UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

———————————

FORM 10-Q/A

Amendment No. 1

 

☑ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2020

 

OR

 

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _____________ to ____________

 

Commission File Number: 000-56037

 

Carrier EQ, LLC

(Exact name of registrant as specified in its charter)

 

Delaware		37-1981503
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
186 Lincoln Street, Third Floor, Boston, MA		02111
(Address of principal executive offices)		(Zip Code)

 

(617) 841-7207

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒ No ☐

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☑

 

  

 

EXPLANATORY NOTE

 

Carrier EQ, LLC d/b/a Airfox (the “Company”) is filing this Form 10-Q/A (“Form 10-Q/A”) to amend our Quarterly Report on Form 10-Q for the three and nine months ended June 30, 2020, originally filed with the Securities and Exchange Commission (the “SEC”) on August 14, 2020 (“Original Report”), to restate our financial statements and related footnote disclosures for the period from October 1, 2019 through June 30, 2020 (the “Affected Period”). This Form 10-Q/A also amends certain other Items in the Original Report, as listed in “Items Amended in this Form 10-Q/A” below. The correction involves only non-cash adjustments.

 

Restatement Background

 

On May 10, 2021, the authorized officers of Carrier EQ, LLC (the “Company”), concluded that the previously issued unaudited condensed consolidated financial statements covering the Company’s fiscal quarters ended December 31, 2019, March 31, 2020, June 30, 2020, December 31, 2020, along with the previously issued audited consolidated financial statements related to the fiscal year ended September 30, 2020 (collectively, the “Restated Periods”), require restatement and should no longer be relied upon.

 

Specifically, during the preparation of the quarterly condensed consolidated financial statements related to the fiscal quarter ended March 31, 2021, the Management reviewed the methodology used to estimate the March 2022 completion date for the AirToken project, which, commencing on October 1, 2019, is the date used to calculate the amount of deferred revenue from the Initial Coin Offering ("ICO Revenue") to be recognized as revenue in the Company's financial statements and is also the date used to calculate the amount of deferred gain on AirTokens issued for services ("AirToken Gains") to be recognized as other income in the Company's financial statements. The AirToken project involves various milestones that can be difficult to forecast. Over time, the achievement of some milestones are determined to be much more difficult than originally projected. Upon the review of the methodology used to estimate the March 2022 completion date, the Company realized that the methodology should have been weighted more heavily on the fact that the completion date is highly dependent on the future rules and approvals from regulatory authorities, such as the Securities and Exchange Commission ("SEC"). These issues are out of the Company's control and thus it is very difficult to estimate when/if these issues might be resolved. These regulatory and license concerns are hindering the Company from further developing the Airtoken project and launching it to the public. Although the Company has advanced in many fronts toward the development of the Airtoken project, there are also business obstacles regarding scaling the loan product and making it profitable with our own capital first before opening it to additional third party lenders. Due to the situation aforementioned, the Company is analyzing the future of the Airtoken project, as its continuity is deeply dependent of the milestones that are completely out of the Company’s control. Once, the regulatory and business obstacles can be overcome, then the Company will be able to decide to resume further development of the Airtoken project, since overcoming these hurdles is a prerequisite before spending time on the actual blockchain components and launching a “decentralized lending market-place”.

 

Based on the factors mentioned above, the Company reevaluated the methodology used to arrive at an estimated March 2022 completion date for the AirToken project was faulty and that since the completion date is highly dependent on milestones that are out of the Company's control, the Company is not able to accurately estimate an accurate completion date and thus, should have ceased recognizing any ICO Revenue and AirToken Gains starting on October 1, 2019. Based on Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 250, Accounting Changes and Error Corrections, the Company deemed this issue to be a correction of an error, resulting in the overstatement of revenue and other income and an understatement of deferred revenue, deferred gain and cost of revenue gain for the Restated Periods. The error described above was material to the Restated Periods. and will be corrected in the restatements of the Company's financial statements for the Restated Periods.

 

Except as described above, this Form 10-Q/A does not amend, update or change any other items or disclosures in the Original Report and does not purport to reflect any information or events subsequent to the filing thereof. As such, this Form 10-Q/A speaks only as of the date the Original Report was filed, and we have not undertaken herein to amend, supplement or update any information contained in the Original Report to give effect to any subsequent events. Accordingly, this Form 10-Q/A should be read in conjunction with our filings made with the SEC subsequent to the filing of the Original Report, including any amendment to those filings.

 

 

Items Amended in this Form 10-Q/A

 

This Form 10-Q/A presents the Original Report, amended and restated with modifications only to “Part I, Item 1. Financial Statements”, “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part I, Item 4. Controls and Procedures” to reflect the restatement. Additionally, in accordance with applicable SEC rules, this Form 10-Q/A includes certifications from our Principal Executive Officer and Principal Financial Officer dated as of the date of this Form 10-Q/A filing which are contained in “Part II, Item 6. Exhibits.”

 

 

CARRIER EQ, LLC. d/b/a AIRFOX AND SUBSIDIARIES

 

PART I — FINANCIAL INFORMATION
Item 1	Financial Statements (as restated)		1
	Condensed Consolidated Balance Sheets (as restated)		1
	Condensed Consolidated Statements of Operations and Comprehensive Loss (as restated)		3
	Condensed Consolidated Statements of Changes in Member’s Deficit and Stockholders’ Deficit (as restated)		4
	Condensed Consolidated Statements of Cash Flows (as restated)		7
	Notes to Condensed Consolidated Financial Statements (as restated)		9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations (as restated)		41
Item 3	Quantitative and Qualitative Disclosures About Market Risk		48
Item 4	Controls and Procedures (as restated)		48
PART II — OTHER INFORMATION
Item 1	Legal Proceedings		50
Item 1A	Risk Factors		51
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		51
Item 3	Defaults upon Senior Securities		52
Item 4	Mine Safety Disclosures		52
Item 5	Other Information		52
Item 6	Exhibits (as amended)		52
Signatures			54

 

 

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

CARRIER EQ, LLC. d/b/a AIRFOX AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		June 30, 2020 (unaudited) (as restated)				September 30, 2019 (audited)
ASSETS
Current assets:
Cash and cash equivalents		$	1,921,263			$	5,451,348
Restricted cash			824,746				—
Short-term investments			—				100,576
Accounts receivable, net of allowance for doubtful accounts of $0 at June 30, 2020 and September 30, 2019			109,000				15,836
Prepaid expenses and other current assets			1,010,287				819,358
Digital assets			—				1,392
Total current assets			3,865,296				6,388,510
Non-current assets:
Intangibles, net			3,885,879				1,773,312
Property and equipment, net			3,326				1,077
Security deposits			334,413				1,548,396
Operating lease right of use assets			2,061,756				—
Due from related party			8,090				—
Total non-current assets			6,293,464				3,322,785
Total assets		$	10,158,760			$	9,711,295

 

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

 

 

CARRIER EQ, LLC. d/b/a AIRFOX AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		June 30, 2020 (unaudited) (as restated)				September 30, 2019 (audited)
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	144,919			$	821,612
Accrued liabilities			1,708,876				1,385,095
Other deferred revenue, current portion			48,416				237,111
Deferred revenue - AirToken Project, current portion			—				5,011,926
Airtoken refund liability			14,449				3,241,948
Operating lease liability, current portion			382,416				—
Deferred gain on issuance of AirTokens for services, current portion			—				158,713
Due to related party			48,122				—
Total current liabilities			2,347,198				10,856,405
Long-term liabilities:
Simple agreement for future equity			—				239,899
Convertible notes payable - long-term portion			—				10,000,000
Deferred revenue – Mastercard Program Agreement			11,962,899				—
Deferred gain on issuance of AirTokens for services, net of current portion			396,790				238,077
Operating lease liability, net of current portion			1,835,238				—
Deferred revenue - AirToken Project, net of current portion			12,529,824				7,517,898
Deferred revenue, net of current portion			108,935				—
Total liabilities			29,180,884				28,852,279
Commitments and contingencies (Note 17)
Member’s and stockholders' deficit:
CarrierEQ, Inc. stockholders’ deficit:
Convertible Preferred stock; Series One; par value $0.00001; 0 shares authorized; 0 shares issued and outstanding as of June 30, 2020; 2,678,861 shares authorized; 2,652,072 shares issued and outstanding as of September 30, 2019			—				27
Convertible Preferred stock; Series One A; par value $0.00001; 0 shares authorized; 0 shares issued and outstanding as of June 30, 2020; 1,046,147 shares authorized; 1,046,147 shares issued and outstanding as of September 30, 2019			—				11
Common stock; par value $0.00001; 0 shares authorized; 0 shares issued and outstanding as of June 30, 2020; 70,000,000 shares authorized; 7,728,821 shares issued and 6,813,928 shares outstanding as of September 30, 2019			—				78
Treasury stock, at cost, 0 shares as of June 30, 2020 and 914,893 shares as of September 30, 2019			—				(240,005	)
Additional paid-in capital			—				2,014,658
Accumulated deficit			—				(21,025,864	)
Accumulated other comprehensive income			—				110,363
Total stockholders' deficit attributable to CarrierEQ, Inc. stockholders			—				(19,140,732	)
Non-controlling interest in subsidiary			—				(252	)
Total stockholders' deficit			—				(19,140,984	)
Carrier EQ, LLC member’s deficit:
Member’s deficit; 1,227,635 limited liability company units outstanding as of June 30, 2020; 0 units outstanding as of September 30, 2019			(20,250,688	)			—
Accumulated other comprehensive income			1,229,277				—
Total member’s deficit attributable to Carrier EQ, LLC members			(19,021,411	)			—
Non-controlling interest in subsidiary			(713	)			—
Total member’s deficit			(19,022,124	)			—
Total liabilities and member’s deficit and stockholders' deficit		$	10,158,760			$	9,711,295

 

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

 

 

CARRIER EQ, LLC. d/b/a AIRFOX AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

 

		Three Months Ended June 30,								Nine Months Ended June 30,
		2020 (as restated)				2019				2020 (as restated)				2019
Revenue		$	34,576			$	1,393			$	58,407			$	1,641
Operating expenses:
Cost of revenue			114,839				—				114,839				—
Selling, general and administrative			6,212,797				2,761,818				16,989,307				6,318,270
Impairment of digital assets			—				—				—				1,079
Total operating expenses			6,327,636				2,761,818				17,104,146				6,319,349
Loss from operations			(6,293,060	)			(2,760,425	)			(17,045,739	)			(6,317,708	)
Other income (expense):
Realized loss on sale of digital assets			—				—				(1,392	)			(90,940	)
Gain on AirToken issuance for services			—				175,717				—				527,152
Interest income, net			122,861				6,895				150,015				28,371
Other income, net			122,861				182,612				148,623				464,583
Loss before income taxes			(6,170,199	)			(2,577,813	)			(16,897,116	)			(5,853,125	)
Income tax benefit (expense)			47,620				(314	)			129,661				(942	)
Net loss			(6,122,579	)			(2,578,127	)			(16,767,455	)			(5,854,067	)
Net (loss) income attributable to non-controlling interest			(44	)			55				461				80
Net loss attributable to Carrier EQ, LLC.			(6,122,623	)			(2,578,072	)			(16,766,994	)			(5,853,987	)
Other comprehensive income
Foreign currency translation adjustment			120,645				10,063				1,118,914				5,488
Total comprehensive loss		$	(6,001,978	)		$	(2,568,009	)		$	(15,648,080	)		$	(5,848,499	)

 

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

 

  

CARRIER EQ, LLC. d/b/a AIRFOX AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF MEMBER’S DEFICIT AND STOCKHOLDERS’ DEFICIT

 

		CARRIEREQ INC.																																																CARRIER EQ LLC
		Preferred Stock								Preferred Stock																								Additional				Accumulated												Accumulated
		(Series One)								(Series One - A)								Common Stock								Treasury Stock								Paid-In				Other Comprehensive				Noncontrolling				Accumulated				Other Comprehensive				Membership				Member's				Noncontrolling				Total
		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Capital				Income (Loss)				Interest				Deficit				Income				Interests				Deficit				Interest				Deficit
Balance at September 30, 2019			2,652,072			$	27				1,046,147			$	11				6,813,928			$	78			$	914,893			$	(240,005	)		$	2,014,658			$	110,363			$	(252	)		$	(21,025,864	)		$	—				—			$	—			$	—			$	(19,140,984	)
Stock based compensation			—				—				—				—				—				—				—				—				42,588				—				—				—				—				—				—				—			$	42,588
Options exercised			—				—				—				—				122,510				1				—				—				33,922				—				—				—				—				—				—				—			$	33,923
Noncontrolling interest			—				—				—				—				—				—				—				—				—				—				(248	)			—				—				—				—				—			$	(248	)
Net loss			—				—				—				—				—				—				—				—				—				—				—				(5,191,690	)			—				—				—				—			$	(5,191,690	)
Foreign currency translation			—				—				—				—				—				—				—				—				—				(101,576	)			—				—				—				—				—				—			$	(101,576	)
Balance at December 31, 2019 (unaudited) (as restated)			2,652,072			$	27				1,046,147			$	11				6,936,438			$	79				914,893			$	(240,005	)		$	2,091,168			$	8,787			$	(500	)		$	(26,217,554	)		$	—				—			$	—			$	—			$	(24,357,987	)
Stock based compensation			—				—				—				—				—				—				—				—				168,015				—				—				—				—				—				—				—			$	168,015
Options exercised			—				—				—				—				816,631				8				—				—				154,449				—				—				—				—				—				—				—			$	154,457
Noncontrolling interest			—				—				—				—				—				—				—				—				—				—				(257	)			—				—				—				—				—			$	(257	)
Net loss			—				—				—				—				—				—				—				—				—				—				—				(5,452,681	)			—				—				—				—			$	(5,452,681	)
Foreign currency translation			—				—				—				—				—				—				—				—				—				1,099,845				—				—				—				—				—				—			$	1,099,845
Balance at March 31, 2020 (unaudited) (as restated)			2,652,072			$	27				1,046,147			$	11				7,753,069			$	87				914,893			$	(240,005	)		$	2,413,632			$	1,108,632			$	(757	)		$	(31,670,235	)		$	—				—			$	—			$	—			$	(28,388,608	)

 

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

 

 

CARRIER EQ, LLC. d/b/a AIRFOX AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF MEMBER’S DEFICIT AND STOCKHOLDERS’ DEFICIT

 

		CARRIEREQ INC.																																																CARRIER EQ LLC
		Preferred Stock								Preferred Stock																								Additional				Accumulated												Accumulated
		(Series One)								(Series One - A)								Common Stock								Treasury Stock								Paid-In				Other Comprehensive				Noncontrolling				Accumulated				Other Comprehensive				Membership				Member's				Noncontrolling				Total
		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Capital				Income (Loss)				Interest				Deficit				Income				Interest				Deficit				Interest				Deficit
Balance at March 31, 2020 (unaudited) (as restated)			2,652,072			$	27				1,046,147			$	11				7,753,069			$	87				914,893			$	(240,005	)		$	2,413,632			$	1,108,632				(757	)		$	(31,670,235	)		$	—				—			$	—			$	—			$	(28,388,608	)
Convertible notes converted into common stock			—				—				—				—				13,339,510				133				—				—				9,999,867				—				—				—				—				—				—				—			$	10,000,000
Conversion of Preferred One and Preferred One A shares to common stock			(2,652,072	)			(27	)			(1,046,147	)			(11	)			3,698,219				38				—				—				—				—				—				—				—				—				—				—			$	—
Cancellation of common stock previously outstanding			—				—				—				—				(8,003,706	)			(80	)			—				—				80				—				—				—				—				—				—				—			$	—
Simple Agreements for Future Equity converted into common stock			—				—				—				—				474,996				5				—				—				239,894				—				—				—				—				—				—				—			$	239,899
Stock compensation related to accelerated vesting of options			—				—				—				—				—				—				—				—				114,979				—				—				—				—				—				—				—			$	114,979
Capital contribution - Via Varejo			—				—				—				—				—				—				—				—				—				—				—				—				—				—				1,921,004				—			$	1,921,004
Noncontrolling interest			—				—				—				—				—				—				—				—				—				—				44				—				—				—				—				—			$	44
Retirement of treasury stock			—				—				—				—				—				—				(914,893	)			240,005				(240,005	)			—				—				—				—				—				—				—			$	—
Net loss			—				—				—				—				—				—				—				—				—				—				—				—				—				—				(6,122,623	)			—			$	(6,122,623	)
Foreign currency translation			—				—				—				—				—				—				—				—				—				—				—				—				120,645				—				—				—			$	120,645
Issuance of common stock to Option Stockholders			—				—				—				—				8,003,706				80				—				—				(80	)			—				—				—				—				—				—				—			$	—
Capital contribution from Via Varejo for payment to Option Holders due to cancellation of stock options			—				—				—				—				—				—				—				—				—				—				—				—				—				—				3,331,255				—			$	3,331,255
Payment to Option Holders due to cancellation of stock options			—				—				—				—				—				—				—				—				(238,719	)			—				—				—				—				—				—				—			$	(238,719	)
Purchase of membership units - Carrier EQ, LLC			—				—				—				—				(25,265,794	)			(263	)			—				—				(12,289,648	)			(1,108,632	)			713				31,670,235				1,108,632				1,277,635				(19,380,324	)			(713	)		$	—
Balance at June 30, 2020 (unaudited) (as restated)			—			$	—				—			$	—				—			$	—				—			$	—			$	—			$	—			$	—			$	—			$	1,229,277				1,277,635				(20,250,668	)		$	(713	)		$	(19,022,124	)

 

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

 

 

CARRIER EQ, LLC. d/b/a AIRFOX AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

 

