Internet security poses a risk on business operations and management budgets.
Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may result in a compromise or breach of the technology used by us to protect client transaction data. Anyone who is able to circumvent our security measures could misappropriate proprietary information or cause material interruptions in our operations. We may be required to expend significant capital and other resources to protect against security breaches or to minimize problems caused by security breaches. To the extent that our activities or the activities of others involve the storage and transmission of proprietary information, security breaches could damage our reputation and expose us to a risk of loss and/or litigation. Our security measures may not prevent security breaches. Our failure to prevent these security breaches may result in consumer distrust and may adversely affect our business, results of operations and financial condition.
Currently, we are lacking diversification of revenues.
Our business will depend upon entering into agreements with customers to use our advertising platform, services and software solutions, as well as, our consulting services.
User fees from our customers from the use of these services will provide all or substantially all of our revenues. We can give no assurance that our current and potential customers, including data service providers that provide broadband service to end users, government agencies or entities with private data networks, will license or will agree to pay the license fees we will request. The failure to enter into those agreements or realize the anticipated benefits from these agreements on a timely basis, or at all, or to renew any agreements upon expiration or termination would have a material adverse effect on our financial condition and results of operations.
We will need significant additional financing to commercialize our products and services, and we may not be able to obtain such financing on acceptable terms or at all.
To date, we have relied primarily on private placements of our common stock and warrants to purchase common stock to fund our operations. We will require additional financing in the near and long-term to fully execute our business plan. Even if we raise the maximum amount of financing contemplated by this offering, we anticipate that we will need additional financing to complete tests of our systems, as well as to cover our operational costs while we obtain all relevant certifications, negotiate relevant agreements, and otherwise fully develop and commercialize them.
In addition, we are currently exploring various options with respect to developing and implementing services in cryptocurrencies and may actively consider from time to time other significant technological, strategic, and operational initiatives. In order to execute on any of these initiatives, we may require additional financing. Our success will depend on our ability to raise such additional financing on reasonable terms and on a timely basis. The market conditions and the macroeconomic conditions that affect the markets in which we operate could have a material adverse effect on our ability to secure financing on acceptable terms, if at all. We may be unable to secure additional financing on favorable terms, or at all, or our operating cash flow may be insufficient to satisfy our financial obligations. The terms of additional financing may limit our financial and operating flexibility. Our ability to satisfy our financial obligations will depend upon our future operating performance, the availability of credit, generally, economic conditions and financial, business, and other factors, many of which are beyond our control. Furthermore, if financing is not available when needed, or is not available on acceptable terms, we may be unable to take advantage of business opportunities or respond to regulatory pressures, any of which could have a material adverse effect on our business, financial condition, and results of operations. We have from time to time evaluated, and we continue to evaluate our potential capital needs. We may utilize one or more types of capital raising in order to fund any initiative in this regard, including the issuance of new equity securities and new debt securities, including debt securities convertible into shares of our common stock. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into shares of our common stock, our existing stockholders could suffer significant dilution in their percentage ownership of our company. In addition, any new securities we issue could have rights, preferences, and privileges senior to those of holders of our common stock, and we may grant holders of such securities rights with respect to the governance and operations of our business. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited. The development and acceptance of competing blockchain platforms or technologies may cause consumers to use alternative distributed ledgers or other alternatives. The development and acceptance of competing blockchain platforms or technologies may cause consumers to use alternative distributed ledgers or an alternative to distributed ledgers altogether. Our business utilizes presently existent digital ledgers and blockchains and we could face difficulty adapting to emergent digital ledgers, blockchains, or alternatives thereto. This may adversely affect us and our exposure to various blockchain technologies and prevent us from realizing the anticipated profits from our investments. Such circumstances could have a material adverse effect on our ability to continue as a going concern or to pursue our new strategy at all, which could have a material adverse effect on our business, prospects, or operations and potentially the value of any bitcoin or other cryptocurrencies we acquire or hold for our own account, and harm investors. Rapid technological change may render our products or services obsolete or less desirable to customers. With innovative technologies emerging at a breakneck pace, there is always a risk that a company's products or services may become obsolete or less desirable to customers. This is especially true in highly competitive markets where companies are constantly striving to develop the latest and greatest technologies. We may experience delays or setbacks in developing new products or technologies. The process of innovation can be unpredictable, with unexpected challenges and roadblocks arising at any stage of development. This can be due to a variety of factors, such as technological limitations, resource constraints, or changes in market demand. Delays or setbacks in the development of new products or technologies could result in missed opportunities and a competitive disadvantage compared to rival companies. Furthermore, such delays can impact our ability to meet customer demand and may lead to negative customer experiences. We may face challenges in integrating modern technologies into our existing products or services. In many cases, it may be necessary to incorporate modern technologies to keep up with the competition or to meet changing customer demands. However, integrating modern technologies can be complex and time-consuming, and may require significant changes to our existing infrastructure, systems, and processes. This can result in delays, increased costs, and potential disruption to our operations. Additionally, there is a risk that the integration may not be successful, which could impact the quality of our products or services, and ultimately, our reputation. We have from time to time evaluated, and we continue to evaluate our potential capital needs. We may utilize one or more types of capital raising in order to fund any initiative in this regard, including the issuance of new equity securities and new debt securities, including debt securities convertible into shares of our common stock. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into shares of our common stock, our existing stockholders could suffer significant dilution in their percentage ownership of our company. In addition, any new securities we issue could have rights, preferences, and privileges senior to those of holders of our common stock, and we may grant holders of such securities rights with respect to the governance and operations of our business. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited.
Assertions by third parties of infringement, misappropriation or other violations by us of their intellectual property rights could result in significant costs and substantially harm our business and operating results.
In recent years, there has been significant litigation involving intellectual property rights in many technology-based industries. We may face from time to time in the future allegations that we or a supplier or customer have violated the rights of third parties, including patent, trademark and other intellectual property rights.
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| Table of third party intellectual property rights, we are unable to prevail in the litigation or retain or obtain sufficient rights or develop non-infringing intellectual property or otherwise alter our business practices on a timely or cost efficient basis, our business and competitive position could be materially adversely affected. Many companies may be devoting significant resources to obtaining patents that could potentially cover aspects of our business. We have not exhaustively searched patents relevant to our technologies and business and, therefore, it is possible that we may unknowingly infringe the patents of others.Any claims of infringement, misappropriation or related allegations, whether or not meritorious, would be time-consuming, divert technical and management personnel and be costly to resolve. We do not presently have funds to defend any such claims without materially impacting funds for the development of our products and services. As a result of any such dispute, we may have to develop noninfringing technology, pay damages, enter into royalty or licensing agreements, cease providing certain products or services, adjust our marketing activities or take other actions to resolve the claims. These actions, if required, may be costly or unavailable on terms acceptable to us. In addition, certain of our potential suppliers may not indemnify us for third party infringement or misappropriation claims arising from our use of supplier technology. As a result, we may be liable in the event of such claims. Any of these events could result in increases in operating expenses and result in a loss of business.
We may not be able to protect our intellectual property rights.
We regard our intellectual property as important to our success. We plan to rely on trademark, copyright and patent law, trade secret protection and confidentiality agreements with our employees, vendors, consultants, and others to protect our proprietary rights. We cannot assure you that the efforts we have taken to protect our proprietary rights will be sufficient or effective, that any pending or future patent and trademark applications will lead to issued patents and registered trademarks in all instances, that others will not develop or patent similar or superior technologies, products or services, or that our patents, trademarks, and other intellectual property will not be challenged, invalidated, misappropriated or infringed by others. Furthermore, the intellectual property laws and enforcement practices of other countries may not protect our products and intellectual property rights to the same extent as the laws of the United States. If we are unable to protect our intellectual property from unauthorized use, our ability to exploit our proprietary technology or our brand may be harmed and, as a result, our business and results of operations may suffer.
Increased costs and other demands associated with our growth could impact our ability to achieve profitability over the long term and could strain our personnel, technology and infrastructure resources.
We expect our costs to increase in future periods as we experience growth in our personnel and operations, which will place significant demands on our management, administrative, technological, operational and financial infrastructure. Our success will depend in part upon our ability to contain costs with respect to growth opportunities. To successfully manage our potential growth, we will need to continue to improve our operational, financial, technological and management controls and our reporting systems and procedures. In addition, as and when we grow, we will need to effectively integrate, develop and motivate new employees. Our failure to successfully manage our growth could adversely affect our business, financial condition and results of operations.
The industry within which we compete is highly competitive, which may hinder our ability to generate revenue and may diminish our margins.
The technology and media focused advertising industry within which we will compete is highly competitive. New developments in technology may negatively affect the development or licensing of proprietary software, or make our proprietary software uncompetitive or obsolete. Some of our competitors may be much larger companies with longer operating histories and substantially greater financial, technical, sales, marketing and other resources than we do, as well as greater name recognition. As a result, our competitors may be able to compete more aggressively and sustain that competition over a longer period of time than we could. Each of these competitors has the potential to capture market share in various markets, which could have a material adverse effect on our position in the industry and our financial results.
RISK FACTORS RELATED TO OUR FINANCIAL STATEMENTS, MANAGEMENT, COMMON STOCK, AND THIS OFFERING
We have no separation agreement or transition service agreement with MCIG and should MCIG decide not to continue to provide funding under the revolving credit agreement we may be unable to support continued operations.
MCIG has no obligations to the company except as a majority shareholder and lender. There are no assurances MCIG will continue to provide financing under the revolving credit agreement or call for payment under the agreement. In addition, so long as the revolving credit agreement is active, we cannot merge with another company, sale our assets, change our fiscal year, make any material changes in our business practices, effect a change of control through the issuance of stock, warrants, or options, or incumber any of our assets, without the written consent of MCIG, which may not be granted. We currently owe in excess of $500,000 to MCIG under the revolving credit agreement, which expires on December 31, 2018. We are in current default. Should we be unable to repay, negotiate other terms, or refinance this debt, MCIG may foreclose on the assets effectively shutting down our business.
All our officers and directors are working under consulting agreements and have/may have external business opportunities and employment that may be in conflict with us.
Currently, all of our officers and directors are working under consulting agreements and may dedicate time and resources to other functions and personal expenditures, some of which may conflict with our objectives as a company. Any and all conflicts of interest entered into by our officers are brought to the company’s board of director’s attention, with a resolution to the conflict addressed as such, at the time of revealment.
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Our business has a limited operating history, which may make it difficult to evaluate our current business and predict our future performance.
Our lack of operating history makes it difficult to accurately evaluate our business and predict our future performance. Any assessments of our current business and predictions that we or you make about our future success or viability may not be as accurate as they could be if we had an operating history. We have encountered and will continue to encounter risks and difficulties frequently experienced by emerging growth companies in rapidly changing industries, and the size and nature of our market opportunity may change as we scale our business and begin deployment of new projects. If we do not address any of the foregoing risks, our business could be harmed.
Our independent registered public accounting firms, in their audit reports related to our financial statements for the period ended January 31, 2019, expressed doubt about our ability to continue as a going concern.
Our independent registered public accounting firms have included an explanatory paragraph in the reports on our financial statements included in this prospectus expressing doubt as to our ability to continue as a going concern. The financial statements included in this prospectus have been prepared assuming that we will continue as a going concern. However, we cannot assure you that we will be able to do so. Our lack of any cash flow raise substantial doubt about our ability to continue as a going concern, and our financial statements do not include any adjustments that might result from the outcome of this uncertainty. If we are unable to achieve or sustain profitability or to secure additional financing on acceptable terms, our inability to continue as a going concern may result in our stockholders losing their entire investment. There is no guarantee that we will become profitable or secure additional financing on acceptable terms, or at all.
Material weaknesses in our internal controls over financial reporting may limit our ability to prevent or detect financial misstatements or omissions. These material weaknesses could result in our financial statements not being in accordance with generally accepted accounting principles, and such failure could negatively affect the price of our stock.
Our current management has limited experience managing and operating a public company, and we rely in many instances on the professional experience and advice of third parties. As a result, we have in the past experienced, and in future may continue to experience, material weaknesses and potential problems in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act. Such material weakness could also include a deficiency, or combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. If we fail to achieve and maintain the adequacy of our internal controls, as such requirements are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly.
We are required to include in our quarterly and annual reports the conclusion of our principal executive and principal financial officers regarding the effectiveness of our disclosure controls and procedures as of the end of the period covered by the report. In addition, in connection with our annual report, we are required to provide management’s assessment of the effectiveness of our internal controls over financial reporting as of the end of the fiscal year. Management has concluded that our internal control over financial reporting was not effective because of material weaknesses that included:
● lack of a functioning audit committee and lack of a majority of outside directors on the Company’s board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures;
● inadequate segregation of duties consistent with control objectives;
● insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of U.S. GAAP and SEC disclosure requirements; and
● ineffective controls over period end financial disclosure and reporting processes.
We expect to incur additional expenses and diversion of management’s time as a result of performing the system and process evaluation, testing and remediation required in order to comply with the management certification.
Currently we have agreements with our key personnel that allow for a 30-day termination notice by either party. The loss of one or more of our key personnel could harm our business.
We depend on the continued service and performance of our key personnel, including Alex Mardikian, our Chief Executive Officer and Brandy Craig, our Chief Financial Officer. Some of these individuals have acquired specialized knowledge and skills with respect to our operations. As a result, if any of these individuals were to stop providing services to us, we could face substantial difficulty in hiring qualified successors and could experience a loss of productivity while any such successor obtains the necessary training and expertise. We do not maintain key man insurance on any of our officers or key employees. In addition, much of our key technology and systems are custom-made by our personnel. The loss of key personnel, including key members of our management team, as well as certain of our key technical personnel, could disrupt our operations and have an adverse effect on our ability to grow our business. We intend to enter into long term contracts with our key personnel but there is no guarantee we will be successful.
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Economic downturns or other disruptions could reduce demand for our products or services.
We may fail to recruit, train and retain the highly skilled employees that are necessary to execute our growth strategy.
Competition for key technical personnel in highly technical industries such as ours is intense. We believe that our future success depends in large part on our ability to hire, train, retain and leverage the skills of qualified software engineers, programmers and other highly skilled personnel needed to maintain and grow our network and related technology and develop and successfully implement our products and technology. We may not be as successful as our competitors at recruiting, training, retaining and utilizing this highly skilled personnel. In particular, we may have more difficulty attracting or retaining highly skilled personnel during periods of poor operating performance. Any failure to recruit, train and retain highly skilled employees could negatively impact our business and results of operations.
The warrants are speculative in nature.
The warrants to be issued to investors in this offering do not confer any rights of common stock ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent the right to purchase shares of common stock at a fixed price for a limited period of time. Specifically, commencing on the date of issuance, holders of the warrants may exercise their right to acquire shares of common stock at an exercise price of $1.00 per share, prior to five years from the date of issuance, after which date any unexercised warrants will expire and have no further value. There can be no assurance that the market price of our common stock will ever equal or exceed the exercise price of the warrants, and consequently, whether it will ever be profitable for holders of the warrants to exercise the warrants.
Our articles of incorporation allow for our board to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock.
Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of directors has the authority to issue up to 100,000,000 shares of our preferred stock without further stockholder approval. As a result, our board of directors could authorize the issuance of additional series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders. Although we have no present intention to issue any additional shares of preferred stock or to create any additional series of preferred stock, we may issue such shares in the future.
Future stock issuances could cause substantial dilution and a decline in our stock price.
We expect to issue additional shares of common stock or other equity or debt securities convertible into shares of our common stock in connection with future financings and compensatory arrangements and may issue additional shares of common stock or other equity securities in connection with acquisitions, litigation settlements or otherwise. In addition, a certain number of shares of our common stock are reserved for issuance upon the exercise of stock options and other equity incentives. We may reserve additional shares of our common stock for issuance upon the exercise of stock options or other similar forms of equity incentives. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price for our common stock. Any of these issuances could result in substantial dilution to our existing stockholders and could cause the trading price of our common stock to decline.
Our significant stockholder could exert influence over our company, and if the ownership of our common stock continues to be concentrated, or becomes more concentrated in the future, it could prevent our other stockholders from influencing significant corporate decisions.
MCIG currently owns 100% of the issued and outstanding Series A Preferred shares of the Company, as of the date of this prospectus. As a result, MCIG will be able to exercise influence over all matters requiring stockholder approval for the foreseeable future, including approval of significant corporate transactions, which may reduce the market price of our common stock. As the Series A Preferred Stock votes on a 1,000:1 basis of common stock, MCIG has 95.0% voting control of the Company.
The interests of the dominant stockholders may conflict with the interests of our other stockholders.
Our corporate governance guidelines address potential conflicts between a director’s interests and our interests, and requires our employees and directors to avoid actions or relationships that might conflict or appear to conflict with their job responsibilities or our interests and to disclose their outside activities, financial interests or relationships that may present a possible conflict of interest or the appearance of a conflict to management or corporate counsel. These corporate governance guidelines and code of business ethics do not, by themselves, prohibit transactions with MCIG.
