, CA
90401.
|
Name
and Address Of Beneficial
Owner of Common Stock
|
Amount
of Common Stock
Beneficially
Owned
|
Percent (%) of Voting Securities Beneficially
Owned (1)
|
|
Patrick Moynihan, CEO and Chairman
(2)
730
Arizona Ave, Suite 220
Santa
Monica, CA 90401
|
10,000,000
|
23.82%
|
|
|
|
|
|
Robert Kalkstein, Principal Financial
Officer (3)
730
Arizona Ave, Suite 220
Santa
Monica, CA 90401
|
1,300,000
|
3.05%
|
|
|
|
|
|
Max Robbins, Director (4)
730
Arizona Ave, Suite 220
Santa
Monica, CA 90401
|
48,000
|
0.11%
|
|
|
|
|
|
All Directors and Officers as a group
|
11,348,000
|
26.99%
|
|
|
|
|
|
Gary
Goodman
14
Dorado Beach East
Dorado,
PR 00646
|
3,000,000
|
7.15%
|
|
|
|
|
|
Robert
Miketich
286
Dorado Beach East
Dorado,
PR 00646
|
3,000,000
|
7.15%
|
|
|
|
|
|
Lawrence Partners (5)
15
Manor Lane
Lawrence,
NY 11559
|
2,775,000
|
6.59%
|
|
|
(1)
|
Applicable
percentage ownership is based on 41,984,355 shares outstanding as of October
26, 2018.
|
|
|
(2)
|
Mr.
Moynihan owns 9,200,000 million shares of common stock through the
Santa Monica Trust, which he is trustee, and 200,000 shares each as
custodian for four of his children.
|
|
|
(3)
|
Mr.
Kalkstein presently owns 1,300,000 shares of common stock. Mr.
Kalkstein will earn 500,000 shares of restricted stock that vest on
December 1, 2018. In addition, he owns 100,000 warrants to purchase
shares of common stock which are currently
exercisable.
|
|
|
(4)
|
Mr.
Robbins joined the Board of Directors on February 1, 2018. For
compensation for Mr. Robbins’ service as a member of our
Board of Directors, he was issued an option to purchase 120,000
shares of common stock, which vests equally at 40,000 shares each
on June 1, 2018, June 1, 2019, and June 1, 2020.
|
|
|
(5)
|
Lawrence
Partners LLC holds 2,650,000 shares of common stock and 125,000
warrants to purchase common stock that are currently exercisable at
$0.25 per share. Jessica Beren has voting or investment control
over the shares held by Lawrence Partners LLC.
|
48
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Except as disclosed below, none of our officers, directors,
proposed director nominees, beneficial owners of more than 10% of
our shares of common stock, or any relative or spouse of any of the
foregoing persons, or any relative of such spouse who has the same
house as such person or who is a director or officer of any parent
or subsidiary of our Company, has any direct or indirect material
interest in any transaction to which we are a party since our
incorporation or in any proposed transaction to which we are
proposed to be a party.
The
Company's Chairman and Chief Executive Officer, Patrick Moynihan's
wife, is an employee of the Company. Ms. Lisa Moynihan is
responsible for managing the Company's media and education
business, including managing the two conferences and corporate
communications. Ms. Moynihan receives a monthly salary payable in
cash of $10,000 and on February 1, 2018 was issued 100,000
restricted shares of our common stock. As of October 26, 2018, of
the 100,000 restricted shares issued to Ms. Moynihan, 25,000 shares
of common stock are fully vested. The remaining 75,000 restricted
shares will vest equally every six months on February 1, 2019, June
1, 2019 and February 1, 2020.
In the event a related party transaction is proposed, such
transaction will be presented to our board of directors for
consideration and approval. Any such transaction will require
approval by a majority of the directors and such transactions will
be on terms no less favorable than those available to disinterested
third parties.
Director Independence
Since
our common stock is not currently listed on a national securities
exchange, we have used the definition of “independence”
of The NASDAQ Stock Market to make this determination. NASDAQ
Listing Rule 5605(a)(2) provides that an “independent
director” is a person other than an officer or employee of
the company or any other individual having a relationship that, in
the opinion of the company’s board of directors, would
interfere with the exercise of independent judgment in carrying out
the responsibilities of a director. The NASDAQ listing rules
provide that a director cannot be considered independent
if:
●
the
director is, or at any time during the past three years was, an
employee of the company;
●
the
director or a family member of the director accepted any
compensation from the company in excess of $120,000 during any
period of 12 consecutive months within the three years preceding
the independence determination (subject to certain exclusions,
including, among other things, compensation for board or board
committee service);
●
a
family member of the director is, or at any time during the past
three years was, an executive officer of the company;
●
the
director or a family member of the director is a partner in,
controlling stockholder of, or an executive officer of an entity to
which the company made, or from which the company received,
payments in the current or any of the past three fiscal years that
exceed 5% of the recipient’s consolidated gross revenue for
that year or $200,000, whichever is greater (subject to certain
exclusions);
●
the
director or a family member of the director is employed as an
executive officer of an entity where, at any time during the past
three years, any of the executive officers of the company served on
the compensation committee of such other entity; or
●
The
director or a family member of the director is a current partner of
the company’s outside auditor, or at any time during the past
three years was a partner or employee of the company’s
outside auditor, and who worked on the company’s
audit.
Based
upon the above criteria, we have determined that Max Robbins is an
independent board member.
49
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our
Board of Directors has selected BF Borgers CPA PC ("Borgers") as
the independent registered public accounting firm to audit our
books and accounts for the fiscal years ending April 30, 2018, 2017
and 2016. Borgers has served as our independent auditor since
October 31, 2016. The aggregate fees billed, or expected to be
billed, for the last three fiscal years ended April 30, 2018, 2017
and 2016, for professional services rendered by Borgers were as
follows:
|
|
Fiscal
2018
|
Fiscal
2017
|
Fiscal
2016
|
|
Audit
Fees
|
$33,500
|
$2,910
|
$2,910
|
|
Audit-Related
Fees
|
3,240
|
–
|
–
|
|
Tax
Fees
|
–
|
–
|
–
|
|
Total
Fees
|
$36,740
|
$2,910
|
$2,910
|
Audit Fees
This
category includes the audit of our annual financial statements,
review of financial statements included in our Form 10-Q Quarterly
Reports and services that are normally provided by the independent
auditors in connection with engagements for those fiscal years.
This category also includes advice on audit and accounting matters
that arose during, or as a result of, the audit or the review of
interim financial statements.
Audit-Related Fees
This
category consists of assurance and related services by the
independent auditors that are reasonably related to the performance
of the audit or review of our financial statements and are not
reported above under “Audit Fees.” The services for the
fees disclosed under this category include consultation regarding
our correspondence with the SEC and acquisition
audits.
Tax Fees
This
category consists of professional services rendered by our
independent auditors for tax compliance and tax advice. The
services for the fees disclosed under this category include tax
return preparation and technical tax advice.
Our
Board of Directors has adopted a procedure for pre-approval of all
fees charged by our independent auditors. Under the procedure, the
Board approves the engagement letter with respect to audit, tax and
review services. Other fees are subject to pre-approval by the
Board, or, in the period between meetings, by a designated member
of Board. Any such approval by the designated member is disclosed
to the entire Board at the next meeting. The audit fees paid to the
auditors with respect to fiscal years 2017 and 2016 were
pre-approved by the entire Board of Directors.
50
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
|
(a)
|
The
following are filed as part of this Annual Report on Form
10-K
|
|
|
|
|
|
|
|
(1)
|
The
financial statements and schedules required to be filed by Item 8
of this Annual Report on Form 10-K and listed in the Index to
Consolidated Financial Statements.
|
|
|
|
|
|
|
(2)
|
The
Exhibits required by Item 601 of Regulation S-K and listed below in
the “Index to Exhibits
required by Item 601 of Regulation S-K.”
|
|
|
|
|
|
(b)
|
The
Exhibits are filed with or incorporated by reference in this Annual
Report on Form 10-K
|
|
|
|
|
|
|
(c)
|
None
|
|
51
Index to Exhibits required by Item 601 of Regulation
S-K.
|
|
|
|
|
Incorporated
by
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Reference
|
|
Filed or
Furnished
|
|
|
|
|
|
Number
|
|
Exhibit
Description
|
|
Form
|
|
Exhibit
|
|
Filing
Date
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Articles
of Incorporation, as amended
|
|
10B12G/A
|
|
|
|
06/30/2006
|
|
|
|
|
|
Certificate
of amendment of Certificate of Incorporation (Name Change to Omni
Global Technologies, Inc. and 1-for-150 Reverse Split dated July 8,
2016)
|
|
|
|
|
|
|
|
X
|
|
|
|
Certificate
of Amendment of Certificate of Incorporation, Name Changed to
Blockchain Industries, Inc. dated November 13, 2017
|
|
8-K
|
|
3.1(II)
|
|
11/16/2017
|
|
|
|
|
|
Certificate
of Amendment of Certificate of Incorporation, 2-for-1 Forward Split
dated December 20, 2017
|
|
|
|
|
|
|
|
X
|
|
|
|
Certificate
of Designation – Series A Convertible Preferred
Stock
|
|
|
|
|
|
|
|
X
|
|
|
|
Bylaws
|
|
|
|
|
|
|
|
X
|
|
|
|
Form of
Warrant
|
|
|
|
|
|
|
|
X
|
|
|
|
Form of
Warrant
|
|
|
|
|
|
|
|
X
|
|
|
|
Equity
Token Purchase Agreement dated December 19, 2017 by and between the
Company and Chimes Broadcasting, Inc.
|
|
|
|
|
|
|
|
X
|
|
|
|
Equity
Token Purchase Agreement dated February 5, 2018 by and between the
Company and Chimes Broadcasting, Inc.
|
|
|
|
|
|
|
|
X
|
|
|
|
Advisory
Agreement dated January 11, 2018 by and between the Company and
KinerjaPay Corp.
|
|
|
|
|
|
|
|
X
|
|
|
|
Private
Token Purchase Commitment Agreement by and between the Company and
BlockEx Limited
|
|
|
|
|
|
|
|
X
|
|
|
|
Stock
Purchase Agreement dated February 19, 2018 by and between the
Company and LegatumX, Inc.
|
|
|
|
|
|
|
|
X
|
|
|
|
Promissory
Note dated January 17, 2018 issued to AutoLotto, Inc.
|
|
|
|
|
|
|
|
X
|
|
|
|
Token
Grant to AutoLotto, Inc. dated January 17, 2018
|
|
|
|
|
|
|
|
X
|
|
|
|
Director
Agreement dated May 10, 2018 by and between the Company and Max
Robbins
|
|
|
|
|
|
|
|
X
|
|
|
|
Consulting
Agreement dated February 1, 2018 by and between the Company and
Zackeriah Pontgrave
|
|
|
|
|
|
|
|
X
|
|
|
|
Consulting
Agreement dated January 1, 2018 by and between the Company and
Bryan Larkin
|
|
|
|
|
|
|
|
X
|
|
|
|
Simple
Agreement for Future Tokens dated January 30, 2018 by and between
the Company and Coral Health Research & Discovery
Inc.