																																						Accumulated
		Preferred Stock								Preferred Stock																								Additional				Other				Non-								Total
		(Series One)								(Series One A)								Common Stock								Treasury Stock								Paid-In				Comprehensive				controlling				Accumulated				Stockholders'
		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Capital				Loss				Interest				Deficit				Deficit
Balance at September 30, 2018 (audited)			2,652,072			$	27				1,046,147			$	11				6,745,595			$	76				914,893			$	(240,005	)		$	1,884,566			$	(302	)		$	(2	)		$	(11,001,067	)		$	(9,356,696	)
Options exercised			—				—				—				—				33,333				1				—				—				2,999				—				—				—				3,000
Stock based compensation			—				—				—				—				—				—				—				—				23,618				—				—				—				23,618
Non-controlling interest			—				—				—				—				—				—				—				—				—				—				(5	)			—				(5	)
Net loss			—				—				—				—				—				—				—				—				—				—				—				(1,111,958	)			(1,111,958	)
Foreign currency translation adjustment			—				—				—				—				—				—				—				—				—				9,763				—				—				9,763
Balance at December 31, 2018 (unaudited)			2,652,072			$	27				1,046,147			$	11				6,778,928			$	77				914,893			$	(240,005	)		$	1,911,183			$	9,461			$	(7	)		$	(12,113,025	)		$	(10,432,278	)
Stock based compensation			—				—				—				—				—				—				—				—				21,995				—				—				—				21,995
Non-controlling interest			—				—				—				—				—				—				—				—				—				—				(20	)			—				(20	)
Net loss			—				—				—				—				—				—				—				—				—				—				—				(2,163,957	)			(2,163,957	)
Foreign currency translation adjustment			—				—				—				—				—				—				—				—				—				(14,338	)			—				—				(14,338	)
Balance at March 31, 2019 (unaudited)			2,652,072			$	27				1,046,147			$	11				6,778,928			$	77				914,893			$	(240,005	)		$	1,933,178			$	(4,877	)		$	(27	)		$	(14,276,982	)		$	(12,588,598	)
Stock based compensation			—				—				—				—				—				—				—				—				28,925				—				—				—				28,925
Common stock issued in exchange for services			—				—				—				—				35,000				1				—				—				22,750				—				—				—				22,751
Non-controlling interest			—				—				—				—				—				—				—				—				—				—				(55	)			—				(55	)
Net loss			—				—				—				—				—				—				—				—				—				—				—				(2,578,072	)			(2,578,072	)
Foreign currency translation adjustment			—				—				—				—				—				—				—				—				—				10,063				—				—				10,063
Balance at June 30, 2019 (unaudited)			2,652,072			$	27				1,046,147			$	11				6,813,928			$	78				914,893			$	(240,005	)		$	1,984,853			$	5,186			$	(82	)		$	(16,855,054	)		$	(15,104,986	)

 

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

 

 

CARRIER EQ, LLC. d/b/a AIRFOX AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		Nine Months Ended June 30,
		2020 (as restated)				2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(16,767,455	)		$	(5,854,067	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization			569,951				86,090
Stock based compensation			325,582				74,538
Additional stock based compensation due to cancellation of stock options			3,092,536				—
Common stock issued in exchange for services			—				22,751
Reversal of accrued interest related to conversion of convertible notes			(104,856	)			—
Impairment of digital assets			—				1,079
Realized loss on sale of digital assets			1,392				90,940
Gain on issuance of AirTokens for services			—				(527,152	)
Changes in Assets and Liabilities:
Accounts receivable			(93,164	)			256,000
Prepaid expenses and other current and long-term assets			1,058,235				(1,643,648	)
Accounts payable			(676,693	)			100,595
Operating lease right of use assets and liabilities			120,717				—
Accrued liabilities and other current liabilities			2,200,572				(351,254	)
Deferred revenue – Mastercard Program Agreement			11,962,899				—
Other deferred revenue			(188,695	)			—
AirToken refund liability			(3,227,499	)			—
Due to related party			48,122				—
Due from related party			(8,090	)			—
Net cash used in operating activities			(1,686,446	)			(7,744,128	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment			(2,249	)			—
Acquisition of intangible assets			(2,682,518	)			(838,641	)
Net cash used in by investing activities			(2,684,767	)			(838,641	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options			188,380				3,000
Proceeds from convertible note			—				6,000,000
Capital contribution – Via Varejo			1,921,004				—
Proceeds from Paycheck Protection Program SBA loan			537,732				—
Payment of principal from  Paycheck Protection Program SBA loan			(537,732	)			—
Proceeds from Via Varejo for payment to Option Holders due to cancellation of stock options			3,331,255				—
Payment to Option Holders due to cancellation of stock options			(3,331,255	)			—
Net cash provided by financing activities			2,109,384				6,003,000
Effect of exchange rate changes on cash, cash equivalents, and restricted cash			(443,510	)			—
Net decrease in cash, cash equivalents, and restricted cash			(2,705,339	)			(2,579,769	)
Cash, cash equivalents, and restricted cash, beginning of period			5,451,348				8,019,152
Cash, cash equivalents, and restricted cash, end of period		$	2,746,009			$	5,439,383

 

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

 

 

CARRIER EQ, LLC. d/b/a AIRFOX AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		Nine Months Ended June 30,
		2020				2019
Supplemental disclosure of non-cash transactions:
Convertible debt instrument settled through issuance of common stock		$	(10,000,000	)		$	—
Simple agreement for future equity settled through issuance of common stock		$	(239,899	)		$	—
Lease liabilities arising from obtaining right of use assets		$	2,465,218			$	—
Cancellation of common stock		$	(80	)		$	—
Conversion to common stock – Series One		$	(27	)		$	—
Conversion to common stock – Series One A		$	(11	)		$	—
Conversion of Preferred One and Preferred One A shares to common stock		$	38			$	—
Retirement of treasury stock		$	240,005			$	—
Issuance of common stock to Option Stockholders		$	80			$	—
Purchase of membership units - Carrier EQ, LLC		$	(263	)		$	—

 

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

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

Note 1 - Organization and Nature of Operations

 

Carrier EQ, LLC., doing business as AirFox (the “Company”), was incorporated in Delaware on May 21, 2020 with a principal place of business in Boston, Massachusetts. The Company was previously formed as a corporation, CarrierEQ, Inc. and was incorporated in Delaware on January 19, 2016.

 

On May 21, 2020, the Company filed a certificate of conversion (the “Certificate of Conversion”) to convert the Corporation to a Limited Liability Company and to change the Company’s name from “CarrierEQ Inc.” to “Carrier EQ, LLC.” The conversion and name change became effective on May 21, 2020. The Company filed a certificate of formation of CarrierEQ, LLC (the “Certificate of Formation”) on May 21, 2020.

 

On May 21, 2020, the Company was fully acquired by Via Varejo S.A, a corporation organized under the laws of the Federative Republic of Brazil (“Via Varejo”) through Lake Niassa Empreendimentos e Participações Ltda., a limited liability company duly organized under the laws of the Federative Republic of Brazil and wholly-owned by Via Varejo (see Note 11).

 

The Company has a 99.99% ownership interest in banQi Instituição de Pagamento Ltda (formerly known as Airfox Servicos E Intermediacoes LTDA) (“Airfox Brazil”), a limited liability company organized under the laws of the Federative Republic of Brazil, and a 100% ownership interest in AirToken GmbH, a Swiss GmbH. Airfox USA, Airfox Brazil and Airtoken GmbH are collectively referred to herein, as the “Company.” On April 6, 2020, Airtoken GmbH was dissolved.

 

Beginning in February 2017, the Company began exploring consumer applications of its legacy prepaid mobile applications. The Company initiated a business plan to introduce a mobile application that would allow users to earn digital tokens, exchange them for free or discounted mobile data and, ultimately, other goods and services in South America as part of a new international business and ecosystem (the “AirToken Project”). The AirToken Project included the issuance of digital tokens (“AirToken(s)”). The AirToken is an ERC-20 token issued on the Ethereum blockchain.

 

The Company obtained Ether and Bitcoin (collectively referred therein as the “Digital Assets”), in August 2017 through early October 2017 from those interested in obtaining AirTokens. The Company raised approximately $15.4 million for the purpose of developing the AirToken Project.

 

The Company’s business is evolving to focus on providing unbanked and financially underserved individuals in emerging markets mobile access to financial services. The Company is developing a software technology platform initially consisting of two applications, a digital wallet application and an alternative credit scoring and lending application. The Company’s software technology platform is designed and built as a Software as Service (or SaaS) offering. The Company expects to generate revenue from these applications from fixed recurring fees, transaction fees, third party fees and interest income. The Company’s initial markets are the cash and unbanked markets in Brazil.

 

The Company’s digital wallet application, branded as banQi, is a digital banking application capable of leveraging machine learning capabilities to build alternative, smartphone-based credit risk models. banQi available on Android and iOS, aims to eliminate the need for traditional financial institutions allowing those without bank accounts or credit cards to more easily and quickly make many everyday transactions using a smartphone. It will also enable the Company to create an alternative credit scoring system for its users for use in connection with the Company’s alternative credit scoring and lending application.

 

The alternative credit scoring and lending application is designed to be a blockchain-based, peer-to-peer lending application that will enable anyone from around the world to provide capital for a microloan to a diversified cohort of borrowers. This technology is expected to harness the decentralized power of the Ethereum blockchain to create a digital ledger of the user’s behavioral and transactional data to fund a new financial asset class from a global pool of lenders seeking to make socially impactful microloans.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

Note 2- Financial Condition and Management’s Plans

 

The Company has experienced recurring losses and negative cash flow from operations. At June 30, 2020, the Company had cash and cash equivalents of $1.9 million, a working capital of $1.5 million, and total member’s deficit of $19.0 million. The Company is obligated to refund the remaining amount of claims related to the AirToken Project when valid claims are finalized. As of June 30, 2020, the amount that was not paid was approximately $44 thousand (comprised of amounts recorded in AirToken refund liability and amounts in accounts payable). Additionally, the Company may be subject to other legal liabilities (see Note 17).

 

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. The Company believes that its ability to continue operations depends on its ability to generate revenues and obtain funding that will be sufficient to sustain its operations until it rolls out its core product offerings and achieve profitability and positive cash flows from operating activities.

 

The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results. The consolidated financial statements do not include any adjustments related to this uncertainty and as to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

 

The Company’s management has taken several actions in an effort to secure funding and generate revenue streams including:

 

1.

Entering into a Services Agreement and related convertible notes agreements with Via Varejo (See Note 11 to the consolidated financial statements) whereby the Company has received $10,000,000 by issuing convertible notes in connection with the Company’s software design and development services provided to Via Varejo. The Company has received $10,256,000 in cash and issued convertible notes totaling $10,000,000 which were converted into common stock on May 21, 2020 (See Note 11).

 

2.

Pursuing opportunities to enter into service agreements with insurance companies, travel companies, and other service companies, to use the Company platform as a source of distribution of their products.

 

3.

Entering into a Program Agreement on June 12, 2019 by and among (i) Airfox Brazil (ii) Via Varejo, and (iii) Mastercard Brasil, whereby on December 16, 2019 the Company received an incentive prepayment totaling R$65,000,000 (approximately $15,973,857 in December 2019) (See Note 5).

 

4.

Entering into a Loan Agreement with Via Varejo (the “Lender”) on October 31, 2019 whereby the Company borrowed R$10,000,000 (approximately $2.5 million USD) from Via Varejo. Principal plus interest is payable at the maturity date and matures 181 days from the date the Loan Agreement was executed. The loan was repaid in full on December 17, 2019 in the amount of R$10,167,740 (approximately $2.5 million USD).

 

In addition to the actions above, the Company is evaluating diversifying its revenue streams, raising additional capital, and considering other actions that may yield additional funding. Further, the Company’s management can implement expense reductions, as necessary. While the risks related to generating revenues or obtaining funding to continue operations have been significantly reduced since the Company transaction on May 21, 2020, the Company has no contractual right to funding from its parent company and there is no assurance that the Company will be successful in obtaining funding from other sources or in generating revenues sufficient to fund operations.

 

In the event the Company is unable to raise additional debt or equity financing, it may:

 

1.

have to cease operations, in which case the Company may file a petition for bankruptcy in U.S. Bankruptcy Court under Chapter 7, whereby a trustee will be appointed to sell off the Company’s assets, and the money will be used to pay off the Company’s debts in order of their priority. The priority of an AirToken holder seeking a refund claim should be equal to all of the Company’s other unsecured creditors; or

2.

file a petition for bankruptcy in U.S. Bankruptcy Court under Chapter 11 to restructure the Company’s debt, including the Company’s debt to AirToken holders seeking refund claims. The priority of an AirToken holder seeking a refund claim, should be equal to all of the Company’s other unsecured creditors. The Chapter 11 reorganization plan will spell out rights of AirToken holders seeking refund claims and what such investors can expect to receive, if anything, from the Company.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

COVID-19 Risks, Impacts and Uncertainties

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 Outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 Outbreak as a pandemic, based on the rapid increase in exposure globally. In Brazil, on March 20, 2020, the Governor of Sao Paulo declared a State of Public Calamity. On March 21, the Governor of Brazil’s financial hub also issued an order requiring that all no-essential business, including Via Varejo’s stores, close their physical workplaces and facilities to workers, customers and the public. On March 10, 2020 the Governor of Massachusetts declared a State of Emergency, and on March 23, 2020 the Governor issued an order requiring that all businesses and organizations that do not provide “COVID-19 Essential Services” close their physical workplaces and facilities to workers, customers and the public. The Governor’s order was extended to May 15, 2020. The Commonwealth’s “Reopening Massachusetts” process is underway, and as of July 6, 2020, the Commonwealth of Massachusetts entered into Phase III, Step 1 and the Company’s offices in Boston were opened on a limited basis subject to certain state mandated safety standards. While the Company expects the COVID-19 Outbreak to negatively impact its results of operations, cash flow and financial position, the related financial impact cannot be reasonably estimated at this time.

 

The Company is subject to the risks arising from the COVID-19 Outbreak’s social and economic impacts. The Company’s management believes that the social and economic impacts, which include but are not limited to the following, could have a significant impact on future financial condition, liquidity, and results of operations: i) the duration and scope of the pandemic; (ii) governmental, business and individual actions that have been and continue to be taken in response to the pandemic, including travel restrictions, quarantines, social distancing, work-from-home and shelter-in-place orders and shut-downs; (iii) the impact on U.S. and global economies and the timing and rate of economic recovery; (iv) potential adverse effects on the financial markets and access to capital; (v) potential goodwill or other impairment charges; (vi) increased cybersecurity risks as a result of pervasive remote working conditions; and (vii) the Company’s ability to effectively carry out its operations due to any adverse impacts on the health and safety of the Company’s employees and their families.

 

In response to the COVID-19 Outbreak, the Company’s employees have been required to work from home. The significant increase in remote working, particularly for an extended period of time, could exacerbate certain risks to the Company’s business, including an increased risk of cybersecurity events and improper dissemination of personal or confidential information. The Company does not believe these circumstances have, or will, materially adversely impact the Company’s internal controls or financial reporting systems.

 

Note 3 - Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated interim financial statements (“interim statements”) of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as determined by Financial Accounting Standards Board (the “FASB”) within its Accounting Standards Codification (“ASC”) and under the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these interim statements have been included. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year. These interim statements should be read in conjunction with the Company’s consolidated financial statements as of and for the year ended September 30, 2019.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

The Company has elected not to apply pushdown accounting to the accompanying standalone consolidated financial statements in accordance with ASC 805 “Business Combinations” (“ASC 805”).

 

The Company is an emerging growth company as the term is used in The Jumpstart Our Business Startups Act, enacted on April 5, 2012 and has elected to comply with certain reduced public company reporting requirements, however, the Company may adopt accounting standards based on the effective dates for public entities.

 

Principles of Consolidation

 

The accompanying consolidated financial statements includes the accounts of the Company and its majority-owned subsidiaries. All intercompany transactions have been eliminated in consolidation. The Company is not involved with variable interest entities.

 

The Company has a 99.99% controlling interest in banQi Instituição de Pagamento Ltda (formerly known as Airfox Servicos E Intermediacoes LTDA) and a 100% interest in AirToken GmbH; accordingly, the Company consolidates these entities and records non-controlling interests to reflect the economic interest of the non-controlling equity holders. On April 6, 2020, Airtoken GmbH was dissolved.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates. The most significant accounting estimates inherent in the preparation of the Company's financial statements includes the fair values of AirTokens and Digital Assets, estimated lives of intangible assets, intangible asset impairment, revenue recognition (including the estimated development period for completing the AirToken Project), stock-based compensation and deferred tax valuation allowance.

 

Foreign Currency

 

The Company has operations in Brazil where the local currency is used to prepare the financial statements which are translated into the Company’s reporting currency, U.S. dollars. The local currency is the functional currency for the operations outside the United States. Changes in the exchange rates between this currency and the Company’s reporting currency, are partially responsible for some of the periodic changes in the consolidated financial statements. Assets and liabilities of the Company’s foreign operations are translated into U.S. dollars at the spot rate in effect at the applicable reporting date. Revenues and expenses of the Company’s foreign operations are translated at the average exchange rate during the applicable period. The resulting unrealized cumulative translation adjustment is recorded as a component of accumulated other comprehensive income (loss) in stockholders’ deficit. Realized and unrealized transaction gains and losses generated by transactions denominated in a currency different from the functional currency of the applicable entity are recorded in other income (loss) in the period in which they occur.

 

Revenue Recognition

 

The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of this standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

 

ASC 606 prescribes a 5-step process to achieve its core principle:

 

	Step 1:	Identify the contract with the customer
	Step 2:	Identify the performance obligations in the contract
	Step 3:	Determine the transaction price
	Step 4:	Allocate the transaction price to the performance obligations in the contract
	Step 5:	Recognize revenue when the Company satisfies a performance obligation

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

Display Advertising Services

 

The Company’s revenue historically was derived from display advertising services and totaled $0 and $1,393 for the three months ended June 30, 2020 and 2019, respectively, and $0 and $1,641 for the nine months ended June 30, 2020 and 2019, respectively. The Company historically engaged in a business line known as Airfox Wireless related to technology that the Company developed that generates display advertising revenue for U.S. advertising networks. Pursuant to the Airfox Wireless model, the Company partnered with U.S. mobile telecommunications companies to have advertisers display advertisements on the lock screens of mobile devices and paid its partners a share of the ad revenue generated. The Company recognizes revenue, net of amounts retained by the third-party partners, pursuant to revenue sharing agreements. The form of the agreements was such that the Company provided services in exchange for a fee. The Company recognizes only the fee for providing its services as it has no latitude in establishing prices with third party advertisers.

 

In January 2019, the Company decided to no longer pursue the display advertising services as a core part of the business plan as the revenue did not represent a significant portion of the Company operations. The Company expects to receive minimal residual income from existing arrangements related to the display advertising services. Additionally, the Company discontinued the AirFox Wireless business line earlier in 2019 so that it can focus on the development of other products.

 

AirToken Project Development Services (Non ASC 606 Revenue)

 

The Company determined that its token issuances represent obligations to perform software development services and accounts for the proceeds received in the token issuances in accordance with ASC 730-20, Research and Development – Research and Development Arrangements (“ASC 730-20”). At the time of, and in conjunction with the token issuances, the Company’s obligation was to develop a live, operational, de-centralized network with token functionality including, at a minimum, features including a digital wallet, credit scoring and peer-to-peer networking (collectively, the “AirToken Project”). Due to the significant hurdles in developing the AirToken Project, technological feasibility had not been established at the time of the token issuances and, therefore, all of the Company’s development costs were expensed.