We are an “emerging growth company,” and any decision on our part to comply with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors. When we lose that status, there will be an increase in the costs and demands placed upon management.
We are an “emerging growth company,” as defined in the JOBS Act, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote regarding executive compensation, and stockholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”) for complying with new or revised accounting standards.
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An emerging growth company can, therefore, delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may, therefore, not be comparable to those of companies that comply with such new or revised accounting standards. We could be an emerging growth company until our fiscal year ending on January 31, 2023, although, if the market value of our common stock that is held by non-affiliates exceeds $700 million prior to that or we issue more than $1 billion of non-convertible debt during a 3-year period, we would cease to be an “emerging growth company” earlier. We cannot predict if investors will determine that our common stock is less desirable if we choose to rely on these exemptions. If some investors determine that our common stock is less desirable as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.
When we lose emerging growth company status, we expect the costs and demands placed upon management to increase, as we would have to comply with additional disclosure and accounting requirements, particularly if our public float should exceed $75 Million, in which case we would also be ineligible to utilize certain scaled disclosure requirements available to smaller reporting companies.
Certain provisions of Delaware law provide for indemnification of our officers and directors at our expense and limit their liability, which may result in a major cost to us and damage the interests of our stockholders, because our resources may be expended for the benefit of our officers and/or directors.
Applicable Delaware law provides for the indemnification of our directors, officers, employees, and agents, under certain circumstances, for attorney’s fees and other expenses incurred by them in any litigation to which they become a party resulting from their association with us or activities on our behalf. We are also obligated to pay the expenses of such litigation for any of our directors, officers, employees, or agents, upon such person’s promise to repay us, if it is ultimately determined that any such person shall not have been entitled to indemnification. These indemnity obligations are set forth more fully in indemnification agreements that we have entered into with our officers and directors. This indemnification policy could result in substantial expenditures by us, which we would be unable to recover.
We have been advised that, in the opinion of the SEC, indemnification for liabilities arising under the federal securities laws is against public policy as expressed in the Securities Act and, therefore, unenforceable. In the event that a claim for indemnification against these types of liabilities, other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, lawsuit or proceeding, is asserted by a director, officer or controlling person in connection with our securities being registered, we will (unless in the opinion of our counsel, the matter has been settled by controlling precedent) submit to a court of appropriate jurisdiction, the issue of whether such indemnification by us is against public policy as expressed in the Securities Act, and we will be governed by the final adjudication of such issue. The legal process relating to this matter, if it were to occur, probably will be very costly and may result in us receiving negative publicity, either of which factors would probably materially reduce the market and price for our common stock.
The market for our common stock may be subject to the penny stock restrictions, which may result in lack of liquidity and make trading difficult or impossible.
SEC Rule 15g9 establishes the definition of a “penny stock,” for purposes relevant to us, as an equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions. Our common stock is currently subject to the penny stock rules, and it is probable that our common stock will continue to be considered to be a penny stock for the immediately foreseeable future. This classification materially and adversely affects the market liquidity for our common stock. For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker-dealer approve a person’s account for transactions in penny stocks, and the broker-dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased.
To approve a person’s account for transactions in penny stocks, the broker-dealer must obtain financial information, investment experience and objectives of that person and make a reasonable determination that transactions in penny stocks are suitable for that person and that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker-dealer
Economic downturns can result in reduced consumer spending and lower demand for non-essential goods and services, including technology products. Similarly, other disruptions such as natural disasters, political instability, or supply chain disruptions could impact the demand for a company's products or services. In such situations, we may experience decreased revenue, lower profits, and potentially even financial losses. We may be dependent on a few large customers or partners, which could create revenue concentration risk. If a significant portion of our revenue comes from a few key customers or partners, any adverse developments or changes in those relationships could have a significant impact on our financial performance. For instance, if one of these key customers or partners decides to reduce or terminate its business relationship with us, we could lose a significant amount of revenue, leading to lower profits or even financial losses. We may face challenges in managing foreign currency exchange rate risks or interest rate risks. We operate in multiple countries, by which we may face challenges in managing foreign currency exchange rate risks or interest rate risks. Fluctuations in foreign currency exchange rates can impact our financial performance, especially if we have significant revenue or expenses denominated in foreign currencies. Similarly, changes in interest rates can impact our borrowing costs and financial performance. Risk of Illiquidity The market for our common stock may be subject to penny stock restrictions, which may result in lack of liquidity and make trading difficult or impossible. 17 CFR 240.3151-1 defines a “penny stock,” for purposes relevant to us, as an equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions. Our common stock could be subject to penny stock rules, and it is probable that our common stock could be considered to be a penny stock in the foreseeable future. This classification materially and adversely affects the market liquidity for our common stock. For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker-dealer approve a person’s account for transactions in penny stocks, and the broker-dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased. To approve a person’s account for transactions in penny stocks, the broker-dealer must obtain financial information, investment experience and objectives of that person and make a reasonable determination that transactions in penny stocks are suitable for that person and that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker-dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which, in highlight form, sets forth: ●
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Disclosure also has to be made about the risks of investing in penny stock in both public offerings and in secondary trading and commissions payable to, both, the broker-dealer and the registered representative, current quotations for the securities, and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Because of these regulations, broker-dealers may desire to not engage in the necessary paperwork and disclosures required to sell our common stock, and broker-dealers may encounter difficulties in their attempt to sell our common stock, which may affect the ability of holders to sell our common stock in the secondary market and have the effect of reducing trading activity in the secondary market of our common stock. These additional sales practice
Disclosure also has to be made about the risks of investing in penny stock in both public offerings and in secondary trading and commissions payable to, both, the broker-dealer and the registered representative, current quotations for the securities, and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Because of these regulations, broker-dealers may desire to not engage in the necessary paperwork and disclosures required to sell our common stock, and broker-dealers may encounter difficulties in their attempt to sell our common stock, which may affect the ability of holders to sell our common stock in the secondary market and have the effect of reducing trading activity in the secondary market of our common stock. These additional sales practices and disclosure requirements could impede the sale of our common stock. In addition, the liquidity of our common stock may decrease, with a corresponding decrease in the price of our common stock. Our common stock, in all probability, will continue to be subject to such penny stock rules for the foreseeable future and our stockholders will, quite probably, have difficulty selling our common stock. Sales of our common stock in reliance on Rule 144 may reduce prices in that market by a material amount.
A significant number of the outstanding shares of our common stock are “restricted securities” within the meaning of Rule 144 under the Securities Act. As restricted securities, those shares may be resold only pursuant to an effective registration statement or pursuant to the requirements of Rule 144 or other applicable exemptions from registration under the Securities Act and as required under applicable state securities laws. Rule 144 provides in essence that an affiliate (i.e., an officer, director, or control person) who has held restricted securities for a prescribed period may, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed 1.0% of the issuer’s outstanding common stock. The alternative limitation on the number of shares that may be sold by an affiliate, which is related to the average weekly trading volume during the four calendar weeks prior to the sale is not available to stockholders of companies whose securities are not traded on an “automated quotation system”; because the OTCQB is not such a system, market based volume limitations are not available for holders of our securities selling under Rule 144.
Pursuant to the provisions of Rule 144, there is no limit on the number of restricted securities that may be sold by a non-affiliate (i.e., a stockholder who has not been an officer, director or control person for at least 90 consecutive days before the date of the proposed sale) after the restricted securities have been held by the owner for a prescribed period, although there may be other limitations and/or criteria to satisfy. A sale pursuant to Rule 144 or pursuant to any other exemption from the Securities Act, if available, or pursuant to registration of shares of our common stock held by our stockholders, may reduce the price of our common stock in any market that may develop.
The trading market for our common stock may be restricted, because of state securities “Blue Sky” laws which prohibit trading absent compliance with individual state laws.
Transfers of our common stock may be restricted pursuant to the securities and state laws promulgated by various states and foreign jurisdictions, commonly referred to as “Blue Sky” laws. Absent compliance with such laws, our common stock may not be traded in such jurisdictions. Because the shares of our common stock registered hereunder have not been registered for resale under the “Blue Sky” laws of any state, the holders of such shares and persons who desire to purchase such shares in any trading market that might develop in the future, should be aware that there may be significant state “Blue Sky” law restrictions upon the ability of investors to sell and purchasers to purchase such shares. These restrictions prohibit the secondary trading our common stock. We currently do not intend and may not be able to qualify securities for resale in those states which do not offer manual exemptions and require securities to be qualified before they can be resold by our stockholders. Accordingly, investors should consider the secondary market for our securities to be limited.
The price of our common stock may be volatile and the value of our common stock could decline.
The trading price of our common stock may be volatile. The trading price of our common stock may fluctuate widely in response to various factors, many of which are beyond our control.
In addition, the stock markets have experienced extreme price and volume fluctuations in recent years that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many such companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. These broad market fluctuations may adversely affect the trading price of our common stock. In the past, following periods of volatility in the market price of a company’s securities, class action litigation has often been instituted against such company. Any litigation of this type brought against us could result in substantial costs and a diversion of our management’s attention and resources, which would harm our business, operating results and financial condition.
Credit card payment processors and merchant account pose a risk.
We accept credit cards as a means of payment for the sale of our products. If we are unable to find suitable providers or an alternative method of payment for our customers, our cash-flow will be constrained and our sales may be effected which may have a material adverse effect on our performance, financial condition and results of operations.
Services exchanges, returns, warranty claims, defect and recalls may adversely affect our business.
All our services are subject to customer claims, which may subject us to requests for refunds and chargebacks. If we are unable to maintain a certain degree of quality control of our services we will incur costs of replacing and or refunding our services to our customers.
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| 11 | We cannot assure you that we will effectively manage our expected growth.
The growth and expansion of our business and products create significant challenges for our management, operational, and financial resources, including managing multiple relations with customers and other third parties. In the event of continued growth of our operations or in the number of our third-party relationships, our information technology systems or our internal controls and procedures may not be adequate to support our operations. In addition, some members of our management do not have significant experience managing a large global business operation, so our management may not be able to manage such growth effectively. To effectively manage our growth, we must continue to improve our operational, financial, and management processes and systems and to effectively expand, train, and manage our employee base. As our organization continues to grow, and we are required to implement more complex organizational management structures, we may find it increasingly difficult to maintain the benefits of our corporate culture, including our ability to quickly develop and launch new and innovative products. This could negatively affect our business performance.
We intend to have significant international operations expanding our operations abroad where we have limited operating experience, and this may subject us to increased business and economic risks that could affect our financial results.
We intend to expand our business operations into international markets. We may enter new international markets where we have limited or no experience in marketing, selling, and deploying our services. Our services are generally available globally through the web and on mobile, but some or all of our services or functionality may not be available in certain markets due to legal and regulatory complexities. We may also outsource certain operational functions to third-party vendors globally. If we fail to deploy, manage, or oversee our international operations successfully, our business may suffer. In addition, we are subject to a variety of risks inherent in doing business internationally, many of which are beyond our control.
The Company intends to enter into indemnification agreements with the officers and directors and we may be required to indemnify our Directors and Officers, and if the claim is greater than $1,000,000, it may create significant losses for the Company.
We are authorized, under Delaware law, to indemnify our directors and officers to the extent provided in that statute. Our Articles of Incorporation require the Company to indemnify each of our directors and officers against liabilities imposed upon them (including reasonable amounts paid in settlement) and expenses incurred by them regarding any claim made against them or any action, suit or proceeding to which they may be a party by reason of their being or having been a director or officer of the company. We currently do not maintain officer's and director's liability insurance coverage. Consequently, any judgment against our Officers and Directors, the Company will be forced to pay. We have entered into indemnification agreements with each of our officers and directors containing provisions that may require us, among other things, to indemnify our officers and directors against certain liabilities that may arise because of their status or service as officers or directors (other than liabilities arising from willful misconduct of a culpable nature) and to advance their expenses incurred because of any proceeding against them as to which they could be indemnified. Management believes that such indemnification provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. We are subject to claims arising from disputes with employees, vendors and other third parties in the normal course of business. These risks may be difficult to assess or quantify and their existence and magnitude may remain unknown for substantial periods of time. If the plaintiffs in any suits against us were to successfully prosecute their claims, or if we were to settle such suits by making significant payments to the plaintiffs, our operating results and financial condition would be harmed. In addition, our organizational documents require us to indemnify our senior executives to the maximum extent permitted by Delaware law. If our senior executives were named in any lawsuit, our indemnification obligations could magnify the costs of these suits.
RISKS FACTORS ASSOCIATED WITH SOCIAL MEDIA
If we fail to retain existing users or add new users, or if our users decrease their level of engagement with our products, our revenue, financial results, and business may be significantly harmed.