|
|
10-Q
|
|
10.1
|
|
03/19/2017
|
|
|
|
|
|
Basecoin
Agreement, dated January 30, 2018 by and between the Company and
Basecoin
|
|
10-Q
|
|
10.2
|
|
03/19/2017
|
|
|
|
|
|
Subscription
Agreement for Origin Protocol Investment dated February 19,
2018
|
|
10-Q
|
|
10.3
|
|
03/19/2017
|
|
|
|
|
|
Consulting
Agreement dated November 1, 2017 by and between the Company and
Patrick Moynihan
|
|
10-K/A
|
|
10.19
|
|
05/21/2018
|
|
|
|
|
|
Consulting
Agreement dated December 1, 2017 by and between the Company and
Sagacious Gambit, Inc.
|
|
10-K/A
|
|
10.21
|
|
05/21/2018
|
|
|
|
|
|
Share
Purchase Agreement dated March 23, 2017 by and between the Company
and JOJ Holdings, LLC
|
|
10-K
|
|
10.1
|
|
08/30/2018
|
|
|
|
|
|
Securities
Purchase Agreement dated August 14, 2018 by and between the Company
and IC, LLC
|
|
|
|
|
|
|
|
X
|
|
|
|
Secured
Promissory Note dated August 14, 2018 by and between the Company
and IC, LLC
|
|
|
|
|
|
|
|
X
|
|
|
|
Securities
Purchase Agreement dated September 5, 2018 by and between the
Company and Ian
Molendyk
|
|
|
|
|
|
|
|
X
|
|
|
|
Secured Promissory Note dated September 5, 2018 by and between the
Company and Ian Molendyk
|
|
|
|
|
|
|
|
X
|
|
|
|
Initial Coin Offering Architecture Proposal Agreement dated July 2,
2018 by and between the Company and BlakFX,
LLC
|
|
|
|
|
|
|
|
X
|
52
|
|
Subsidiaries
of the Registrant
|
|
|
|
|
|
|
|
X
|
|
|
|
Certification
by the Principal Executive Officer of Registrant pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or
Rule 15d-14(a)).
|
|
|
|
|
|
|
|
X
|
|
|
|
Certification
by the Principal Financial Officer of Registrant pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or
Rule 15d-14(a)).
|
|
|
|
|
|
|
|
X
|
|
|
|
Certification
by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
|
X
|
|
|
|
Certification
by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
|
X
|
|
|
101.INS
|
|
XBRL
Instance Document
|
|
|
|
|
|
|
|
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
|
|
|
|
|
|
|
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
|
|
|
|
|
|
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
|
|
|
|
|
|
|
|
|
101.LAB
|
|
BRL
Taxonomy Extension Label Linkbase Document
|
|
|
|
|
|
|
|
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
|
|
|
|
|
|
|
|
* Indicates a management contract or compensatory plan or
arrangement.
53
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
Dated:
October 26, 2018
|
BLOCKCHAIN
INDUSTRIES, INC.
|
|
|
|
|
|
|
|
By:
|
/s/ Patrick Moynihan
|
|
|
|
Patrick
Moynihan
|
|
|
|
Executive
Chairman
(Principal
Executive Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ Patrick Moynihan s
|
|
Chairman
of the Board, Chief Executive Officer
|
|
October
26, 2018
|
|
Patrick
Moynihan
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/
Robert
Kalkstein
|
|
Principal
Financial Officer
|
|
October
26, 2018
|
|
Robert
Kalkstein
|
|
(Principal
Financial Officer and Principal Accounting Officer)
|
|
|
|
|
|
|
|
|
|
/s/
Max Robbins
|
|
Director
|
|
October
26, 2018
|
|
Max
Robbins
|
|
|
|
|
|
|
|
|
|
|
54
BLOCKCHAIN INDUSTRIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 2018 AND 2017
CONTENTS
|
|
PAGE
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-1
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
F-2
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
F-3
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
|
F-4
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
F-5
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-6
|
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Report of Independent Registered Public Accounting
Firm
To the shareholders and the board of directors of Blockchain
Industries, Inc.
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of
Blockchain Industries, Inc. as
of April 30, 2018 and 2017, the related statements of operations,
stockholders' equity (deficit), and cash flows for the years then
ended, and the related notes (collectively referred to as the
"financial statements"). In our opinion, the financial statements
present fairly, in all material respects, the financial position of
the Company as of April 30, 2018 and 2017, and the results of its
operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted
in the United
States.
Basis for Opinion
These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
Company's financial statements based on our audit. We are a public
accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or
fraud.
Our
audit included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audit also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis
for our opinion.
Substantial Doubt about the Company’s Ability to Continue as
a Going Concern
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
2 to the financial statements, the Company has suffered recurring
losses from operations and has a significant accumulated deficit.
In addition, the Company continues to experience negative cash
flows from operations. These factors raise substantial doubt about
the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/S/ BF
Borgers CPA PC
BF Borgers CPA PC
We have
served as the Company's auditor since 2016
Lakewood,
CO
October
26, 2018
F-1
BLOCKCHAIN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
|
|
April
30,
|
|
|
|
2018
|
2017
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash & cash
equivalents
|
$518,960
|
$-
|
|
Investments in
securities
|
780,000
|
-
|
|
Investments in
digital currencies
|
1,166,477
|
-
|
|
Investments in
SAFTs
|
1,720,000
|
-
|
|
Other
receivables
|
26,245
|
-
|
|
Other current
assets
|
123,488
|
-
|
|
Total current
assets
|
4,335,170
|
-
|
|
|
|
|
|
Property, plant
& equipment, net of accumulated depreciation of $584 and $0 as
of April 30, 2018, and April 30, 2017,
respectively
|
112,139
|
-
|
|
Note
receivable
|
500,000
|
-
|
|
Other non-current
assets
|
69,077
|
-
|
|
Total
assets
|
$5,016,386
|
$-
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts payable
and accrued expenses
|
$357,208
|
$493,596
|
|
Deferred
revenue
|
1,427,285
|
-
|
|
Current
liabilities
|
1,784,493
|
493,596
|
|
|
|
-
|
|
Due to related
parties
|
-
|
3,981,423
|
|
Note
payable
|
-
|
501,112
|
|
Convertible
note
|
-
|
53,000
|
|
Total
liabilities
|
1,784,493
|
5,029,131
|
|
|
|
|
|
Shareholders'
deficit:
|
|
|
|
Preferred stock,
$0.001 par value, 5,000,000 authorized. 278,422 and 0 shares issued
and outstanding as of April 30, 2018 and April 30, 2017,
respectively
|
278
|
-
|
|
Common stock;
$0.001 par value; 400,000,000 shares authorized 39,548,579 and
40,737,406 shares issued and outstanding as of April 30, 2018 and
April 30, 2017, respectively
|
39,548
|
40,737
|
|
Additional paid-in
capital
|
15,215,842
|
6,159,120
|
|
Accumulated
deficit
|
(12,023,775)
|
(11,228,988)
|
|
Total shareholders'
equity (deficit)
|
3,231,893
|
(5,029,131)
|
|
Total liabilities
and shareholders' equity (deficit)
|
$5,016,386
|
$-
|
|
|
|
|
The accompanying notes are an integral part of these audited
consolidated financial statements.
F-2
BLOCKCHAIN INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
|
|
For the Years Ended
April 30,
|
|
|
|
2018
|
2017
|
|
Sales
|
$1,582,483
|
$-
|
|
Cost of goods
sold
|
328,785
|
-
|
|
Gross
margin
|
1,253,698
|
-
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
Professional
fees
|
1,760,703
|
117,420
|
|
General and
administrative expense
|
1,134,179
|
30,580
|
|
Total operating
expenses
|
2,894,882
|
148,000
|
|
|
|
|
|
Loss from
operations
|
(1,641,184)
|
(148,000)
|
|
|
|
|
|
Other income
(expense):
|
|
|
|
Debt
forgiveness
|
5,049,131
|
-
|
|
Interest
expense
|
(441)
|
(5,913)
|
|
Realized and
unrealized gain (loss)
|
(979,857)
|
-
|
|
Stock compensation
expense
|
(3,222,436)
|
-
|
|
Other income
(expense), net
|
846,397
|
(5,913)
|
|
Loss before income
taxes
|
(794,787)
|
(153,913)
|
|
Provision for
income taxes (benefit)
|
-
|
-
|
|
|
|
|
|
Net
loss
|
$(794,787)
|
$(153,913)
|
|
|
|
|
|
Net
loss per share attributable to common shareholders:
|
|
|
|
Basic and
diluted
|
$(0.021)
|
$(0.003)
|
|
|
|
|
|
Weighted-average
number of common shares outstanding:
|
|
|
|
Basic and
diluted
|
38,116,598
|
4,901,790
|
The accompanying notes are an integral part of these audited
consolidated financial statements.
F-3
BLOCKCHAIN INDUSTRIES, INC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(DEFICIT)
|
|
Common Stock
|
Preferred Stock (Class A)
|
|
|
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Additional Paid-In Capital
|
Accumulated Deficit
|
Total Shareholders' Equity (Deficit)
|
|
Balance at April 30, 2017
|
40,737,406
|
$40,737
|
-
|
$-
|
$6,159,120
|
$(11,228,988)
|
$(5,029,131)
|
|
|
|
|
|
|
|
|
|
|
Sale
of common stock
|
14,194,700
|
14,195
|
-
|
-
|
5,712,930
|
-
|
5,727,125
|
|
|
|
|
|
|
|
|
|
|
Issuance
of preferred stock
|
-
|
-
|
323,617
|
323
|
58,145
|
-
|
58,468
|
|
|
|
|
|
|
|
|
|
|
Shares
converted to preferred stock
|
(12,944,660)
|
(12,945)
|
-
|
-
|
(45,523)
|
-
|
(58,468)
|
|
|
|
|
|
|
|
|
|
|
Issuance
of restricted stock for services
|
653,333
|
653
|
-
|
-
|
2,459,430
|
-
|
2,460,083
|
|
|
|
|
|
|
|
|
|
|
Stock option
compensation expense
|
|
|
|
|
762,353
|
|
762,353
|
|
|
|
|
|
|
|
|
|
|
Shares
retired
|
(5,000,000)
|
(5,000)
|
-
|
-
|
(13,750)
|
-
|
(18,750)
|
|
|
|
|
|
|
|
|
|
|
Shares converted
from preferred stock to common stock
|
1,807,800
|
1,808
|
(45,195)
|
(45)
|
(1,763)
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
Shares issued for
acquisition of LegatumX shares
|
100,000
|
100
|
-
|
-
|
124,900
|
-
|
125,000
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(794,787)
|
(794,787)
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2018
|
39,548,579
|
$39,548
|
278,422
|
$278
|
$15,215,842
|
$(12,023,775)
|
$3,231,893
|
The accompanying notes are an integral part of these audited
consolidated financial statements.
F-4
BLOCKCHAIN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AUDITED)
|
|
For the Years
Ended April 30,
|
|
|
|
2018
|
2017
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net
loss
|
$(794,787)
|
$(153,913)
|
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation and
amortization
|
584
|
-
|
|
Stock-based
compensation
|
3,222,436
|
|
|
Interest
expense
|
441
|
-
|
|
Unrealized gain
(loss) of investments
|
979,857
|
|
|
|
|
|
|
Change in operating
assets and liabilities:
|
|
-
|
|
Other
receivables
|
(26,245)
|
-
|
|
Prepaid expenses
and other assets
|
(123,488)
|
3,913
|
|
Other non-current
assets
|
(69,077)
|
-
|
|
Accounts payable
and accrued expenses
|
(135,837)
|
-
|
|
Deferred
revenue
|
1,427,285
|
-
|
|
Net cash provided
by (used in) operating activities:
|
4,481,169
|
(150,000)
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Purchases of
investments
|
(2,886,477)
|
-
|
|
Payments to related
parties
|
(3,981,423)
|
-
|
|
Purchases of fixed
assets
|
(113,497)
|
-
|
|
Payment of note
receivable
|
(500,000)
|
-
|
|
Net cash used in
investing activities
|
(7,481,397)
|
-
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Proceeds from the
issuance of common stock
|
4,073,300
|
150,000
|
|
Repayment of
convertible note
|
(53,000)
|
-
|
|
Repayment of note
payable
|
(501,112)
|
-
|
|
Net cash provided
by financing activities
|
3,519,188
|
150,000
|
|
|
|
|
|
Net change in
cash
|
518,960
|
-
|
|
|
|
|
|
Cash, beginning of
year
|
-
|
-
|
|
|
|
|
|
Cash, end of
year
|
$518,960
|
$-
|
The accompanying notes are an integral part of these audited
consolidated financial statements.