 

The Company, beginning in August 2017 through early October 2017, obtained Ether and Bitcoin totaling approximately $15.3 million (and cash of $0.1 million) towards the development of the AirToken Project. Pursuant to the terms of the AirTokens, there is no form of partnership, joint venture, agency or any similar relationship between a holder of an AirToken and the Company and/or other individuals or entities involved with the AirToken Project. AirTokens are non-refundable and do not pay interest and have no maturity date. AirTokens confer only the right to services in the AirToken Project and confer no other rights of any form with respect to the Company, including, but not limited to, any voting, distribution, redemption, liquidation, proprietary (including all forms of intellectual property), or other financial or legal rights. Subsequent to the distribution of AirTokens to those parties who contributed towards the funding of the AirToken Project, no AirTokens were sold by the Company.

 

Pursuant to the Settlement Agreement (as defined and described further in Note 17), the Company is obligated to refund amounts raised for the purpose of developing the AirToken Project if valid claims are submitted and may incur other fines and penalties. As of June 30, 2020, the amount that was not paid was approximately $44 thousand (comprised of amounts recorded in AirToken refund liability and amounts in accounts payable).

 

On or before December 28, 2019, the Company paid all approved claims to approved claimants who returned their AirTokens to the Company (approximately 93.5% of the total dollar amount of all approved claim refunds). All amounts were refunded in cash and paid through the Company’s existing cash and cash equivalent reserves. The total claim amounts including interest, totaled $3,289,607 on December 28, 2019. Certain approved claimants did not return their AirTokens to the Company. The Company did not pay approved claims to approved claimants who did not return their AirTokens to the Company. As of June 30, 2020, the amount that was not paid was approximately $44 thousand (comprised of amounts recorded in AirToken refund liability and amounts in accounts payable). All unpaid approved claims are expected to be paid during the 2020 fiscal year upon return to the Company of approved claimants’ AirTokens. Refer to Note 17 for further information on the rescission offer.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

The Company will recognize the remaining proceeds of $12.5 million over the remaining estimated development period of the AirToken Project until its completion. Currently, the Company is not able to estimate a date to conclude the development of the AirToken Project due to regulatory matters that affect the continuity of the development process. Due to this reason, the AirToken Project is currently on hold and no revenue has been recognized from the AirToken Project.

 

Mastercard Revenue and Sale Incentives

 

On December 16, 2019, Airfox Brazil, received R$65,000,000 (approximately U.S. $15,973,857 in December 2019) from Mastercard Brasil Soluções de Pagamento Digital Ltda. (“Mastercard Brasil) pursuant to a Strategic Alliance and Incentive Program Agreement (the “Program Agreement”) entered into between Airfox Brazil, Mastercard Brasil and Via Varejo S.A. (“Via Varejo”) on June 12, 2019 (See Note 5).

 

Pursuant to the Program Agreement, Airfox Brazil, as a licensee of MasterCard International, Inc. and a business partner of Mastercard Brasil, entered into the Incentive Program (as defined in the Program Agreement) in order to issue, expand and boost the prepaid card (“Airfox Card”) base of Airfox Brazil as well as the number of transactions and turnover (sales revenue) generated by MasterCard Cards.

 

As a Mastercard prepaid card issuer, Airfox Brazil will be entitled to receive Sales Revenue Incentives pursuant to the Program Agreement. As a result, the Sales Revenue Incentives will be used to amortize the Sales Revenue Incentive Prepayment received on December 11, 2019. Upon complete amortization of Incentive Prepayment, Mastercard will make quarterly payments of the Sales Revenue Incentive, calculated according to the value of transactions completed with the prepaid cards issued by the Airfox Brazil. Airfox Brazil will have no minimum commitment of transaction volumes to be completed with the prepaid cards.

 

The Company will recognize the revenue as earned on a monthly basis, based on a fixed percentage of the total dollar value of card transactions completed during the month in accordance with the terms in the agreement. The Company has identified one performance obligation that meets the series provision and recognizes revenue over time. The Company Sales incentives totaling $429 and $794 have been earned for the three and nine months ended June 30, 2020, respectively, and meets the guidance to be classified as a series.

 

In connection to the Program Agreement, the Company also entered into an agreement with Mastercard, an Interchange Manual (“Interchange Fee Agreement”) from Mastercard dated June 18, 2019, which details the fees paid by a merchant’s bank to Airfox Brazil to compensate for the value and benefits that merchant receives when it accepts electronic payments.

 

The fee is a specified percentage of the total dollar amount of a card transaction, and a fixed percentage based on the type of card transaction (i.e. merchant type, national vs. international, etc.), based on the schedule of fees outlined in the Interchange Fee Agreement (“Interchange Fee Revenue”).

 

On a monthly basis, the Company earns revenue from the Interchange Fee received. The Company has identified one performance obligation that meets the series provision and recognizes revenue over time. Interchange Fee Revenue totaling $3,085 and $6,802 has been earned for the three and nine months ended June 30, 2020, respectively, and meets the guidance to be classified as a series.

 

Via Varejo Services Agreement Revenue

 

The Company entered into a Services Agreement (the “Services Agreement”) as of September 11, 2018 (“the Agreement Effective Date”) with Via Varejo (the “Client”).

 

The Company has been engaged to design and develop a mobile software module and application programming interface that will provide the Client’s customers with access to certain mobile payment functionality, and that integrates banQi (“VV Wallet Services”). The Company will provide certain services, including hosting, maintenance and operation of banQi. The VV Wallet Services are structured into four phases. The Phases are - Phase 1: Specifications and Customization; Phase 2: Features; Phase 3: License and Maintenance Services and Phase 4: Rollout.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

The development of the VV Wallet Services is considered a bundled performance obligation that includes the development of the API and software as a service which is hosted on the Company’s servers. In addition to the software as a service performance obligation, the Company will provide support services for the software as a service. The Client is considered to simultaneously receive and consume the benefits provided by the Company’s performance as the Company performs the services. Accordingly, the revenue from Service Charges will be recognized over time based on the number of transactions made by Client customers with banQi. As of the date of the financial statements no revenue has been received or recognized. Revenue will not be recognized until banQi is utilized by the Client customers.

 

During Phase 1, there was a payment of $256,000 (“Upfront Payment”) from the Client to be recognized as revenue commencing when the product was ready for its intended use and ratably over the remaining term of the Services Agreement through the duration of the Services Agreement. The total revenue recognized for the three and nine months ended June 30, 2020 totaled $12,104 and $24,903, respectively.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks and money market instruments.

 

Restricted Cash

 

Restricted cash consists of the money received by AirFox Brazil related to the Mastercard Program Agreement. Airfox Brazil cannot use any Incentives (as defined in the Program Agreement) for the benefit of any product of any Mastercard competitor and/or any card brand other than the Mastercard Network. (Note 5).

 

Short-Term Investments

 

Short-term investments are investments which have a maturity at the date of purchase of three months to five years. Short-term investments consist of a Certificate of Deposit due to mature January 1, 2020 with Santander Bank located in the Cayman Islands. This short-term investment was renewed on January 22, 2020 and matured on May 21, 2020.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness; and determines the allowance for doubtful accounts based on historical write-off experience, customer specific facts and economic conditions.

 

Concentrations of Credit Risk and Off-Balance Sheet Risk

 

The Company is subject to concentration of credit risk with respect to their cash and cash equivalents, which the Company attempts to minimize by maintaining cash, cash equivalents, and restricted cash with institutions of sound financial quality. At times, cash balances may exceed limits federally insured by the Federal Deposit Insurance Corporation. At June 30, 2020, Airfox Brazil held cash, cash equivalents, and restricted cash totaling $1,365,616 in Brazilian financial institutions. The Company had cash, cash equivalents, and restricted cash, including amounts held in financial institutions in the USA and Brazil that totaled $2,746,009.

 

The Company believes it is not exposed to significant credit risk due to the financial strength of the depository institutions in which the funds are held. The Company has no financial instruments with off-balance sheet risk of loss.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

Long-Lived Assets, Including Definite Intangible Assets

 

Long-lived assets and other indefinite-lived intangibles are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. The Company’s definite-lived intangible assets primarily consist of various domain names and websites. For long-lived assets used in operations, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. The Company measures the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value.

 

Security Deposits

 

As of June 30, 2020, security deposits primarily include monies being held subject to a security agreement (“Security Agreement”) with Mastercard, Inc. executed on June 7, 2019. The Security Agreement is related to the Services Agreement (See Note 11) to ensure a minimum number of users for the cards, as this is a major phase in the Company’s development process. On April 22, 2020 Mastercard returned $1.2 million plus interest in cash deposit to the Company. Upon Mastercard issuing the minimum number of cards to users, the $300,000 will be paid back to the Company in full. The Company has classified this amount as non-current assets as these funds are not highly liquid and cannot be easily converted into cash.

 

Software Development Costs

 

The Company capitalizes costs related to software developed or obtained for internal use in accordance with the ASC 350-40, Internal-Use Software (“ASC 350-40”). The following illustrates the various stages and related processes of computer software development in accordance with ASC 350-40:

 

●

Preliminary project stage: (a) conceptual formulation of alternatives; (b) evaluation of alternatives; (c) determination of existence of needed technology; and (d) final selection of alternatives. Internal and external costs incurred during the preliminary project stage are expensed as incurred.

●

Application development stage: (a) design of chosen path, including software configuration and software interfaces; (b) coding; (c) installation to hardware; and (d) testing, including parallel processing phase. Internal and external costs incurred to develop internal-use computer software during the application development stage are capitalized.

●

Post-implementation-operation stage: (a) training; and (b) application maintenance. Internal and external costs incurred during the post-implementation-operation stage are expensed as incurred.

 

Certain costs incurred are considered enhancements, modifications to existing internal-use software that result in additional functionality. Enhancements normally require new software specifications and may also require a change to all or part of the existing software specifications. When this additional functionality is determinable, the related costs are capitalized. Otherwise, costs are expensed as incurred. Capitalization of internal-use software costs ceases when a computer software project is substantially complete and ready for its intended use. The Company begins amortization when the product is available for general release or use.

 

The Company has capitalized software costs relating to the Via Varejo Services Agreement (see Note 11) and began amortization on January 1, 2020 as the product is now ready for its intended use and will be amortized through the contract term in September 2023. The amortization expense related to the Via Varejo Services Agreement capitalized software for the three and nine months ended June 30, 2020 totaled $234,159 and $468,318, respectively.

 

The Company capitalizes costs related to the development and maintenance of its website in accordance with ASC 350-50, Website Development Costs. Accordingly, costs expensed as incurred include planning the website, developing the applications and infrastructure until technological feasibility is established, developing graphics such as borders, background and text colors, fonts, frames and buttons, and operating the site such as training administration and maintenance.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

Capitalizing Software Costs in Connection with Hosting Arrangements and Software as a Service Arrangements

 

The Company develops certain software that is considered to be part of a cloud computing arrangement (or hosting arrangement), whereby, a user or a customer of software does not take possession of the Company’s software; rather, the software is accessed on an as-needed basis over the Internet.

 

Therefore, when the software is used to produce a product or in a process to provide a service to a customer, and the customer is not given the right to obtain or use the software, the related costs are accounted for in accordance with ASC 350-40. When a hosting arrangement includes multiple modules or components, capitalized costs are amortized on a module-by-module basis. When a module or component is substantially ready for its intended use, amortization begins, regardless of whether the overall hosting arrangement is being placed in service in planned stages. If the module’s functionality is entirely dependent on the completion of one or more other modules, then amortization does not begin until that group of interdependent modules is substantially ready for use.

 

Impairment of Long-term Assets

 

The Company evaluates the recoverability of tangible and intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.

 

Leases

 

The Company categorizes leases at their inception as either operating or finance leases based on the criteria in ASC 842, Leases. The Company adopted ASC 842 on October 1, 2019, using the modified retrospective approach, and has established a Right-of-Use (“ROU”) Asset and a current and non-current Lease Liability for each lease arrangement identified. The lease liability is recorded at the present value of future lease payments discounted using the discount rate that approximates the Company’s incremental borrowing rate for the lease established at the commencement date, and the ROU asset is measured as the lease liability plus any initial direct costs, less any lease incentives received before commencement. The Company recognizes a single lease cost, so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis.

 

Advertising

 

Advertising costs are expensed as incurred and included in selling, general and administrative expenses and amounted to $179,205 and $75,004 for the three months ended June 30, 2020 and 2019, and $562,200 and $93,536 for the nine months ended June 30, 2020 and 2019, respectively.

 

Income Taxes

 

Income taxes are recorded in accordance with ASC 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

 

The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. The Company recognizes any interest and penalties accrued related to unrecognized tax benefits as income tax expense.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

Deferred gain on issuance of AirTokens for services

 

AirTokens issued to vendors for services in connection with raising monies for the purpose of developing the AirToken Project are accounted for in accordance with ASC 845-30-1, Nonmonetary Transactions, which requires that the AirTokens to be recognized at fair value, and resulted in recognizing a deferred gain of approximately $1.7 million in October 2017. The fair value of the AirTokens issued was based on the last price paid ($0.02) by initial investors in acquiring AirTokens towards the development of the AirToken Project (representing a Level 3 non-recurring measurement). The deferred gain will be recognized on a straight-line basis over the estimated development period of the AirToken Project as this represents the best depiction of the measure of progress towards the development of the AirToken Project. The Company will recognize the gain in Other Income beginning October 2017 through the estimated development period of the AirToken Project. Currently, the Company is not able to estimate a date to conclude the development of the AirToken Project due to regulatory matters that affect the continuity of the development process. Due to this reason, the AirToken Project is currently on hold and recognition of deferred gains ceased on September30, 2019. Refer to Note 17 for further information on the rescission offer.

 

Distinguishing Liabilities from Equity

 

The Company relies on the guidance provided by ASC 480, Distinguishing Liabilities from Equity, to classify certain redeemable and/or convertible instruments. The Company first determines whether a financial instrument should be classified as a liability. The Company will determine the liability classification if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional obligation that the Company must or may settle by issuing a variable number of its equity shares.

 

Once the Company determines that a financial instrument should not be classified as a liability, the Company determines whether the financial instrument should be presented between the liability section and the equity section of the balance sheet. The Company will determine temporary equity classification if the redemption of the financial instrument is outside the control of the Company (i.e., at the option of the holder). Otherwise, the Company accounts for the financial instrument as permanent equity.

 

The Company records its financial instruments classified as liability, temporary equity or permanent equity at issuance at the fair value, or cash received.

 

The Company records its financial instruments classified as liabilities at their fair value at each subsequent measurement date. The changes in fair value of these financial instruments are recorded as other expense/income.

 

Hedging

 

The Company does not use derivative instruments to hedge exposures to cash flows, market or foreign currency risks. The Company evaluates its financial instruments, including equity-linked financial instruments, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives.

 

Stock-based Compensation

 

The Company accounts for stock-based compensation to employees and non-employees in conformity with the provisions of ASC 718, Compensation - Stock Based Compensation. The Company expenses stock-based compensation to employees and non-employees over the requisite service period based on the estimated grant-date fair value of the awards. The Company accounts for forfeitures as they occur. Stock-based awards are recognized on a straight-line basis over the requisite service period. For stock-based employee compensation, cost recognized at any date will be at least equal to the amount attributable to share-based compensation that is vested at that date. The Company estimates the fair value of stock option grants using the Black-Scholes option-pricing model and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.

 

Common shares issued to third parties for services provided are valued based on the estimated fair value of the Company’s common shares.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

All stock-based compensation costs are recorded in selling, general and administrative expenses in the condensed consolidated statements of operations. All stock-based compensation awards were cancelled as pursuant to the Transaction which occurred on May 21, 2020 (see Note 11).

 

Fair Value Measurement

 

The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable and short and long-term debt. The fair values of cash and cash equivalents, accounts receivable, and accounts payable approximate their stated amounts because of the short maturity of these financial instruments. The Company believes the carrying amount of their simple agreement for future equity approximate fair value based on rates and other terms currently available to the Company for similar debt instruments.

 

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 under ASC 820 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.

 

Adoption of Recent Accounting Pronouncements

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. The amendments in this Update require that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update do not provide a definition of restricted cash or restricted cash equivalents. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.

 

In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02 (“ASU 2016-02”), which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Targeted Improvements; and ASU No. 2018-20, Narrow-Scope Improvements for Lessors. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

 

The Company adopted ASU 2016-02 effective October 1, 2019 using the modified retrospective approach whereby the Company will continue to present prior period financial statements and disclosures under ASC 840. In addition, the Company elected the transition package of three practical expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification and initial direct costs. Further, the Company adopted a short-term lease exception policy, permitting the Company to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets.

 

Adoption of the new standard resulted in the recording of right-of-use assets and lease liabilities related to the Company’s operating leases, totaling $2.3 and $2.4 million, respectively, recorded on the Company’s consolidated balance sheet as of October 1, 2019. The standard did not materially affect the Company's consolidated net earnings or cash flows.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

Recent Accounting Pronouncements

 

The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company's financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated financial statements and assures that there are proper controls in place to ascertain that the Company's consolidated financial statements properly reflect the change.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, that changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for losses. In addition, an entity will have to disclose significantly more information about allowances and credit quality indicators. The new standard is effective for the Company for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements and intends to adopt the standard on October 1, 2023.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles, Goodwill and Other (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (“ASU 2018-15”), which requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance in ASC 350-40. The new standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting the new standard.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends disclosure requirements on fair value measurements in Topic 820. This amendment modifies the valuation process of fair value measurements by removing the disclosure requirements for the valuation processes for Level 3 fair value measurements, clarifying the timing of the measurement uncertainty disclosure, and including the changes in unrealized gains and losses for recurring Level 3 fair value measurements in other comprehensive income if held at the end of the reporting period. It also allows the disclosure of other quantitative information in lieu of the weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 and should be applied prospectively for the most recent period presented in the initial fiscal year of adoption. The Company is currently evaluating the impact that this guidance will have on the Company’s results of operations, financial position and cash flows.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which modifies ASC 740 to reduce complexity while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 2019-12 is effective for the Company for interim and annual reporting periods beginning after December 15, 2021. The Company is currently assessing the impact of ASU 2019-12, but it is not expected to have a material impact on the Company’s consolidated financial statement.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

Note 4 – Restatement of Previously Issued Financial Statements

 

The Company has restated its condensed consolidated interim financial statements for June 30, 2020 that were originally presented in a Form 10-Q filed on August 14, 2020. The nature and impact of these adjustments are described below and detailed in the tables below.