The size of our user base and our users' level of engagement are critical to our success. Our financial performance will be significantly determined by our success in adding, retaining, and engaging active users of our products. We anticipate that our active user growth rate will continue to grow over time as the size of our active user base increases, and as we achieve higher market penetration rates. If people do not perceive our products to be useful, reliable, and trustworthy, we may not be able to attract or retain users or otherwise maintain or increase the frequency and duration of their engagement. A number of other social networking companies that achieved early popularity have since seen their active user bases or levels of engagement decline, in some cases precipitously. There is no guarantee that we will not experience a similar erosion of our active user base or engagement levels. Our user engagement can be difficult to measure, particularly as we introduce new and different products and services. Any number of factors could potentially negatively affect user retention, growth, and engagement, including if:
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| users increasingly engage with other competitive products or services;
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The Financial Industry Regulatory Authority, or FINRA, sales practice requirements may limit a shareholder’s ability to buy and sell our common shares. FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common shares, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares. See Risk of Restrictions on Selling Shares. Risk of No Market Liquidity There may in all likelihood be little demand for shares of our common stock and as a result, investors may be unable to sell at or near ask prices or at all if they need to liquidate their investment. There may be little demand for shares of our common stock on the OTC Bulletin Board, or OTC Markets.com, meaning that the number of persons interested in purchasing our common shares at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if the company came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven, early-stage company such as ours or purchase or recommend the purchase of any of our securities until such time as it became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our securities is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on the securities price. We cannot give investors any assurance that a broader or more active public trading market for our common securities will develop or be sustained, or that any trading levels will be sustained. Due to these conditions, we can give investors no assurance that they will be able to sell their shares at or near ask prices or at all if they need money or otherwise desire to liquidate their holdings of our securities. Risk of Restrictions on Selling Shares The trading market for our common stock may be restricted, because of state securities “Blue Sky” laws which prohibit trading absent compliance with individual state laws. Transfers of our common stock may be restricted pursuant to the securities and state laws promulgated by various states and foreign jurisdictions, commonly referred to as “Blue Sky” laws. Absent compliance with such laws, our common stock may not be traded in such jurisdictions. Because the shares of our common stock registered hereunder have not been registered for resale under the “Blue Sky” laws of any state, the holders of such shares and persons who desire to purchase such shares in any trading market that might develop in the future, should be aware that there may be significant state “Blue Sky” law restrictions upon the ability of investors to sell and purchasers to purchase such shares. These restrictions prohibit the secondary trading of our common stock. our currently do not intend and may not be able to qualify securities for resale in those states which do not offer manual exemptions and require securities to be qualified before they can be resold by our stockholders. Accordingly, investors should consider the secondary market for our securities to be limited. | | 12 | ·
| we fail to introduce new products or services that users find engaging or if we introduce new products or services that are not favorably received;
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Sales of our common stock in reliance on Rule 144 may reduce prices in that market by a material amount. A substantial number of the outstanding shares of our common stock are “restricted securities” within the meaning of Rule 144 under the Securities Act. As restricted securities, those shares may be resold only pursuant to an effective registration statement or pursuant to the requirements of Rule 144 or other applicable exemptions from registration under the Securities Act and as required under applicable state securities laws. Rule 144 provides in essence that an affiliate (i.e., an officer, director, or control person) who has held restricted securities for a prescribed period may, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed 1.0% of the issuer’s outstanding common stock. The alternative limitation on the number of shares that may be sold by an affiliate, which is related to the average weekly trading volume during the four calendar weeks prior to the sale is not available to stockholders of companies whose securities are not traded on an “automated quotation system.” The OTCQB is not such a system, therefore market-based volume limitations are not available for holders of our securities selling under Rule 144. Pursuant to the provisions of Rule 144, there is no limit on the number of restricted securities that may be sold by a non-affiliate (i.e., a stockholder who has not been an officer, director or control person for at least ninety (90) consecutive days before the date of the proposed sale) after the restricted securities have been held by the owner for a prescribed period, although there may be other limitations and/or criteria to satisfy. A sale pursuant to Rule 144 or pursuant to any other exemption from the Securities Act, if available, or pursuant to registration of shares of our common stock held by our stockholders, may reduce the price of our common stock in any market that may develop. Risk of Adverse Tax Consequences A risk of adverse tax consequences is the risk that an investment will be subject to an unexpected or unfavorable tax rate. This can occur if a company is taxed at a higher rate than expected or if changes in laws, regulations, or taxation policies result in an increase in taxes due. Investing in high-risk securities also carries a greater risk of incurring negative tax consequences due to their unstable nature. Risk of Limited Disclosure We may identify material weaknesses in our financial reporting, or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our financial statements or cause us to fail to meet our periodic reporting obligations. We are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”). Section 404 requires that we document and test our internal control over financial reporting and issue management’s assessment of our internal control over financial reporting. Management assessed the effectiveness of our internal control over financial reporting as of January 31, 2022. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. To remediate any material weaknesses, our management has been implementing, and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. We believe that these actions will remediate the material weakness. If we fail to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, the accuracy and timeliness of the filing of our annual and quarterly reports may be materially adversely affected and could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. In addition, a material weakness in the effectiveness of our internal control over financial reporting could result in an increased chance of fraud and the loss of customers, reduce our ability to obtain financing and require additional expenditures to comply with these requirements, each of which could have a material adverse effect on our business, results of operations and financial condition. We expect to incur additional expenses and diversion of management’s time as a result of performing the system and process evaluation, testing and remediation required in order to comply with the management certification. | | 13 | ·
| users feel that their experience is diminished as a result of the decisions we make with respect to the frequency, prominence, format, size, and quality of ads that we display;
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Public disclosure requirements and compliance with changing regulation of corporate governance pose challenges for our management team and result in additional expenses and costs which may reduce the focus on management and the profitability of our company. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated thereunder, the Sarbanes-Oxley Act and SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the U.S. public markets. Our management team will need to devote considerable time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. Risk of Business Failure Some of our officers and directors are working under consulting agreements and have/may have external business opportunities and employment that may be in conflict with us. Currently, some of our officers and directors are working under consulting agreements and may dedicate time and resources to other functions and personal expenditures, some of which may conflict with our objectives as a company. Any and all conflicts of interest entered into by our officers are brought to the attention of the Company’s board of directors, with a resolution to the conflict addressed as such at the time of reveal. The loss of one or more of our key personnel could harm our business. We depend on the continued service and performance of our key personnel. Some of these individuals have acquired specialized knowledge and skills with respect to our operations. As a result, if any of these individuals were to stop providing services to us, we could face substantial difficulty in hiring qualified successors and could experience a loss of productivity while any such successor obtains the necessary training and expertise. Moreover, much of our key technology and systems are custom-made by our personnel. The loss of key personnel, including key members of our management team, as well as certain of our key technical personnel, could disrupt our operations and have an adverse effect on our ability to grow our business. We intend to enter into long-term contracts with our key personnel but there is no guarantee we will be successful. We may fail to recruit, train, and retain the highly skilled employees that are necessary to execute our growth strategy. Competition for key technical personnel in highly technical industries such as ours is intense. We believe that our future success depends in large part on our ability to hire, train, retain and leverage the skills of qualified software engineers, programmers and other highly skilled personnel needed to maintain and grow our network and related technology and develop and successfully implement our products and technology. We may not be as successful as our competitors at recruiting, training, retaining and utilizing this highly skilled personnel. In particular, we may have more difficulty attracting or retaining highly skilled personnel during periods of poor operating performance. Any failure to recruit, train and retain highly skilled employees could negatively impact our business and results of operations. Our insurance may be inadequate to cover existing and future claims against us and our ability to pay for such claims may be limited, which may adversely affect our business. If our existing insurance policies expire or are otherwise inadequate to cover liabilities and claims for indemnification, we may be required to pay for liabilities directly, which could negatively affect our liquidity. To the extent we are required to pay for liabilities directly, our available cash reserves will be affected, which may affect our ability to respond to market conditions and to pay for other emergent expenses, which could negatively affect the results of our operations and our business. | | 14 | ·
| users have difficulty installing, updating, or otherwise accessing our products on mobile devices as a result of actions by us or third parties that we rely on to distribute our products and deliver our services;
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Currently, we are lacking diversification of revenues. Our business will depend upon entering into agreements with customers to use our services and software solutions, as well as our consulting services. User license fees from our customers from the use of these services will provide all or substantially all of our revenues. We can give no assurance that our current and potential customers, including data service providers that provide broadband service to end users, government agencies or entities with private data networks, will license or will agree to pay the license fees we will request. The failure to enter into those agreements or realize the anticipated benefits from these agreements on a timely basis, or at all, or to renew any agreements upon expiration or termination would have a material adverse effect on our financial condition and results of operations. We face intense competition and our failure to compete effectively could have a material adverse effect on our business, results of operations and financial condition. There can be no assurance that we will be able to compete successfully against any of our competitors, some of whom have far greater resources, capital, experience, market penetration, sales, and distribution channels than us. If our major competitors were, for example, to significantly increase the level of price discounts offered to consumers, we could respond by offering price discounts, which could have a materially adverse effect on our business, results of operations and financial condition. In social media, we compete with companies that sell advertising, as well as with companies that provide social and communication products and services that are designed to engage users and capture time spent on mobile devices and online. We face significant competition in every aspect of our business, including from companies that facilitate communication and the sharing of content and information, companies that enable marketers to display advertising, and companies that provide development platforms for applications developers. We compete with companies that offer services across broad platforms that replicate capabilities we provide. We also compete with companies that develop applications, particularly mobile applications, which provide social or other communications functionality, such as messaging, photo, and video-sharing, and micro-blogging, as well as companies that provide regional social networks that have strong positions in particular countries. In addition, we face competition from traditional, online, and mobile businesses that provide media for marketers to reach their audiences and/or develop tools and systems for managing and optimizing advertising campaigns. Some of our current and potential competitors may have significantly greater resources or better competitive positions in certain service segments, geographic regions, or user demographics than we do. These factors may allow our competitors to respond more effectively than us to new or emerging technologies and changes in market conditions. We believe that some of our users are aware of and actively engaging with other products and services similar to, or as a substitute for, our products and services, and we believe that some of our users have reduced their use of and engagement with our service in favor of these other products and services. The industry within which we compete is highly competitive, which may hinder our ability to generate revenue and may diminish our margins. The technology and media focused advertising industry within which we will compete is highly competitive. New developments in technology may negatively affect the development or licensing of proprietary software or make our proprietary software uncompetitive or obsolete. Some of our competitors may be much larger companies with longer operating histories and substantially greater financial, technical, sales, marketing, and other resources than we do, as well as greater name recognition. As a result, our competitors may be able to compete more aggressively and sustain that competition over a longer period of time than we could. Each of these competitors has the potential to capture market share in various markets, which could have a material adverse effect on our position in the industry and our financial results. We may not be able to compete with other companies, some of whom have greater resources and experience. We may not be able to compete successfully against present or future competitors. The cryptocurrency industry has attracted various high-profile and well-established operators, some of which have substantially greater liquidity and financial resources than we do. We may experience great difficulties in expanding and improving our network of computers to remain competitive. Competition from existing and future competitors that have access to more competitively priced resources could result in our inability to secure acquisitions and partnerships that we may need to expand our business in the future. This competition from other entities with greater resources, experience and reputation may result in our failure to maintain or expand our business, as we may never be able to successfully thrive in the already established market. If we are unable to expand and remain competitive, our business could be negatively affected, which would have an adverse effect on the trading price of our securities. | | 15 | ·
| user behavior on any of our products changes, including decreases in the quality and frequency of content shared on our products and services;
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We may experience data breaches, which could result in theft of sensitive information or loss of customer trust. A data breach can occur due to a variety of factors, including cyberattacks, human error, or technical failures. If a company's data is compromised, it can lead to theft of intellectual property, pecuniary loss, or reputational damage. Moreover, customers may lose trust in our ability to protect our data, which can result in reduced customer loyalty and decreased revenue. We may face challenges in protecting our intellectual property, trade secrets, and other confidential information. Protecting trade secrets and confidential information is critical to maintaining our competitive position and preventing competitors from gaining an unfair advantage. We may be vulnerable to attacks by hackers, cybercriminals, or state-sponsored actors. Cyber threats continue to evolve rapidly, and tech companies must remain vigilant to identify and mitigate these risks proactively. The potential harm from a cyberattack could include theft of intellectual property, sensitive customer information, or financial data, as well as disruption of business operations. We may face legal challenges related to patents, trademarks, or copyrights, which could result in costly litigation or loss of intellectual property rights. We may face legal challenges from competitors, patent trolls, or other third parties alleging infringement or violation of our intellectual property rights. In addition, we may need to defend against claims that our products or services violate the intellectual property rights of others. We may be subject to claims of infringement or misappropriation of intellectual property by competitors, which could also result in legal disputes. We may be subject to claims of infringement or misappropriation of intellectual property by competitors, which could result in costly legal disputes, financial losses, and reputational damage. Competitors may allege that our products or services infringe on their intellectual property rights or that we have misappropriated their confidential information or trade secrets. Such claims may arise even if we have taken reasonable steps to avoid infringement or misappropriation. We may face challenges in licensing our intellectual property or protecting it from unauthorized use. We may face challenges in licensing our intellectual property or protecting it from unauthorized use, which can result in lost revenue, competitive disadvantages, and reputational damage. Licensing intellectual property to third parties can be complex, and we may need to negotiate and manage complex agreements to ensure that our intellectual property is used appropriately and that our interests are protected. Additionally, we may face challenges in enforcing our intellectual property rights against infringing third parties, including competitors and others who may attempt to use our intellectual property without permission. We may be subject to fines, penalties, or other regulatory action for non-compliance with data protection, privacy, or antitrust regulations. We are subject to a range of data protection, privacy, and antitrust regulations, and failure to comply with these regulations can result in fines, penalties, or other regulatory action, including legal disputes, reputational damage, and potential loss of business. | | 16 | ·
| we are unable to continue to develop products for mobile devices that users find engaging, that work with a variety of mobile operating systems and networks, and that achieve a high level of market acceptance;
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Changes in regulatory requirements may increase compliance costs or require changes to our business practices. We are subject to evolving regulatory requirements that can increase compliance costs or require changes to our business practices. These changes can result in significant financial costs, including legal fees, administrative costs, and potential fines for non-compliance. Regulatory requirements can impact various aspects of a company's operations, including data protection, privacy, antitrust, and consumer protection, among others. We may face challenges in navigating regulatory requirements in different jurisdictions where we operate. We operate in multiple jurisdictions and are subject to regulatory requirements that can vary significantly from one jurisdiction to another. These differences can create challenges for companies seeking to navigate the regulatory landscape, particularly in areas such as data protection, privacy, and consumer protection. Failure to comply with regulatory requirements can result in fines, legal disputes, and other penalties. We may experience disruptions in our supply chain or production processes, which could impact our ability to deliver products or services to customers. We rely on complex supply chains and production processes to deliver our products or services to customers. Disruptions to these processes can result in delays, cost overruns, and quality issues that can impact our ability to meet customer demand and maintain our competitive position. We may face challenges in managing distribution networks or logistics. Distribution networks and logistics are essential components of our supply chain management strategy, enabling us to deliver products and services to customers in a timely and cost-effective manner. However, managing these networks can be complex, particularly for companies operating in multiple geographies. We may be subject to negative publicity related to data breaches, product defects, or other issues, which could damage our reputation or brand. Negative publicity related to data breaches, product defects, or other issues can have a significant impact on a company's brand value and reputation, leading to reduced customer trust, loss of business, and even legal liabilities. We may face challenges in managing our public image or social media presence. Social media platforms have become a primary source of information for customers and stakeholders, and any negative comments, reviews, or posts can quickly spread and damage a company's reputation. Risk of Counterparty Default A counterparty, such as a borrower or counterparty in a financial transaction, may be unable to meet its contractual obligations due to financial difficulty or other circumstances. This kind of risk can lead to losses for the other parties involved, which could include us. In essence, both counterparties and non-counterparties are exposed to this risk. Risk of Use of Funds We are a “smaller reporting company” and any decision on our part to comply with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors. When we lose that status, there will be an increase in the costs and demands placed upon management. As a company that is no longer an emerging growth company, the costs and demands placed upon management will likely increase, as we now have to comply with additional disclosure and accounting requirements. | | 17 | ·
| there are decreases in user sentiment about the quality or usefulness of our products or concerns related to privacy and sharing, safety, security, or other factors;
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| we are unable to manage and prioritize information to ensure users are presented with content that is appropriate, interesting, useful, and relevant to them;
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| we are unable to obtain or attract engaging third-party content;
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| users adopt new technologies where our products may be displaced in favor of other products or services, or may not be featured or otherwise available;
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| there are adverse changes in our products that are mandated by legislation, regulatory authorities, or litigation, including settlements or consent decrees;
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| technical or other problems prevent us from delivering our products in a rapid and reliable manner or otherwise affect the user experience, such as security breaches or failure to prevent or limit spam or similar content;
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| we adopt terms, policies, or procedures related to areas such as sharing or user data that are perceived negatively by our users or the general public;
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| we elect to focus our user growth and engagement efforts more on longer-term initiatives, or if initiatives designed to attract and retain users and engagement are unsuccessful or discontinued, whether as a result of actions by us, third parties, or otherwise;
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| we fail to provide adequate customer service to users, marketers, developers, or other partners;
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| we, developers whose products are integrated with our products, or other partners and companies in our industry are the subject of adverse media reports or other negative publicity; or
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| our current or future products, such as our development tools and application programming interfaces that enable developers to build, grow, and monetize mobile and web applications, reduce user activity on our products by making it easier for our users to interact and share on third-party mobile and web applications.
| If we are unable to increase our user base and user engagement, our revenue and financial results may be adversely affected. Any decrease in user retention, growth, or engagement could render our products less attractive to users, marketers, and developers, which is likely to have a material and adverse impact on our revenue, business, financial condition, and results of operations. If our active user growth rate slows, we will become increasingly dependent on our ability to maintain or increase levels of user engagement and monetization in order to drive revenue growth.
We project to generate substantial revenue from advertising. The loss of marketers, or reduction in spending by marketers, could seriously harm our business.
Substantially all of our revenue is currently projected to be generated from third parties advertising. As is common in the industry, our marketers do not have long-term advertising commitments with us. Many of our marketers spend only a relatively small portion of their overall advertising budget with us. In addition, marketers may view some of our products as experimental and unproven. Marketers will not continue to do business with us, or they will reduce the prices they are willing to pay to advertise with us or the budgets they are willing to commit to us, if we do not deliver ads in an effective manner, or if they do not believe that their investment in advertising with us will generate a competitive return relative to other alternatives.
Our advertising revenue could also be adversely affected by a number of other factors, including:
·decreases in user engagement, including time spent on our products;
·our inability to continue to increase user access to and engagement with our mobile products;
·product changes or inventory management decisions we may make that change the size, format, frequency, or relative prominence of ads displayed on our products or of other unpaid content shared by marketers on our products;
·our inability to maintain or increase marketer demand, the pricing of our ads, or both;
·our inability to maintain or increase the quantity or quality of ads shown to users;
·changes to third-party policies that limit our ability to deliver or target advertising on mobile devices;
·the availability, accuracy, and utility of analytics and measurement solutions offered by us or third parties that demonstrate the value of our ads to marketers, or our ability to further improve such tools;
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· loss of advertising market share to our competitors, including if prices for purchasing ads increase or if competitors offer lower priced or more integrated products;
· adverse legal developments relating to advertising, including legislative and regulatory developments and developments in litigation;
· decisions by marketers to reduce their advertising as a result of adverse media reports or other negative publicity involving us, our advertising metrics, content on our products, developers with mobile and web applications that are integrated with our products, or other companies in our industry;
· the effectiveness of our ad targeting or degree to which users opt out of certain types of ad targeting;
· the degree to which users cease or reduce the number of times they click on our ads;
· changes in the way advertising on mobile devices or on personal computers is measured or priced; and
· the impact of macroeconomic conditions, whether in the advertising industry in general, or among specific types of marketers or within particular geographies.
The occurrence of any of these or other factors could result in a reduction in demand for our ads, which may reduce the prices we receive for our ads, or cause marketers to stop advertising with us altogether, either of which would negatively affect our revenue and financial results.
Our user growth, engagement, and monetization on mobile devices depend upon effective operation with mobile operating systems, networks, and standards that we do not control.