F-5
NOTE 1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Overview
Blockchain
Industries, Inc. (“BCII”, “Blockchain”, the
“Company”, “we”, “our” or
“us”) was originally formed under the laws of the State
of Nevada on September 15, 1995 as Interactive Processing, Inc. to
market high-tech consumer electronics through television
home-shopping networks, retail stores, catalog companies and their
website remotecontrols.com. In March 1999, the Company changed its
name to Worldtradeshow.com, Inc. (“WTS”). In April
1999, the Company acquired intellectual property rights to a
database from Chaiisai Tora, Inc., an unaffiliated third party, and
significantly changed its business plan to develop tradeshow
software and market both physical and virtual tradeshow space
through the Company's website.
The
Company’s business involved the operation of Hotels.com.vn,
tour companies and restaurants and marketing of the WTS Discount
Card in Vietnam in order to serve as an online vehicle for
Vietnamese companies to promote themselves, using the largest
travel and tourism online website in, as well as being recognized
as the official travel/tourism website of, Vietnam.
On
March 26, 2007, the Company acquired assets from Business.com.vn, a
Vietnamese company, which assets consisted of a database of 300,000
Vietnamese companies, marketing software, trademarks and
intellectual property, with the intention of developing a directory
of companies. The plan included offering such companies
opportunities to market themselves through domain registration,
website development, and online marketing expertise to help these
Vietnamese companies market themselves directly and/or on the
Company’s BVNI web portal. In June 2007, the Company changed
its name to Business.vn, Inc.
From
October 2008 through early 2016, the Company’s operations
were limited due to a lack of capital resources. However, during
this time, the Hotel.vn website was still operational. On May 15,
2016, the Company was placed under the control of a Receiver in
Nevada’s Eighth Judicial District (the
“Receiver”). From May 15, 2016 through March 22, 2017,
while under the control of the Receiver, the Company continued to
incur expenses to maintain its corporate existence as a public
company. On November 18, 2016, the Company changed its name to Omni
Global Technologies, Inc. and on May 23, 2017, the Company entered
into a Share Purchase Agreement with JOJ Holdings, LLC
(“JOJ”), pursuant to which JOJ: (i) purchased
40,000,000 restricted shares of common stock, $0.001 par value (the
“Control Shares”); (ii) assumed the liabilities of a
judgement creditor in the amount of approximately $25,000; and
(iii) paid the Receiver $150,000 for the Receiver’s and other
Company expenses (the “Share Purchase Agreement”).
Additionally, and concurrent with the execution of the Share
Purchase Agreement, the Receiver resigned, and Olivia Funk was
appointed as the sole officer and director of the
Company.
F-6
On
November 13, 2017, the Company filed Certificate of Amendment to
its Articles of Incorporation with the State of Nevada for the
purpose of changing its name from Omni Global Technologies, Inc. to
Blockchain Industries, Inc. to more accurately reflect its new
business strategy. Since that time the
Company has taken steps to become a next generation
blockchain-powered, financial technology and advisory company. In
this regard the Company’s business can be divided into the
following four verticals:
●
Investment
Management
●
Digital
Asset Advisory Services
●
Media
and Education
●
Digital
Asset Mining
Our Business
Our
initial plan to develop a blockchain business with a new domain
called hotelsinvietnam.net has been discontinued. We intend to
target and acquire or build a broad portfolio of Digital Assets
within our four business verticals. The Company’s mission is
to provide products and services related to Digital Assets. We
intend to target and acquire or build a broad portfolio of Digital
Assets by building an ecosystem within the Digital Asset industry.
Our ecosystem will include four major verticals: investment
management, digital asset advisory services, media & education,
and digital asset mining. In the future, we also plan to establish
auxiliary businesses such as OTC (over-the-counter) trading,
exchanges.
1.
Investment
Management
One of
our main lines of business will be investment management of
blockchain-related assets. We are seeking to provide services to
traditional investment management companies, with a focus on
blockchain technology. Our thesis in this business will focus on
new or traditional businesses that have already integrated or have
reasonably viable plans to implement blockchain-technology into
their business model.
This
business vertical will be operated through our wholly-owned
subsidiary, BCI Investment Management, LLC, (“BCIM”) a
Delaware limited liability company. We expect to begin the process
to register this entity with the Securities and Exchange Commission
as a registered investment company under the Investment Company Act
of 1940 by the end of the calendar year 2018, although we do not
expect to complete the process by the end of calendar year 2018.
The Company expects to seed the funds with its own capital and
subsequently obtain outside investment capital from non-related
third parties. We expect to generate revenues by charging a
combination of management and performance fees. Our preference is
to invest in businesses whereby blockchain is required to make the
business practical. However, we will assess and potentially invest
in opportunities where blockchain technology can enhance business
operations, although it may not be necessary for the business to
succeed. We are in the process of establishing the following three
alternative investment vehicles in furtherance of the
foregoing:
a. Blockchain Industries Global Opportunity Fund
This
fund will seek to invest in exchange-traded tokens. This fund will
employ two primary investment strategies (i)
algorithmic/high-frequency trading (“HFT”); and (ii)
small/mid-cap fundamental trading. The HFT component seeks to
capture inefficiencies in market structure and provide liquidity to
other market participants. The small/mid-cap fundamental strategy
would seek to invest tokens that are outside of the top fifteen
high market-capitalization tokens. We aim to invest in tokens that
we believe are mispriced and overlooked after deep fundamental due
diligence.
b. Blockchain Industries ICO Access Fund
This
fund will seek to invest in early-stage Initial Coin Offerings
(“ICO”), Security Token Offerings (“STO”)
and private token sales. Utilizing our business network, we believe
that we can differentiate against competitors to access deals that
are unavailable to most investors and often at favorable terms. We
will frequently seek to add value to the companies we invest in
through providing them access to our ecosystem (exposure to media,
technical advisory, capital raising strategy, treasury management,
and various partnership opportunities). We expect significant
overlap between our portfolio companies and our advisory
clients.
F-7
c. Blockchain Industries Venture Fund
This
fund will seek to invest in early-stage equity of blockchain and
blockchain related companies. and will make equity investments in
fiat-generating businesses in the blockchain space (e.g. exchanges,
trading tool providers) and in companies developing
blockchain-native technologies who may or may not have token
offerings. We will take a similar value-add approach as we will in
our Blockchain Industries ICO Access Fund and expect significant
overlap between our portfolio companies and our advisory
clients.
2.
Advisory
Services
We
believe that incorporating a blockchain into a traditional business
model can add value not only from raising capital, but also
transparency and efficiency. Our advisory service seeks to offer
clients a complete solution including, but not limited to,
architecting their token structure and issuance, crypto-economic
design (assessing economic benefits of utilizing a blockchain-based
token), technology/engineering, consulting, generating whitepapers,
software development, marketing and eventually making capital
introductions via the use of a broker-dealer, which we are actively
seeking. In addition, we aim to use our reputation and media &
education business to help our clients establish a meaningful
understanding of blockchain technologies and services, establish
partnerships and provide them with media exposure and informative
literature. The Company is remunerated through a combination of
upfront compensation (generally in U.S. Dollars), equity and/or
tokens of the companies we advise. Lastly, we eventually intend to
form or purchase a broker-dealer to help us maintain compliance and
execute our business in the emerging token capital markets. We are
currently actively seeking partnership and coverage from existing
broker-dealers.
The
Company continues to examine a wide array of potential companies
that we believe will benefit from our consulting and other services
related to their planned ICO or STO, and we will continue to
contract with customers that we feel have a high-value utility in
their underlying business model.
3.
Media and
Education
Blockchain
technology is fairly nascent and most educated investors are
unaware of its broad use cases or how the technology works.
Education is going to be a large part of the technology’s
success and we believe there is a market to develop educational and
other content for professionals, students, investors or other
potential users of the technology.
We have
developed a business to help promote the awareness, growth, and
education of blockchain technology and Digital Assets. Our goals
are (1) to invest in, partner with or acquire media streams, news
outlets or other methods of content distribution focused on the
marketing of blockchain technologies and Digital Asset economies
and their impact on the future and (2) partner with educational
institutions to help train the next generation of blockchain
developers. We have begun executing our goal to hold conferences
around the world with strategic partners that attract key sponsors
and influential speakers from the blockchain industry, local
governments and educators on an ongoing basis. In 2018 we held two
conference, one in San Juan, Puerto Rico and the other in Tokyo,
which focused on bringing together regulators, investors,
technologists, media and other blockchain stakeholders to discuss
the evolution of blockchain technology and its impact on industries
such as government, finance, technology and more. The conference in
San Juan Puerto Rico was held under the name
“Blockchain Unbound”, for which we submitted an
application in April 2018 to the U.S. Patent and Trademark Office
(the “USPTO”) for trademark registration. Our
application was received by and is currently pending before the
USPTO. The application has been initially refused due to a prior
filed application by another applicant seeking registration of the
trademark “Unbound” to be used in manner that the
examiner considers to be confusingly similar to ours. Pending the
resolution of the prior filed application, we will determine
whether to continue our pursuit of the trademark
registration.
We
promote our brand primarily through the use of our network,
bringing on speakers that are influencers, which we feel will draw
crowds. We do anticipate a small amount of advertising on social
media or news websites. The Company was responsible for organizing
media, security, entertainment, and booking guest speakers and
travel for certain guests.
The
Company expects to hold these conferences at least annually or hold
smaller events throughout the coming years. Pricing for our
conferences is typically at different levels and stages. For
example, we hold early-bird pricing with discounts. We also offer
different levels of pricing, which include negotiated hotel rate
with the venue where we host the conference. Further, we also offer
discount codes for certain participant groups, which are typically
negotiated for larger or strategic groups.
F-8
4.
Digital Asset
Mining
“Mining”
for Digital Assets is the process by which a node on a blockchain
network is rewarded with the coin or token from that blockchain for
providing resources to the blockchain. For example, Bitcoin, a
popular cryptocurrency, uses a proof-of-work method to add blocks
to the blockchain. Specialized computers solve complex mathematical
problems to validate transaction and post them to the blockchain.
For successfully solving the problems, and providing power to the
network, the computer is rewarded with coins or tokens inherent to
that blockchain. There are other methods of validation and
verification such as, proof-of-stake and proof-of-space, hybrid
methods, among others. It is the intention of BCII to build a data
center that houses the specialized computers or other resources on
behalf of clients. We intend to rent space or resources (power,
bandwidth, etc.) to client for a fee.