 

The Company identified an error in the presentation of the recognized revenue associated with the AirToken Project. The management reviewed the methodology used to estimate the March 2022 completion date for the AirToken project, which, commencing on October 1, 2019, is the date used to calculate the amount of deferred revenue from the Initial Coin Offering ("ICO Revenue") to be recognized as revenue in the Company's financial statements and is also the date used to calculate the amount of deferred gain on AirTokens issued for services ("AirToken Gains") to be recognized as other income in the Company's financial statements. The AirToken project involves various milestones that can be difficult to forecast. Over time, the achievement of some milestones were determined to be much more difficult than originally projected. Upon the review of the methodology used to estimate the March 2022 completion date, the Company realized that the methodology should have been weighted more heavily on the fact that the completion date is highly dependent on the future rules and approvals from regulatory authorities, such as the Securities and Exchange Commission ("SEC"). These issues are out of the Company's control and thus it is very difficult to estimate when/if these issues might be resolved. These regulatory and license concerns are hindering the Company from further developing the Airtoken project and launching it to the public. Although the Company has advanced in many fronts toward the development of the Airtoken project, there are also business obstacles regarding scaling the loan product and making it profitable with the Company's own capital first before opening it to additional third party lenders. Due to the situation aforementioned, the Company is analyzing the future of the Airtoken project, as its continuity is deeply dependent of the milestones that are completely out of the Company’s control. Once, the regulatory and business obstacles can be overcome, then the Company will be able to decide whether to resume further development of the Airtoken project, since overcoming these hurdles is a prerequisite before spending time on the actual blockchain components and launching a “decentralized lending market-place”.

 

Based upon the factors mentioned above, the Company reevaluated the methodology used to arrive at an estimated March 2022 completion date for the AirToken project was faulty and that since the completion date is highly dependent on milestones that are out of the Company's control, the Company is not able to accurately estimate an accurate completion date and thus, should have ceased recognizing any ICO Revenue and AirToken Gains starting on October 1, 2019. Based on Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 250, Accounting Changes and Error Corrections, the Company deemed this issue to be a correction of an error, resulting in the overstatement of revenue of $1.1 million and other income of $ 39.7 thousand for the three months ended June 30, 2020 and in the overstatement of revenue of $3.6 million and other income of $ 119.0 thousand for the nine months ended June 30, 2020. It also resulted in an understatement of deferred revenue of $3.8 million and deferred gain of $119.0 thousand for the period ended June 30, 2020.

 

The effects of these errors on the Company’s previously reported balance sheet are as follows:

 

		June 30, 2020 (unaudited)
		As reported				Adjustments				As restated
Total assets		$	10,158,760			$	—			$	10,158,760
Current liabilities:
Deferred revenue - AirToken Project, current portion			5,011,926				(5,011,926	)			—
Deferred gain on issuance of AirTokens for services, current portion			158,713				(158,713	)			—
Total Current Liabilities			7,517,837				(5,170,639	)			2,347,198
Long-term liabilities:
Deferred revenue - AirToken Project, net of current portion			3,758,955				8,770,869				12,529,824
Deferred gain on issuance of AirTokens for services, net of current portion			119,043				277,747				396,790
Total liabilities			25,302,907				3,877,977				29,180,884
Stockholders' deficit:
Accumulated deficit			(16,372,712	)			(3,877,976	)			(20,250,668	)
Total member's deficit attributable to Carrier EQ, LLC members			(15,143,435	)			(3,877,976	)			(19,021,411	)
Total member's deficit			(15,144,147	)			(3,877,977	)			(19,022,124	)
Total liabilities and stockholders' deficit		$	10,158,760			$	—			$	10,158,760

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

The effects of these errors on the Company’s previously reported three and nine months ended June 30, 2020 statements of operations and comprehensive loss are as follows:

 

		Three months ended												Nine months ended
		June 30, 2020 (unaudited)												June 30, 2020 (unaudited)
		As reported				Adjustments				As restated				As reported				Adjustments				As restated
Revenue		$	1,172,718				(1,138,142	)		$	34,576			$	3,702,510				(3,644,103	)		$	58,407
Cost of revenue		$	—				(114,839	)		$	(114,839	)		$	—				(114,839	)		$	(114,839	)
Other income:
Gain on AirToken issuance for services		$	39,678				(39,678	)		$	—			$	119,034				(119,034	)		$	—
Net Loss		$	(4,829,920	)			(1,292,659	)		$	(6,122,579	)		$	(12,889,479	)			(3,877,976	)		$	(16,767,455	)
Comprehensive net loss		$	(4,709,319	)			(1,292,659	)		$	(6,001,978	)		$	(11,770,104	)			(3,877,976	)		$	(15,648,080	)

 

The effects of these errors on the Company’s previously reported nine months ended June 30, 2020 statement of cash flows as follows:

 

		Nine Months Ended June 30, 2020 (unaudited)
		As reported				Adjustments				As restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(12,889,479	)			(3,877,976	)		$	(16,767,455	)
Gain on issuance of AirTokes for services			(119,034	)			119,034				—
Deferred revenue - AirToken Project			(3,758,943	)			3,758,942				(1	)
Net cash used in operating activities		$	(1,686,446	)		$	—			$	(1,686,446	)

 

Note 5 – Mastercard Program Agreement

 

On December 16, 2019, Airfox Brazil, received R$65,000,000 (approximately U.S. $15,973,857 in December 2019) from Mastercard Brasil pursuant to the “Program Agreement entered into between Airfox Brazil, Mastercard Brasil and Via Varejo Via Varejo on June 12, 2019.

 

Pursuant to the Program Agreement, Airfox Brazil, as a licensee of MasterCard International, Inc. and a business partner of Mastercard Brasil, entered into the Incentive Program (as defined in the Program Agreement) in order to issue, expand and boost the prepaid card (“Airfox Card”) base of Airfox Brazil as well as the number of transactions and turnover (sales revenue) generated by MasterCard Cards. The Program Incentives monies (as defined in the Program Agreement) cannot be used for the benefit of any product of any Mastercard competitor and/or any card brand other than the Mastercard Network. As an incentive to support the launching of Airfox Card, on December 16, 2019 Mastercard Brasil made to Airfox Brazil the incentive prepayment per sales revenue ("Sales Revenue Incentive Prepayment") totaling R$65,000,000.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

As a Mastercard prepaid card issuer, Airfox Brazil will be entitled to receive Sales Revenue Incentive pursuant to the Program Agreement. As a result, the Sales Revenue Incentive will be used to amortize the Sales Revenue Incentive Prepayment received on December 11, 2019. Upon complete amortization of Incentive Prepayment, Mastercard will make quarterly payments of the Sales Revenue Incentive, calculated according to the value of transactions completed with the prepaid cards issued by the Airfox Brazil. Airfox Brazil will have no minimum commitment of transaction volumes to be completed with the prepaid cards.

 

The Sales Revenue Incentive Prepayment constitutes the creation of a direct financial obligation on Airfox Brazil since it constitutes prepaid sales revenue from Mastercard Brasil to Airfox Brazil. Via Varejo has agreed to act as a guarantor of Airfox Brazil’s Sales Revenue Incentive Prepayment obligations to Mastercard Brasil pursuant to the Program Agreement and a Guaranty Letter.

 

The Program Agreement has a term of ten years, unless earlier terminated by either party in accordance with specific provisions of the Program Agreement.

 

The Company will recognize the revenue as earned on a monthly basis, based on a fixed percentage of the total dollar value of card transactions completed during the month in accordance with the terms in the agreement. The Company has identified one performance obligation that meets the series provision and recognizes revenue over time. The Company Sales incentives totaling $429 and $794 have been earned for the three and nine months ended June 30, 2020, respectively, and meets the guidance to be classified as a series.

 

Note 6 - Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consisted of the following:

 

		June 30, 2020				September 30, 2019
Service contract		$	349,000			$	349,000
R&D tax credit			418,760				288,187
Prepaid expenses			242,527				182,171
Total Prepaid expenses and other current assets		$	1,010,287			$	819,358

 

Note 7 - Digital Assets

 

Digital Assets held by the Company consist of Ether and Bitcoin and are included in current assets in the consolidated balance sheets. Due to the lack of authoritative GAAP guidance, the Company has determined its Digital Assets to be akin to intangible assets and are accounted in such manner. As intangible assets, Digital Assets are initially measured at cost. Since there is no limit on the useful life of the Company’s Ether and Bitcoin, they are classified as indefinite-lived intangible assets.

 

Indefinite-lived intangible assets are not subject to amortization. Instead they are tested for impairment on an annual basis and more frequently if events or circumstances change that indicate that it’s more likely than not that the asset is impaired. As a result of the aforementioned, the Company will only recognize decreases in the value of its Ether and Bitcoin, and any increase in value will be recognized upon disposition. Ether and Bitcoin are traded on exchanges in which there are observable prices in an active market, the Company views a decline in the quoted price below the cost to be an impairment indicator. The quoted price and observable prices, for Ether and Bitcoin, are determined by the Company using a principal market analysis in accordance with ASC 820, Fair Value Measurement.

 

When the Company evaluates its Ether and Bitcoin for impairment under ASC 350, Intangible – Goodwill and Other, each acquisition of Ether and Bitcoin is considered a separate unit of account. The Company tracks the cost of each unit of Ether and Bitcoin when received or purchased, when performing impairment testing and upon disposition either through sale or exchanged for goods or services. Realized gain (loss) on sale of Digital Assets is included in other income (expense) in the consolidated statements of operations, while impairment of Digital Assets is included in operating expenses because of the nature of the assets.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

Changes in Digital Assets during the nine months ended June 30, 2020 was as follows:

 

		Ether				Bitcoin				Total
Balance at September 30, 2019		$	1,392			$	—			$	1,392
Realized loss on the sale of digital assets			(1,392	)			—				(1,392	)
Balance at June 30, 2020		$	—			$	—			$	—

 

Note 8 - Intangible Assets, Net

 

The following table summarizes the Company’s definitive-lived intangible assets:

 

		June 30, 2020
		Estimated Useful Life (Years)				Gross Carrying Amount				Additions				Accumulated Amortization				Net Carrying Value
Domain names			3			$	140,012			$	—			$	(86,545	)		$	53,467
Capitalized software costs towards VV wallet			3				1,500,058				2,658,813				(468,318	)			3,690,553
Website			3				272,083				10,562				(167,236	)			115,409
Software			3				17,486				13,143				(4,179	)			26,450
						$	1,929,639			$	2,682,518			$	(726,278	)		$	3,885,879

 

		September 30, 2019
		Estimated Useful Life (Years)				Gross Carrying Amount				Additions				Accumulated Amortization				Net Carrying Value
Domain names			3			$	86,540			$	53,472			$	(51,542	)		$	88,470
Capitalized software costs towards VV wallet			3				—				1,500,058				—				1,500,058
Website			3				120,333				151,750				(104,202	)			167,881
Software			3				—				17,486				(583	)			16,903
						$	206,873			$	1,722,766			$	(156,327	)		$	1,773,312

 

The Company uses the straight-line method to determine the amortization expense for its definite-lived intangible assets. The amortization expense related to the definite-lived intangible assets was $266,329 and $569,951 for the three and nine months ended June 30, 2020, and $31,567 and $86,090 for the three and nine months ended June 30, 2019, respectively.

 

Note 9 - Accrued liabilities

 

Accrued liabilities consisted of the following: 

 

		June 30, 2020				September 30, 2019
Other accrued liabilities		$	402,987			$	562,840
Customer deposits			557,106				193,267
Accrued compensation			334,945				167,760
Accrued taxes			262,773				—
Legal and professional			151,065				97,957
Software and website development			—				363,271
Total accrued liabilities		$	1,708,876			$	1,385,095

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

Note 10 – Debt

 

Note Payable – Paycheck Protection Program Loan

 

On April 21, 2020, the Company  received $537,732 in loan funding from the Paycheck Protection Program (the “PPP”), established pursuant to the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and administered by the U.S. Small Business Administration (“SBA”). The unsecured loan (the “PPP Loan”) is evidenced by a promissory note of the Company dated April 21, 2020 (the “Note”) in the principal amount of $537,732, to Silicon Valley Bank (the “Bank”), the lender.

 

Under the terms of the Note and the PPP Loan, interest accrues on the outstanding principal at the rate of 1.0% per annum. The term of the Note is two years, though it may be payable sooner in connection with an event of default under the Note. To the extent the loan amount is not forgiven under the PPP, the Company is obligated to make equal monthly payments of principal and interest, beginning seven months from the date of the Note, until the maturity date.

 

The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, the Company may apply for and be granted forgiveness for all or part of the PPP Loan. The amount of loan proceeds eligible for forgiveness is based on a formula that takes into account a number of factors, including the amount of loan proceeds used by the Company during the eight-week period after the loan origination for certain purposes including payroll costs, rent payments on certain leases, and certain qualified utility payments, provided that at least 75% of the loan amount is used for eligible payroll costs; the employer maintaining or rehiring employees and maintaining salaries at certain levels; and other factors. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible costs during the covered eight-week period will qualify for forgiveness. The Company intends to use the entire Loan amount for qualifying expense, though no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part.

 

The Note may be prepaid in part or in full, at any time, without penalty. The Note provides for certain customary events of default, including, but not limited to, failing to make a payment when due under the Note, failure to do anything required by the Note, the Company defaulting under certain agreements in favor of any third party, making false statements, the Company’s insolvency, and the commencement of creditor or forfeiture proceedings against the Company. Upon the occurrence of an event of default, the Bank has customary remedies and may, among other things, require immediate payment of all amounts owed under the Note, collect all amounts owing from the Company, and file suit and obtain judgment against the Company.

 

On May 21, 2020, the PPP loan of $537,732 plus interest of $433 was paid back in full by the Company.

 

Note 11 – Via Varejo Services Agreement and Convertible Notes

 

Services Agreement

 

The Company entered into a Services Agreement (the “Services Agreement”) as of September 11, 2018 (“the Agreement Effective Date”) with Via Varejo S.A., a corporation organized under the laws of the Federative Republic of Brazil (the “Client”) and those stockholders of the Company that have signed the Call Option Agreement (defined below) as well as any stockholder of the Company who signs a joinder to the Services Agreement after September 11, 2018 (the “Stockholders”). Concurrently, the Client and the Company entered into a convertible note purchase and call option agreement (the “Call Option Agreement”). The Client has the irrevocable option to acquire shares of the Company’s capital stock owned by certain stockholders and convert notes issued, in connection with the Call Option Agreement, into shares of the Company’s capital stock representing, in the aggregate, up to eighty percent (80%) of the Company’s common stock (the “Call Option”). The Company may issue up to $10,000,000 in convertible notes for cash dependent on the completion of designated phases outlined in the Services Agreement.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

The Client has engaged the Company to design and develop a mobile software module and application programming interface that will provide Client customers with access to certain mobile payment functionality, and that integrates banQi (“VV Wallet Services”). In conjunction with the Services Agreement, the Company will provide certain services, including hosting, maintenance and operation of banQi (the “VV Ongoing Services”). The VV Wallet Services are structured into four phases. The Phases are - Phase 1: Specifications and Customization; Phase 2: Features; Phase 3: License and Maintenance Services and Phase 4: Rollout.

 

The Client will make the following payments to the Company related to the VV Wallet Services:

 

●

$256,000, non-refundable, to be paid within thirty days of the date of the Services Agreement. This payment was received on December 14, 2018, and the Company has recognized $12,104 and $24,903 of the revenue for the three and nine months ended June 30, 2020, respectively.

●

$2,500,000, to be paid upon completion of Phase 1, in exchange for a convertible note in the same amount to be issued by the Company. This payment was received on February 14, 2019 and the Company issued a Convertible Note (defined below).

●

$3,500,000, to be paid upon completion of Phase 2, in exchange for a convertible note in the same amount to be issued by the Company. This payment was received on June 10, 2019 and the Company issued a convertible note.

●

$4,000,000, to be paid upon completion, as defined, of Phase 3, in exchange for a convertible note in the same amount to be issued by the Company. This payment was received on September 6, 2019 and the Company issued a convertible note.

 

On May 21, 2020, convertible notes in the aggregate principal amount of $10,000,000 were converted into 13,339,510 shares of the Company’s Common Stock in connection with the Call Exercise Notice received from the Client. The common stock was subsequently cancelled.

 

In consideration for the VV Ongoing Services rendered by the Company, the Client will pay the Company amounts monthly for the services outlined in the Services Agreement (the “Service Charges”).

 

The development of the VV Wallet Services is considered a bundled performance obligation that includes the development of the API and software as a service which is hosted on the Company’s servers. In addition to the software as a service performance obligation, the Company will provide support services for the software as a service. The Client is considered to simultaneously receive and consume the benefits provided by the Company’s performance as the Company performs the services. Accordingly, the revenue from Service Charges will be recognized over time based on the number of transactions made by Client customers with banQi. As of the date of the financial statements no revenue has been received or recognized. Revenue will not be recognized until banQi is utilized by the Client customers.

 

The Company has begun recognizing the upfront payment of $256,000 (“Upfront Payment”) on January 1, 2020 as revenue, ratably over the remaining term of the Services Agreement through the duration of the Services Agreement. The funding received in exchange for the convertible notes is not considered revenue but is a liability of the Company. The total revenue recognized for the three and nine months ended June 30, 2020 totaled $12,104 and $24,903, respectively.

 

All payments to the Company under the Services Agreement will be based in U.S. dollars except those in connection with the Service Charges, which will be in Brazilian Real.

 

This Services Agreement has a term of five years, unless earlier terminated by either the Client or the Company as set forth below:

 

i.

The Client may terminate the Services Agreement at its sole discretion upon written notice to the Company at any time prior to the completion of Phase 1;

ii.

In the event that the Company is not able to complete any of its deliverables for any phase of the Services Agreement;

iii.

After the commencement of Phase 3, provided that the Phase 3 funding has been paid to the Company;

iv.

At any time, if the Company’s obligation under the Settlement Agreement exceeds $15,000,000 (as defined in Note 17); or

v.

If the Call Option expires without being exercised.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

In the event that this Services Agreement is terminated by the Client, the Company shall retain all right, title and ownership interest in and to banQi and the Company shall retain the payment of $256,000 received in December 2018.