The substantial majority of our revenue will be generated from advertising on mobile devices. There is no guarantee that popular mobile devices will feature our products, or that mobile device users will continue to use our products rather than competing products. We are dependent on the interoperability of our products with popular mobile operating systems, networks, and standards that we do not control, such as the Android and iOS operating systems. Any changes, bugs, or technical issues in such systems, or changes in our relationships with mobile operating system partners, or in their terms of service or policies that degrade our products' functionality, reduce or eliminate our ability to distribute our products, give preferential treatment to competitive products, limit our ability to deliver, target, or measure the effectiveness of ads, or charge fees related to the distribution of our products or our delivery of ads could adversely affect the usage of our products and monetization on mobile devices. Additionally, to deliver high-quality mobile products, it is important that our products work well with a range of mobile technologies, systems, networks, and standards that we do not control. We may not be successful in maintaining or developing relationships with key participants in the mobile ecosystem or in developing products that operate effectively with these technologies, systems, networks, or standards. If it is more difficult for our users to access and use our products on their mobile devices, or if our users choose not to access or use our products on their mobile devices or use mobile products that do not offer access to our products, our user growth, and user engagement could be harmed. From time to time, we may also take actions regarding the distribution of our products or the operation of our business based on what we believe to be in our long-term best interests. Such actions may adversely affect our users and our relationships with the operators of mobile operating systems, or other business partners, and there is no assurance that these actions will result in the anticipated long-term benefits. If our users are adversely affected by these actions or if our relationships with such third parties deteriorate, our user growth, engagement, and monetization could be adversely affected, and our business could be harmed.
Security breaches and improper access to or disclosure of our data or user data, or other hacking and phishing attacks on our systems, could harm our reputation and adversely affect our business.
Our industry is prone to cyber-attacks by third parties seeking unauthorized access to our data or users’ data. Any failure to prevent or mitigate security breaches and improper access to or disclosure of our data or user data could result in the loss or misuse of such data, which could harm our business and reputation and diminish our competitive position. In addition, computer malware, viruses, social engineering (predominantly spear phishing attacks), and general hacking have become more prevalent in our industry and may occur on our systems in the future. As a result of the industry, we believe that we are a particularly attractive target for such breaches and attacks. Such attacks may cause interruptions to the services we provide, degrade the user experience, cause users to lose confidence and trust in our products, or result in financial harm to us. Our efforts to protect our company data or the information we receive may also be unsuccessful due to software bugs or other technical malfunctions; employee, contractor, or vendor error or malfeasance; government surveillance; or other threats that evolve. In addition, third parties may attempt to fraudulently induce employees or users to disclose information in order to gain access to our data or our users' data. Although we have developed systems and processes that are designed to protect our data and user data, to prevent data loss, and to prevent or detect security breaches, we cannot assure you that such measures will provide absolute security.
In addition, some of our developers or other partners, such as those that help us measure the effectiveness of ads, may receive or store information provided by us or by our users through mobile or web applications. We provide limited information to such third parties based on the scope of services provided to us. However, if these third parties or developers fail to adopt or adhere to adequate data security practices, or in the event of a breach of their networks, our data or our users' data may be improperly accessed, used, or disclosed.
Affected users or government authorities could initiate legal or regulatory actions against us in connection with any security breaches or improper disclosure of data, which could cause us to incur significant expense and liability or result in orders or consent decrees forcing us to modify our business practices. Any of these events could have a material and adverse effect on our business, reputation, or financial results.
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We may acquire other businesses, form joint ventures, or acquire other companies or businesses that could negatively affect our operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense; notwithstanding the foregoing, our growth may depend on our success in uncovering and completing such transactions.
We may incur liability as a result of information retrieved from or transmitted over the Internet or published using our products or as a result of claims related to our products.
We may face claims relating to information that is published or made available on our products. In particular, the nature of our business exposes us to claims related to defamation, dissemination of misinformation or news hoaxes, intellectual property rights, rights of publicity and privacy, personal injury torts, or local laws regulating hate speech or other types of content. This risk is enhanced in certain jurisdictions outside the United States where our protection from liability for third-party actions may be unclear and where we may be less protected under local laws than we are in the United States. We could incur significant costs investigating and defending such claims and, if we are found liable, significant damages. We could also face orders restricting or blocking our services in particular geographies as a result of content hosted on our services. If any of these events occur, our business and financial results could be adversely affected.
Our products and internal systems rely on software that is highly technical, and if it contains undetected errors or vulnerabilities, our business could be adversely affected.
Our products and internal systems rely on software, including software developed or maintained internally and/or by third parties, that is highly technical and complex. In addition, our products and internal systems depend on the ability of such software to store, retrieve, process, and manage immense amounts of data. The software on which we rely has contained, and will in the future contain, undetected errors, bugs, or vulnerabilities. Some errors may only be discovered after the code has been released for external or internal use. Errors, vulnerabilities, or other design defects within the software on which we rely may result in a negative experience for users and marketers who use our products, delay product introductions or enhancements, result in targeting, measurement, or billing errors, compromise our ability to protect the data of our users and/or our intellectual property or lead to reductions in our ability to provide some or all of our services. In addition, any errors, bugs, vulnerabilities, or defects discovered in the software on which we rely, and any associated degradations or interruptions of service, could result in damage to our reputation, loss of users, loss of revenue, or liability for damages, any of which could adversely affect our business and financial results.
Technologies have been developed that can block the display of our ads, which could adversely affect our financial results.
Technologies have been developed, and will likely continue to be developed, that can block the display of our ads, particularly advertising displayed on personal computers. We project to generate substantially all of our revenue from advertising, including revenue resulting from the display of ads on personal computers. Revenue generated from the display of ads on personal computers has been impacted by these technologies from time to time. As a result, these technologies may have an adverse effect on our financial results and, if such technologies continue to proliferate, in particular with respect to mobile platforms, our future financial results may be harmed.
Our Cannabis marketing and advertising clients face intense media attention and public pressure.
The cannabis marketplace is controversial. Certain members of the media, politicians, government regulators and advocate groups, including independent doctors have called for an outright ban of all cannabis products, pending regulatory review and clinical studies. A ban of this type would likely have the effect of terminating our United States’ sales and marketing efforts for our cannabis clients which we may currently market or have plans to market in the future. Such a ban would have a material adverse effect on our business, financial condition and performance.
Federal regulation and enforcement may adversely affect the implementation of medical and recreational cannabis laws and regulations may negatively impact our revenues and profits.
Currently, there are 28 states plus the District of Columbia that have laws and/or regulations that recognize, in one form or another, legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. Many other states are considering similar legislation. Conversely, under the CSA, the policies and regulations of the federal government and its agencies are that cannabis has no medical benefit and a range of activities including cultivation and the personal use of cannabis is prohibited. Unless and until Congress amends the CSA with respect to medical marijuana, as to the timing or scope of any such potential amendments there can be no assurance, there is a risk that federal authorities may enforce current federal law, and our cannabis clients may be deemed to be producing, cultivating, or dispensing marijuana in violation of federal law. Active enforcement of the current federal regulatory position on cannabis may thus indirectly and adversely affect our revenues and profits. The risk of strict enforcement of the CSA in light of Congressional activity, judicial holdings, and stated federal policy remains uncertain.
RISK FACTORS ASSOCIATED WITH CRYPTOCURRENCIES
We may lose our private key to our digital wallet, destroying all of our cryptocurrency assets.
Cryptocurrencies are stored in a digital wallet and are controllable by the processor of both the public key and the private key relating to the digital wallet in which the cryptocurrencies are held, both of which are unique. If the private key is lost, destroyed, or otherwise compromised, we may be unable to access our cryptocurrencies held in the related digital wallet which will essentially be lost. If the private key is acquired by a third party, then this third party may be able to gain access to our cryptocurrencies.
We rely on third party service providers to exchange our cryptocurrencies who may be at risks to cyber-security and malicious activity.
Trading platforms and third-party service providers may be vulnerable to hacking or other malicious activities which we cannot control. If one or more malicious actor(s) obtains control of sufficient consensus nodes on the Blockchain, or, other means of alteration, then a Blockchain may be altered. While the Blockchain is decentralized, there is increasing evidence of concentration and techniques that may increase the risk that one or several actors could control the Blockchain on which we conduct business.
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Cryptocurrencies may be traded on numerous online platforms, through third party service providers and as peer-to-peer transactions between parties. Many marketplaces simply bring together counterparties without providing any clearing or intermediary services and without being regulated. In such cases, we assume all risks.
Cryptocurrency trading platforms, largely unregulated and providing only limited transparency with respect to their operations, have come under increasing scrutiny due to cases of fraud, business failure or security breaches, where we may not be compensated for losses caused by such activities. Although one does not need a trading platform or an exchange to trade cryptocurrencies, such platforms are often used to convert fiat currency into cryptocurrency or to trade one cryptocurrency for another.
There are no assurances that the market for Cryptocurrencies will not continue to be highly volatile.
The Digital Assets industry is part of a new and rapidly evolving ecosystem, which itself is subject to a high degree of uncertainty. For a relatively small use of Cryptocurrencies in the retail and commercial marketplace, online platforms have generated a large trading activity by speculators seeking to profit from the short-term or long-term holding of Cryptocurrencies. Most Cryptocurrencies are not backed by a central bank, a national or international organization, or assets or other credit, and their value is strictly determined by the value that the market participants place on them through their transactions, which means that loss of confidence may bring about a collapse of trading activities and an abrupt drop in value.
Future regulations may prevent us or restrict our ability to use our Cryptocurrencies.
There are significant inconsistencies among various regulators with respect to the legal status of Cryptocurrencies. Regulators are also concerned that Cryptocurrencies may be used by criminal and terrorist organizations. Certain countries are restricting the right to acquire, own, hold, sell, or use Cryptocurrencies. Investors should understand that to date no initial coin offerings have been registered with the SEC. The SEC also has not to date approved for listing and trading any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies. The SEC has issued investor alerts, bulletins, and statements on initial coin offerings and cryptocurrency related investments. Furthermore, the SEC has not approved for listing or trading and exchange-traded cryptocurrencies, or other assets related to cryptocurrencies.
The SEC has not yet determined if it will classify all digital assets that are labelled as cryptocurrencies as securities. The CFTC and SEC, along with other federal and state agencies, including state and federal prosecutors are seeking to establish transparency and integrity to these markets in order to prevent fraud and abuse. These markets are new, evolving and international. As such the SEC will continue to evolve its treatment of our business that may not have a positive effect on our business, whether short term or long term.
Should the SEC determine that any one of the cryptocurrencies obtained by us for services rendered are not compliant it may have a negative effect on the value of the cryptocurrency or prevent us from selling our cryptocurrency exchanging it for FIAT.
We may not be able to convert our Cryptocurrency into FIAT currency in a timely manner.
Policies and/or interruptions in the deposit and withdrawal of fiat currency into or out of the trading platforms may impact the ability of us to convert.
RISK FACTORS ASSOCIATED WITH OUR COMMON STOCK
Should we be listed, the market price of our common stock may be volatile or may decline regardless of the Company’s operating performance, and you may not be able to resell your shares at or above the initial public offering price and the price of our common stock may fluctuate significantly.
We intend to file for initial placement on the OTC Markets for our stock. There is no guarantee that FINRA shall approve the listing of our stock. Should we be approved, the commencement of trading of our common stock on the OTC Markets, the market price of our common stock may be volatile, and fluctuates widely in price in response to various factors, which are beyond our control.
Furthermore, we must note that the price of our common stock may not necessarily be indicative of our operating performance or long-term business prospects. In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock. Factors such as the following could cause the market price of our common stock to fluctuate substantially.
Volatility in our common stock price may subject us to securities litigation.
The market for our common stock is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We could, in the future, be the target of similar litigation. Any such litigation could result in substantial costs and liabilities to us and could divert our management’s attention and resources from managing our operations and business.
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We are actively considering strategic opportunities with the support of our external advisors and consultants of diverse types; however, we cannot offer any assurance that acquisitions of businesses, assets, and/or entering into strategic alliances or joint ventures will be successful. We may not be able to find suitable partners or acquisition candidates and may not be able to complete such transactions on favorable terms, if at all. If we make any acquisitions, we may not be able to integrate these acquisitions successfully into the existing business and could assume unknown or contingent liabilities.
The Company may issue more shares in connection with future mergers or acquisitions, which could result in substantial dilution to existing shareholders.
Our Certificate of Incorporation authorizes the issuance of 200,000,000 shares of common stock and 100,000,000 blank check preferred stock. Any future merger or acquisition effected by us may result in the issuance of additional securities without stockholder approval and may result in substantial dilution in the percentage of our common stock held by our then-current stockholders. Moreover, the common stock issued in any such merger or acquisition transaction may be valued on an arbitrary or non-arm’s-length basis by our management, resulting in an additional reduction in the percentage of common stock held by our then existing stockholders. Our Board of Directors has the power to issue any or all of such authorized but unissued shares without stockholder approval. To the extent that additional shares of common stock or preferred stock are issued in connection with a future business combination or otherwise, dilution to the interests of our stockholders will occur, and the rights of the holders of common stock could be materially and adversely affected.
We do not anticipate paying cash dividends for the foreseeable future, and therefore investors should not buy our stock if they wish to receive cash dividends.
We have not paid dividends in the past and do not expect to pay dividends for the foreseeable future, and any return on investment may be limited to potential future appreciation on the value of our common stock.
We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including without limitation, our financial condition, operating results, cash needs, growth plans, and the terms of any credit agreements that we may be party to at the time. To the extent we do not pay dividends, our stock may be less valuable because a return on investment will only occur if and to the extent our stock price increases, which may never occur. In addition, investors must rely on sales of their common stock after price appreciation as the only way to realize their investment, and if the price of our stock does not appreciate, then there will be no return on investment. Investors seeking cash dividends should not purchase our common stock.
The Company has deeply centralized management that is vested a small number of shareholders, officers, and directors, which will limit the rights of the common shareholder.
Our officers, directors, and principal stockholders (greater than 5% stockholders) collectively control approximately 50% of our outstanding common stock. As a result, these stockholders will be able to affect the outcome of, or exert significant influence over, all matters requiring stockholder approval, including the election and removal of directors and any change in control. In particular, this concentration of ownership of our common stock could have the effect or delaying or preventing a change in control of us or otherwise discouraging or preventing a potential acquirer from attempting to obtain control of us. This, in turn, could have a negative effect on the market price of our common stock. It could also prevent our stockholders from realizing a premium over the market prices for their shares of common stock. Moreover, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders, and accordingly, they could cause us to enter into transactions or agreements that we would not otherwise consider.
Our common stock is considered to be a “penny stock,” and thereby be subject to additional sale and trading regulations that may make it more difficult to sell.
Our common stock is considered to be a “penny stock.” It does not qualify for one of the exemptions from the definition of “penny stock” under Section 3a51-1 of the Exchange Act. Our common stock is a “penny stock” because it meets one or more of the following conditions:
● the stock trades at a price less than $5.00 per share;
● it is not traded on a “recognized” national exchange; or
● it is not quoted on the NASDAQ Global Market, or has a price less than $5.00 per share. The principal result or effect of being designated a “penny stock” is that securities broker-dealers participating in sales of our common stock are subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9 promulgated under the Securities Exchange Act.
For example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor's account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience, and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation, investment experience, and investment objectives. Compliance with these requirements may make it more difficult and time-consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.
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FINRA sales practice requirements may limit a shareholder’s ability to buy and sell our common shares.
In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common shares, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
Rule 144 sales in the future may have a depressive effect on the company's stock price as an increase in supply of shares for sale, with no corresponding increase in demand will cause prices to fall.
All of the outstanding shares of common stock held by the present officers, directors, and affiliate stockholders are "restricted securities" within the meaning of Rule 144 under the Securities Act of 1933, as amended. As restricted shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under the Securities Act of 1933 and as required under applicable state securities laws. Rule 144 provides in essence that a person who is an affiliate or officer or director who has held restricted securities for six months may, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed the greater of 1.0% of a Company's issued and outstanding common stock. There is no limit on the amount of restricted securities that may be sold by a non-affiliate after the owner has held the restricted securities for a period of six months if the Company is a current reporting company under the Securities Exchange Act of 1934. A sale under Rule 144 or under any other exemption from the Securities Act of 1933 , if available, or pursuant to subsequent registration of shares of common stock of present stockholders, may have a depressive effect upon the price of the common stock in any market that may develop.
Future issuances of shares for various considerations including working capital and operating expenses will increase the number of shares outstanding which will dilute existing investors and may have a depressive effect on the company's stock price.
There may be substantial dilution to our shareholders purchasing in future offerings as a result of future decisions of the Board to issue shares without shareholder approval for cash, services, payment of debt or acquisitions.
There may in all likelihood be little demand for shares of our common stock and as a result, investors may be unable to sell at or near ask prices or at all if they need to liquidate their investment.