The
Company intends to set up mining facilities with access to
inexpensive energy and lease these facilities to experienced
digital asset miners. The Company previously intended to enter into
an agreement to purchase land and build a tier-2 data center in
upstate New York. The Company entered into several agreements with
independent contractors to assess the design, feasibility and
profitability of this endeavor. The Company incurred costs for the
project which was paid to services professionals for their work in
connection therewith. As of April 30, 2018, the Company has
withdrawn from that opportunity. The Company is now focused on a
potential site in Virginia Beach, VA and expects to incur
additional costs on the assessment of this opportunity. Our goal is
to start by purchasing land in Virginia Beach, VA and build a data
center and lease space or power to tenants. We are negotiating with
a local economic development agency for the development of the
site. As of October 2018, their request is to build a full data
center. The Company is seeking additional capital to proceed with
this potential investment.
5.
Future
Plans
The
following businesses are areas that the Company has invested time
and capital but has not yet pursued to a point where they have been
able to generate revenues or believe they will generate any
significant revenues in the immediate future. The Company is
actively seeking to build these business units or merge them with
existing business units at the appropriate time. No guarantee can
be made that we will continue to pursue these opportunities or that
we will have the capital in order to do so in a timely manner or at
all.
a. Merchant Banking
The
Company has explored developing merchant banking operations to (1)
help broker off-exchange transactions in Bitcoin, Ethereum and
other Digital Assets, (2) perform Digital Asset custody service,
(3) provide financing for ICO’s or STO’s, acquisitions
or other services related to traditional merchant banking, but
related to the Digital Asset industry. We believe there is great
potential in this business as Digital Asset exchanges are
fragmented and cannot provide enough liquidity, the buyers and
sellers inherently do not trust each other, and many of the
transactions are not up to standards in terms of regulatory
requirements. The Company plans to leverage its reputationto offer
a global, scalable solution to this market. Our solution is planned
to consist of a client portal, streamlined KYC/AML procedure, coin
verification, third-party escrow, and institutional-caliber
service. Although this is a relatively new initiative for the
Company, we believe that we would be well positioned to be a market
leader as we have negotiating to engage one of the most experienced
OTC agents in the industry and are building the platform to scale
his expertise. We are planning to set up our operations in
international jurisdictions and are aware that there will be
regulatory agencies that will require applications for licensing
which will increase the time and costs to complete. We currently do
not have an estimated time that the Company feels it will complete
this potential business, if ever. The success of this business will
rely on maintaining experienced or training employees with
necessary licenses in order to develop and maintain the operation
of this business, which may be difficult or impossible to achieve.
This business’ success will also rely on the Digital Asset
market to at least maintain its market capitalization, as a decline
in the value of these assets will inhibit our ability to find the
necessary volume and prices for this business to be
successful.
b. Digital Asset Exchange
The
Company is currently in the initial stages of performing diligence
to establish a Digital Asset exchange. We are partnering with
high-frequency trading and technology specialists to develop a
global exchange with the intention of uniting the fragmented
liquidity pools on the hundreds of Digital Asset exchanges. We
believe that this platform would be able to provide the robust
infrastructure and market depth to support institutional investors.
Therewill be regulatory agencies that will have oversight on this
business, which will require us to apply and successfully receive,
in order to operate legally in the jurisdictions where we plan to
operate and where our clients are located. We will be required to
adhere to strict standards of security and compliance, which will
make this business costly and difficult to operate. The success of
our Digital Asset Exchange will require partnerships with key
vendors, experienced technical and financial expertise, regulatory
and compliance in various jurisdictions, all of which will require
significant capital, there can be no guarantee that we would be
able to raise such capital on favorable terms or at
all.
F-9
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The
accompanying consolidated financial statements for the years ended
April 30, 2018 and 2017 have been prepared in accordance and in
conformity with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) and applicable
rules and regulations of the Securities and Exchange Commission
(“SEC”) regarding consolidated financial
information.
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 certain estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and
expenses during the periods presented. Actual results could differ
from those estimates.
Significant
estimates made by management are, among others, realizability of
long-lived assets, deferred taxes and stock option valuation.
Management reviews its estimates on a quarterly basis and, where
necessary, makes adjustments prospectively.
Revenue Recognition
We
recognize revenue when the following criteria are met: (1)
persuasive evidence of an arrangement exists; (2) delivery has
occurred or services are rendered; (3) the price to the buyer is
fixed or determinable; and (4) collectability is reasonably
assured. During the year ended April 30, 2018, we had one contract
with a customer to provide services. The Company used the OTC
Market price of our customer because we felt the price was readily
available and volume of the common stock, which we received as
compensation, was fairly liquid to use the OTC Market price as an
appropriate valuation. The Company may enter into additional
agreements where we receive non-cash assets as compensation, which
will require us to use estimates on the value of our services,
which will be recorded as revenue. To the extent the Company
receives compensation of illiquid non-cash assets, or any asset
that may not have a readily determinable fair market value, we may
require the use of certain Level 3 fair value estimated as defined
by ASC 820.
Currently, the Company’s revenue is in the form of consulting
services provided to customers, sponsorship fees for promotional
material and events and event registration. Revenue is recognized
pro rata on a monthly basis over the term of the contractual
agreement for consulting services and on the day of the event for
promotional material and events and event
registration.
Stock-based Compensation
In
accordance with ASC 718, Compensation – Stock Based
Compensation, and ASC 505, Equity Based Payments to Non-Employees,
the Company accounts for share-based payment using the fair value
method. Common shares issued to third parties for non-cash
consideration are valued based on the fair market value of the
services provided or the fair market value of the common stock on
the measurement date, whichever is readily determinable. The
Company calculates the fair value of option grants utilizing the
Black-Scholes pricing model and estimates the fair value of the
stock based upon the estimated fair value of the common stock. The
amount of stock-based compensation recognized during a period is
based on the value of the portion of the awards that are ultimately
expected to vest. The result of the estimates used in our valuation
was approximately $3,222,436 million of stock-based compensation
expense for the year ended April 30, 2018, comprised of $2,460,083
of expense related to independent contractors and $762,353 of
expense related to options granted to independent
contractors.
F-10
Investments in Digital Currencies
The
Company uses fair value as its method of accounting for digital
currencies (also referred to herein as digital assets) in
accordance with the fair value election pursuant to FASB ASC 825,
Financial Instruments (“ASC 825”). The Company
considers its investments in digital currencies to be analogous to
commodities as the Commodity Futures Trading Commission
(“CFTC”) determined that Bitcoin and other digital
currencies are commodities in September 2015. On March 6, 2018, a
United States District Court of New York ruled that the CFTC has
standing to exercise its enforcement power over fraud related to
virtual currencies sold in interstate commerce. This ruling
affirmed the CFTC’s position that digital currencies are
subject to the anti-fraud and anti-manipulation enforcement
authority, thereby asserting jurisdiction over futures, swaps, and
other CFTC regulated derivatives that reference digital currencies.
Consistent with the recent ruling, the Company classifies its
investment in digital currencies as commodities and are held at
fair value. Changes in net unrealized gains or losses for these
digital currencies are included in realized and unrealized gains,
net on the Consolidated Statement of Income.
Principle Market and Fair Value Determination
In
determining which of the eligible digital currency exchanges is the
Company’s principal market for the purpose of determining
fair value of individual digital currencies, the Company considers
only digital currency exchanges that have an online platform and
publish transaction price and volume publicly. In determining which
of the eligible digital currency exchanges is the appropriate
principal market, the Company reviews these criteria in the
following order, for each digital currency being fair
valued:
First,
the Company prepares a list of eligible digital currency exchanges
and determines if any meet all of the following three criteria: (i)
the digital currency exchange has a USD pairing to allow for USD
liquidation to U.S. based customers, (ii) the Company has access to
the exchange as a U.S. based customer and can legally open an
account on the exchange platform, and (iii) the exchange complies
with federal and state licensing requirements and practices
regarding anti-money laundering procedures that are applicable to
the Company.
From
the list of eligible digital currency exchanges prepared in
accordance with the eligibility criteria noted above, the Company
selects the exchange with the highest trading volume and USD
pairing for the trailing twelve months, taking into consideration
intra-day pricing fluctuations and the degree of variances in price
on the digital currency exchanges.
Second,
if no digital currency exchange meets all of the above criteria,
the Company will filter each exchange that has a USD pairing,
regardless of whether it is accessible to U.S. based customers.
From this list, the Company selects the exchange with the highest
trading volume and USD pairing for the trailing twelve months,
taking into consideration intra-day pricing fluctuations and the
degree of variances in price.
Third,
if there are no exchanges with USD pairing, the Company will assess
exchanges for compliance with federal and state licensing
requirements that are applicable to the Company. The Company also
assesses each exchange’s practices regarding anti-money
laundering procedures. The Company then identifies the pairing with
the highest trading volume of the digital currency being fair
valued to the digital currency with the highest market
capitalization for the prior trailing twelve months, taking into
consideration intra-day pricing fluctuations and the degree of
variances in price on digital currency exchanges.
The
Company determines its principal market annually for each digital
currency held to determine if (i) there have been recent changes to
each digital currency exchange’s transaction volume in the
prior trailing twelve months, (ii) if any digital currency
exchanges have fallen out of, or come into, compliance with
applicable regulatory requirements, (iii) if there have been any
digital currency exchanges that have added a USD pairing, (iv) if
exchanges previously inaccessible to the Company are now
accessible, or (v) if recent changes to each exchange price
stability have occurred that would materially impact the selection
of the principal market and necessitate a change in the
Company’s determination of its principal market.
F-11
Investments in SAFTs and Pre-ICO Tokens
The
Company enters into simple agreements for future tokens
(“SAFT”) in which the Company invests in a company for
a promise of access to future product of the company. Investments
in SAFT agreements are carried at cost.
The
Company had investments in the following companies as of April 30,
2018:
KinerjaPay ICO(KPAY)
On
January 11, 2018, the Company entered into an advisory agreement to
provide Initial Coin Offering (“ICO”) services to PT
KinerjaPay Indonesia, an Indonesian company and a wholly-owned
subsidiary of KinerjaPay Corp., a Delaware corporation (OTCQB:
KPAY) (“KPAY”). As consideration for entering into the
advisory agreement and providing services related to administering
the KinerjaPay ICO and establishing a Digital Asset Exchange in
Indonesia, we were paid $250,000 in cash, and received 1,000,000
restricted shares of KinerjaPay’s common stock, having a
market value approximately $1,800,000 based upon the closing price
of the KPAY shares on the OTCQB of $1.80 on January 11, 2018. In
addition, we shall receive a 50% equity ownership in an
Indonesian-based Digital Asset Exchange which has yet to be formed.
Per the advisory agreement, the Company, in conjunction with
Fintech Financial Consultants, Inc. (“FFCI”) shall
provide to the Company the following Advisory Services
(“Services”):
●
Consulting related
to the launch of the ICO and the establishment of a market on the
Exchange for which to trade and transfer digital
tokens;
●
Introductions to
third parties with marketing and advisory experience potentially
relevant to the ICO; and
●
Creation of the
Exchange and a full complement of related pre-sale support,
functionality and acquisitions concerning digital
tokens.
As part
of the Services, the Company and FFCI will formulate, develop,
structure, establish, administer and operate the Exchange. Such
Services may include but shall not be limited to consulting and
advisory services regarding trading, price discovery and
settlement/clearing, as well as, due diligence, escrow,
underwriting and providing communication platforms to enable the
adoption of new products and technologies and to attract investors.
The Company
was previously working through its Japanese partner to assist KPAY
with its coin offering. A visit was made to Indonesia to
collect additional data and develop strategy, however due to a
sharp reduction in demand for digital assets, the advisory work is
still underway and will resume at the appropriate time in the
future. There are no disagreements between KPAY and
Blockchain Industries and we anticipate being able to assist them
in the future with the their contemplated ICO.