 

Either Party shall be entitled to terminate the Services Agreement upon written notice to the other party, in the event of a material breach, as defined in the Services Agreement, by the other party and that the breaching party has failed to remedy such breach within the applicable period.

 

If there is a Company liquidity event, as defined in the Services Agreement, within five years of the date of termination, the Company will, within ten business days from the closing of such liquidity event, pay to Client an amount equivalent to eighty percent (80%) of the proceeds from such liquidity event(s), less the Liquidated Damages Amount. In addition, and pursuant to certain data transfer limitations, as defined in the Services Agreement, the Company shall grant to Client a market-priced, royalty-bearing, non-exclusive, non- sublicensable, non-transferable, revocable license to use and operate the banQi App for a term of thirty (30) years.

 

In the event that the Services Agreement is terminated by Client pursuant to a material technical breach, as defined in the Services Agreement, by the Company:

 

i.

The outstanding convertible notes shall become immediately due and payable;

ii.

The Company shall pay to Client liquidated damages in the amount of $500,000 (the “Reduced Liquidation Damages Amount”) within five business days of termination;

iii.

Certain data transfer limitations will apply; and

iv.

If there is any Company liquidity event within two years of the date of termination, the Company shall, within ten business days from the closing of such liquidity event, pay to Client an amount equivalent to: eighty percent (80%) of the proceeds from such Company Liquidity Event(s), less the Reduced Liquidated Damages Amount the (“Liquidated Damages Amount”).

 

In the event that the Services Agreement is terminated by the Company pursuant to a material breach, as defined in the Services Agreement, by Client:

 

i.

The convertible notes shall be canceled;

ii.

The Call Option shall be terminated;

iii.

Certain data transfer limitations will apply;

iv.

The banQi License shall be immediately terminated; and

v.

The Company will retain the payment of $256,000 and any funding it has received as of the date of such termination, and Client shall not be entitled to convert any convertible notes into common stock of the Company and shall not be entitled to exercise the Call Option.

 

The Company shall have the right to terminate the Services Agreement, upon written notice to Client, commencing two years after the Call Option Expiration Date, in the event that Client does not exercise its Call Option.

 

In the event that the Services Agreement is terminated by the Company the convertible notes shall remain outstanding and the Company may repay the obligations under the convertible notes at any time until the respective convertible note maturity date without any penalty; and data transfer limitations apply.

 

Either Party may terminate the Services Agreement if either Party experiences or undergoes a bankruptcy event. In the event that this Services Agreement is terminated:

 

i.

Due to a Company Bankruptcy Event:

a)

The outstanding convertible notes shall become immediately due and payable; and

b)

Certain data transfer limitations apply.

 

ii.

Due to a Client bankruptcy event:

a)

the convertible notes shall remain outstanding, and the Company may repay the obligations under the convertible notes without penalty at any point until the maturity date; and

b)

Certain data transfer limitations apply.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

Convertible Notes

 

On September 11, 2018, the Company entered into an agreement (the “Notes Agreement”) to sell up to $10,000,000 of one or more Convertible Promissory Notes (the “Notes”) to the Client. The Company received cash and issued convertible notes totaling $2,500,000, $3,500,000, and $4,000,000 on February 14, 2019, June 10, 2019, and September 6, 2019 respectively, under these agreements. On May 21, 2020, convertible notes in the aggregate principal amount of $10,000,000 were converted into 13,339,510 common shares of the Company, and immediately cancelled pursuant to the terms of the Call Exercise Notice.

 

Interest Rates

 

The outstanding principal amount of the Notes bear interest at the annual rate of 1.00%, compounded monthly. If any amount payable under the Notes are not paid when due, such overdue amount shall bear interest of 3.00%.

 

The Notes were converted based on the principal outstanding amount of the Notes and excluded any accrued and unpaid interest due under the Notes at the conversion date, and the accrued and unpaid interest of approximately $105,000 was forgiven per the terms in the Notes Agreement.

 

Call Option

 

The Call Option Period for the Notes is the period commencing on the Agreement Effective Date and ending upon the earlier to occur of (a) November 30, 2020 or (b) 30 days following the date on which banQi has been downloaded 12 million times in the aggregate by customers in Brazil for use with the VV Wallet Services (the "Call Option Period End Date"). The Call Option Period End Date may be extended to September 30, 2021 by certain events detailed in the Notes Agreement (collectively, the “Call Options Expiration Date”).

 

The Notes features both primary and secondary call rights in which, during the Call Option Period, at the option of the Client, the Notes may be converted into $10,000,000 and $6,000,000, respectively, of the Company’s Common Stock. On May 21, 2020, the convertible notes in the aggregate amount of $10,000,000 was converted into shares of the Company’s Common Stock, and an additional $6,000,000 of shares of the Company Common Stock (8,003,706 shares) was purchased directly from certain Company stockholders (the “Option Stockholders”). The Common Stock was immediately cancelled pursuant to the terms of the Call Exercise Notice, and the Buyer received 100% membership interests in the Company.

 

The Company analyzed the call options and determined they did not meet the definition of derivatives and therefore they will not be bifurcated from the host agreement.

 

Exercise of Call Rights

 

During the Call Option Period, the Client may choose to exercise certain call rights (the “Call Rights”). In such instance, the Client will notify the Company and specify that the exercise is with respect to one of the following alternatives:

 

a.

Majority Exercise - An aggregate amount of (i) Notes equal to $4,000,000 being converted into shares of the Company’s Common Stock (“Primary Shares”) and (ii) $6,000,000 of shares of the Company’s Common Stock being purchased directly from the Stockholders (“Secondary Shares”), provided, that, in the event that there are less than $4,000,000 in Notes outstanding ("Insufficient Notes") at the time the Client elects to exercise the Call Rights, the Company agrees to issue to the Client, at an established valuation of the Company, as defined in the Notes Agreement (the “Agreed Valuation”) and the Client agrees to purchase, such additional shares of the Company’s common stock in an amount such that when combined with, and after giving effect to, the conversion of the Insufficient Notes into Primary Shares and the purchase of $6,000,000 in Secondary Shares, The Client shall own at least a majority of the shares of Company Stock then issued and outstanding, on a fully diluted basis; or

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

b.

Eighty Percent Exercise - An aggregate amount of (i) Notes equal to $10,000,000 being converted into Primary Shares and (ii) $6,000,000 of Secondary Shares being purchased from the Stockholders, such that the Client shall own 80% of the Company Stock on a fully diluted basis, provided, that, in the event that, at the time the Client elects to exercise the Call Right, there are less than $6,000,000 of Secondary Shares available for purchase from the Stockholders, the Company agrees to issue to the Client, at the Agreed Valuation, and Client agrees to purchase, such additional shares of the Company’s common stock in an amount such that when combined with, and after giving effect to, the conversion of the Notes into Primary Shares and the purchase of the Secondary Shares available for purchase from the Stockholders, the Client shall own at least 80% of the shares of common stock then issued and outstanding, on a fully diluted basis.

 

On May 21, 2020, the convertible notes in the aggregate amount of $10,000,000 was converted into 13,339,510 shares of the Company’s Common Stock, and an additional $6,000,000 of shares of the Company Common Stock was purchased directly from Option Stockholders, totaling 8,003,706 shares. The common stock was subsequently cancelled, and the Buyer received 100% membership interests in the Company.

 

Call Exercise Notice and Business Combination

 

On February 7, 2020, Via Varejo notified the Company and the Option Stockholders of Via Varejo’s intention to exercise its call right pursuant to a Convertible Note Purchase and Call Option Agreement, dated as of September 11, 2018, as amended on June 10, 2019 by the First Amendment to the Convertible Note Purchase and Call Option Agreement, through Lake Niassa (the “Buyer”), whereby (i) convertible notes in the aggregate principal amount of $10,000,000 will be converted into shares of the Company’s common stock and (ii) $6,000,000 of shares of the Company’s common stock will be purchased directly from the Option Stockholders, such that, after purchasing the Primary Shares and the Secondary Shares, Via Varejo shall own 80% of the Company’s common stock on a fully diluted basis (the “Transaction”). The agreed upon valuation of the Company for the purposes of the Transaction is $20 million. The Transaction closed on May 21, 2020. On May 21, 2020, the Buyer, Via Varejo, the Company and Victor Santos, solely in his capacity as the Company’s Representative (as such term is defined in the Call Option Agreement) entered into that certain Side Letter Agreement (the “Side Letter”), which defined the term “Diligence Liabilities,” as such term is used in the Call Option Agreement.

 

Pursuant to the Call Exercise Notice, Via Varejo’s exercise of the Call Right, and its obligation to consummate the Transaction, is subject to and conditioned upon the satisfaction by the Company or the Option Stockholders of certain conditions (or waiver of such conditions by Via Varejo) prior to the consummation of the Transaction, which closed on May 21, 2020. These conditions include, among other things, (a) the Company amending its certificate of incorporation to provide for (i) a single class of common stock (and automatic conversion of any and all outstanding shares of preferred stock into common stock) (the “Conversion of Shares”) and (ii) no preferential rights in favor of any person other than Via Varejo, (b) obtaining preemptive rights waivers’ from certain Option Stockholders and (c) the acceleration of vesting of all stock options issued under the Company’s 2016 Equity Incentive Plan, as amended (the “Plan”) whereby upon the consummation of the Transaction, all stock options then issued and outstanding under the Plan are cancelled in exchange for a cash payment (calculated based on the per share price contained in the form of Second Amendment to Stock Purchase Agreement, dated as of May 18, 2020 entered into by the Buyer and certain employees of the Company (the “Employee SPAs”)) funded by Via Varejo and made to the holders of such stock options. Additionally, the execution and delivery of a stock purchase agreement, substantially in the form contemplated by the Call Option Agreement, by each of Via Varejo, the Company and the Option Stockholders, is a condition to closing the Transaction.

On May 21, 2020, the number of shares of common stock issued upon the conversion of the Notes was 13,339,510. The aggregate number of shares of common stock purchased from the Option Stockholders was 8,003,706. The Buyer purchased a total of 3,168,226 shares of common stock pursuant to the Employee Stock Purchase Agreements (“SPAs”) and the Non-Employee SPAs. Immediately upon closing of the Transaction and the purchase of the common shares of the Company pursuant to the Employee SPAs and Non-Employee SPAs, the Buyer owned 24,511,442 common shares.

 

Additionally, in connection with the Call Exercise Notice, the two outstanding SAFE agreements in the aggregate fair value amount of $239,899 were converted into 474,996 common shares of the Company, which was paid to the holders of the SAFEs by the Buyer, and determined pursuant to the terms of the Call Exercise Notice.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

The Buyer also purchased 279,354 shares of common stock from five shareholders, who were not included in the purchase of common stock related to the Call Option Agreement, SPAs, or SAFE agreements (the “Remaining Shareholders”) as described above. The Buyer acquired each share of common stock owned by the Remaining Shareholders pursuant to the Employee SPAs and the Non-Employee SPAs.

 

The Buyer owned an aggregate of 25,265,794 common shares of the Company from the above transactions, which were immediately cancelled on May 21, 2020, and the Buyer received 100% membership interests in the Company.

 

Concurrently with the consummation of the Transaction and as a condition precedent under the Call Option Agreement, the Company’s Board of Directors cancelled all outstanding options to purchase Company common stock granted under the Plan. All of the holders of the outstanding options issued under the Plan were immediately cancelled and, in consideration for such cancellation, were entitled to a lump sum cash payment from the Company, funded by Via Varejo.

 

Note 12 - Simple Agreement for Future Equity

 

In July 2017, the Board of Directors of the Company approved and designated a right to Investors for certain shares of the Company’s capital stock (otherwise known as Simple Agreement for Future Equity (“SAFE”), utilizing a valuation estimate, as defined, (“Valuation Cap”) and 80% discount rate (the “Discount Rate”). On July 15, 2017, the Company entered into two SAFE’s in the amount of $189,899, and $50,000, respectively. The number of shares to be issued upon conversion of the SAFE’s are subject to the following:

 

●

Equity Financing – Prior to the expiration of termination of the SAFEs, if there is an equity financing that occurs, the Company is to automatically issue a number of shares of Preferred Stock, equal to the Purchase amount divided by the Conversion Price of shares.

●

Conversion Price – Means either: (1) the SAFE Price or (2) the Discount Price, whichever calculation results in the greater number of shares of Preferred Stock. The SAFE Price is the price per share equal to the Valuation Cap divided by the Company’s capitalization amount on a fully-diluted basis. The Discount Price is the price per share of the equity instrument sold in an Equity Financing multiplied by the Discount Rate.

●

Liquidity Event – If there is Liquidity Event, as defined, before the scheduled termination of the SAFE instruments, the holder of a SAFE can either (i) receive a cash payment equal to the amount paid for the SAFE (“SAFE Amount”) or (ii) automatically receive from the Company a number of shares of Common Stock equal to the SAFE Amount divided by the price per share from the Liquidation Event. The SAFE amount is due and payable by the Company to the holder of a SAFE concurrent with a Liquidation Event. If there are insufficient funds to pay the holders of SAFEs, the remaining funds available for distribution will be done on a pro rate basis among the holders in proportion with their SAFE Amounts.

●

Dissolution Event – Upon a dissolution event that occurs before the expiration of the SAFEs, the Company will pay an amount equal to the SAFE Amount to the holder at the time of the Dissolution Event. If the Company has insufficient funds to make complete payment to all holders of SAFEs, the Company will then be liable to distribute available assets to the holder for the remaining portion due.

 

The Company evaluated the SAFEs in accordance with ASC 480-10 and determined that the SAFEs represented an obligation that the Company must settle by issuing a variable number of its equity shares, the monetary value of which is known when entering into the SAFE.

 

On May 21, 2020, in connection with the Call Exercise Notice, the two outstanding SAFE agreements in the aggregate fair value amount of $239,899 were converted into 474,996 common shares of the Company, which was paid to the holders of the SAFEs by the Buyer, and determined pursuant to the terms of the Call Exercise Notice, which were immediately cancelled.

 

Note 13 - Preferred Stock

 

Series One and One-A Preferred Stock Purchase Agreement

 

On July 15, 2016, the Company sold to accredited investors an aggregate of 2,652,072 shares of Series One and 1,046,147 of Series One-A Preferred Shares (collectively, “Preferred Stock”).

 

The Preferred Stock is convertible into the Company’s Common Stock on a 1 for 1 basis at the holders’ option. The Preferred Stock does not contain any redemption provisions. The Preferred Stock does not pay dividends and vote together with the common stock of the Company as a single class on all actions to be taken by the stockholders of the Company.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

On May 21, 2020, in connection with the Call Exercise Notice, the aggregate of 2,652,072 shares of Series One and 1,046,146 of Series One-A Preferred Shares were converted into the Company’s Common Stock during the Transaction which were subsequently cancelled.

 

The Company amended its Certificate of Incorporation and filed the Second Restated Certificate of Incorporation (the “Restated Certificate of Incorporation”) with the Delaware Secretary of State on May 21, 2020, to provide for (i) a single class of common stock (and automatic conversion of any and all outstanding shares of preferred stock into common stock) and (ii) no preferential rights in favor of any shareholder.

 

Note 14 - Common Stock

 

On January 25, 2016, the Company issued 497,873 shares of common stock to an investor (the “Investor”) for a purchase price of $20,000, which at the time represented 6% of the capital stock of the Company. As part of this transaction, the Company agreed to issue additional shares of common stock (for no additional consideration) to maintain the investor’s ownership interest at 6% of the total capital stock upon a subsequent equity financing greater than $250,000. This 6% ownership is calculated on a fully diluted basis, including all outstanding shares of common and preferred stock, all outstanding options and warrants, phantom stock, stock appreciation rights, and any shares reserved for issuance under the Company’s equity incentive plans. However, the capital stock does exclude shares issuable, but contingent on conversion of any current or future convertible debt and equity instruments (which would include the SAFE’s). Therefore, as part of any issuance of capital stock to any future investors, the Company must issue additional stock to the Investor, as well, to ensure that they remain at 6% of the Company’s capital stock. There were 133,893 additional shares issued on July 15, 2016 to the Investor in order to maintain their 6% equity interest.

 

The contingent issuance of shares of common stock to the Investor was evaluated to determine whether the embedded feature would be required to be recorded as a derivative liability. It was determined the embedded feature qualifies for equity classification.

 

On February 28, 2018, the Company repurchased 414,893 shares of common stock which it had previously granted to an independent entity in exchange for $240,000. The Company recorded these repurchased shares as Treasury shares in its consolidated balance sheet.

 

On May 21, 2020, in connection with the Call Exercise Notice, all of the Company’s previously outstanding common stock was purchased by the Buyer, which is included in the total aggregate of 25,265,794 of the Company’s Common Stock that was purchased by the Buyer during the Transaction. All shares of common stock were immediately then cancelled, including the shares held in treasury.

 

Note 15 - Stock Based Compensation

 

The Company established the 2016 Equity Incentive Plan (the “Plan”) during 2016 and issued stock-based awards to certain employees and non-employees under the Plan. The Plan provides for the issuance of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock units and other stock awards.

 

On February 3, 2020, the Company’s Board of Directors approved an amendment to the Plan to decrease the aggregate number of shares of the Company’s common stock that may be issued pursuant to Stock Awards (as defined in the Plan) from 2,834,837 to 2,676,126; and waived the restrictions on transfer and right of first refusal in favor of the Company, as set forth in the Company’s Amended and Restated Bylaws, for certain stockholders.

 

Additionally, on February 3, 2020, the Company’s Board of Directors approved the acceleration of vesting of 751,849 outstanding stock option awards awarded to employees and a third-party.

 

On February 6, 2020, the Board approved the acceleration of vesting of 149,564 outstanding stock options awarded to a third-party.

 

On February 26, 2020, the Board approved the acceleration of vesting of 277,564 outstanding stock options awarded to employees and other third-parties.

 

On May 21, 2020, concurrently with the consummation of the Transaction and as a condition precedent under the Call Option Agreement, the Company’s Board of Directors cancelled all outstanding options to purchase the Company’s Common Stock granted under the Plan. All of the holders of the outstanding options issued under the Plan were immediately cancelled and, in consideration for such cancellation were entitled to a lump sum cash payment from the Company.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

The Company lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historical volatility of a set of publicly traded peer companies. Due to the lack of historical exercise history, the expected term of the Company’s stock options for employees has been determined utilizing the “simplified” method for awards. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is zero based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

 

The fair value of the Company’s common stock was estimated to be $0.29 at September 30, 2019. There was no common stock outstanding at June 30, 2020. In order to determine the fair value, the Company considered, among other things, the Company’s business, financial condition and results of operations; the lack of marketability of the Company’s common stock; the market performance of comparable publicly traded companies; and U.S. and global economic and capital market conditions.