There may be little demand for shares of our common stock on the OTC Bulletin Board, or OTC Markets.com, meaning that the number of persons interested in purchasing our common shares at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that it is a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if the Company came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven, early-stage company such as ours or purchase or recommend the purchase of any of our Securities until such time as it became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in the Company's securities is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on the securities price. We cannot give investors any assurance that a broader or more active public trading market for the Company's common securities will develop or be sustained, or that any trading levels will be sustained. Due to these conditions, we can give investors no assurance that they will be able to sell their shares at or near ask prices or at all if they need money or otherwise desire to liquidate their securities of the Company.
Public disclosure requirements and compliance with changing regulation of corporate governance pose challenges for our management team and result in additional expenses and costs which may reduce the focus on management and the profitability of our company.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated thereunder, the Sarbanes-Oxley Act and SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the U.S. public markets. Our management team will need to devote significant time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
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Any future acquisitions also could result in the issuance of stock, incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill, any of which could have a negative impact on our cash flows, financial condition, and results of operations. Integration of an acquired company may also disrupt ongoing operations and require management resources that otherwise would be focused on developing and expanding our existing business. We may experience losses related to potential investments in other companies, which could harm our financial condition and results of operations. Further, we may not realize the anticipated benefits of any acquisition, strategic alliance, or joint venture if such investments do not materialize.
SHOULD ONE OR MORE OF THE FOREGOING RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED
ITEM 1B. UNRESOLVED STAFF COMMENTS.
To finance any acquisitions or joint ventures, we may choose to issue shares of common stock, preferred stock or a combination of debt and equity as consideration, which could significantly dilute the ownership of our existing stockholders or provide rights to such preferred stockholders in priority over our common stockholders. Additional funds may not be available on terms that are favorable to us, or at all. If the price of our common stock is low or volatile, we may not be able to acquire other companies or fund a joint venture project using stock as consideration. We may be subject to credit risk associated with our customers or suppliers. Our customers and/or suppliers may not be able to fulfill their financial obligations, such as paying invoices or delivering goods and services, which could have a negative impact on our financial position and operations. SHOULD ONE OR MORE OF THE FOREGOING RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED. ITEM 1B. UNRESOLVED STAFF COMMENTS. Not applicable. ITEM 2. PROPERTIES. Our executive office is located in Jacksonville, Florida, which consists of approximately 800 square feet of leased office space. Mercury owns a building in Idaho Falls, Idaho, which consists of approximately 2,500 square feet of office and warehouse space. ITEM 3. LEGAL PROCEEDINGS. As disclosed in Note 12 – Legal Proceedings to the consolidated financial statements included in “Part II – Item 8. Financial Statements and Supplementary Data” in this report, we are engaged in certain legal matters, and the disclosure set forth in Note 12 relating to such legal matters is incorporated by reference. ITEM 4. MINE SAFETY DISCLOSURES. Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES. (a) Market Information Our common stock was quoted on the OTC Markets under the stock symbol “OBTX” for the period of March 24, 2020, through November 7, 2022, and under the stock symbol “EBZT” starting on November 8, 2022. The following table sets forth for the periods indicated the range of high and low closing prices for the Company’s common stock, as reported by the OTC Markets. Year Ended January 31, 2023 | | High | | | Low | | First Quarter, ended April 30, 2022 | | $ | 6.85 | | | $ | 3.15 | | Second Quarter, ended July 31, 2022 | | $ | 4.53 | | | $ | 1.65 | | Third Quarter, ended October 31, 2022 | | $ | 4.60 | | | $ | 1.63 | | Fourth Quarter, ended January 31, 2023 | | $ | 3.95 | | | $ | 1.40 | |
Year Ended January 31, 2022 | | High | | | Low | | First Quarter, ended April 30, 2021 | | $ | 3.50 | | | $ | 2.40 | | Second Quarter, ended July 31, 2021 | | $ | 16.23 | | | $ | 1.96 | | Third Quarter, ended October 31, 2021 | | $ | 15.00 | | | $ | 6.90 | | Fourth Quarter, ended January 31, 2022 | | $ | 10.88 | | | $ | 6.20 | |
The closing price of our common stock as reported on the OTC Markets was $2.27 on April 21, 2023. (b) Holders As of January 31, 2023, there were approximately 100 owners of record for our common stock. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of the common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock. Transfer Agent and Registrar Our independent stock transfer agent is Colonial Stock Transfer Company, Inc., 66 Exchange Place, 1st Floor, Salt Lake City, UT 84111 Telephone: (801) 355-5740. (c) Dividends We have never paid or declared any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to fund the expansion of our business, and we do not anticipate paying any cash dividends for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors deems relevant. In addition, the terms of any future debt or credit facility may preclude us from paying dividends. (d) Securities Authorized for Issuance under Equity Compensation Plans None (e) Recent Sales of Unregistered Securities The following shares of Series C Preferred Stock were sold to accredited investors during the past 12 months: Name | | Shares | | | Total Price | | | Date | | Abdul Mohsen Al-Faraj | | | 250,000 | | | $ | 1,000,000 | | | April 19, 2022 | | Alamo City Engineering Services Inc. | | | 1,000,000 | | | $ | 1,500,000 | | | January 5, 2023 | |
(f) Issuer Purchases of Equity Securities None ITEM 6. SELECTED FINANCIAL DATA. We are a smaller reporting company and therefore, we are not required to provide the information required by this Item of Form 10-K. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. In addition to the information provided here in Management’s Discussion and Analysis of Financial Condition and Results of Operations, we believe that in order to more fully understand our discussion in this section, you should read our consolidated financial statements and the notes thereto and the other disclosures herein, including the discussion of our business and risk factors. The Company’s financial statements have been prepared in accordance with GAAP. Management’s Discussion and Analysis may contain various “forward looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding future events or the future financial performance of the Company that involve risks and uncertainties. Certain statements included in this Form 10-K, including, without limitation, statements related to anticipated cash flow sources and uses, and words including but not limited to “anticipates”, “believes”, “plans”, “expects”, “future” and similar statements or expressions, identify forward looking statements. Any forward-looking statements herein are subject to certain risks and uncertainties in the Company’s business and any changes in current accounting rules, all of which may be beyond the control of the Company. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth therein. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements. ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. Except as set forth below we are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
(a) Market Information
Our common stock is not currently quoted on any markets.
The value
| Table of the common stock as listed in the Company’s recent S-1 Registration statement is at $0.55 on December 11, 2018. (b) Holders
As of January 31, 2019, there were approximately 10 owners of record for our common stock. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of the common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock.
Transfer Agent and Registrar
Our independent stock transfer agent is Colonial Stock Transfer company, Inc., 66 Exchange Place, 1st Floor, Salt Lake City, UT 84111 Telephone: (801) 355-5740.
(c) Dividends
We have never paid or declared any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to fund the expansion of our business, and we do not anticipate paying any cash dividends for the foreseeable future following this offering. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors deems relevant. In addition, the terms of any future debt or credit facility may preclude us from paying dividends.
(d) Securities Authorized for Issuance under Equity Compensation Plans
None
(e) Recent Sales of Unregistered Securities
None
(f) Issuer Purchases of Equity Securities
None
ITEM 6. SELECTED FINANCIAL DATA.
We are a smaller reporting company and therefore, we are not required to provide information required by this Item of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Management’s Discussion and Analysis of Results of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the financial statements included herein. Further, this MD&A should be read in conjunction with the Company’s Financial Statements and Notes to Financial Statements included in this Annual Report on Form 10-K for the years ended January 31, 2019 and 2018, as well as the “Business” and “Risk Factors” sections within this Annual Report on Form 10-K. The Company's financial statements have been prepared in accordance with United States generally accepted accounting principles.
Management’s Discussion and Analysis may contain various “forward looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding future events or the future financial performance of the Company that involve risks and uncertainties. Certain statements included in this Form 10-K, including, without limitation, statements related to anticipated cash flow sources and uses, and words including but not limited to “anticipates”, “believes”, “plans”, “expects”, “future” and similar statements or expressions, identify forward looking statements. Any forward-looking statements herein are subject to certain risks and uncertainties in the Company’s business and any changes in current accounting rules, all of which may be beyond the control of the Company. The Company has adopted the most conservative recognition of revenue based on the most astringent guidelines of the SEC.
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Management will elect additional changes to revenue recognition to comply with the most conservative SEC recognition on a forward going accrual basis as the model is replicated with other similar markets (i.e. SBDC). The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth therein. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
Any future equity financing will cause existing shareholders to experience dilution of their interest in our Company. In the event we are not successful in raising additional financing, we anticipate that we will not be able to proceed with our business plan. In such a case, we may decide to discontinue our current business plan and seek other business opportunities in the resource sector. Any business opportunity would require our management to perform diligence on possible acquisitions.
During this period, we will need to maintain our periodic filings with the appropriate regulatory authorities and will incur legal and accounting costs. In the event no other such opportunities are available and we cannot raise additional capital to sustain operations, we may be forced to discontinue business. We do not have any specific alternative business opportunities in mind and have not planned for any such contingency.
The Company's MD&A is comprised of significant accounting estimates made in the normal course of its operations, overview of the Company's business conditions, results of operations, liquidity and capital resources and contractual obligations.
The discussion and analysis of the Company’s financial condition and results of operations is based upon its financial statements, which have been prepared in accordance with generally accepted accounting principles generally accepted in the United States (or "GAAP"). The preparation of those financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities at the date of its financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Overview
We were incorporated in the State of Delaware on March 30, 2017, originally under the name GigeTech, Inc. On October 31, 2017, the Company changed its name to OBITX, Inc., and updated its Articles of Incorporation through unanimous consent of its shareholder, MCIG. The Company is headquartered in Jacksonville, Florida.
The Company’s Primary Standard Industrial Classification Code (referred to as “SIC Codes”) is 7379, Computer Related Services, not elsewhere classified. The Company’s primary NAICS CODE is 519130, Internet publishing and broadcasting and web search portals. We publish and generate textual, audio, and/or video content on the Internet, and operate websites that use a search engine to generate and maintain extensive databases of internet addresses and content.
Results of Operations
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.
Overview The Company is primarily engaged in the business of consulting and developing blockchain and cybersecurity related solutions. We are a technology company that is blending blockchain, zero-trust, and database management technology to create a platform to solve real world, practical business problems. Our business model is based on building recurring revenue through software subscriptions, licensing agreements, and transaction fees. Our patent-pending advances in blockchain engineering deliver the essential elements needed for real-world business use: speed, security, and energy efficiency. Currently, our lines of business are EB Advise, BuildDB and EB Control. On June 21, 2021, we acquired all of the equity interests of 832. On June 30, 2021, we acquired all of the equity interests of Mercury. On July 31, 2021, we acquired all of the equity interests of Vengar. Factors Affecting Comparability of Financial Information Our historical results of operations for the year ended January 31, 2023, may not be comparable with our results of operations for the year ended January 31, 2022, for the reasons discussed below. 832’s operations are included in our historical operating results as of June 21, 2021. Mercury’s operations are included in our historical operating results as of July 1, 2021. Vengar’s operations are included in our historical operating results as of August 1, 2021. Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. On an ongoing basis, we evaluate our estimates, including those related to uncollectible receivables, inventory valuation, deferred compensation, and contingencies. We base our estimates on historical performance and on various other assumptions that we believe to be reasonable under the circumstances. These estimates allow us to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe the following accounting policies are our critical accounting policies because they are important to the portrayal of our financial condition and results of operations, and they require critical management judgments and estimates about matters that may be uncertain. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition, and results of operations for future periods could be materially affected. Revenue Recognition Policies
Our revenue is derived from the subscription, non-software related hosted services, term-based and perpetual licensing of software products, associated software maintenance and support plans, consulting services, training, and technical support. Most of our customer arrangements involve multiple solutions and various license rights, bundled with post-contract customer support and other meaningful rights that together provide a complete end-to-end solution to the customer.
We recognize revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is probable. Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report.
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Our operating results for the years ended January 31, 2019 and 2018 are summarized as follows:
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| | For the year ended January 31, | | | 2019 | | 2018 | Revenue | $ | 103,787 | | $ | 1,342,056 | Cost of Sales | | 655,287 | | | 484,042 | Gross Profit (Loss) | | (551,500) | | | 858,014 | Expenses | | 301,715 | | | 169,279 | Net Income (Loss) from operations | $ | (867,215) | | $ | 688,735 |
Revenue
Our revenue from operations for the period ended January 31, 2019, was $103,787. An additional $12,000 was generated through MCIG, the Company’s majority owner, which was eliminated in the consolidation of MCIG’s financial statements. $25,167 was generated through altCUBE until dissolved on January 11, 2019. The remainder $78,620 was generated through advertising and technology services.
Cost of Goods Sold
Our cost of goods sold for the period ended January 31, 2019, was $655,287. The costs of goods consisted of services expenses of $75,302, $484,634 of amortization and depreciation expenses, $11,488 in computer lease, and $83,862 in programming and development costs directly associated with sales.
Gross Profit
There was a deficit of $1,409,514 in our gross loss for the year ended January 31, 2019 as compared to the gross revenue for the year ended January 31, 2018. Our gross loss for the year ended January 31, 2019 was $551,500 as compared to a gross profit of $858,014 for the year ended January 31, 2018. The variance was attributable to the decrease in revenue of $1,238,269 and the increase of cost of sales of $171,245.
Operating Expenses
Our operating expenses for the period ended January 31, 2019, was $301,715. Our total operating expenses for the period ended January 31, 2019, of $301,715 consisted of $23,072 of selling, general and administrative expenses, $36,900 of payroll, 9,795 of advertising fees, professional fees of $24,294, and consulting expense of $205,477. Our general and administrative expenses consist of bank charges, telephone expenses, meals and entertainments, travel, computer and internet expenses, postage and delivery, office supplies and other expenses.
Net Loss
There was a net loss of $869,785 in 2019 compared with a profit of $688,735 in 2018. This is mostly attributable to a decrease in sales in 2019. Sales in 2018 were $1,342,056 and dropped to $103,787 in 2019. Our cost of sales increased by $171,244 in 2019 and consulting fees increased from $73,500 in 2018 to $205,477 in 2019.
Liquidity and Capital Resources
Introduction
During the period ended January 31, 2019, our cash flow decreased by ($16,350) in operating cash flows. Our cash on hand as of January 31, 2019 was $0.
Cash Requirements
We had cash available of $0 as of January 31, 2019. We currently use approximately $40,000 per month in the operations of our business. The company has relied upon MCIG to fund the company along with the raising of capital. The company will require $492,000 to maintain operations for the next 12-month period. We have a revolving credit agreement with MCIG for $1,000,000 and a revolving credit agreement with APO Holdings, Inc for $100,000.
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Sources and Uses of Cash
Operations
We used $82,634 in cash by operating activities for the period ended January 31, 2019. Net cash used by operations consisted primarily of the net loss of ($883,785) offset by non-cash expenses of $486,812 in depreciation and amortization. Additionally, changes in assets and liabilities consisted of a increase of 215,337 in accounts receivable and subscription receivables, with an increase of $99,002 in accounts payable.
Investments
We used $114,018 in investing activities for the period ended January 31, 2019. Our investing activities consisted of a $108,196 transfer of krypto ATMs to held for sale from fixed assets, $2,160 capitalization of fixed assets, and $3,662 capitalization of intangible assets.
Financing
We had net cash provided in financing activities of $180,302 for the period ended January 31, 2019. Our financing activities consisted of an increase of $180,302 of advances made by a related party.
Off-Balance Sheet Arrangements
None
Going Concern
Our financial statements are prepared using generally accepted accounting principles, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. Because the business is relatively new and has a short history and relatively few sales, no certainty of continuation can be stated. The accompanying consolidated financial statements for the years ended January 31, 2019 and 2018 have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company and therefore, we are not required to provide information required by this Item of Form 10-K.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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INDEX TO FINANCIAL STATEMENTS
| | | Report of Independent Registered Public Accounting Firm
22 | F-1
| | Table of Contents | Consolidated Balance Sheets
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Revenue Recognition Our revenue is derived from the subscription, non-software related hosted services, term-based and perpetual licensing of software products, associated software maintenance and support plans, consulting services, training, technical support, and merchandise sales. Most of our customer arrangements involve multiple solutions and various license rights, bundled with post-contract customer support and other meaningful rights that together provide a complete end-to-end solution to the customer. We determine revenue recognition through the following steps: | F-2
| | | Consolidated Statements of Operations
| F-3
| | | Consolidated Statements of Stockholders' Equity
| F-4
| | | Consolidated Statements of Cash Flows
| F-5
| | | Notes to Consolidated Financial Statements
| F-6
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Report of Independent Registered Public Accounting Firm
To the Shareholders and of the Board of Directors
OBITX, Inc.