The
equity interests of the Exchange Entity shall be beneficially owned
one-half (50%) by KPAY and one-half (50%) by the Company. The
Company and FFCI having made other arrangements between themselves,
and FFCI acknowledges and agrees that FFCI shall have no equity
interest in the Exchange Entity.
The
Exchange Entity shall initially be funded pursuant to a
contribution by KPAY of Two Hundred Fifty Thousand U.S. Dollars
($250,000 USD) from the proceeds generated by the ICO (the
“Startup Contribution”). KPAY and the Company shall
contribute such additional capital to the Exchange Entity as
mutually agreed upon to be necessary and appropriate for the
operation of the Exchange and in proportion to their respective
ownership interests in the Exchange Entity. If the Company and/or
FFCI advance funds to the Exchange Entity prior to KPAY’s
funding of the Startup Contribution, the Company and/or FFCI, as
the case may be, shall be entitled to prompt reimbursement for the
entire amount of such funds so advanced.
F-12
Chimes ICO
On
December 19, 2017 and February 5, 2018, the Company entered into
two agreements with Chimes Broadcasting, Inc.
(“Chimes”) to purchase 500,000 equity tokens for
$400,000 (the “Chimes Equity Tokens”). As of the year
ended April 30, 2018, the Company has disbursed $400,000 to Chimes
in exchange for 500,000 Chimes Equity Tokens, to be issued at a
later date, representing less than 1% (0.5%) ownership in Chimes.
There are 100,000,000 authorized Chimes Equity Tokens, which share
the same economic benefits to common shareholders of Chimes,
however, the Chimes Equity Tokens are non-voting
shares.
In
addition, the Company entered into two Simple Agreements for Future
Tokens (“SAFTs”) with Chimes Broadcasting, Inc. which
grants us the option to purchase future utility tokens for use on
the Chimes network platform. To date, the Company has disbursed
$100,000 to Chimes for an amount of CHIME tokens yet to be
determined. The Company has not been issued or received any CHIME
tokens to date.
AutoLotto
On
January 17, 2018, the Company entered into a Promissory Note
Agreement (“AutoLotto Agreement”) with AutoLotto, Inc.,
a Delaware corporation. Under the terms of the AutoLotto Agreement,
the Company will pay to AutoLotto $1.5 million (the
Principal”) in exchange for a promissory note that will
accrue interest at one percent per annum (the
“Interest”). All unpaid Principal and Interest are due
and payable to the Company at the earlier of (i) the closing of
AutoLotto’s initial coin offering of at least $20,000,000 or
(ii) AutoLotto’s issuance of equity securities (excluding any
conversion or issuance of any note or other convertible security)
of at least $20,000,000. In the event AutoLotto does not raise
$20,000,000 through an initial coin offering or issuance of equity
noted above, any unpaid Principal and Interest will convert to
equity at a rate of $250,000,000 divided by the number of common
shares outstanding immediately prior to January 17, 2020. As part
of the AutoLotto Agreement, the Company also received an option to
purchase tokens of the AutoLotto initial coin offering (the
“Option”) equal to two times the outstanding unpaid
Principal and Interest under the AutoLotto Agreement. The exercise
price of the Option will be an undisclosed private pre-sale price,
and the Option is exercisable within ten days of AutoLotto
providing notice to the Company of its initial coin offering. The
Option expires on January 16, 2020.
Academy
On
January 30, 2018, the Company invested $250,000 into Academy Token,
a utility token that will be used as a means of paying for
immersive training programs, educational offerings, and to access
online content related to blockchain technology. Academy intends to
address the shortfall in the supply of blockchain developers due to
the increasing demand of blockchain technology.
Coral Health
On
January 31, 2018, the Company invested $250,000 into the Coral
Health utility token. Coral Health aims to align the interests of
different players in the healthcare ecosystem. Coral Health intends
to utilize blockchain technology to accelerate the uptake of
personalized medicine, incorporating all levels of healthcare from
patient records, payments, insurance, prescriptions, clinical
trials and monitoring.
Basecoin & Origin Protocol
On
February 13, 2018 and February 20, 2018, the Company entered into
two separate subscription agreements with KR CRYPTO SPE, LLC, a
special-purpose entity, for the purpose of acquiring tokens of
Basecoin and Origin Protocol, respectively. The Company invested
$100,000 and $50,000 into the subscription agreements for Basecoin
and Origin Protocol, respectively. Basecoin’s token will be
utilized as a form of controlling the supply and demand of
fiat-based currencies to expand or contract the money-supply,
similar to how current central banks attempt to maintain a
normalized supply and demand of their respective fiat currencies.
The Origin Protocol utilizes the Ethereum blockchain, allowing
developers to build decentralized marketplaces to facilitate the
shared economy, such as home rentals, ride share and bike share,
without intermediary companies such as Airbnb and
Uber.
F-13
BlockEx
On
February 16, 2018, we entered into a Private Token Purchase
Commitment Form (“BlockEx Agreement”) with BlockEx
Limited (“BlockEx”) a privately held limited liability
company incorporated under the laws of Gibraltar. Under the terms
of the BlockEx Agreement, the Company agreed to purchase up to
5,714,285.71 Digital Asset Exchange Tokens (“DAXT”)
from the Company for 2,000,000 Euros, or at the time of the
purchase, approximately $2,481,600 USD. As of the date of this
Report, the Company has purchased tokens amounting to approximately
1,428,571 tokens for a purchase price of 395,069.53 Euros,
approximately $500,000 USD. The tokens were issued to the Company
in June 2018. The Company filled the 2,000,000 Euro obligation for
the BlockEx Agreement by pooling with other investors for the
remaining 1,604,930 Euros. The remaining 4,285,714.71 DAXT will be
issued to the investor pool.
This
investment provides the Company with exposure to a digital asset
exchange platform. The BlockEx platform provides an institutional
exchange, white-labeled brokerage software, and the ability to
launch ICO’s. DAXT is BlockEx’s ICO. It is a utility
token. Only holders of DAXT will be able to access the pre-sale
feature of ICOs in BlockEx Markets. DAXT must be burnt each time a
customer uses it to purchase ICOs on a pre-sale basis.
Wireline
On
February 6, 2018, the Company invested $20,000 into Wireline tokens
(“WRL”). These tokens are offered by Wireline Developer
Fund, Inc., a Cayman Islands company established to launch a
network platform that enables developers to create applications and
services that dynamically discover, interact, and trade with each
other using smart contracts. Wireline is the decentralized network
and registry for serverless cloud computing. Services running on
Wireline benefit from the scaling and high-availability guarantees
of internet-scale serverless architecture; the blockchain-backed
registry provides a decentralized mechanism for service discovery
and coordination.
VideoCoin
On
January 23, 2018, the Company invested $50,000 into VideoCoin
tokens. These tokens are offered by VideoCoin Development
Association, LTD which develops and operates VideoCoin Network, a
decentralized platform for video encoding, video storage, and video
distribution. The company's platform turns cloud-based video
services into an algorithmic market running on a blockchain with a
VideoCoin token. The platform also captures unused computing
capacity while providing tokenized rewards for users that
participate in decentralizing video content processing through the
network. The company is based in Los Angeles,
California.
LegatumX
On
February 19, 2018, the Company entered into a Stock Purchase
Agreement (“LegatumX Agreement”) with LegatumX, Inc.
(“LegatumX”). This investment will provide us with a
market share into the legal industry for the storage,
authentication and validation of legal documents such as wills,
trusts, deeds, mortgages, and more. We expect that the Media and
Education segment of our business will be able to assist this
company in marketing their products to consumers worldwide,
although we will be starting with U.S. consumers. Under the terms
of the LegatumX Agreement, we will initially receive 30% of
LegatumX’s common stock calculated on a fully diluted basis
for a purchase price of $1,300,000:
|
Amount paid by Company
|
Paid or Due on
|
|
$100,000
|
February 19, 2018
|
|
$200,000
|
May 20, 2018
|
|
100,000 shares of our Common Stock (1)
|
March 1, 2018
|
(1) The
value of our Common Stock for this agreement was valued at $10 per
share.
The
Company may earn an additional (i) 5%, for a total of 35%, of
LegatumX’s common stock if LegatumX realizes $2.3 million in
gross proceeds from the sale of the 100,000 shares of our common
stock within the 12-month period following the effective date of
the Company’s filing of a Form 10 with the SEC (the
“Form 10”), or (ii) an additional 10%, for a total of
40%, of LegatumX’s common stock if LegatumX realizes $10.1
million in gross proceeds from the sale of the 100,000 shares of
our common stock within the 12-month period following the effective
date of the Form 10. As of April 30, 2018, the Company paid
$100,000 to LegatumX in exchange for 20% ownership in LegatumX. As
of the date of this Report, the Company has paid an additional
$20,000 (for a total of $120,000) and issued 100,000 shares of our
common stock to LegatumX for a total of 25.5% ownership in
LegatumX.
F-14
Fair Value Measurement
The
Company applies ASC 820, Fair
Value Measurement (‘‘ASC 820’’),
which establishes a framework for measuring fair value and
clarifies the definition of fair value within that framework. ASC
820 defines fair value as an exit price, which is the price that
would be received for an asset or paid to transfer a liability in
the Company’s principal or most advantageous market in an
orderly transaction between market participants on the measurement
date. The fair value hierarchy established in ASC 820 generally
requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
Observable inputs reflect the assumptions that market participants
would use in pricing the asset or liability and are developed based
on market data obtained from sources independent of the reporting
entity. Unobservable inputs reflect the entity’s own
assumptions based on market data and the entity’s judgments
about the assumptions that market participants would use in pricing
the asset or liability and are to be developed based on the best
information available in the circumstances.
The
valuation hierarchy is composed of three levels. The classification
within the valuation hierarchy is based on the lowest level of
input that is significant to the fair value measurement. The levels
within the valuation hierarchy are described below:
Level 1
— Assets and liabilities with unadjusted, quoted prices
listed on active market exchanges. Inputs to the fair value
measurement are observable inputs, such as quoted prices in active
markets for identical assets or liabilities.
Level 2
— Inputs to the fair value measurement are determined using
prices for recently traded assets and liabilities with similar
underlying terms, as well as direct or indirect observable inputs,
such as interest rates and yield curves that are observable at
commonly quoted intervals.
Level 3
— Inputs to the fair value measurement are unobservable
inputs, such as estimates, assumptions, and valuation techniques
when little or no market data exists for the assets or
liabilities.
Financial assets
are considered Level 3 when their fair values are determined using
pricing models, discounted cash flow methodologies or similar
techniques and at least one significant model assumption or input
is unobservable.
The
fair value hierarchy gives the highest priority to quoted prices
(unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used
to measure the financial assets and liabilities fall within more
than one level described above, the categorization is based on the
lowest level input that is significant to the fair value
measurement of the instrument.
The
carrying amounts of the Company’s financial assets and
liabilities, such as cash, prepaid expenses and other current
assets, accounts payable and accrued expenses approximate their
fair values due to the short-term nature of these
instruments.
The
Company had no Level 3 financial assets or liabilities as of April
30, 2018 and 2017.