 

The Company used the Black-Scholes option-pricing model to estimate the fair value of options issued using the following assumptions:

 

		Nine Months Ended June 30, 2020				Nine Months Ended June 30, 2019
Price of Common Stock		$	0.25 - 0.29			$	0.29
Volatility			60 - 72%				60	%
Expected term (in years)			0 - 6.90				5.30 - 6.08
Risk free rate			1.39 - 1.74%				1.82 - 2.25%

 

The following table summarizes the Company’s stock option activity and related information for the period indicated:

 

			Number of Shares				Weighted Average Remaining Contractual Term (in years)				Weighted Average Exercise Price ($)
Outstanding at September 30, 2019				2,684,717				9.47			$	0.23
Granted				17,000				9.46			$	0.26
Forfeited				(355,745	)			8.03			$	0.30
Exercised				(939,141	)			8.08			$	0.20
Cancelled				(1,406,831	)			8.30			$	0.25
Outstanding at June 30, 2020				—				—			$	—
Exercisable at June 30, 2020				—				—			$	—

 

On May 21, 2020, there was a change in control when the Company was fully acquired by Via Varejo, and as a condition precedent under the Call Option Agreement, the Company’s Board of Directors cancelled all outstanding options. As noted in the 2016 Equity Incentive Plan Amendment, for instances where a change in control occurs, vesting will be accelerated for all outstanding stock award and a cash payment will be paid to all Option Stockholders by Via Varejo. The total unrecognized compensation cost based on the fair value of the options was recognized as stock-based compensation expense at May 21, 2020 totaling $114,979. Additionally, all of the holders of the outstanding options issued under the Plan were immediately cancelled and, in consideration for such cancellation, were entitled to a lump sum cash payment totaling $3,331,255, contributed by Via Varejo to the Company and paid from the Company to the Option Holders. The conversion price per option was determined pursuant to the terms of the Call Exercise Notice. Any additional payment over the original fair value of the stock options ($238,719) was recognized by the Company as additional stock-based compensation expense due to the cancellation of stock options, which totaled $3,092,536 at May 21, 2020. The expense for stock-based compensation awards was $3,207,515 and $28,925 for the three months ended June 30, 2020 and 2019, respectively. The expense for stock-based compensation awards was $3,418,118 and $74,538 for the nine months ended June 30, 2020 and 2019, respectively.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

Note 16 - Concentrations

 

Accounts Payable

 

As of June 30, 2020, and September 30, 2019 the Company had approximately 85% and 86%, respectively, of its accounts payable balances held by its top five vendors. During each of these same aforementioned periods, the Company had one and two of its vendors accounting for more than 10% each of the Company’s accounts payables balances.

 

Note 17 - Commitments and Contingencies

 

Operating Leases

 

The Company has operating leases primarily consisting of office space with remaining lease terms of 1 to 8 years, subject to certain renewal options as applicable.

 

Leases with an initial term of twelve months or less are not recorded on the balance sheet, and the Company does not separate lease and non-lease components of contracts. There are no material residual guarantees associated with any of the Company’s leases, and there are no significant restrictions or covenants included in the Company’s lease agreements. Certain leases include variable payments related to common area maintenance and property taxes, which are billed by the landlord, as is customary with these types of charges for office space.

 

The Company determined that the exercise of the renewal option became reasonably certain for its office space in Boston and Brazil; therefore, the payments associated with the renewal are now included in the measurement of the lease liability and ROU asset for those locations. The useful life of the Boston and Brazil office spaces will extend through February 2028 and September 2021, respectively.

 

The Company’s lease agreements generally do not provide an implicit borrowing rate. Therefore, the Company used a benchmark approach to derive an appropriate imputed discount rate. The Company benchmarked itself against other companies of similar credit ratings and comparable quality and derived imputed rates, which were used to discount its real estate lease liabilities. The Company used estimated incremental borrowing rates of 7.52%, 5.73%, and 9.68% on October 1, 2019 for all leases that commenced prior to that date, for two office spaces in Boston, Massachusetts, and one office space in Brazil, respectively.

 

The Company entered into a sublease agreement with a subtenant on March 1, 2020, and the rent commencement date was April 1, 2020. There was approximately $30 thousand of sublease income recognized related to this agreement for the quarter ended June 30, 2020, which was recorded as a reduction to rent expense on the Consolidated Statements of Operations and Comprehensive Loss. No related party transactions for lease arrangements have occurred.

 

Lease Costs

 

The table below presents certain information related to the lease costs for the Company’s operating leases for the three and nine months ended June 30, 2020:

 

		Three Months Ended				Nine Months Ended
		June 30, 2020				June 30, 2020
Components of total lease cost:
Operating lease expense		$	168,115				504,345
Short-term lease expense			—				—
Total lease cost		$	168,115			$	504,345

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

Lease Position as of June 30, 2020

 

Right of use lease assets and lease liabilities for our operating leases were recorded in the condensed consolidated balance sheet as follows:

 

		As of
		June 30, 2020
Assets
Operating lease right of use assets		$	2,061,756
Total lease assets		$	2,061,756
Liabilities
Current liabilities:
Operating lease liability, current portion		$	382,416
Noncurrent liabilities:
Operating lease liability, net of current portion			1,835,238
Total lease liability		$	2,217,654

 

Lease Terms and Discount Rate

 

The table below presents certain information related to the weighted average remaining lease term and the weighted average discount rate for the Company’s operating leases as of June 30, 2020:

 

Weighted average remaining lease term (in years) – operating leases			6.86
Weighted average discount rate – operating leases			7.7	%

 

Undiscounted Cash Flows

 

Future lease payments included in the measurement of lease liabilities on the condensed consolidated balance sheet as of June 30, 2020, for the following five fiscal years and thereafter were as follows:

 

Year ending September 30,			Operating Leases
Remaining 2020			$	141,550
2021				525,434
2022				326,453
2023				333,104
2024				339,755
2025				346,406
2026				353,055
2027				359,714
2028				152,420
Total Minimum Lease Payments			$	2,877,891
Less effects of discounting				(660,237	)
Present value of future minimum lease payments			$	2,217,654

 

Legal Proceedings

 

The Company may be involved in various lawsuits, claims and proceedings incidental to the ordinary course of business. The Company accounts for such contingencies when a loss is considered probable and can be reasonably estimated.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

Between August and October 2017, the Company offered and sold AirTokens pursuant to the 2017 ICO and raised approximately $15 million in capital. The SEC determined that the AirToken offering was an offer and sale of “securities” as defined by Section 2(a)(1) of the Securities Act. On November 16, 2018 the Company settled the 2017 ICO matter with the SEC pursuant to the Settlement Agreement. As part of the Settlement Agreement, the Company agreed to offer rescission rights to the Potential AirToken Claimants and paid a penalty of $250,000 to the SEC.

 

On March 15, 2019, the Company filed an initial registration statement on Form 10 with the SEC under the Exchange Act on a voluntary basis in connection with the Settlement Agreement and to provide current information to Potential AirToken Claimants pursuant to Section 12(a) of the Securities Act. The Form 10 registration statement became effective on May 14, 2019, and on October 18, 2019 the Company was notified that the SEC had completed its review of the Form 10 registration statement.

 

In conjunction with the Settlement Agreement, Potential AirToken Claimants are entitled to return their AirTokens to the Company and receive a refund in the amount of consideration paid, plus interest, less the amount of any income received thereon. Pursuant to the Settlement Agreement, as modified in May 2019, the Company timely distributed the claim forms on June 28, 2019. The claims period closed on September 28, 2019. All forms were processed in accordance with the terms and provisions set forth by the Settlement Agreement. The Company received claim forms from 174 Potential AirToken Claimants during the claims period and the Company determined to approve payment on 163 out of the 174 claims, which is approximately 93% of the claim forms received during the claims period. On December 11, 2019 the Company commenced the process of notifying, via email only, all 174 Potential AirToken Claimants of the Company’s resolution of their claim.

 

On or before December 28, 2019 the Company paid all approved claims to approved claimants who returned their AirTokens to the Company (approximately 93.5% of the total dollar amount of all approved claim refunds). All amounts were refunded in cash and paid through the Company’s existing cash and cash equivalent reserves. The total claim amounts including interest, totaled $3,289,607 on December 28, 2019. Certain approved claimants did not return their AirTokens to the Company. The Company did not pay approved claims to approved claimants who did not return their AirTokens to the Company. As of June 30, 2020, the amount that was not paid was approximately $44 thousand (comprised of amounts recorded in AirToken refund liability and amounts in accounts payable). All unpaid approved claims are expected to be paid during the 2020 fiscal year upon return to the Company of approved claimants’ AirTokens.

 

Additionally, the Settlement Agreement requires the Company to:

 

●

Maintain timely filings of all reports required by Section 13(a) of the Exchange Act for at least one year from the date the Form 10 becomes effective (the “Effective Date”) and continue these filings until the Company is eligible to terminate its registration pursuant to Rule 12g-4 under the Securities Exchange Act of 1934.

●

Provide monthly reports to the SEC which include the amount of the claims paid, and any claims not paid as well as the reasons for non-payment.

●

Submit to the SEC a final report of its handling of all claims received within seven months from the Effective Date of the Form 10 filing.

 

Also, on November 16, 2018, the Company entered into a settlement with the Massachusetts Securities Division related to our issuance of AirTokens in the Company’s 2017 ICO whereby the Company agreed to pay a penalty of $100,000 to the Commonwealth of Massachusetts.

 

As a result of the Company’s inability to timely resolve these accounting issues, the Company did not timely file with the SEC the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019, and the Company’s annual report on Form 10-K for the year ended September 30, 2019, which puts the Company in violation of Section 13(a) of the Exchange Act and the Settlement Agreement. In addition, the Company did not timely file certain Current Reports on Form 8-K. As a result of the Company’s failure to timely file these various reports, the SEC may through civil or administrative actions seek monetary and non-monetary relief from the Company, including fines, penalties, undertakings and conduct-based injunctions, and officer and director bars and suspensions.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

On December 30, 2019 a claimant who purchased AirTokens in the 2017 ICO whose claim was denied for failure to comply with the deadlines and the claim process filed a civil lawsuit against the Company in the Supreme Court of the State of New York, County of New York. The lawsuit alleges a claim of sale of unregistered securities to the plaintiff under Section 12(a) of the Securities Act of 1933 in connection with the plaintiff’s purchase of AirTokens in the 2017 ICO. The plaintiff demands a full refund in the amount of consideration paid, plus interest and other costs. On February 25, 2020 the Company settled this claim with the plaintiff and the lawsuit was dismissed.

 

The claims period officially came to a close on Sept. 28, 2019. All claims were processed in accordance with the terms and provisions set forth in the SEC Order.

 

Other than with respect to the matters described above, the Company is not aware of any pending or threatened claims that the Company violated any federal or state securities laws. However, the Company cannot assure you that any such claim will not be asserted in the future or that the claimant in any such action will not prevail. The possibility that such claims may be asserted in the future will continue until the expiration of the applicable federal and state statutes of limitations. If the payment of additional rescission claims or fines is significant, it could have a material adverse effect on the Company’s cash flow, financial condition or prospects and the value of the AirTokens.

 

On January 29, 2020 Gad Red Propaganda Ltda. (“GAD”) filed a civil lawsuit against the Company’s operating subsidiary banQi Instituição de Pagamento Ltda (dba “banQi”) in 41o Civil Court of Justice of the Estate of Sao Paulo. The lawsuit alleges that banQi failed to fully compensate GAD for certain marketing and other services GAD performed on behalf of banQi pursuant to an alleged strategic partnership GAD entered into with banQi. GAD demands payments of up to approximately U.S. $690,820 for services performed. banQi filed an answer to the claim on May 15, 2020. The Company accounts for contingencies when a loss is considered probable or possible (more likely than not) and can be reasonably estimated. banQi filed an answer to the claim on May 15, 2020 denying any liability for any payments GAD is seeking.

 

During the quarter ended March 31, 2020, the Company entered into agreements with respect to contracts involving third parties and accrued liabilities of approximately $1.6 million. $1.4 million has been paid as of June 30, 2020.

 

Note 18 - Income Taxes

 

A nominal provision for taxes has been recorded as the Company has incurred net operating losses since inception. Significant components of the Company’s net deferred income tax assets as of June 30, 2020 and September 30, 2019 consist of income tax loss carryforwards. These amounts are available for carryforward indefinitely for use in offsetting taxable income. Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carry-forward period. Prior to May 21, 2020 the Company was classified as a C Corporation for tax purposes. As of May 21, 2020, when the Company was converted from a C Corporation to a limited liability company. The Company also then elected to be classified as a C Corporation for U.S. tax purposes. On May 21, 2020, the Company was fully acquired by Via Varejo S.A, a corporation organized under the laws of the Federative Republic of Brazil (“Via Varejo”) through Lake Niassa Empreendimentos e Participações Ltda., a limited liability company duly organized under the laws of the Federative Republic of Brazil and wholly-owned by Via Varejo. As a result of the acquisition, the utilization of some of the net operating loss carryforwards generated in both prior and the current fiscal years may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. As of the date of these financial statements, the Company has not undertaken an IRC 382 study to estimate the amount of the net operating losses that may be utilized in the future. However, throughout the Company’s history the Company has generated substantial net operating losses. These deferred tax assets arising from the future tax benefits are currently considered not likely to be realized and are thus reduced to zero by an offsetting valuation allowance. As a result, there is no provision for income taxes other than those amounts required to properly accrued for the various state minimum income taxes owed by the Company to the jurisdictions in which it operates.

 

Note 19 - Related Party Transaction

 

The related party transactions between the Company and Via Varejo were unbilled receivables totaling $8.1 thousand, accounts payable totaling $8.4 thousand, and deferred revenue totaling $197 thousand as of June 30, 2020. Additionally, on May 28, 2020, the Company received $1.9 million from Lake Niassa as a capital contribution with no additional membership interests issued. There were no related party transactions as of June 30, 2019.

 

 

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

Note 20 - Subsequent Events

 

On July 29, 2020, the Company entered into an agreement with Lake Niassa to receive a capital contribution in the amount of $1.5 million. Additionally, the Company will receive capital contributions of $1 million on August 31, 2020, and $1.4 million on September 30, 2020 per the terms of the agreement.

 

On July 30, 2020, Lake Niassa made a capital contribution to Airfox Brazil in the amount of R$7,370,000 (approximately $1,429,043 USD) in exchange for 7,370,000 shares of Airfox Brazil, with a par value of R$1.00 (approximately $0.19 USD) per share.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q/A contains, and our officers and representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections about the Company’s industry, management’s beliefs, and certain assumptions made by management. Forward-looking statements include our expectations regarding product, services, and maintenance revenue, and short- and long-term cash needs. In some cases, words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “estimates,” variations of these words, and similar expressions are intended to identify forward-looking statements. The statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any forward-looking statements. Risks and uncertainties of our business include those set forth under “Risk Factors” in our Annual Report on Form 10-K (“Form 10-K”) as of and for the year ended September 30, 2019, as filed with the United States Securities and Exchange Commission (“SEC”) on January 15, 2020. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. However, readers should carefully review the risk factors set forth in other reports or documents we file from time to time with the Securities and Exchange Commission, particularly any future Annual Reports on Form 10-K, any Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

 

COVID-19

 

During this uncertain time, our critical priorities are the health and safety of our employees and contractors, all of whom began working from home and reduced travel to essential business needs. We currently have a Company-wide work-from-home program. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, local authorities, or that we determine are in the best interests of our employees. The Commonwealth’s “Reopening Massachusetts” process is underway, and as of July 6, 2020, the Commonwealth of Massachusetts entered into Phase III, Step 1 and our offices in Boston were opened on a limited basis subject to certain state mandated safety standards.

 

In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China. This new coronavirus has caused a global health emergency and was declared a pandemic by the World Health Organization in March 2020 (“COVID-19 Outbreak”). We are continually monitoring the impacts the COVID-19 Outbreak could have on our business. Risks relating to the spread of coronavirus pushed the United States Federal Reserve to cut interest rates as part of an emergency action to protect the economy from the COVID-19 Outbreak’s impact. In an effort to contain and slow the spread of COVID-19, governments have implemented various measures, such as, ordering non-essential businesses to close, issuing travel advisories, cancelling large scale public events, ordering residents to shelter in place, and requiring the public to practice social distancing.

 

The COVID-19 Outbreak has materially and adversely affected businesses worldwide. The magnitude and duration of the impact from COVID-19 are unknown and cannot be reasonably estimated.

 

The COVID-19 pandemic has had and continues to have a significant impact on local, state, national and global economies. The actions taken by governments, as well as businesses and individuals, to limit the spread of the disease has significantly disrupted the Company’s normal activities. Numerous businesses, including our contractors, collaborative partners and suppliers have either shut down or are operating on a limited basis, employees have been furloughed or laid off and social distancing has been mandated through stay-in-place orders. The Company expects these actions to have a significant impact on the Company’s results of operations, particularly with respect to research and development, and financial position. The full extent of the impact to the Company due to the impact of the COVID-19 pandemic cannot be reasonably estimated at this time. The extent to which the COVID-19 pandemic will impact the Company will depend on future developments, which are highly uncertain and cannot be reasonably predicted, including the duration of the outbreak, the increase or reduction in governmental restrictions to businesses and individuals, the potential for a resurgence of the virus and other factors.

 

 

We are subject to the risks arising from the COVID-19 Outbreak’s social and economic impacts. Our management believes that the social and economic impacts, which include but are not limited to the following, could have a significant impact on future financial condition, liquidity, and results of operations: i) the duration and scope of the pandemic; (ii) governmental, business and individual actions that have been and continue to be taken in response to the pandemic, including travel restrictions, quarantines, social distancing, work-from-home and shelter-in-place orders and shut-downs; (iii) the impact on U.S. and global economies and the timing and rate of economic recovery; (iv) potential adverse effects on the financial markets and access to capital; (v) potential goodwill or other impairment charges; (vi) increased cybersecurity risks as a result of pervasive remote working conditions; and (vii) our ability to effectively carry out our operations due to any adverse impacts on the health and safety of our employees and their families.

 

In response to the COVID-19 Outbreak, our employees have been required to work from home. The significant increase in remote working, particularly for an extended period of time, could exacerbate certain risks to our business, including an increased risk of cybersecurity events and improper dissemination of personal or confidential information. We do not believe these circumstances have, or will, materially adversely impact our internal controls or financial reporting systems.