Jacksonville, Florida
Opinion on the Financial Statements
We have audited the accompanying balance sheets of OBITX, Inc and its subsidiaries (“the Company”) as of January 31, 2019 and 2018 and the related statements of operations, changes in stockholders’ deficit and cash flows, for the two years ended January 31, 2019, and the related notes and schedules (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 31,2019 and 2018, and the results of its operations and its cash flows for each of the years ended January 31, 2019, and 2018 in conformity with generally accepted accounting principles in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company’s ability to continue as a going concern is dependent upon raising additional funds through debt and equity financing and generating revenue. There are no assurances the Company will receive the necessary funding or generate revenue necessary to fund operations. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan regarding these matters is also described in Note 3 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Dov Weinstein & Co. C.P.A. (Isr)
We have served as the Company's auditor since 2017.
Jerusalem, Israel
April 15, 2019
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OBITX, Inc. | and SUBSIDIARIES | Consolidated Balance Sheets | ASSETS | | | | | January 31, | | January 31, | | | | | 2019 | | 2018 | Current Assets | | | | | Cash and cash equivalents | $ - | | $ 16,350 | | | Accounts receivable, net | 4,500 | | 1,469,986 | | Assets held for Sale | 408,166 | | - | | Prepaid expenses | 149 | | - | | | Total current assets | 412,815 | | 1,486,336 | Property, plant and equipment, net | 2,445,322 | | 3,227,767 | Intangible assets, net | 5,576 | | 4,091 | Total assets | $ 2,863,713 | | $ 4,718,194 | | | | | | | | LIABILITIES AND STOCKHOLDERS' EQUITY | Current liabilities | | | | | Accounts payable and accrued expenses | $ 143,702 | | $ 62,200 | | Due to Related Party | 707,680 | | 523,878 | | | Total current liabilities | 851,382 | | 586,078 | | | Total Liabilities | 851,382 | | 586,078 | Stockholders' equity | | | | | Series A Preferred stock, $0.0001 par value; 1,000,000 shares authorized; | 10 | | 10 | | | 100,000 shares issued and outstanding, as | | | of January 31, 2019 and January 31, 2018, respectively. | | | | | Common stock, $0.0001 par value, voting; 200,000,000 shares authorized; | 546 | | 546 | | | 5,460,000 shares issued and outstanding, as | | | | | | of January 31, 2019 and January 31, 2018, respectively. | | | | | Additional paid in capital | 3,442,825 | | 3,442,825 | | Accumulated deficit | (1,431,050) | | 688,735 | | | Total stockholders' equity | 2,012,331 | | 4,132,116 | | | Total liabilities and stockholders' equity | 2,863,713 | | $ 4,718,194 | | | | | | | | See accompanying notes to audited consolidated financial statements. |
OBITX, Inc. | and SUBSIDIARIES | Consolidated Statements of Operations | | | | | | | | | | For the Year ended | | | | | | | | January 31, | | | | | | | | 2019 | | 2018 | | | | | | | | | | | Sales | | | | $ 103,787 | | $ 1,342,056 | | | Computer lease | | | | 11,488 | | 11,238 | | Cost of services | | | | 75,302 | | 221,612 | | | Depreciation expense | | | | 484,634 | | 199,455 | | Software maintenance | | | | 83,862 | | 51,536 | | | Freight and shipping costs | | | | - | | 202 | Total cost of sales | | | | 655,287 | | 484,042 | Gross (Loss) profit | | | | (551,500) | | 858,014 | Selling, general, and administrative | | | | 23,072 | | 26,902 | Professional fees | | | | 24,294 | | 8,484 | Marketing & advertising | | | | 9,795 | | 5,198 | Payroll | | | | 36,900 | | 55,195 | Consultant fees | | | | 205,477 | | 73,500 | Amortization & depreciation expense | | | | 2,177 | | - | Total operating expenses | | | | 301,715 | | 169,279 | Income (Loss) from operations | | | | (853,215) | | 688,735 | Extraordinary (Loss) | | | | (1,250,000) | | - | Net income (loss) from operations | | | | (2,103,215) | | 688,735 | (Loss) on discontinued operations | | | | (16,571) | | - | Net income (loss) | | $ (2,119,785) | | $ 688,735 | Basic and diluted (Loss) per share: | | | | | | | Income(Loss) per share from continuing operations | | (0.3813) | | 0.6160 | Income(Loss) per share | | | | (0.3813) | | 0.6160 | Weighted average shares outstanding - basic and diluted | | 5,560,000 | | 1,118,082 | | | | | | | | | | | See accompanying notes to audited consolidated financial statements. | | | | | 33 | | | | | | | | | | | |
OBITX, Inc. | Statement of Changes in Stockholders’ Equity Year Ended January 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | Additional | | Additional | | | | Total | | Common Stock | | Preferred Stock | | Paid-in | | Paid-in | | Accumulated | | Stockholders' | | Shares | | Amount | | Shares | | Amount | | Capital | | Capital - Preferred | | Profits | | Equity | Founders Stock | 960,000 | | $ 96 | | - | | $ - | | $ - | | $ - | | $ - | | $ 96 | Stock issued for cash | 4,000,000 | | 400 | | - | | - | | 399,600 | | - | | - | | 400,000 | Stock issued for acquisition | 500,000 | | 50 | | 100,000 | | 10 | | 276,600 | | 2,766,625 | | - | | 3,043,285 | Net profit | - | | - | | - | | - | | - | | - | | 688,735 | | 688,735 | Balance – January 31, 2018 | 5,460,000 | | 546 | | 100,000 | | 10 | | 676,200 | | 2,766,625 | | 688,735 | | 4,132,116 | Net loss | - | | - | | - | | - | | - | | - | | (2,119,785) | | (2,119,785) | Balance – January 31, 2019 | 5,460,000 | | $ 546 | | 100,000 | | $ 10 | | $ 676,200 | | $ 2,766,625 | | $ 688,735 | | $ 2,012,331 | See accompanying notes to audited consolidated financial statements. 34 |
OBITX, Inc. | and SUBSIDIARIES | Statements of Cash Flows | For the year ended January 31, | | | | | | 2019 | | 2018 | Cash flows from operating activities: | | | | Net (Loss) profit | $ (869,785) | | $ 688,735 | Adjustments to reconcile net loss to net | | | | | | Cash provided by (used in) operating activities: | | | | | | Depreciation and amortization | 486,812 | | 199,455 | | | Decrease (Increase) in: | | | | | | Accounts receivable, net | 215,486 | | (1,469,986) | | | Prepaid expenses and other current assets | (149) | | - | | | | Accounts payable, accrued expenses and taxes payable | 81,502 | | 62,200 | | Total adjustment to reconcile net income to net cash | 783,651 | | (1,208,331) | | | | | Net cash provided In operating activities | (86,134) | | (519,596) | Cash flows from investing activities: | | | | | | Increase (Decrease) in: | | | | | | | Assets held for Sale | (108,196) | | - | | | Acquisition of property, plant and equipment | (2,160) | | (3,427,222) | | | | Acquisition of intangible assets | (3,662) | | (4,091) | | | | Net cash received in investing activities | (114,018) | | (3,431,313) | Cash Flows From Financing Activities: | | | | | | Borrowing from related party | 183,802 | | 523,878 | | | | Proceeds from Issuance of Stock, Net | - | | 3,443,381 | | | | Net Cash Provided By Financing Activities | 183,802 | | 3,967,259 | Net Change in Cash | (16,350) | | 16,350 | Cash at Beginning of Year | 16,350 | | - | Cash at End of Period | $ - | | $ 16,350 | | | | | | | | | See accompanying notes to audited consolidated financial statements. 35 |
OBITX, INC.
Notes to Condensed Consolidated Financial Statements
(Audited)
Note 1. Organization and Basis of Presentation
The accompanying audited financial statements of OBITX, Inc., (the “Company”, “we”, “our”), have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”).
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). All significant intercompany accounts and transactions have been eliminated.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Haute Jobs, LLC, (“HAUTE”), Campaign Pigeon, LLC, (“CAMP”), and altCUBE, Inc., (“altCUBE”). altCUBE was closed on December 31, 2018.
Description of Business
The Company was incorporated in the State of Delaware on March 30, 2017 originally under the name GigeTech, Inc. On October 31, 2017 the Company changed its name to OBITX, Inc., and updated its Articles of Incorporation through unanimous consent of its shareholder, MCIG. The Company is headquartered in Jacksonville, Florida.
The Company’s primary NAICS CODE is 519130, Internet publishing and broadcasting and web search portals. We publish and generate textual, audio, and/or video content on the Internet, and operate web sites that use a search engine to generate and maintain extensive databases of internet addresses and content.
The Company earns revenue through social media advertising, fees, and services. Under its plan, the Company developed its white label software solution for MCIG under the 420 Cloud brand in support of the cannabis industry. The company has expanded its services and solutions in software development and internet advertising and promotion into the social media industries of entertainment, business administration, blockchain technologies, and social media.1
On December 10, 2018 OBITX, Inc became a publicly reporting company.
Subsidiaries of the Company
The company currently operates, in addition to OBITX, Inc., three wholly owned subsidiaries which are consolidated:
Haute Jobs, LLC
We incorporated on May 10, 2018 in the state of Wyoming. Haute Jobs, LLC was created to provide services in the arena of job marketing and matching services, to perform an as an employment center.
Campaign Pigeon, LLC
We incorporated on May 10, 2018 in the state of Wyoming. Campaign Pigeon, LLC was created to provide services in the arena of online marketing and generating advertising.
altCUBE, Inc
We incorporated on June 4, 2018 in the state of Wyoming. altCUBE, Inc was created to provide services in the arena of promoting individual advertising solutions and enabling access to the financial crypto global market, providing modern, efficient, clean and intuitive user interface. altCUBE discontinued its operations on January 11, 2019.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the wholly owned subsidiaries of HAUTE, CAMP, and altCUBE
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.
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Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The most significant estimates include: revenue recognition; sales returns and other allowances; allowance for doubtful accounts; valuation of inventory; valuation and recoverability of long-lived assets; property and equipment; contingencies; and income taxes.
On a regular basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates.
Revenue Recognition Policies
We intend to earn revenue from the subscription, non-software related hosted services, term-based and perpetual licensing of software products, associated software maintenance and support plans, consulting services, training, and technical support.
On February 1, 2018, we adopted Topic 606, using the modified retrospective transition method applied to those contracts which were not completed as of February 1, 2018. Results for reporting periods beginning after February 1, 2018 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with our historic accounting. The impact of adopting the new revenue standard was not material to our financial statements and there was no adjustment to beginning retained earnings on February 1, 2018.
Under Topic 606, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
We determine revenue recognition through the following steps:
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· | identification of the contract, or contracts, with a customer; | ·
| | | | · | identification of the performance obligations in the contract; | ·
| | | | · | determination of the transaction price; | ·
| | | | · | allocation of the transaction price to the performance obligations in the contract; and | ·
| | | | · | recognition of revenue when, or as, we satisfy a performance obligation. |
Services revenue. We generate services revenue via consulting services and software development. The Company is engaged in developing, engineering, and designing blockchain projects, to include platforms and cryptocurrencies for customers. Subscription revenue. We generate revenue from subscriptions through staking of our current crypto assets. Our primary token being staked is a hybrid Proof of Work (“POW”) and Proof of Stake (“POS”) system. Stakers in this particular token are paid inflation based both on the duration of the stake (contract length), as well as based on the volume / quantity of tokens staked. Rewards / interest / inflation are paid in the native token. We also participate in networks with POW consensus algorithms, through creating or validating blocks on the network. In exchange for participating in the consensus mechanism of these networks, the Company earns rewards in the form of the native token of the network. Each block creation or validation is a performance obligation. Revenue is recognized at the point when the block creation or validation is complete, and the rewards are available for transfer. Revenue is measured based on the number of tokens received and the fair value of the token at the date of recognition. Product revenue. We generate product revenue through customized product development and merchandise sales. We recognize revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Acquisition Method of Accounting We account for business combinations using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Goodwill and Intangibles The Company tests goodwill and intangibles for impairment annually or more often if an event or circumstance indicates that an impairment may have occurred. Our operating results for the years ended January 31, 2023 and 2022 are summarized as follows: | | For the Years Ended January 31, | | | | 2023 | | | 2022 | | | | (in thousands) | | Revenue | | $ | 2,612 | | | $ | 2,481 | | Cost of sales | | | 1,540 | | | | 231 | | Gross profit | | | 1,072 | | | | 2,250 | | Selling, general and administrative | | | 3,935 | | | | 2,208 | | Stock based compensation | | | 2,912 | | | | 1,975 | | Depreciation and amortization | | | 178 | | | | 96 | | Goodwill impairment | | | 1,319 | | | | - | | Software impairment | | | 135 | | | | - | | Total operating expenses | | | 8,479 | | | | 4,279 | | Loss from operations | | | (7,407 | ) | | | (2,029 | ) | Other income (expense), net | | | (2,511 | ) | | | 5,181 | | Income (loss) before income taxes | | | (9,918 | ) | | | 3,152 | | Income tax (benefit) expense | | | (474 | ) | | | 835 | | Net income (loss) | | $ | (9,444 | ) | | $ | 2,317 | |
Revenue Revenue for the year ended January 31, 2023 was $2.6 million as compared to $2.5 million for the year ended January 31, 2022. Revenue for the year ended January 31, 2023 primarily consisted of $1.8 million from product revenue, $0.7 million from consulting services, and $0.1 million from staking of cryptocurrency. Revenue for the year ended January 31, 2022 primarily consisted of $1.7 million from consulting services, $0.4 million from product revenue, and $0.3 million from staking of cryptocurrency. Cost of Sales Cost of sales for the year ended January 31, 2023 was $1.5 million as compared to $0.2 million for the year ended January 31, 2022. The primary reason for the increase in cost of sales was due to the increase in product revenue. Cost of sales primarily consisted of product costs and commissions from Mercury. Gross Profit Gross profit for the year ended January 31, 2023 was $1.1 million as compared to $2.3 million for the year ended January 31, 2022. The primary reason for the decrease was due to the increase in cost of sales as discussed above. Operating Expenses Operating expenses primarily consist of selling, general and administrative expenses, stock-based compensation expense, amortization and depreciation expense, and goodwill and software impairment. Selling, general and administrative expenses primarily consist of personnel costs, consultant fees, professional fees, computer and internet expenses, marketing expenses, utilities expenses, meals and entertainment, office supplies, and reporting fees. Operating expenses for the year ended January 31, 2023 were $8.5 million compared to $4.3 million for the year ended January 31, 2022. Operating expenses for the year ended January 31, 2023 of $8.5 million consist primarily of stock-based compensation of $2.9 million, payroll costs of $1.5 million, goodwill impairment of $1.3 million, professional fees and marketing expenses of $0.7 million each, consultant fees and depreciation and amortization expense of $0.2 million each, and software impairment of $0.1 million. The goodwill impairment relates to the write off of the Mercury goodwill. The software impairment relates to the write off of Render software. Operating expenses for the year ended January 31, 2022 of $4.3 million consist primarily of stock-based compensation of $2.0 million, payroll costs of $1.1 million, professional and consultant fees of $0.3 million each, marketing expenses of $0.1 million, and a bad debt expense of $0.1 million. Operating Loss Operating loss increased by $5.4 million to an operating loss of $7.4 million for the year ended January 31, 2023 as compared to an operating loss of $2.0 million for the year ended January 31, 2022. The primary reasons for the increase in operating loss were due to the increase in revenue and operating expenses as discussed above. Other Income Other income consists primarily of sales of cryptocurrency and the associated costs, fair market value adjustments to cryptocurrency, and interest income and expense. Other expense, net for the year ended January 31, 2023 was $2.5 million compared to other income, net for the year ended January 31, 2022 of $5.2 million. Other expense, net for the year ended January 31, 2023 of $2.5 million consists primarily of fair market value expense adjustments to cryptocurrency of $2.2 million and net loss from sales of cryptocurrency of $0.2 million. Other income, net for the year ended January 31, 2022 of $5.2 million consists primarily of fair market value adjustments to cryptocurrency of $3.8 million and net profit from sales of cryptocurrency of $1.2 million. Adjusted EBITDA The Company reports all financial information required in accordance with GAAP. The Company believes, however, that evaluating its ongoing operating results will be enhanced if it also discloses certain non-GAAP information. Adjusted EBITDA, which is a non-GAAP financial measure, is defined by the Company as net income (loss) plus net interest income, income tax (benefit) expense, depreciation and amortization, stock-based compensation, and goodwill and software impairment. Adjusted EBITDA should not be considered an alternative to net income, operating income, net cash provided by operating activities, or any other measure of financial performance or liquidity presented in accordance with GAAP. In addition, Adjusted EBITDA presented by other companies may not be comparable to our presentation since each company may define these terms differently. The table below reconciles Adjusted EBITDA, which is a non-GAAP financial measure, to net income (loss). | | For the Years Ended January 31, | | | | 2023 | | | 2022 | | | | (in thousands) | | Net income (loss) | | $ | (9,444 | ) | | $ | 2,317 | | Add: | | | | | | | | | Income tax (benefit) expense | | | (474 | ) | | | 835 | | Stock based compensation | | | 2,912 | | | | 1,975 | | Depreciation and amortization expense | | | 178 | | | | 96 | | Goodwill impairment | | | 1,319 | | | | - | | Software impairment | | | 135 | | | | - | | Net interest (income) expense | | | 58 | | | | (12 | ) | Adjusted EBITDA | | $ | (5,316 | ) | | $ | 5,211 | |