The
Company uses Level 1 of the fair value hierarchy to measure the
fair value of investments in common equity securities. The Company
uses Level 2 of the fair value hierarchy to measure the fair value
of investments in digital currencies. The Company revalues such
assets at every reporting period and recognizes gains or losses as
revenue and cost of revenue respectively in the consolidated
statements of operations that are attributable to the change in the
fair value of the digital currencies. Refer to the table below for
a breakout of the Company’s investments in digital currencies
and traditional securities as of April 30, 2018:
|
|
|
Fair Value Measurement Using
|
|||
|
|
Carrying value
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
April
30, 2018
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Investments
in digital currencies
|
$1,166,477
|
$-
|
$1,166,477
|
$-
|
$1,166,477
|
|
BNB
|
213
|
-
|
213
|
-
|
213
|
|
BTC
|
753,371
|
-
|
753,371
|
-
|
753,371
|
|
BTCP
|
19,992
|
-
|
19,992
|
-
|
19,992
|
|
EOS
|
108,292
|
-
|
108,292
|
-
|
108,292
|
|
ETH
|
149,190
|
-
|
149,190
|
-
|
149,190
|
|
NEO
|
57,713
|
-
|
57,713
|
-
|
57,713
|
|
OMG
|
22,018
|
-
|
22,018
|
-
|
22,018
|
|
QSP
|
14,968
|
-
|
14,968
|
-
|
14,968
|
|
QTUM
|
8,782
|
-
|
8,782
|
-
|
8,782
|
|
REP
|
31,938
|
-
|
31,938
|
-
|
31,938
|
|
Investments
in securities
|
780,000
|
780,000
|
-
|
-
|
780,000
|
|
KinerjaPay
|
780,000
|
780,000
|
-
|
-
|
780,000
|
|
|
$1,946,477
|
$780,000
|
$1,166,477
|
$-
|
$1,946,477
|
There were no financial securities or investments in digital assets
as of April 30, 2017.
The KinerjaPay Common Stock was received as compensation and, as
such, the Company did not use cash to acquire the
securities.
Deferred Revenue
The
Company has deferred revenue from its first consulting contract for
the KPAY agreement. The Company determined that its obligations
would be met evenly over the course of the contract and, as such,
will record revenue evenly over the course of the agreement.
Estimated used in the determination of value and duration may
change on a per-contract basis and, in addition, the Company could
change the original estimates used for a specific contract
depending on changes over the course of contracts with customers.
For example, the KPAY agreement is currently being recorded evenly
over one year, however, the Company may determine the obligations
to have all been met early and may decide to record the remaining,
unearned revenue immediately.
Going Concern
We will
need additional working capital for ongoing operations, which
raises substantial doubt about our ability to continue as a going
concern. Management of the Company is working on a strategy to meet
future operational goals which may include equity funding, short
term or long-term financing or debt financing, to enable the
Company to reach profitable operations, however, there can be no
assurances that the plan will succeed, nor that the Company will be
able to execute its plans.
Cost of Goods Sold
The
cost of goods sold is the direct costs attributable to the
production of goods sold. Cost of goods sold primarily consisted of
catering and jobs supplies relating to the events portion of the
Company’s business.
F-15
Stock Purchase Warrants
The
Company accounts for warrants issued to purchase shares of its
Common Stock as equity in accordance with FASB ASC 480, Accounting
for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock, Distinguishing Liabilities
from Equity.
Cash and cash equivalents
The
Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash
equivalents. Cash and cash equivalents consist of cash on deposit
with banks and money market funds, the fair value of which
approximates cost. The Company maintains its cash balances with a
high-credit-quality financial institution. At times, such cash may
be in excess of the Federal Deposit Insurance Corporation-insured
limit of $250,000. The Company has not experienced any losses in
such accounts, and management believes the Company is not exposed
to any significant credit risk on its cash and cash
equivalents.
F-16
Property and equipment
Property and
equipment are stated at cost or fair value if acquired as part of a
business combination. Depreciation is computed by the straight-line
method and is charged to operations over the estimated useful lives
of the assets. Maintenance and repairs are charged to expense as
incurred. The carrying amount and accumulated depreciation of
assets sold or retired are removed from the accounts in the year of
disposal and any resulting gain or loss is included in results of
operations. The Company currently is in the process of building a
mining facility for Digital Assets. All cost associated with that
project, including the architectural, designs, and planning cost
are being capitalized until the completion of the project. Property
and equipment are stated at cost and depreciated on a straight-line
basis over their estimated useful lives. Useful lives are 10 years
for software and 10 years for buildings.
Basic and Diluted Net Loss Per Share
Net
earnings or loss per share is calculated in accordance with SFAS
No. 128, Earnings Per Share for the period presented. Basic
earnings, net loss per share is based upon the weighted average
number of common shares outstanding. Fully diluted earnings per
share is based on the assumption includes dilutive equivalents such
as warrants, stock options, and convertible preferred
stock.
Recently Adopted Accounting Standards
In
January 2017, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standard Update
(“ASU”) 2017-01, Business Combinations: Clarifying the
Definition of a Business, which amends the current
definition of a business. Under ASU 2017-01, to be considered a
business, an acquisition would have to include an input and a
substantive process that together significantly contributes to the
ability to create outputs. ASU 2017-01 further states that when
substantially all of the fair value of gross assets acquired is
concentrated in a single asset (or a group of similar assets), the
assets acquired would not represent a business. The new guidance
also narrows the definition of the term “outputs” to be
consistent with how it is described in Topic 606, Revenue from
Contracts with Customers. The changes to the definition of a
business will likely result in more acquisitions being accounted
for as asset acquisitions. The guidance is effective for the annual
period beginning after December 15, 2017, with early adoption
permitted. The Company has elected to early adopt ASU 2017-01 and
to apply it to any transaction, which occurred prior to the
issuance date that has not been reported in financial statements
that have been issued or made available for issuance.
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2014-09,
“Revenue from Contracts with Customers,” Topic 606.
This Update affects any entity that either enters into contracts
with customers to transfer goods or services or enters into
contracts for the transfer of nonfinancial assets, unless those
contracts are within the scope of other standards. The guidance in
this Update supersedes the revenue recognition requirements in
Topic 605, Revenue Recognition and most industry-specific guidance.
The core principle of the guidance is that an entity should
recognize revenue to illustrate the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services. The new guidance also includes a cohesive set of
disclosure requirements that will provide users of financial
statements with comprehensive information about the nature, amount,
timing, and uncertainty of revenue and cash flows arising from a
reporting organization’s contracts with customers. In April
2016, the FASB issued ASU No. 2016-10, “Revenue from
Contracts with Customers,” Topic 606: “Identifying
Performance Obligations and Licensing”. This Update clarifies
guidance related to identifying performance obligations and
licensing implementation guidance contained in the new revenue
recognition standard. The Update includes targeted improvements
based on input the Board received from the Transition Resource
Group for Revenue Recognition and other stakeholders. The update
seeks to proactively address areas in which diversity in practice
potentially could arise, as well as to reduce the cost and
complexity of applying certain aspects of the guidance both at
implementation and on an ongoing basis. In May 2016, the FASB
issued ASU No. 2016-12, “Revenue from Contracts with
Customers,” Topic 606: “Narrow-Scope Improvements and
Practical Expedients”. The amendments in this Update address
narrow-scope improvements to the guidance on collectability,
noncash consideration, and completed contracts at transition.
Additionally, the amendments in this Update provide a practical
expedient for contract modifications at transition and an
accounting policy election related to the presentation of sales
taxes and other similar taxes collected from customers. This ASU is
the final version of Proposed Accounting Standards Update 2015-320,
“Revenue from Contracts with Customers,” (Topic 606):
“Narrow-Scope Improvements and Practical Expedients,”
which has been deleted. In December 2016, the FASB issued ASU No.
2016-20, “Revenue from Contracts with Customers,” Topic
606: “Technical Corrections and Improvements to Topic 606,
Revenue from Contracts with Customers”. The amendments in
this Update address narrow-scope improvements to the guidance on
loan guarantee fees, contract cost-impairment testing, contract
costs-interaction of impairment testing with guidance in other
topics, provision for losses on construction-type and
production-type contracts, scope of topic 606 to exclude all
contracts that are within the scope of Topic 944, disclosure of
remaining performance obligations, disclosure of prior-period
performance obligations, contract modifications, contract asset
versus receivable, refund liability, advertising costs, fixed-odds
wagering contracts in the casino industry and cost capitalization
for advisors to private funds and public funds. The Board decided
to issue a separate Update for technical corrections and
improvements to Topic 606 and other Topics amended by Update
2014-09 to increase stakeholders’ awareness of the proposals
and to expedite improvements to Update 2014-09. This ASU is
effective for fiscal years, and interim periods within those years
beginning after December 15, 2017 for public companies and 2018 for
non-public entities. We adopted the new standard effective May 1,
2018, using the modified retrospective transition
method.
F-17
We developed an implementation plan to adopt this new guidance,
which included an assessment of the impact of the new guidance on
our financial position and results of operations. We have
substantially completed our assessment and have determined that
this standard will not have a material impact on our financial
position or results of operations, except enhanced disclosure
regarding revenue recognition, including disclosures of revenue
streams, performance obligations, variable consideration and the
related judgments and estimates necessary to apply the new
standard. On May 1, 2018, we adopted the new accounting standard
ASC 606, Revenue from Contracts with Customers and for all open
contracts and related amendments as of May 1, 2018 using the
modified retrospective method. Results for reporting periods
beginning after May 1, 2018 will be presented under ASC 606, while
the comparative information will not be restated and will continue
to be reported under the accounting standards in effect for those
periods.
Recently Issued Accounting Pronouncements
In
March 2016, the FASB issued ASU 2016-09, Compensation - Stock
Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting (ASU 2016-09). ASU 2016-09 simplifies
several aspects of the accounting for share-based payment
transactions, including the income tax consequences, classification
of awards as either equity or liabilities, and classification on
the statement of cash flows. The Company adopted the provisions of
this ASU effective May 1, 2017. The adoption of this update did not
have an impact on the Company’s financial
statements.
In March 2016, the FASB issued ASU 2016-07,
Investments - Equity Method and Joint Ventures (Topic 323):
Simplifying the Transition to the Equity Method of Accounting (ASU
2016-07). ASU 2016-07 eliminates the requirement that when an
investment, initially accounted for under a method other than the
equity method of accounting, subsequently qualifies for use of the
equity method, an investor must retrospectively apply the equity
method in prior periods in which it held the investment. This
requires an investor to determine the fair value of the
investee’s underlying assets and liabilities retrospectively
at each investment date and revise all prior periods as if the
equity method had always been applied. The new guidance requires
the investor to apply the equity method prospectively from the date
the investment qualifies for the equity method. The investor will
add the carrying value of the existing investment to the cost of
the additional investment to determine the initial cost basis of
the equity method investment. ASU 2016-07 is effective for fiscal
years beginning after December 15, 2016, and interim periods within
those fiscal years, and early adoption is permitted.
The
Company adopted ASU 2016-07 in the first quarter of fiscal 2018.
The adoption of ASU 2016-07 in the first quarter of fiscal 2018 did
not impact the Company's financial position or results of
operations.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU
2016-02”), which is effective for annual reporting periods
beginning after December 15, 2018. Under ASU 2016-02, lessees will
be required to recognize the following for all leases (with the
exception of short-term leases) at the commencement date: 1) a
lease liability, which is a lessee’s obligation to make lease
payments arising from a lease, measured on a discounted basis, and
2) a right-of-use asset, which is an asset that represents the
lessee’s right to use, or control the use of, a specified
asset for the lease term. The Company is currently evaluating the
effects of ASU 2016-02 on its audited consolidated financial
statements.