 

While the Company believes it is well positioned in times of economic uncertainty, the Company is not able to estimate the effects of the COVID-19 Outbreak on its results of operations, financial condition, or liquidity for the year ending September 30, 2020 and beyond. If the COVID-19 Outbreak continues, it may have a material adverse effect on the Company’s financial condition, liquidity, and future results of operations.

 

OVERVIEW

 

Beginning in February 2017, the Company began exploring consumer applications of its legacy prepaid mobile applications. The Company initiated a business plan to introduce a mobile application that would allow users to earn digital tokens, exchange them for free or discounted mobile data and, ultimately, other goods and services in South America as part of a new international business and ecosystem (the “AirToken Project”). The AirToken Project included the issuance of digital tokens (“AirTokens”). The AirToken is an ERC-20 token issued on the Ethereum blockchain.

 

The Company obtained Ether and Bitcoin (collectively referred therein as the “Digital Assets”), in August 2017 through early October 2017 from those interested in obtaining AirTokens. The Company raised approximately $15.4 million for the purpose of developing the AirToken Project.

 

The Company’s business is evolving to focus on providing unbanked and financially underserved individuals in emerging markets mobile access to financial services. The Company is developing a software technology platform initially consisting of two applications, a digital wallet application and an alternative credit scoring and lending application. The Company’s software technology platform is designed and built as a Software as Service (or SaaS) offering. The Company expects to generate revenue from these applications from fixed recurring fees, transaction fees, third party fees and interest income. The Company’s initial markets are the cash and unbanked markets in Brazil.

 

The Company’s digital wallet application, branded as banQi, is a digital banking application capable of leveraging machine learning capabilities to build alternative, smartphone-based credit risk models. banQi, available on Android and iOS, aims to eliminate the need for traditional financial institutions allowing those without bank accounts or credit cards to more easily and quickly make many everyday transactions using a smartphone. It will also enable the Company to create an alternative credit scoring system for our users for use in connection with our alternative credit scoring and lending application.

 

The alternative credit scoring and lending application is designed to be a blockchain-based, peer-to-peer lending application that will enable anyone from around the world to provide capital for a microloan to a diversified cohort of borrowers. This technology is expected to harness the decentralized power of the Ethereum blockchain to create a digital ledger of the user’s behavioral and transactional data to fund a new financial asset class from a global pool of lenders seeking to make socially impactful microloans.

 

Subsequent to the distribution of AirTokens to those parties who contributed towards the funding of the AirToken Project, no AirTokens were sold by the Company.

 

 

The Company has experienced recurring losses and negative cash flows from operations. At June 30, 2020 and September 30, 2019, the Company had cash and cash equivalents of $1,921,263 and $5,451,348, a working capital of $1,518,098 and a working capital deficit of $4,467,895, and total member’s deficit/stockholders’ deficit of $19,022,124 and $19,140,984. To date, the Company has in large part, relied on debt and equity financing to fund its operations. The Company expects to continue to incur losses from operations for the near-term and these losses could be significant as the Company incurs costs and expenses associated with the development of the AirToken Project.

 

On November 16, 2018, the Company entered into a settlement agreement with the SEC (the “SEC Settlement Agreement”). Initially with the Commonwealth of Massachusetts and ultimately pursuant to the SEC Settlement Agreement, the Company agreed to the certain actions including a) payment of a penalty, b) offer to refund consideration paid for AirTokens on or before October 5, 2017 in exchange for AirTokens, plus interest, c) filing a Form 10 to register the AirTokens as a class of securities and maintain timely filings of all reports required by Section 13(a) of the Exchange Act for at least one year from the date the Form 10 becomes effective (the “Effective Date”) and continue these filings until the Company is eligible to terminate its registration, and d) submit to the SEC a final report of its handling of all claims received within seven months from the Effective Date of the Form 10 registration statement filing. See Liquidity and Capital Resources for further details. The Company’s Form 10 registration statement is now effective, and we need to ensure that we will have the ability to prepare, on a timely basis, financial statements that comply with SEC reporting requirements.

 

In conjunction with the Settlement Agreement, Potential AirToken Claimants are entitled to return their AirTokens to our Company and receive a refund in the amount of consideration paid, plus interest, less the amount of any income received thereon. Pursuant to the Settlement Agreement, as modified in May 2019, our Company timely distributed the claim forms on June 28, 2019. The claims period closed on September 28, 2019. All forms were processed in accordance with the terms and provisions set forth by the Settlement Agreement. We received claim forms from 174 Potential AirToken Claimants during the claims period and we determined to approve payment on 163 out of the 174 claims, which is approximately 93% of the claim forms received during the claims period. On December 11, 2019 we commenced the process of notifying, via email only, all 174 Potential AirToken Claimants of our resolution of their claim.

 

On or before December 28, 2019 the Company paid all approved claims to approved claimants who returned their AirTokens to the Company (approximately 93.5% of the total dollar amount of all approved claim refunds). All amounts were refunded in cash and paid through the Company’s existing cash and cash equivalent reserves. The total claim amounts including interest, totaled $3,289,607 on December 28, 2019. Certain approved claimants did not return their AirTokens to the Company. The Company did not pay approved claims to approved claimants who did not return their AirTokens to the Company. As of June 30, 2020, the amount that was not paid was approximately $44 thousand (comprised of amounts recorded in AirToken refund liability and amounts in accounts payable). All unpaid approved claims are expected to be paid during the 2020 fiscal year upon return to the Company of approved claimants’ AirTokens.

 

The Company will recognize the remaining proceeds of $12.5 million over the remaining estimated development period of the AirToken Project until the completion of the AirToken Project. Currently, the Company is not able to estimate a date to conclude the development of the AirToken Project due regulatory matters that affect the continuity of the development process. Due to this reason, the AirToken Project is currently on hold and no revenue has been recognized from the AirToken Project.

 

In September 2018, the Company entered into the Services Agreement and related convertible notes agreement with Via Varejo whereby the Company could receive up to $10,256,000 by issuing convertible notes in connection with the Company’s software design and development services provided to Via Varejo. The Company has received the full $10,256,000 in cash and issued convertible notes for $2,500,000 on February 14, 2019, $3,500,000 on June 10, 2019, and $4,000,000 on September 6, 2019 under these agreements. See Note 11 – Via Varejo Services Agreement and Convertible Notes in the notes to the unaudited condensed consolidated interim financial statements appearing elsewhere in this Form 10-Q/A. Additionally, the Company started recognizing revenue in January 2020 from the Upfront Payment of $256,000 related to the Via Varejo Services Agreement. On May 21, 2020, the convertible notes in the aggregate principal amount of $10,000,000 were converted into 13,339,510 shares of the Company’s Common Stock.

 

 

On June 12, 2019, Airfox Brazil entered into a Program Agreement with Mastercard Brasil and Via Varejo. As a licensee of MasterCard International, Inc. and a business partner of Mastercard Brasil, we launched our prepaid card and entered into an Incentive Program (as defined in the Program Agreement) in order to issue, expand and boost the Airfox Card base in Brazil as well as the number of transactions and turnover (sales revenue) generated by MasterCard Cards. As an incentive to support the launching of our Airfox Card, on December 16, 2019 Mastercard Brasil made to our Company a Sales Revenue Incentive Prepayment totaling R$65,000,000 (approximately $15,973,857 in December 2019). The Sales Revenue Incentive Prepayment constitutes the creation of a direct financial obligation on our Company since it constitutes prepaid sales revenue from Mastercard Brasil to our Company. Via Varejo has agreed to act as a guarantor of our Sales Revenue Incentive Prepayment obligations to Mastercard Brasil pursuant to the Program Agreement and a guaranty letter.

 

As a Mastercard prepaid card issuer, we will be entitled to receive Sales Revenue Incentive (as defined in the Program Agreement) pursuant to the Program Agreement. As a result, the Sales Revenue Incentive will be used to amortize the Sales Revenue Incentive Prepayment. Upon complete amortization of the Sales Revenue Incentive Prepayment, Mastercard will make quarterly payments of the Sales Revenue Incentive, calculated according to the value of transactions completed with the prepaid cards issued by the Company. We have no minimum commitment of transaction volumes to be completed with the Airfox Cards.

 

The Program Agreement has a term of ten years, unless earlier terminated by either party in accordance with specific provisions of the Program Agreement.

 

On February 7, 2020, pursuant to a written Call Exercise Notice (“Call Exercise Notice”), Via Varejo notified the Company and the Option Stockholders of Via Varejo’s intention to exercise the Call Right pursuant to the Call Option Agreement, through Lake Niassa Empreendimentos e Participações Ltda., a limited liability company duly organized under the laws of the Federative Republic of Brazil and 100% owned by Via Varejo (the “Buyer”), whereby (i) the Notes in the aggregate principal amount of $10,000,000 will be converted into shares of the Company’s common stock (the “Primary Shares”) and (ii) $6,000,000 of shares of the Company’s common stock will be purchased directly from the Option Stockholders (the “Secondary Shares”), such that Via Varejo shall own 80% of the Company’s common stock on a fully diluted basis (the “Transaction”). The agreed upon valuation of the Company for the purposes of the Transaction is $20 million.

 

Pursuant to the Call Exercise Notice, Via Varejo’s exercise of the Call Right, and its obligation to consumate the Transaction, is subject to and conditioned upon the satisfaction by the Company or the Option Stockholders of certain conditions (or waiver of such conditions by Via Varejo) prior to the consummation of the Transaction, which closed on May 21, 2020. These conditions include, among other things, (a) the Company amending its certificate of incorporation to provide for (i) a single class of common stock (and automatic conversion of any and all outstanding shares of preferred stock into common stock) and (ii) no preferential rights in favor of any person other than Via Varejo, (b) obtaining preemptive rights waivers’ from certain Option Stockholders and (c) the acceleration of vesting of all stock options issued under the Company’s 2016 Equity Incentive Plan, as amended whereby upon the consummation of the Transaction, all stock options then issued and outstanding under the Plan are cancelled in exchange for a cash payment (calculated based on the per share price in the form of the Second Amendment to Stock Purchase Agreement, dated as of May 18, 2020 entered into by the Buyer and certain employees of the Company (the “Employee SPAs”)) funded by Via Varejo and made to the holders of such stock options. Additionally, the execution and delivery of a stock purchase agreement, substantially in the form contemplated by the Call Option Agreement, by each of Via Varejo, the Company and the Option Stockholders, is a condition to closing the Transaction.

 

On May 21, 2020, all 1,404,227 stock options then issued and outstanding under the Plan were cancelled in exchange for a cash payment of $3,331,255 (calculated based on the per share price in the Employee SPAs) funded by Via Varejo and made to the holders of such stock options.

 

 

RESULTS OF OPERATIONS

 

The following comparative analysis on results of operations for the three months ended June 30, 2020 and 2019 are based on the comparative unaudited condensed consolidated financial statements, footnotes, and related information for the periods identified. This analysis should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this filing.

 

The following table shows our results of operations for the periods indicated. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

 

		For the Three Months Ended June 30,								Change (as restated)
		2020 (as restated)				2019				Dollars				Percentage
Revenue		$	34,576			$	1,393			$	33,183				2,382	%
Cost of revenue			114,839				—				114,839				100	%
Selling, general and administrative			6,212,797				2,761,818				3,450,979				125	%
Operating expenses			6,327,636				2,761,818				3,565,818				129	%
Loss from operations			(6,293,060	)			(2,760,425	)			(3,532,635	)			128	%
Other income, net			122,861				182,612				(59,571	)			(33	)%
Income tax benefit (expense)			47,620				(314	)			47,934				15,266	%
Net loss		$	(6,122,579	)		$	(2,578,127	)		$	(3,544,452	)			137	%

 

Revenue

 

Revenue for the three months ended June 30, 2020 was $34,576 primarily from the Company’s payment services fees related to the regular business in Brazil. Additionally, revenue totaling $12 thousand was recognized from the Upfront Payment of $256 thousand related to the Via Varejo Services Agreement, and revenue totaling $3 thousand was recognized from the Program Agreement with Mastercard.

 

Operating expenses

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses for the three months ended June 30, 2020 was $6.2 million representing an increase of $3.4 million or a 125% increase, as compared to $2.8 million for the three months ended June 30, 2019. The primary components of the increase include: stock-based compensation increased by $3.2 million due to additional stock-based compensation related to the cancellation of stock options and recognizing the total unrecognized compensation cost at the Transaction date, salaries and wage, and one time year-end bonus related expenses increased by $0.5 million due to an increase in full time employees, depreciation & amortization increased by $0.2 million due to the current quarter’s amortization of Via Varejo capitalized software, consulting services decreased by $0.1 million, and legal and professional fees decreased by $0.2 million due to due to assistance with ERP system implementation.

 

Cost of revenue

 

Cost of revenue expenses for the three months ended June 30, 2020 was $114,839, representing an increase of 100% compared to the $0 for the three months ended June 30, 2019. This expense was related to an write off of a prepaid expense balance related to the operational partners.

 

Other income, net

 

Other income, net for the three months ended June 30, 2020 and 2019 was $123 thousand and $183 thousand, respectively. The $59.7 thousand decrease in other income, net was primarily attributable to a decrease in the gain on AirTokens issued to vendors as compensation for services due to a review over the estimated development period and the Company decided that it is no possible to determine a new estimate date for the conclusion of the AirToken project and ceased the amortization. Interest income increased by $116 thousand primarily due to interest earned from funds in interest bearing accounts.

 

 

Income tax benefit (expense)

 

Income tax benefit (expense) increased for the three months ended June 30, 2020 and 2019 was $47,620 and ($314), respectively.

 

The following table shows our results of operations for the periods indicated. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

 

		For the Nine Months Ended June 30,								Change (as restated)
		2020 (as restated)				2019				Dollars				Percentage
Revenue		$	58,407			$	1,641			$	56,766				3,459	%
Cost of revenue			114,839				—				114,839				100	%
Selling, general and administrative			16,989,307				6,318,270				10,671,037				169	%
Operating expenses			17,104,146				6,319,349				10,784,797				171	%
Loss from operations			(17,045,739	)			(6,317,708	)			(10,728,031	)			170	%
Other income, net			148,623				464,583				(315,960	)			(68	)%
Income tax benefit (expense)			129,661				(942	)			130,603				13,864	%
Net loss		$	(16,767,455	)		$	(5,854,067	)		$	(10,913,388	)			186	%

 

Revenue

 

Revenue for the nine months ended June 30, 2020 was $58,407 primarily from the Company’s payment services fees related to the regular business in Brazil. Additionally, revenue totaling $25 thousand was recognized from the Upfront Payment of $256 thousand related to the Via Varejo Services Agreement, and revenue totaling $8 thousand was recognized from the Program Agreement with Mastercard.

 

Operating expenses

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses for the nine months ended June 30, 2020 was $17.0 million representing an increase of $10.7 million or a 169% increase, as compared to $6.3 million for the nine months ended June 30, 2019. The primary components of the increase include: stock-based compensation increased by $3.3 million due to additional stock-based compensation related to the cancellation of stock options and recognizing the total unrecognized compensation cost at the Transaction date, general and administrative expenses increased by $2.7 million due to the overall increase of our operating activities, salaries and wage, and one time year-end bonus related expenses increased by $2.5 million due to an increase in full time employees, consulting services increased by $0.1 million, legal and professional fees increased by $1.2 million due to assistance with ERP system implementation, depreciation & amortization increased by $0.5 million due to the current year’s amortization of Via Varejo capitalized software, and advertising expenses increased by $0.5 million due to increased activity in Brazil and the increased spend related to marketing efforts.

 

Cost of revenue

 

Cost of revenue expenses for the nine months ended June 30, 2020 was $114,839, representing an increase of 100% compared to the $0 for the three months ended June 30, 2019. This expense was related to a write-off of a prepaid expense balance related to the operational partners.

 

Other income, net

 

Other income, net for the nine months ended June 30, 2020 and 2019 was $148.6 thousand and $0.5 million, respectively. The $0.3 million decrease in other income, net was primarily attributable to a decrease in the gain on AirTokens issued to vendors as compensation for services, which was due to the Company's conclusion that it was no longer possible to determine an estimated date for the completion of the AirToken project and thus ceased recognition of deferred gains as of September 30, 2019 .

 

 

Income tax benefit (expense)

 

Income tax benefit (expense) for the three months ended June 30, 2020 and 2019 was $129,661 and ($942), respectively.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our working capital deficit turned positive after improvement of $6.0 million, or 134%, to $1.5 million as of June 30, 2020 from a working capital deficit of $4.5 million as of September 30, 2019. The variance in working capital is related to a decrease in cash and cash equivalents and the AirToken refund liability, along with an increase in accounts payable, and accrued liabilities, offset by increases in restricted cash and deferred revenue related to the Mastercard Program Agreement.

 

We have historically experienced recurring losses and negative cash flows from operations. At June 30, 2020, we had a working capital of $1,518,098 which included cash and cash equivalents of $1,921,263. The following table summarizes total current assets, liabilities and working capital deficit for the periods indicated:

 

		June 30, 2020 (as restated)				September 30, 2019				Change (as restated)
Current assets (including $824,746 of restricted cash at June 30, 2020)		$	3,865,296			$	6,388,510			$	(2,523,214	)
Current liabilities			2,347,198				10,856,405				(8,509,207	)
Working capital deficit		$	1,518,098			$	(4,467,895	)		$	5,985,993

 

Cash Flows

 

We have historically financed operations through cash flows from investing and financing activities. At June 30, 2020, our principal source of liquidity was $1.9 million in cash and cash equivalents. Other uses of cash may include capital expenditures and products technology expansion.

 

		For the Nine Months Ended June 30,
		2020 (as restated)				2019
Net cash used in operating activities		$	(1,686,446	)		$	(7,744,128	)
Net cash used in investing activities		$	(2,684,767	)		$	(838,641	)
Net cash provided by financing activities		$	2,109,384			$	6,003,000

 

Operating Activities

 

Net cash used in operating activities for the nine months ended June 30, 2020 was $1,686,446. Cash was consumed from continuing operations by the loss of $16,767,455, non-cash items consisting primarily of amortization totaling $569,951, stock-based compensation totaling $325,582, additional stock-based compensation due to cancellation of stock options totaling $3,092,536, net of the reversal of accrued interest related to conversion of convertible notes of $104,856. Changes in other working capital accounts had a positive impact of $11,196,404 on cash, including deferred revenue – Mastercard Program Agreement of $11,962,899, offset by $3,227,499 in AirToken refund.