Analysis of Cash Flows Operating Activities Net cash used in operating activities was $2.8 million for the year ended January 31, 2023. We had net loss of $9.4 million, which included fair value adjustments to cryptocurrency of $2.2 million, due to decreases in the values of cryptocurrencies, stock-based compensation of $2.9 million and realized net loss on investment in cryptocurrency of $0.2 million. Net cash used in operating activities was $0.4 million for the year ended January 31, 2022. We had net income of $2.3 million, which included fair value adjustments to cryptocurrency of $3.8 million, stock-based compensation of $2.0 million and realized net gain on investment in cryptocurrency of $1.2 million. Investing Activities Net cash used in investing activities was $0.5 million for the year ended January 31, 2023, compared to net cash provided by investing activities of $1.2 million for the year ended January 31, 2022. During the year ended January 31, 2023, we had capital expenditures of $1.2 million, which were offset by proceeds from sale of cryptocurrencies of $0.8 million. During the year ended January 31, 2022, we sold $5.8 million of cryptocurrency and purchased $3.1 million of cryptocurrency. We also had capital expenditures of $1.5 million. Financing Activities Net cash provided by financing activities was $3.0 million for the year ended January 31, 2023, compared to $0.3 million for the year ended January 31, 2022. During the year ended January 31, 2023, we sold 1.3 million shares of Series C Preferred Stock for $2.5 million, and warrants were exercised for a total of 0.6 million shares of common stock resulting in the Company receiving $0.6 million. During the year ended January 31, 2022, we had proceeds from issuance of common stock of $0.8 million and we paid off debt to a related party of $0.5 million. Liquidity and Capital Resources Cash on hand as of January 31, 2023 was $0.8 million. During the year ended January 31, 2023, we funded operations primarily through cash on hand and cash from sales of cryptocurrencies, Series C Preferred Stock and exercises of warrants. On March 17, 2022, our board approved the conversion of two million shares of blank check preferred stock into two million shares of Series C Preferred Stock, par value $0.0001. On April 19, 2022, the Company sold 250,000 shares of Series C Preferred Stock for $1.0 million. On June 14, 2022, our board of directors approved the early conversion of 250,000 shares of Series C Preferred Stock into 560,928 shares of common stock. On April 19, 2022, two warrants were exercised for a total of 500,000 shares of common stock resulting in the Company receiving $0.5 million. On July 27, 2022, we launched EB Control, our patent-pending, zero-trust data protection solution, which was developed by Vengar. On August 11, 2022, our board of directors approved the sale of our 2022 Cadillac Escalade to Eric Jaffe, our former chief executive officer and current board member, for $91,983. Mr. Jaffe paid for the vehicle with 26,662 shares of his Company common stock. On August 14, 2022, to fund operations our board of directors approved the sale of 10 million HEX tokens to Michael Hawkins for $450,000. During the year ended January 31, 2023, the market price of HEX dropped. The Company recorded a loss on the transaction of approximately $47,000. On September 16, 2022, to fund operations our board of directors approved the sale of approximately 6.7 million HEX tokens and approximately 7 Bitcoins to Michael Hawkins for $304,747. During the year ended January 31, 2023, the market prices of HEX and Bitcoin dropped. The Company recorded a loss on the transaction of approximately $195,000. As of January 31, 2023, the Company owns approximately $4,000 of cryptocurrencies. On October 31, 2022, two warrants were exercised for a total of 250,000 shares of common stock, resulting in the Company having a receivable for $0.2 million. Since the receivable is from a stockholder, it is recorded as a contra-equity account. On December 12, 2022, we launched BuildDB, our patent-pending blockchain platform, which serves as the backbone of the Company’s proprietary blockchain and trust ecosystem. EBI’s subsidiary, 832, developed BuildDB. On January 5, 2023, the Company sold one million shares of Series C Preferred Stock for $1.5 million to OEM partner, Alamo City Engineering Services. We were recently notified by the bank that the Mercury Acquisition triggered defaults under both Mercury's line of credit and term loan, due to the change in ownership. Both the line of credit and term loan are classified as current liabilities. We are working on refinancing both loans. Off-Balance Sheet Arrangements We did not have any material off-balance sheet arrangements as of January 31, 2023. Going Concern Our financial statements are prepared in accordance with GAAP, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. Because the business is relatively new and has a succinct history and relatively few sales, no certainty of continuation can be stated. The accompanying consolidated financial statements for the years ended January 31, 2023 and 2022 have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are a smaller reporting company and therefore, we are not required to provide information required by this Item of Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Everything Blockchain, Inc. Opinion on the Financial Statements We have audited the accompanying the consolidated balance sheets of Everything Blockchain Inc. and its subsidiaries (“the Company”) as of January 31, 2023 and 2022 and the related statements of operations, changes in stockholders’ deficit and cash flows, for the years then ended, and the related notes and schedules (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2023 and 2022, and the results of its operations and its cash flows for the years ended January 31, 2023 and 2022, in conformity with generally accepted accounting principles in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, as of January 31, 2023, the Company suffered losses from operations in all years since inception, except for the year ended January 31, 2022. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan regarding these matters is also described in Note 3 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Going Concern- Refer to Note 3 to the financial statements Critical Audit Matter Description The Company raised substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time. The financial statements for the years under audit have been prepared to assume that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have identified the Going Concern as a critical audit matter because of the significant estimates and assumptions made by management. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of the Company’s assessment of Going Concern. See the explanatory paragraph of the opinion paragraph. How the Critical Audit Matter Was Addressed in the Audit (i) We evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time. (ii) We obtained information about management’s plans that are intended to mitigate the effect of such conditions or events, and assess the likelihood that such plans can be effectively implemented. (iii) We added an explanatory paragraph to the audit report. Fair Value Measurements Included in subsidiaries acquisitions— Refer to Notes 4, 5 and 6 to the financial statements Critical Audit Matter Description During June and July 2021, the Company acquired three subsidiaries. As a result, the Company performed a valuation of the intangible assets involved including goodwill, IP/Technology, and non-compete agreements. The Company’s valuation included a selection of multiples and an assessment of future profit for the Company. We have identified the fair value measurements as a critical audit matter because of the significant estimates and assumptions made by management. This valuation requires management to make significant estimates and assumptions related to valuation multiples and forecasts of future profit. We identified the valuation of the intangible assets as a critical audit matter because of the significant judgments made by management to estimate the fair value. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the selection of the valuation multiples and forecasts of future profit. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the valuation of the fair value measurements of the intangible assets included the following, among others: (i) Performed sensitivity analyses of the valuation multiples and revenue growth assumptions used in the model. (ii) Perform substantive testing procedures over the forecasted profit used within the valuation model. (iii) With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) valuation multiples by: (a) Testing the source information underlying the determination of the multiples and the mathematical accuracy of the calculation. (b) Developing an independent range of valuation multiples and comparing those to the multiples selected by management. Assessment of uncertain tax positions — Refer to Note 17 to the financial statements Critical Audit Matter Description As discussed in Note 17, to the consolidated financial statements, the Company has recognized uncertain tax positions including associated interest and penalties. The Company’s tax positions are subject to audit by local taxing authorities and the resolution of such audits may span multiple years. Tax law is complex and often subject to varied interpretations. Accordingly, the ultimate outcome with respect to taxes the Company may owe may differ from the amounts recognized. We identified the assessment of uncertain tax positions as a critical audit matter. The assessment of tax exposures and the ultimate resolution of uncertain tax positions requires a higher degree of auditor judgment in evaluating the Company’s interpretation of, and compliance with, tax law across multiple jurisdictions. How the Critical Audit Matter Was Addressed in the Audit The primary procedures we performed to address this critical audit matter included the following. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s process to assess uncertain tax positions, including controls related to the interpretation of tax law and identification of uncertain tax positions, the evaluation of which of the Company’s tax positions may not be sustained upon audit and the estimation of exposures associated with uncertain tax positions. We communicate with the tax professionals, that the Company hired, with specialized skills and knowledge who assisted in assessing filed tax positions, and evaluating the Company’s interpretation of tax law and its assessment of certain tax uncertainties and expected outcomes, including, if applicable, the measurement thereof, by reading advice obtained from the Company’s external specialists and correspondence with taxation authorities. /s/Elkana Amitai CPA We have served as the Company’s auditor since 2022. Mitzpe Netofa, Israel May 1, 2023 Everything Blockchain, Inc. Consolidated Balance Sheets (Amounts in thousands, except share and per share data) | | As of January 31, | | | | 2023 | | | 2022 | | ASSETS | | | | | | | Current Assets | | | | | | | Cash | | $ | 824 | | | $ | 1,062 | | Accounts receivable, net | | | 89 | | | | 11 | | Inventory | | | 64 | | | | 60 | | Current cryptocurrencies, net | | | 4 | | | | 3,152 | | Prepaid expenses | | | 2,663 | | | | 2,918 | | Other assets | | | 127 | | | | 36 | | Total current assets | | $ | 3,771 | | | $ | 7,239 | | Property, plant and equipment, net | | | 660 | | | | 1,001 | | Goodwill | | | 16,504 | | | | 17,823 | | Intangible assets, net | | | 4,270 | | | | 3,119 | | Other assets | | | 463 | | | | 463 | | Total assets | | $ | 25,668 | | | $ | 29,645 | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | Current Liabilities | Accounts payable and accrued expenses | | $ | 1,151 | | | $ | 744 | | Accounts payable related party | | | 13 | | | | 24 | | Current portion of long-term debt | | | 474 | | | | 282 | | Reserve for legal settlements | | | 154 | | | | 154 | | Deferred revenue | | | 279 | | | | 108 | | Total current liabilities | | $ | 2,071 | | | $ | 1,312 | | Long-term liabilities | | | | | | | | | Debt | | | 47 | | | | 271 | | Deferred income taxes | | | - | | | | 617 | | Total long-term liabilities | | $ | 47 | | | $ | 888 | | Total Liabilities | | $ | 2,118 | | | $ | 2,200 | | Stockholders’ Equity | Series A Preferred stock, $0.0001 par value; 1,000,000 shares authorized; 200,000 shares issued and outstanding as of January 31, 2023 and 2022 | | | - | | | | - | | Series B Preferred stock, $0.0001 par value; 1,500,000 shares authorized; 650,000 shares issued and 400,000 shares outstanding as of January 31, 2023 and 2022 | | | - | | | | - | | Series C Preferred stock, $0.0001 par value: 2,000,000 shares authorized; 1,000,000 and 0 shares issued and outstanding as of January 31, 2023 and 2022, respectively | | | - | | | | - | | Common stock, $0.0001 par value, voting; 200,000,000 shares authorized; 9,949,966 shares issued and 9,923,304 shares outstanding as of January 31, 2023, and 8,604,038 shares issued and outstanding as of January 31, 2022 | | | 1 | | | | 1 | | Treasury stock | | | (1,691 | ) | | | (1,599 | ) | Additional paid-in capital | | | 85,975 | | | | 80,134 | | Receivable from stockholder | | | (200 | ) | | | - | | Accumulated deficit | | | (60,535 | ) | | | (51,091 | ) | Total stockholders’ equity | | $ | 23,550 | | | $ | 27,445 | | Total liabilities and stockholders’ equity | | $ | 25,668 | | | $ | 29,645 | |
See Accompanying Notes to Consolidated Financial Statements. Everything Blockchain, Inc. Consolidated Statements of Operations (Amounts in thousands, except share and per share data) | | For the Years Ended | | | | January 31, | | | | 2023 | | | 2022 | | | | | | | | | Revenue | | $ | 2,612 | | | $ | 2,481 | | Cost of sales | | | 1,540 | | | | 231 | | Gross profit | | $ | 1,072 | | | $ | 2,250 | | Selling, general, and administrative | | | 3,935 | | | | 2,208 | | Stock based compensation | | | 2,912 | | | | 1,975 | | Depreciation and amortization | | | 178 | | | | 96 | | Goodwill impairment | | | 1,319 | | | | - | | Software impairment | | | 135 | | | | - | | Total operating expenses | | $ | 8,479 | | | $ | 4,279 | | Loss from operations | | | (7,407 | ) | | | (2,029 | ) | Other income (expense), net | | | (2,511 | ) | | | 5,181 | | Income (loss) before income taxes | | $ | (9,918 | ) | | $ | 3,152 | | Income tax (benefit) expense | | | (474 | ) | | | 835 | | Net income (loss) | | $ | (9,444 | ) | | $ | 2,317 | | | | | | | | | | | Basic and diluted income (loss) per share: | | | | | | | | | Basic income (loss) per share | | $ | (1.00 | ) | | $ | 0.31 | | Diluted income (loss) per share | | $ | (1.00 | ) | | $ | 0.24 | | Weighted average shares outstanding - basic | | | 9,425,769 | | | | 7,460,213 | | Weighted average shares outstanding - diluted | | | 9,425,769 | | | | 9,792,915 | |
See Accompanying Notes to Consolidated Financial Statements. Everything Blockchain, Inc Consolidated Statements of Stockholders’ Equity (Amounts in thousands) | | Preferred Stock | | | Common Stock | | | Treasury | | | Additional Paid-in | | | Receivable from | | | Accumulated | | | Total Stockholders’ | | | | Shares | | | Amount | | | Shares | | | Amount | | | Stock | | | Capital | | | Shareholder | | | Deficit | | | Equity | | | | | | | | | | | | | | Balance – January 31, 2021 | | | 800 | | | $ | - | | | | 5,974 | | | $ | 1 | | | $ | - | | | $ | 54,946 | | | $ | - | | | $ | (53,408 | ) | | $ | 1,539 | | Stock issued | | | - | | | | - | | | | 308 | | | | - | | | | - | | | | 669 | | | | - | | | | - | | | | 669 | | Stock issued for services | | | - | | | | - | | | | 390 | | | | - | | | | - | | | | 1,109 | | | | - | | | | - | | | | 1,109 | | Stock issued for acquisitions | | | - | | | | - | | | | 1,750 | | | | - | | | | - | | | | 19,623 | | | | - | | | | - | | | | 19,623 | | Stock based compensation | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,647 | | | | - | | | | - | | | | 1,647 | | Warrant exercise | | | - | | | | - | | | | 182 | | | | - | | | | - | | | | 140 | | | | - | | | | - | | | | 140 | | Issuance of Series A Preferred for services | | | 50 | | | | - | | | | - | | | | - | | | | - | | | | 2,000 | | | | - | | | | - | | | | 2,000 | | Conversion of note receivable | | | (250 | ) | | | - | | | | - | | | | - | | | | (1,599 | ) | | | - | | | | - | | | | - | | | | (1,599 | ) | Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,317 | | | | 2,317 | | Balance – January 31, 2022 | | | 600 | | | $ | - | | | | 8,604 | | | $ | 1 | | | $ | (1,599 | ) | | $ | 80,134 | | | $ | - | | | $ | (51,091 | ) | | $ | 27,445 | | Issuance of Series C Preferred | | | 1,250 | | | | - | | | | - | | | | - | | | | - | | | | 2,500 | | | | - | | | | - | | | | 2,500 | | Conversion of Series C Preferred into common stock | | | (250 | ) | | | - | | | | 561 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Warrant exercise | | | - | | | | - | | | | 785 | | | | - | | | | - | | | | 785 | | | | (200 | ) | | | - | | | | 585 | | Sale of asset | | | - | | | | - | | | | (27 | ) | | | - | | | | (92 | ) | | | - | | | | - | | | | | | | | (92 | ) | Stock based compensation | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,556 | | | | - | | | | - | | | | 2,556 | | Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (9,444 | ) | | | (9,444 | ) | Balance – January 31, 2023 | | | 1,600 | | | $ | - | | | | 9,923 | | | $ | 1 | | | $ | (1,691 | ) | | $ | 85,975 | | | $ | (200 | ) | | $ | (60,535 | ) | | $ | 23,550 | |