F-18
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230)
Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”). ASU 2016-15 eliminates the diversity
in practice related to the classification of certain cash receipts
and payments for debt prepayment or extinguishment costs, the
maturing of a zero-coupon bond, the settlement of contingent
liabilities arising from a business combination, proceeds from
insurance settlements, distributions from certain equity method
investees and beneficial interests obtained in a financial asset
securitization. ASU 2016-15 designates the appropriate cash flow
classification, including requirements to allocate certain
components of these cash receipts and payments among operating,
investing and financing activities. The guidance is effective for
fiscal years beginning after December 15, 2017. The Company is
currently evaluating the effects of ASU 2016-15 on its audited
consolidated financial statements.
In May
2017, the FASB issued ASU No 2017-09 Compensation-Stock Compensation (Topic 718):
Scope of Modification Accounting (“ASU
2017-09”). ASU 2017-09 provides clarity and reduces both (i)
diversity in practice and (ii) cost and complexity when applying
the guidance in Topic 718, Compensation-Stock Compensation, to a
change to the terms or conditions of a share-based payment award.
The amendments in ASU 2017-09 provide guidance about which changes
to the terms or conditions of a share-based payment award require
an entity to apply modification accounting in Topic 718. An entity
should account for the effects of a modification unless all three
of the following are met: (1) The fair value (or calculated value
or intrinsic value, if such an alternative measurement method is
used) of the modified award is the same as the fair value (or
calculated value or intrinsic value, if such an alternative
measurement is used) of the original award immediately before the
original award is modified. If the modification does not affect any
of the inputs to the valuation technique that the entity uses to
value the award, the entity is not required to estimate the value
immediately before and after the modification. (2) The vesting
conditions of the modified award are the same as the vesting
conditions of the original award immediately before the original
award is modified. (3) The classification of the modified award as
an equity instrument or a liability instrument is the same as the
classification of the original award immediately before the
original award is modified. Note that the current disclosure
requirements in Topic 718 apply regardless of whether an entity is
required to apply modification accounting under the amendments in
ASU 2017-09. This guidance is
effective for annual reporting periods beginning after December 15,
2018, including interim periods within the reporting period. We are
currently evaluating the effect of the adoption of this guidance on
our condensed consolidated financial
statements.
In July
2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing
Liabilities from Equity (Topic 480) and Derivatives and Hedging
(Topic 815): I. Accounting for Certain Financial Instruments with
Down Round Features; II. Replacement of the Indefinite Deferral for
Mandatorily Redeemable Financial Instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Noncontrolling
Interests with a Scope Exception. Part I of this update
addresses the complexity of accounting for certain financial
instruments with down round features. Down round features are
features of certain equity-linked instruments (or embedded
features) that result in the strike price being reduced on the
basis of the pricing of future equity offerings. Current accounting
guidance creates cost and complexity for entities that issue
financial instruments (such as warrants and convertible
instruments) with down round features that require fair value
measurement of the entire instrument or conversion option. Part II
of this update addresses the difficulty of navigating Topic 480,
Distinguishing Liabilities from Equity, because of the existence of
extensive pending content in the FASB Accounting Standards
Codification. This pending content is the result of the indefinite
deferral of accounting requirements about mandatorily redeemable
financial instruments of certain nonpublic entities and certain
mandatorily redeemable noncontrolling interests. The amendments in
Part II of this update do not have an accounting effect. This ASU
is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2018. The Company is currently
assessing the potential impact of adopting ASU 2017-11 on its
audited consolidated financial statements and related
disclosures.
Management has
evaluated other recently issued accounting pronouncements and does
not believe that any of these pronouncements will have a
significant impact on our consolidated financial statements and
related disclosures.
F-19
NOTE 3. RESTATEMENT OF FINANCIAL STATEMENTS
On
January 16, 2018, the Company executed a 2-for-1 forward stock
split. Accordingly, all references to the numbers of common shares
and per share data in the accompanying financial statements have
been adjusted to reflect these splits, on a retroactive basis,
unless indicated otherwise. Upon further review it was determined
the Company’s shareholders’ equity (deficit) had not
been adjusted for the above mentioned forward split. The balance at
April 30, 2017 of common stock and additional paid-in capital was
originally reported at $20,368 and $6,179,489, respectively and
revised as $40,737 and $6,159,120, respectively. In addition, the
number of common shares issued and outstanding as of April 30, 2017
was originally reported as 737,406 and revised as
40,737,406.
The
following table summarizes the effects of the revisions on the
financial statements for the period reported.
|
|
|
Previously Reported
|
|
Adjustments
|
|
As revised
|
|
|
Consolidated Statement of Shareholders' Equity (Deficit) as of
April 30, 2017
|
|
|
|
|
|
|
|
|
Common stock - shares
|
|
737,406
|
|
40,000,000
|
|
40,737,406
|
|
|
Common stock - amount
|
|
$ 20,368
|
|
$ 20,369
|
|
$ 40,737
|
|
|
Additional paid-in capital
|
|
$ 6,179,489
|
|
$ (20,369)
|
|
$ 6,159,120
|
|
NOTE 4. INVESTMENT IN LEGATUMX
On
February 19, 2018, the Company entered into a Stock Purchase
Agreement (“LegatumX Agreement”) with LegatumX, Inc.
(“LegatumX”). This investment will the Company with a
market share into the legal industry for the storage,
authentication and validation of legal documents such as wills,
trusts, deeds, mortgages, and more. Under the terms of the LegatumX
Agreement, the Company will initially receive 30% of
LegatumX’s common stock calculated on a fully diluted basis
for a purchase price of $1,300,000.
The
Company may earn an additional (i) 5%, for a total of 35%, of
LegatumX’s common stock if LegatumX realizes $2.3 million in
gross proceeds from the sale of the 100,000 shares of our common
stock within the 12-month period following the effective date of
the Company’s filing of a Form 10 with the SEC (the
“Form 10”), or (ii) an additional 10%, for a total of
40%, of LegatumX’s common stock if LegatumX realizes $10.1
million in gross proceeds from the sale of the 100,000 shares of
our common stock within the 12-month period following the effective
date of the Form 10. As of April 30, 2018, the Company paid
$100,000 to LegatumX in exchange for 20% ownership in LegatumX. As
of the date of this Report, the Company has paid an additional
$20,000 (for a total of $120,000) and issued 100,000 to LegatumX
for a total of 25.5% ownership in LegatumX.
NOTE 5. PROPERTY AND EQUIPMENT, NET
Property and
equipment consisted of the following:
|
|
April
30,
|
|
|
|
2018
|
2017
|
|
Buildings
|
$105,195
|
$-
|
|
Software
|
7,528
|
-
|
|
Total
|
112,723
|
-
|
|
Less:
Accumulated depreciation
|
(584)
|
-
|
|
Property
and equipment, net
|
$112,139
|
$-
|
Depreciation
expense was $584 and $0 for the years ended April 30, 2018, and
2017, respectively.
F-20
NOTE 6. NOTE RECEIVABLE
On January 17, 2018, the Company entered into a
Promissory Note Agreement (“AutoLotto Agreement”) with
AutoLotto, Inc., a Delaware corporation. Under the terms of the
AutoLotto Agreement, the Company will pay to AutoLotto $1.5 million
(the “Principal”) in exchange for a promissory note
that will accrue interest at one percent per annum (the
“Interest”). All unpaid Principal and Interest are due
and payable to the Company at the earlier of (i) the closing of
AutoLotto’s initial coin offering of at least $20,000,000 or
(ii) AutoLotto’s issuance of equity securities (excluding any
conversion or issuance of any note or other convertible security)
of at least $20,000,000. In the event AutoLotto does not raise
$20,000,000 through an initial coin offering or issuance of equity
noted above, any unpaid Principal and Interest will convert to
equity at a rate of $250,000,000 divided by the number of common
shares outstanding immediately prior to January 17, 2020. As part
of the AutoLotto Agreement, the Company also received an option to
purchase tokens of the AutoLotto initial coin offering (the
“Option”) equal to two times the outstanding unpaid
Principal and Interest under the AutoLotto Agreement. The exercise
price of the Option will be an undisclosed private pre-sale price,
and the Option is exercisable within ten days of AutoLotto
providing notice to the Company of its initial coin offering. The
Option expires on January 16, 2020. During the year the Company
funded $500,000 to AutoLotto in conjunction with the AutoLotto
Agreement. The Note Receivable balance for the years ended
April 30, 2018 and 2017 was $500,000 and $0,
respectively.
NOTE 7. LIABILITIES DISCHARGED IN RECEIVERSHIP
The
Company was dormant from October 2008 through May 15, 2016, until
it was placed under the control of a Receiver in Nevada’s
Eighth Judicial District pursuant to Case #A14-715484-P (“the
Case”). On June 13, 2017, pursuant to an order by the judge
presiding over the Case, the Company emerged from receivership and
liabilities including accounts payable, accrued expenses, amounts
due to related parties, notes payable, and convertible notes
amounting to $5,049,131 that had been outstanding since 2009, were
officially discharged. As a result, the Company recorded other
income, “debt forgiveness” on its income statement for
the period ended July 31, 2017. The amount of debt discharged
represented substantially all of the Company’s liabilities
outstanding as of April 30, 2018.
NOTE 8. NOTE PAYABLE
Note
payable consisted of the following:
|
|
April
30,
2018
|
April
30,
2017
|
|
Note
Payable
|
$-
|
$501,112
|
|
Total
|
$-
|
$501,112
|
The
interest expense associated with the note payable was $0 and $5,913
for the years ended April 30, 2018 and 2017,
respectively.
NOTE 9. DEFERRED REVENUE
As of
April 30, 2018, deferred revenue amounted to $1,427,285 compared to
$0 as of April 30, 2017. The deferred revenue was concentrated in
one customer with whom the Company had signed a one-year consulting
agreement on January 11, 2018 (the “Consulting
Agreement”). Under the terms of the Consulting Agreement with
the customer, the value of the contract was comprised of $250,000
in cash and 1,000,000 shares of stock valued at $1.80 per share, or
$1,800,000, and was paid in full to the Company prior to the
commencement of services. The total value of the contract was
$2,050,000. The Company or customer may cancel the Consulting
Agreement at any time for any reason whatsoever without an
obligation to return any of the consideration received. In the
event of such termination, the Company would immediately record the
entire deferred liability balance as service revenue.
There
were no deferred revenue balances as of April 30,
2017.
NOTE 10. DUE TO RELATED PARTIES
In
March 2018 and October 2018, Robert Kalkstein, our Principal
Financial Officer, loaned to the Company approximately $180,000 and
$100,000, respectively, on a credit card for hotel bills related to
the Blockchain Unbound events. The short-term loans were repaid
within 1-2 days and did not bear any interest.
As of
April 30, 2018, the balance due to related parties was $0. As of
April 30, 2017, the balance due to related parties was $3,981,423.
This amount was written off as part of the discharge in
receivership described in Note 7. Liabilities Discharged in
Receivership.
F-21
NOTE 11. COMMITMENTS AND CONTINGENCIES
Occasionally, the
Company may be involved in claims and legal proceedings arising
from the ordinary course of its business. The Company records a
provision for a liability when it believes that is both probable
that a liability has been incurred, and the amount can be
reasonably estimated. If these estimates and assumptions change or
prove to be incorrect, it could have a material impact on the
Company’s consolidated financial statements. Contingencies
are inherently unpredictable, and the assessments of the value can
involve a series of complex judgments about future events and can
rely heavily on estimates and assumptions.