 

Net cash used in operating activities for the nine months ended June 30, 2019 was $7,744,128. Cash was consumed from continuing operations by the loss of $5,854,067, non-cash items consisting of an impairment charge of our Digital Assets of $1,079, amortization totaling $86,090, stock-based compensation totaling $74,538, $90,940 of realized loss on the sale of Digital Assets and $527,152 of a deferred gain on the issuance of AirTokens. Changes in working capital accounts had a negative impact of $1,638,307 on cash, with the majority of the impact related to the $1,500,000 service agreement with Mastercard (see Note 4).

 

Investing Activities

 

Net cash used in investing activities during the nine months ended June 30, 2020 was $2,684,767 which substantially consisted of the acquisition of capitalized software costs relating to the Via Varejo Services Agreement.

 

 

Net cash used in investing activities during the nine months ended June 30, 2019 was $838,641 consisting of the acquisition of intangible assets including $651,851 capitalized software costs relating to the Via Varejo Services Agreement and $186,790 related to the domain name and website.

 

We expect to make investments in our personnel, systems, corporate facilities, and information technology infrastructure in Fiscal 2020 and thereafter. However, the amount of our capital expenditures has fluctuated materially and may continue to fluctuate on an annual basis.

 

Financing Activities

 

Net cash provided by financing activities related primarily to a capital contribution from Via Varejo of $1,921,004, and $188,380 in proceeds from the exercise of options for the nine months ended June 30, 2020.

 

Net cash provided by financing activities related primarily to $6,000,000 in proceeds from convertible notes and proceeds from the exercise of options for the nine months ended June 30, 2019.

 

SIGNIFICANT ACCOUNTING POLICIES

 

Our significant accounting policies, including the assumptions and judgments underlying them, are disclosed in the Notes to the Consolidated Financial Statements. We have consistently applied these policies in all material respects. We do not believe that our operations to date have involved uncertainty of accounting treatment, subjective judgment, or estimates, to any significant degree.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2020, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were not effective at the reasonable assurance level.

 

The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board include the following:

 

 

For the year ended September 30, 2019, we did not effectively apply the Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO framework, due primarily to an insufficient complement of personnel possessing the appropriate accounting and financial reporting knowledge and experience to determine the appropriate accounting for non-recurring transactions and transactions requiring more complex accounting judgment. The Company has not established an audit committee which led to ineffective oversight in the establishment and monitoring of required internal controls and procedures.

 

We did not maintain an appropriate level of evidence of the effectiveness of controls over the preparation and review of certain reconciliations utilized in the financial close processes to ensure that the information recorded in the general ledger was complete and accurate, including the stock-based compensation process. In addition, we did not maintain effective controls over the preparation and review of the consolidated financial statements to ensure that we identified and accumulated all required supporting information to ensure the completeness and accuracy of the information contained in the consolidated financial statements.

  

In addition, as a result of the foregoing errors, the Company has determined that there was a material weakness in internal control over financial reporting related to its ICO and Airtoken Gains revenue recognition procedures. Our management has re-evaluated its assessment of our disclosure controls and procedures and internal control over financial reporting as of June 30, 2020 and concluded that each was ineffective as of that date due to the existence of the foregoing material weakness.

 

Lastly, we did not implement appropriate general information technology controls as the Company did not maintain effective logical access and program change controls over our third-party systems, including the general ledger system.

 

Management’s Remediation Initiatives

 

In an effort to remediate the identified material weakness and enhance our internal controls, we have initiated the following measures:

 

	●	We retained full-time accounting staff over the course of the 2019. We started 2019 with 2 accountants and utilized an accounting and financial reporting advisory firm. As of June 30, 2020, our internal full-time accounting team is 9 accountants with requisite experience to oversee the accounting function and with implementing and enhancing our internal controls over financial reporting. As we secure additional working capital, we will create additional positions in order to increase our personnel resources and technical accounting expertise within the accounting function.
	●	We will continue to utilize an accounting and financial reporting advisory firm with significant experience with publicly held companies to assist our management in evaluating significant transactions and conclusions reached regarding technical accounting matters and financial reporting disclosures for the foreseeable future until our internal team is fully staff.
	●	We will reevaluate the AirToken Project in order analyze its future, as its continuity is deeply dependent of the milestones that are completely out of the Company’s control. Once, the regulatory and business obstacles can be overcome, then the Company will be able to decide to resume further development of the Airtoken project, since overcoming these hurdles is a prerequisite before spending time on the actual blockchain components and launching a “decentralized lending market-place”.

 

Changes in Internal Control over Financial Reporting

 

Except as set forth above, there were no changes to our internal control over financial reporting during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Between August and October 2017, our Company offered and sold AirTokens pursuant to the 2017 ICO and raised approximately $15 million in capital. The SEC determined that the AirToken offering was an offer and sale of “securities” as defined by Section 2(a)(1) of the Securities Act. On November 16, 2018 we settled the 2017 ICO matter with the SEC pursuant to the Settlement Agreement. As part of the Settlement Agreement, the Company agreed to offer rescission rights to the Potential AirToken Claimants and paid a penalty of $250,000 to the SEC.

 

On March 15, 2019, we filed an initial registration statement on Form 10 with the SEC under the Exchange Act on a voluntary basis in connection with the Settlement Agreement and to provide current information to Potential AirToken Claimants pursuant to Section 12(a) of the Securities Act. The Form 10 registration statement became effective on May 14, 2019, and on October 18, 2019 we were notified that the SEC had completed its review of the Form 10 registration statement.

 

In conjunction with the Settlement Agreement, Potential AirToken Claimants are entitled to return their AirTokens to our Company and receive a refund in the amount of consideration paid, plus interest, less the amount of any income received thereon. Pursuant to the Settlement Agreement, as modified in May 2019, our Company timely distributed the claim forms on June 28, 2019. The claims period closed on September 28, 2019. All forms were processed in accordance with the terms and provisions set forth by the Settlement Agreement. We received claim forms from 174 Potential AirToken Claimants during the claims period and we determined to approve payment on 163 out of the 174 claims, which is approximately 93% of the claim forms received during the claims period. On December 11, 2019 we commenced the process of notifying, via email only, all 174 Potential AirToken Claimants of our resolution of their claim.

 

On or before December 28, 2019 the Company paid all approved claims to approved claimants who returned their AirTokens to the Company (approximately 93.5% of the total dollar amount of all approved claim refunds). All amounts were refunded in cash and paid through the Company’s existing cash and cash equivalent reserves. The total claim amounts including interest, totaled $3,289,607 on December 28, 2019. Certain approved claimants did not return their AirTokens to the Company. The Company did not pay approved claims to approved claimants who did not return their AirTokens to the Company. As of June 30, 2020, the amount that was not paid was approximately $44 thousand (comprised of amounts recorded in AirToken refund liability and amounts in accounts payable). All unpaid approved claims are expected to be paid during the 2020 fiscal year upon return to the Company of approved claimants’ AirTokens.

 

Additionally, the Settlement Agreement requires our Company to:

 

●

Maintain timely filings of all reports required by Section 13(a) of the Exchange Act for at least one year from the date the Form 10 becomes effective (the “Effective Date”) and continue these filings until the Company is eligible to terminate its registration pursuant to Rule 12g-4 under the Securities Exchange Act of 1934.

●

Provide monthly reports to the SEC which include the amount of the claims paid, and any claims not paid as well as the reasons for non-payment.

●

Submit to the SEC a final report of its handling of all claims received within seven months from the Effective Date of the Form 10 filing.

 

Also, on November 16, 2018, we entered into a settlement with the Massachusetts Securities Division related to our issuance of AirTokens in our 2017 ICO whereby we agreed to pay a penalty of $100,000 to the Commonwealth of Massachusetts.

 

As a result of our inability to timely resolve these accounting issues, we did not timely file with the SEC our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019, which puts us in violation of Section 13(a) of the Exchange Act and the Settlement Agreement. In addition, we did not timely file certain Current Reports on Form 8-K. As a result of our failure to timely file these various reports, the SEC may through civil or administrative actions seek monetary and non-monetary relief from us, including fines, penalties, undertakings and conduct-based injunctions, and officer and director bars and suspensions.

 

 

On December 30, 2019 a claimant who purchased AirTokens in the 2017 ICO whose claim was denied for failure to comply with the deadlines and the claim process filed a civil lawsuit against our Company in the Supreme Court of the State of New York, County of New York. The lawsuit alleges a claim of sale of unregistered securities to the plaintiff under Section 12(a) of the Securities Act of 1933 in connection with the plaintiff’s purchase of AirTokens in the 2017 ICO. The plaintiff demands a full refund in the amount of consideration paid, plus interest and other costs. On February 25, 2020 the Company settled this claim with the plaintiff and the lawsuit was dismissed.

 

During the quarter ended March 31, 2020, the Company entered into agreements with respect to contracts involving third parties and accrued liabilities of approximately $1.6 million, of which $1.4 million has been paid as of June 30, 2020.

 

On January 29, 2020 Gad Red Propaganda Ltda. (“GAD”) filed a civil lawsuit against the Company’s operating subsidiary banQi Instituição de Pagamento Ltda (dba “banQi”) in 41o Civil Court of Justice of the Estate of Sao Paulo. The lawsuit alleges that banQi failed to fully compensate GAD for certain marketing and other services GAD performed on behalf of banQi pursuant to an alleged strategic partnership GAD entered into with banQi. GAD demands payments of up to approximately U.S.$690,820 for services performed. banQi filed an answer to the claim on May 15, 2020 denying any liability for any payments GAD is seeking. This proceeding remains pending.

 

ITEM 1A. RISK FACTORS

 

The following risk factor supplements the Risk Factors described in the Company’s annual report on Form 10-K for the year ended September 30, 2019, and should be read in conjunction therewith.

 

The extent to which the COVID-19 pandemic will adversely impact our business, financial condition and results of operations is highly uncertain and cannot be predicted.

 

The COVID-19 pandemic has created significant worldwide uncertainty, volatility and economic disruption. The extent to which COVID-19 will adversely impact our business, financial condition and results of operations is dependent upon numerous factors, many of which are highly uncertain, rapidly changing and uncontrollable. These factors include, but are not limited to: (i) the duration and scope of the pandemic; (ii) governmental, business and individual actions that have been and continue to be taken in response to the pandemic, including travel restrictions, quarantines, social distancing, work-from-home and shelter-in-place orders and shut-downs; (iii) the impact on U.S. and global economies and the timing and rate of economic recovery; (iv) potential adverse effects on the financial markets and access to capital; (v) potential goodwill or other impairment charges; (vi) increased cybersecurity risks as a result of pervasive remote working conditions; and (vii) our ability to effectively carry out our operations due to any adverse impacts on the health and safety of our employees and their families. Furthermore, as a result of the COVID-19 pandemic, our employees have been required to work from home. The significant increase in remote working, particularly for an extended period of time, could exacerbate certain risks to our business, including an increased risk of cybersecurity events and improper dissemination of personal or confidential information. We do not believe these circumstances have, or will, materially adversely impact our internal controls or financial reporting systems.

We were acquired by Via Varejo in May 2020 and the failure to fully integrate our companies in the future could disrupt our business and adversely affect our operating results.

 

The integration of our Company with Via Varejo is expected to divert management attention from other business activities, which could have a material adverse effect on our business, financial condition and results of operations. Integrating companies involve numerous risks, including the potential failure to achieve the expected benefits of the combination; difficulties integrating and harmonizing financial reporting systems; difficulties in and the cost of integrating operations, technologies, systems, services and personnel; diversion of financial and managerial resources from existing operations; potential loss of certain employees; unanticipated expenses related to integrating technologies; and challenges caused by distance, language and cultural differences. If we do not successfully integrate with Via Varejo, or if there are delays in integrating our businesses, the anticipated synergies and other benefits of our Company being acquired by Via Varejo may not be realized fully or at all or may take longer to realize than expected.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Not Applicable

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

Not Applicable

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable

 

ITEM 5. OTHER INFORMATION

 

Not Applicable

 

ITEM 6. EXHIBITS

 

INDEX TO EXHIBITS

 

					Incorporated by Reference							Filed or Furnished
Exhibit #		Exhibit Description			Form		Date Filed			Number		Herewith
2.1		Certificate of Ownership and Merger			8-K		5/28/20			2.1
3.1.		Restated Certificate of Incorporation			8-K		5/28/20			3.1
3.2		Certificate of Conversion			8-K		5/28/20			3.2
3.3		Certificate of Formation			8-K		5/28/20			3.3
4.1		Limited Liability Company Agreement			8-K		5/28/20			4.1
4.2		Convertible Promissory Note, attached as Exhibit B to each of  (i) Services Agreement dated September 11, 2018 between by and among the Company and Via Varejo, S.A. et. al., and (ii) Convertible Note Purchase and Call Option Agreement dated September 11, 2018 by and among the Company and Via Varejo, S.A. et. al.			10		3/15/19			4.1
4.3		Form of Additional Convertible Promissory Note attached as Exhibit B-1 to each of (i) Services Agreement Amendment dated June 7, 2019 by and among the Company and Via Varejo, S.A. et. al., and (ii) Convertible Note Purchase and Call Option Agreement Amendment dated June 7, 2019 by and among the Company and Via Varejo, S.A. et. al.			10/A		7/8/19			4.2
10.1		Services Agreement dated September 11, 2018 by and among the Company and Via Varejo, S.A. et. al.			10		3/15/19			10.1
10.2		Services Agreement Amendment dated June 7, 2019 by and among the Company and Via Varejo, S.A. et. al.			10/A		7/8/19			10.2
10.3		Convertible Note Purchase and Call Option Agreement dated September 11, 2018 by and among the Company and Via Varejo, S.A. et. al. attached as Exhibit A to Services Agreement dated September 11, 2018 between by and among the Company and Via Varejo, S.A. et. al.			10		3/15/19			10.2
10.4		Convertible Note Purchase and Call Option Agreement Amendment dated June 7, 2019 by and among the Company and Via Varejo, S.A. et. al.			10/A		7/8/19			10.4
10.5		Airfox Service Level Agreement attached as Exhibit C to Services Agreement dated September 11, 2018 between by and among the Company and Via Varejo, S.A. et. al.			10		3/15/19			10.3
10.6		Client Service Level Agreement attached as Exhibit D to Services Agreement dated September 11, 2018 between by and among the Company and Via Varejo, S.A. et. al.			10		3/15/19			10.4
10.7		Form of CarrierEQ, Inc. Stockholders Agreement attached as Exhibit D to Convertible Note Purchase and Call Option Agreement dated September 11, 2018 by and among the Company and Via Varejo, S.A. et. al.			10		3/15/19			10.5

 

 

10.8		Form of Stock Purchase Agreement attached as Exhibit E to Convertible Note Purchase and Call Option Agreement dated September 11, 2018 by and among the Company and Via Varejo, S.A. et. al.			10		3/15/19			10.6
10.9		Call Exercise Notice			8-K		2/13/20			10.9
10.10		Side Letter Agreement dated May 21, 2020			8-K		5/28/20			10.10
10.11		Stock Purchase Agreement – Employee -Victor Santos			8-K		2/13/20			10.10
10.12		Amendment to Stock Purchase Agreement dated April 17, 2020			8-K		5/28/20			10.12
10.13		Second Amendment to Stock Purchase Agreement dated May 18, 2020			8-K		5/28/20			10.13
10.14		Stock Purchase Agreement – Employee - Douglas Lopes			8-K		2/13/20			10.11
10.15		Amendment to Stock Purchase Agreement dated April 17, 2020			8-K		5/28/20			10.15
10.16		Second Amendment to Stock Purchase Agreement dated May 18, 2020			8-K		5/28/20			10.16
10.17		Stock Purchase Agreement – Employee - Emanuel Moecklin			8-K		2/13/20			10.12
10.18		Amendment to Stock Purchase Agreement dated April 17, 2020			8-K		5/28/20			10.18
10.19		Second Amendment to Stock Purchase Agreement dated May 18, 2020			8-K		5/28/20			10.19
10.20		Stock Purchase Agreement – Non-Employee - Chris McLean			8-K		2/13/20			10.13
10.21		Amendment to Stock Purchase Agreement dated February 7, 2020			8-K		5/28/20			10.21
10.22		Second Amendment to Stock Purchase Agreement dated May 18, 2020			8-K		5/28/20			10.22
10.23		Stock Purchase Agreement – Non-Employee - Tekoa Capital LLC			8-K		2/13/20			10.14
10.24		Amendment to Stock Purchase Agreement dated February 7, 2020			8-K		5/28/20			10.24
10.25		Second Amendment to Stock Purchase Agreement dated May 18, 2020			8-K		5/28/20			10.25
10.26		Stock Purchase Agreement – Non-Employee - Winsten Limited			8-K		2/13/20			10.15
10.27		Amendment to Stock Purchase Agreement dated February 7, 2020			8-K		5/28/20			10.27
10.28		Second Amendment to Stock Purchase Agreement dated May 18, 2020			8-K		5/28/20			10.28
10.29		Stock Purchase Agreement – Non-Employee - Andrew Wang			8-K		2/13/20			10.16
10.30		Amendment to Stock Purchase Agreement dated February 7, 2020			8-K		5/28/20			10.30
10.31		Second Amendment to Stock Purchase Agreement dated May 18, 2020			8-K		5/28/20			10.31
10.32		Victor Santos Employee Agreement dated 05/21/20			8-K		5/28/20			10.32
10.33		Douglas Lopes Employee Agreement dated 05/21/20			8-K		5/28/20			10.33
10.34		Emanuel Moecklin Employee Agreement dated 05/21/20			8-K		5/28/20			10.34
10.35		Contribution Agreement			8-K		5/28/20			10.35
31.1		Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, executed by the Principal Executive Officer of the Company			10-Q		8/14/20			31.1
31.2		Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, executed by the Principal Financial Officer of the Company			10-Q		8/14/20			31.2
31.3		Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, executed by the Principal Executive Officer of the Company										Filed
31.4		Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, executed by the Principal Financial Officer of the Company										Filed
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Principal Executive Officer of the Company			10-Q		8/14/20			32.1
32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Principal Financial Officer of the Company			10-Q		8/14/20			32.2
101		The following financial information from the quarterly report on Form 10-Q/A of CarrierEQ, Inc. for the quarter ended June 30, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss, (iii) Condensed Consolidated Statement of Stockholders’ Deficit, (iv) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.										Filed

 

 

SIGNATURES

 

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

 

	Carrier EQ, LLC.
Date: May 24, 2021	By:	/s/ Douglas de Carvalho Lopes
		Douglas de Carvalho Lopes
		Chief Financial Operating Officer (Principal Financial Officer)