NOTE 12. STOCKHOLDERS’ EQUITY (DEFICIT)
The
Company has 400,000,000 shares of Common Stock authorized with a
par value of $0.001 per share. As of April 30, 2018, and 2017,
there were 39,548,579 and 40,737,406 shares of Common Stock
outstanding, respectively.
The
Company has 5,000,000 shares of Series A Preferred Stock (the
“preferred shares”) authorized, with a par value of
$0.001 per share. The preferred shares shall have no voting rights
unless and until such shares are converted into shares of common
stock of the Company. Each preferred share is convertible to 40
shares of Common Stock, which is adjusted for the 2-for-1 forward
stock split effective January 16, 2018. As of April 30, 2018 and
2017, there were 278,422 and 0 preferred shares outstanding,
respectively.
Per ASC
230-10-50-3, the Company executed a non-cash financing activity by
entering into an agreement with certain shareholders to convert
their 12,944,660 shares of Common Stock into 323,617 preferred
shares. On March 8, 2018, one shareholder converted 45,195
preferred shares into 1,807,800 shares of Common Stock. As of April
30, 2018, the following dilutive securities calculated using the
treasury method were considered equivalents for the purposes of
calculating earnings per share:
|
Preferred shares
convertible to Common Stock
|
11,136,860
|
|
Warrants
|
7,637,500
|
|
Stock
options
|
234,247
|
2,000,000 warrants are not yet vested and will
vest on January 1, 2019. As such, the 2,000,000 warrants are
not considered when calculating dilutive shares for the
period.
F-22
Common Stock Issued in Exchange for Consulting, Professional and
Other Services
The
Company has issued non-statutory stock options, restricted stock
purchase awards and stock compensation to directors and
consultants. The terms of stock options granted under these plans
generally may not exceed 10 years. The Company currently does not
have a defined equity incentive plan. Stock issued to directors and
consultants have been granted via individual
agreements.
Share-based payment
arrangements were made to compensate independent contractors to
perform services as a way to conserve cash as we develop our
business. Share-based payments were made in negotiations with each
independent contractor and may be in the form of an option to
purchase shares of our common stock or restricted shares of our
common stock. The following are fair- values at specific
dates:
|
Value
Date
|
Fair
Value ($ per share)
|
|
December
1, 2017
|
$0.063
|
|
January
1, 2018
|
$0.117
|
|
February
1, 2018
|
$1.25
|
|
March
1, 2018
|
$1.25
|
|
April 1,
2018
|
$1.25
|
ASC
505-50 requires all nonemployee transactions, in which goods or
services are the consideration received in exchange for equity
instruments, to be accounted for based on the fair value of the
consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable. The Company believes
these values represent an accurate representation of our fair
market value at the specific dates. According to these results
above, the Company determined that it did not issue any options
below the fair value market price. The Company will keep this
valuation in the event the IRS investigates our claims that our
OTC-traded price is not a fair representation of our market value
on those dates. If the IRS concludes that the OTC-traded price
should be used to determine our valuation, there may be penalties
to the grantees or to the Company under Section 409A of the
Internal Revenue Code.
If
the Company is a newly formed corporation or shares of the Company
are thinly traded the use of share prices established in the
Company’s most recent private placement memorandum
(“PPM”), or weekly or monthly price observations would
generally be more appropriate than the use of daily price
observations as such shares could be artificially inflated due to a
larger spread between the bid and asked quotes and lack of
consistent trading in the market.
The
fair value of share options and similar instruments is estimated on
the date of grant. The ranges of assumptions for inputs are as
follows:
●
Expected
term of share options and similar instruments: Pursuant to
Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards
Codification the expected term of share options and represents the
period of time the options are expected to be outstanding taking
into consideration of the contractual term of the instruments and
holder’s expected exercise behavior into the fair value of
the instruments. The Company uses historical data to estimate
holder’s expected exercise behavior.
●
Expected
volatility of the entity’s shares and the method used to
estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii) a
thinly-traded or nonpublic entity that uses the calculated value
method shall disclose the reasons why it is not practicable for the
Company to estimate the expected volatility of its share price, the
appropriate industry sector index that it has selected, the reasons
for selecting that particular index, and how it has calculated
historical volatility using that index. The Company uses the
average historical volatility of the comparable companies over the
expected contractual life of the share options or similar
instruments as its expected volatility. If shares of a company are
thinly traded the use of weekly or monthly price observations would
generally be more appropriate than the use of daily price
observations as the volatility calculation using daily observations
for such shares could be artificially inflated due to a larger
spread between the bid and asked quotes and lack of consistent
trading in the market.
●
Expected
annual rate of quarterly dividends. The expected dividend yield is
based on the Company’s current dividend yield as the best
estimate of projected dividend yield for periods within the
expected term of the share options and similar
instruments.
●
Risk-free
rate(s). The risk-free interest rate is based on the U.S. Treasury
yield curve in effect at the time of grant for periods within the
expected term of the share options and similar
instruments.
Pursuant
to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant
fully vested, non-forfeitable equity instruments that are
exercisable by the grantee only after a specified period of time if
the terms of the agreement provide for earlier exercisability if
the grantee achieves specified performance conditions. Any measured
cost of the transaction shall be recognized in the same period(s)
and in the same manner as if the entity had paid cash for the goods
or services or used cash rebates as a sales discount instead of
paying with, or using, the equity instruments. A recognized asset,
expense, or sales discount shall not be reversed if a share option
and similar instrument that the counterparty has the right to
exercise expires unexercised.
F-23
During
the year ended April 30, 2018, the Company issued 653,333
restricted shares of Common Stock (“RSA”) to
independent contractors for professional services. The Company
issued the shares of restricted Common Stock for services as
outlined in the table below:
|
Value Date
|
Value ($ per share)
|
|
December
1, 2017
|
$0.063
|
|
January 1,
2018
|
$0.117
|
|
February 1,
2018
|
$1.25
|
|
March 1,
2018
|
$1.25
|
Preferred Stock Convertible to Common Stock
During
the year ended April 30, 2018, the Company converted 45,195
preferred shares into 1,807,800 shares of Common Stock. The Company
designated 500,000 shares as preferred shares. The Company had
agreed to convert certain investor shares of Common Stock into the
preferred shares, which are convertible into shares of Common Stock
at a rate of one preferred share into forty shares of Common Stock.
At April 30, 2018, the Company had 278,422 preferred shares issued
and outstanding. The Company is obligated is issue shares of Common
Stock to the holders of the preferred shares at the holder’s
discretion once the holder submits a notice of conversion to the
Company. The Company shall issue the required number of shares of
Common Stock at a rate of 40 shares of Common Stock to 1 share of
the preferred shares. In addition, the Holders shall have no voting
rights unless and until such shares are converted into shares of
common stock and must provide written notice to the authorized
representative of the Company in order to convert their shares. In
no event may the holder convert any preferred shares into Common
Stock if, as a result of such conversion, the Holder will own of
record and/or beneficially in excess of 4.99% of the outstanding
shares of Common Stock.
On
February 12, 2018, the Company filed a Certificate of Designation
with the State of Nevada effective as of November 11, 2017 for a
newly authorized Series A Convertible Preferred Stock. A total of
500,000 shares of Series A Convertible Preferred Stock have been
authorized of which 278,422 shares were issued and outstanding, as
follows:
|
Issuee
Name
|
Series A
Convertible Preferred Shares
|
|
JOJ
Holdings, LLC (1)
|
90,922
|
|
JFS
Investments, Inc. (2)
|
187,500
|
|
Total
|
278,422
|
(1) Mr.
Justin Schreiber is the control person of JOJ Holdings,
LLC.
(2) Mr.
Joe Salvani is the control person of JFS Investments,
Inc.
On
March 8, 2018, JOJ Holdings,
LLC converted 45,195 Series A Preferred Shares into
1,807,800 shares of Common Stock.
F-24
Stock Purchase Warrants
The
stock purchase warrants have been accounted for as equity in
accordance with FASB ASC 480, Accounting for Derivative Financial
Instruments indexed to, and potentially settled in, a
company’s own stock, distinguishing liabilities from
equity.
The
Company had a total of 9,637,500 warrants outstanding as of April
30, 2018 as outlined in the table below:
|
|
Quantity
Issued
|
Strike
Price
|
Average Remaining
Contractual Life (years)
|
Amount
Exercised
|
|
Founders
|
2,500,000
|
$2.50
|
4.39
|
$–
|
|
Founders
|
2,000,000
|
$0.25
|
2.39
|
$–
|
|
Private
Placement
|
5,137,500
|
$0.25
|
2.48
|
$–
|
|
Total
|
9,637,500
|
|
|
$–
|
|
Weighted-average
exercise price
|
|
$0.83
|
|
|
The
$0.83 per share is the weighted-average exercise price of all
warrants that have been issued, which are convertible into one
share of our Common Stock. 2,000,000 warrants are not yet vested
and will vest on January 1, 2019. As such the 2,000,000 warrants
are not considered when calculating dilutive shares for the
period.
NOTE 13. COST OF GOODS SOLD
The cost of goods sold is the direct costs
attributable to the production of goods sold. Cost of goods sold
primarily consisted of catering and jobs supplies relating to the
events portion of the Company’s business. Cost of goods
sold for the years ended April 30, 2018 and 2017 were
$328,785 and $0, respectively.
NOTE
14. INCOME TAXES
As
of April 30, 2018, the Company has a federal net operating loss
carry forwards of approximately $12,140,000 that can be
utilized to reduce future taxable income. The net operating loss
carry forward will expire through 2024 if not utilized. Utilization
of the net operating loss and tax credit carry forward may be
subject to substantial annual limitations due to the ownership
change limitations provided by the Internal Revenue Code of 1986,
as amended, and similar state provisions. The annual limitation may
result in the expiration of net operating loss and tax credit carry
forwards before utilization. The Company has provided a full
valuation allowance on the deferred tax asset because of
uncertainty regarding
realizability.
F-25
NOTE 15. SUBSEQUENT EVENTS
On July 2, 2018,
the Company entered into a service agreement with BlakFX to provide
consulting services such as building BlakFX’s tokenization
model, an ICO Whitepaper, legal and KYC/AML, and technology review
or design. The Company will receive $150,000 over six months for
the services, plus 0.60% of the total amount of U.S. Dollar raised
in BlakCoin, their token. The $150,000 in U.S. Dothat the Company
will receive is contingent upon BlakFX raising at least $5,000,000
from any funding source. The Company has begun working on the
BlakFX whitepaper.
On August 14, 2018,
the Company entered into a Promissory Note for the principal amount
of $250,000 and a flat rate of $25,000. The Promissory Note is due
and payable on September 14, 2018. In conjunction, with the
Promissory Note, the Company issued to the holder of the Promissory
Note right to purchase 500,000 shares of the Company’s common
stock at a per share purchase price of $1.25.
On
September 5, 2018, the Company entered into a Promissory Note for
the principal amount of $100,000 and interest on the principle at
the rate of 10%. The Promissory Note is due and payable on
September 18, 2018. In conjunction, with the Promissory Note, the
Company issued to the holder of the Promissory Note right to
purchase 50,000 shares of the Company’s common stock at a per
share purchase price of $1.25.
On
October 9, 2018, the Company entered into a subscription purchase
agreement with an accredited investor for $762,606 to purchase
435,775 shares of our common stock at a price of $1.75 per share.
The subscription was paid for in Ether and Bitcoin and translated
into U.S. Dollars at the then current
market values of Ether and Bitcoin to arrive at the U.S.
Dollar value of $762,606.
F-26