See Accompanying Notes to Consolidated Financial Statements. Everything Blockchain, Inc. Consolidated Statements of Cash Flows (Amounts in thousands) | | For the Years Ended | | | | January 31, | | | | 2023 | | | 2022 | | Cash flows from operating activities: | | | | | | | Net income (loss) | | $ | (9,444 | ) | | $ | 2,317 | | Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | | | | | Stock based compensation | | | 2,912 | | | | 1,975 | | Goodwill impairment | | | 1,319 | | | | - | | Software impairment | | | 135 | | | | - | | Deferred income tax expense | | | (618 | ) | | | 617 | | Reversal of bad debt | | | - | | | | (233 | ) | Net loss on exchanges | | | 4 | | | | - | | Realized net (gain) loss on investment in cryptocurrency | | | 186 | | | | (1,180 | ) | Loss on cryptocurrency impairment | | | - | | | | 16 | | Fair value adjustment to cryptocurrency | | | 2,206 | | | | (3,777 | ) | Depreciation and amortization | | | 178 | | | | 96 | | Changes in operating assets and liabilities: | | | | | | | | | Accounts receivable, net | | | (78 | ) | | | 22 | | Interest receivable | | | - | | | | (32 | ) | Inventory | | | (4 | ) | | | (60 | ) | Prepaid expenses | | | (101 | ) | | | (136 | ) | Other assets | | | (91 | ) | | | (499 | ) | Accounts payable to related parties | | | (10 | ) | | | 11 | | Accounts payable and accrued expenses | | | 442 | | | | 561 | | Deferred revenue | | | 171 | | | | (135 | ) | Net cash used in operating activities | | $ | (2,793 | ) | | $ | (437 | ) | Cash flows from investing activities: | | | | | | | | | Acquisition of cryptocurrency, net | | | - | | | | (3,084 | ) | Proceeds from sale of cryptocurrency | | | 755 | | | | 5,756 | | Capital expenditures | | | (1,221 | ) | | | (1,486 | ) | Sale of assets | | | 3 | | | | 85 | | Acquisitions, net of cash received | | | - | | | | (23 | ) | Net cash provided by (used in) investing activities | | $ | (463 | ) | | $ | 1,248 | | Cash flows from financing activities: | | | | | | | | | Payment to related party | | | - | | | | (500 | ) | Payment of debt | | | (32 | ) | | | (18 | ) | Proceeds from issuance of Series C Preferred Stock | | | 2,500 | | | | - | | Proceeds from exercise of warrants | | | 550 | | | | - | | Proceeds from issuance of stock, net | | | - | | | | 769 | | Net cash provided by financing activities | | $ | 3,018 | | | $ | 251 | | Net Change in Cash | | | (238 | ) | | | 1,062 | | Cash at Beginning of Year | | | 1,062 | | | | - | | Cash at End of Year | | $ | 824 | | | $ | 1,062 | | | | | | | | | | | Supplemental Disclosure of Cash Flows Information: | | | | | | | | | Cash paid for interest | | $ | 58 | | | $ | 35 | | Cash paid for income taxes | | $ | 3 | | | $ | - | | | | | | | | | | | Non-cash Investing and Financing Activities: | | | | | | | | | Conversion of accounts payable to related party to common stock | | $ | 35 | | | $ | 40 | | Sale of asset for common stock | | $ | 92 | | | $ | - | | Exercise of warrant for receivable | | $ | 200 | | | $ | - | | Loan of cryptocurrency | | $ | - | | | $ | 500 | | Currency received for payment under contract | | $ | - | | | $ | 240 | | Fair value of assets in acquisitions | | $ | - | | | $ | 20,414 | | Fair value of liabilities assumed in acquisitions | | $ | - | | | $ | 791 | | Accounts receivable settlement for Render Payment | | $ | - | | | $ | 233 | | Conversion of note receivable in exchange for common stock and preferred stock | | $ | - | | | $ | 1,599 | | Issuance of stock for services | | $ | - | | | $ | 1,110 | | Issuance of Series A Preferred for services | | $ | - | | | $ | 2,000 | |
See Accompanying Notes to Consolidated Financial Statements. EVERYTHING BLOCKCHAIN, INC. Notes to Consolidated Financial Statements Note 1. Organization and Basis of Presentation The accompanying consolidated financial statements of Everything Blockchain, Inc., (the “Company,” “we,” “us” or “our”), have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”). The Company began trading under the stock symbol “OBTX” on March 24, 2020. On May 23, 2021, the Company changed its name from OBITX, Inc. to Everything Blockchain, Inc. On November 8, 2022, the Company began trading under the stock symbol “EBZT”. Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Description of Business The Company is primarily engaged in the business of consulting and developing blockchain and cybersecurity related solutions. We are a technology company that is blending blockchain, zero-trust, and database management technology to create a platform to solve real world, practical business problems. Our business model is based on building recurring revenue through software subscriptions, licensing agreements, and transaction fees. Subsidiaries of the Company On April 26, 2021, in a settlement agreement with Render Payment, LLC, now named Render Payment Corp. (“Render”), owners, the Company became the sole owner of Render, in exchange for an outstanding accounts receivable the Company impaired in 2019. The settlement was considered a related party transaction and conducted as an arm’s length transaction approved by board members not associated with Render. As part of the transaction the Company recognized other income of $233,000 as fair market value (“FMV”) of the assets obtained under the settlement. The Company received two vehicles with FMV of $49,000 each and the Render Payment Processing Software with FMV of $135,000. On June 18, 2021, the Company formed Everything Blockchain Technology Corporation (“EBTC”) to retain ownership of all intellectual property, technology patents and software code. On June 21, 2021, the Company acquired all of the equity interests of 832 Energy Technology Consultants, LLC (“832”), pursuant to a Purchase Agreement dated June 17, 2021. Upon the closing of the transaction (the “832 Acquisition”), 832 became a wholly owned subsidiary of the Company. 832, which is located in Texas, has developed many innovations in the areas of distributed computing, artificial intelligence and blockchain technologies. For information on the 832 Acquisition refer to “Note 4. 832 Acquisition”. On June 30, 2021, the Company acquired all of the equity interests of Mercury, Inc. (“Mercury”), pursuant to a Purchase Agreement dated April 24, 2021. Upon the closing of the transaction (the “Mercury Acquisition”), Mercury became a wholly owned subsidiary of the Company. The Company has utilized Mercury, which is located in Idaho, as its hosting solution since May 2020. The Company, with Mercury, launched its mining operations in the western United States. The Company has commenced mining for Bitcoin. Since the Mercury Acquisition, Mercury has handled the Company’s information technology and customer support functions and started its network operations center. For information on the Mercury Acquisition refer to “Note 5. Mercury Acquisition.” On July 31, 2021, the Company acquired all of the equity interests of Vengar Technologies LLC (“Vengar”), pursuant to a Purchase Agreement. Upon the closing of the transaction (the “Vengar Acquisition”), Vengar became a wholly owned subsidiary of the Company. Vengar, which is located in Florida, has developed a zero-trust data access and protection software that the Company plans to integrate into its blockchain solutions. For information on the Vengar Acquisition refer to “Note 6. Vengar Acquisition.” On November 16, 2022, the Company formed EBI International, Inc., which will own and manage, collectively, all international subsidiaries of the Company. Note 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The most significant estimates and judgments relate to revenue recognition; sales returns and other allowances; allowance for doubtful accounts; valuation of inventory; valuation of long-lived assets and finite-lived intangible assets; recoverability of goodwill; acquisition method of accounting; contingencies; and income taxes. On a regular basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience, and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates. Revenue Recognition Policies Our revenue is derived from the subscription, non-software related hosted services, term-based and perpetual licensing of software products, associated software maintenance and support plans, consulting services, training, technical support, and merchandise sales. Most of our customer arrangements involve multiple solutions and various license rights, bundled with post-contract customer support and other meaningful rights that together provide a complete end-to-end solution to the customer. We determine revenue recognition through the following steps: | · | identification of the contract, or contracts, with respect to trade receivables and commodities are limited duea customer; | | | | | · | identification of the performance obligations in the contract; | | | | | · | determination of the transaction price; | | | | | · | allocation of the transaction price to the diverse groupperformance obligations in the contract; and | | | | | · | recognition of customers to whom the Company provides services to.revenue when, or as, we satisfy a performance obligation. |
Services revenue. We generate services revenue via consulting services and software development. The Company is engaged in developing, engineering, and designing blockchain projects, to include platforms and cryptocurrencies for customers. Subscription revenue. We generate revenue from subscriptions through staking of our current crypto assets. Our primary token being staked is a hybrid Proof of Work (“POW”) and Proof of Stake (“POS”) system. Stakers, in this particular token are paid inflation based both on the duration of the stake (contract length), as well as based on the volume / quantity of tokens staked. Rewards / interest / inflation are paid in the native token. We also participate in networks with POW consensus algorithms, through creating or validating blocks on the network. In exchange for participating in the consensus mechanism of these networks, the Company earns rewards in the form of the native token of the network. Each block creation or validation is a performance obligation. Revenue is recognized at the point when the block creation or validation is complete, and the rewards are available for transfer. Revenue is measured based on the number of tokens received and the fair value of the token at the date of recognition. Product revenue. We generate product revenue through customized product development and merchandise sales. We recognize revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Research and Development Research and development expenditures on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, are recognized in profit or loss as an expense as incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalized only if the product or process is technically and commercially feasible, if development costs can be measured reliably, if future economic benefits are probable, if the Company intends to use or sell the asset and the Company intends and has sufficient resources to complete development. For the years ended January 31, 2023 and 2022, the Company capitalized software development costs of $1,174,000 and $303,000, respectively. Concentration of Credit Risk and Significant Customers Financial instruments which potentially subject the Company to a concentration of credit risk consist principally of temporary cash investments and accounts receivable. Concentrations of credit risk with respect to trade receivables and commodities are limited due to the Company’s diverse group of customers. The Company establishes an allowance for doubtful accounts when events and circumstances regarding the collectability of its receivables or the selling of its commodities warrant based upon factors such as the credit risk of specific customers, historical trends, other information, and past bad debt history. The outstanding balances are stated net of an allowance for doubtful accounts. Revenues from one customer represent $1.0 million of the Company’s revenue for the year ended January 31, 2022. Our cash balances are maintained in accounts held by major banks and financial institutions located in the United States. The Company may occasionally maintain amounts on deposit with a financial institution that are in excess of the federally insured limit of $250,000. The risk is managed by maintaining all deposits in high-quality financial institutions. The Company had $0 in excess of federally insured limits on
January 31, 2019, and January 31, 2018
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| F-10 | For the year ended January 31, 2019 there were $4,500 in accounts receivable and $1,469,986 for the year ended January 31, 2018. During the last quarter
| Table of the year end January 31, 2019 the accounts receivable for Render Payment was written off to bad debt expense as the amount of time of non-payment was quite substantial and greater than 1 year.Cost of Goods Sold
The Company recognizes the direct cost of purchasing product for sale, including freight-in and packaging, as cost of goods sold in the accompanying statement of operations.
Cost of Revenue
Cost of revenue includes: manufacturing and distribution costs for products sold and programs licensed; operating costs related to product support service centers and product distribution centers; costs incurred to include software on PCs sold by OEMs, to drive traffic to our websites and products, and to acquire online advertising space; costs incurred to support and maintain Internet-based products and services, including data center costs and royalties; warranty costs; inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized software development costs. Capitalized software development costs are amortized over the estimated lives of the products.
Cash and Cash Equivalents
The Company includes in cash and cash equivalents all short-term, highly liquid investments that mature within three months of the date of purchase. Cash equivalents consist principally of investments in interest-bearing demand deposit accounts and liquidity funds with financial institutions and are stated at cost, which approximates fair value. For cash management purposes, the company concentrates its cash holdings in an account at Bank of America. The Company had no cash equivalents as of January 31, 2019, and $16,350 as of January 31, 2018.
Property, Plant, and Equipment
Property, plant, and equipment (“PPE”) are stated at cost less accumulated depreciation and amortization.Contents
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Our cash balances are maintained in accounts held by major banks and financial institutions located in the United States. The Company may occasionally maintain amounts on deposit with a financial institution that are in excess of the federally insured limit of $250,000. The risk is managed by maintaining all deposits in high-quality financial institutions. The Company had $0.4 million and $0.1 million in excess of federally insured limits on January 31, 2023, and January 31, 2022, respectively. Our cryptocurrency balances are maintained in accounts held by institutions located in and outside the United States. The Company maintains amounts on deposit that often exceed coverage from third party insured limit of up to $1,000,000. The risk is managed by maintaining multiple accounts with various accounts held in a cold storage wallet. The Company had $4,000 in excess of amounts protected by insurance. Cost of Services Provided Cost of services provided includes programs licensed; costs incurred to support and maintain Internet-based products and services, including data center costs and royalties; warranty costs; costs associated with the delivery of consulting services; and the amortization of capitalized software development costs. Capitalized software development costs are amortized over the estimated lives of the products, which the Company rates at three years. Cash and Cash Equivalents The Company includes in cash and cash equivalents all short-term, highly liquid investments that mature within three months of the date of purchase. Cash equivalents consist principally of investments in interest-bearing demand deposit accounts and liquidity funds with financial institutions and are stated at cost, which approximates fair value. The Company had no cash equivalents as of January 31, 2023 and 2022. Property, Plant, and Equipment Property, plant, and equipment is stated at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred. Additions, improvements and major replacements that extend the life of the asset are capitalized. Depreciation and amortization are recorded using the straight-line method over the estimated useful lives of depreciable assets, which are generally three to five periods.
The Company classifies its software under theFinancial Accounting Standards Advisory Board (FASAB) Statement of Federal Financial Accounting Standards (SFFAS) No. 10, Accounting for Internal Use Software, and the Governmental Accounting Standards Board (GASB) Statement No. 42,Accounting of Costs of Computer Software Developed or Obtained for Internal Use. When software is used in providing goods and services it is classified as PPE. The Company considers its proprietary software as a major part of the Company’s operations that are intended to provide profits.
Accounts Receivable
The Company’s accounts receivable are trade accounts receivable. The Company recognized $1,250,000 as an uncollectable reserve for the year ending January 31, 2019 and $0 for the year ended January 31, 2018.
Advertising Costs and Expense
The advertising costs are expensed as incurred. Advertising costs were $9,795 for the year ended January 31, 2019 and $5,198 for the year ended January 31, 2018.
Foreign Currency Translation
The Company’s functional currency and its reporting currency is the United States Dollar.
Income Taxes
In accordance withSAB Topic 1: Financial Statements, Subsidiary’s or Division’s Separate Financial Statements and Segments, income taxes are consolidated with MCIG, the controlling entity of the Company. There are currently no tax implications for the year ended January 31, 2019 should the Company not consolidate with MCIG. With only losses showing for the period there would be no taxes payable for this period. If there were tax expenses, they would be based on the IRS published corporate tax rate of 34% for 2017 and 21% for 2018.
The following table reflects the tax implications should the Company not consolidate with MCIG for the period ended January 31, 2018. The proforma tax expense is based on the 2017 corporate tax rate of 34%.
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Depreciation is calculated using the straight-line method over the estimated useful lives of the assets as follows: Type of Asset | | Period from Inception (March 30, 2017) to January 31, 2018Estimated Useful Life
| Building and building improvements | | 15 years | Machinery and equipment | | 7 years | Furniture, fixtures, and office equipment | | | 7 years | Computer equipment and computer software | | 1 - 3 years | Vehicles | | 5 years |
Goodwill Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. The Company’s goodwill was the result of the 832 Acquisition, the Mercury Acquisition, and the Vengar Acquisition. The Company tests goodwill for impairment annually or more often if an event or circumstance indicates that an impairment may have occurred. Intangible Assets The Company tests intangible assets for impairment annually or more often if an event or circumstance indicates that an impairment may have occurred. Intangible assets consist of the following: | | As of January 31, 2023 | | | | Gross Amount | | | Accumulated Amortization | | | Net Carrying Amount | | | | (in thousands) | | IP/Technology | | $ | 4,251 | | | $ | - | | | $ | 4,251 | | Non-compete agreements | | | 82 | | | | 63 | | | | 19 | | Total Intangibles | | $ | 4,333 | | | $ | 63 | | | $ | 4,270 | |
| | As of January 31, 2022 | | | | Gross Amount | | | Accumulated Amortization | | | Net Carrying Amount | | | | (in thousands) | | IP/Technology | | $ | 3,060 | | | $ | - | | | $ | 3,060 | | Non-compete agreements | | | 82 | | | | 23 | | | | 59 | | Total Intangibles | | $ | 3,142 | | | $ | 23 | | | $ | 3,119 | |
The Company’s IP/Technology is still being developed so no amortization has been recorded. The non-compete agreements are amortized over two years. Acquisition Method of Accounting The Company accounts for business combinations using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Advertising Costs and Expense The advertising costs are expensed as incurred. Advertising costs were $0.7 million and $0.1 million for the years ended January 31, 2023 and 2022, respectively. Foreign Currency Translation The Company’s functional currency and its reporting currency is the United States Dollar. Basic and Diluted Net Earnings (Loss) Per Share The Company follows ASC Topic 260 – Earnings Per Share, and FASB 2015-06, Earnings Per Share to account for earnings per share. Basic earnings per share (“EPS”) calculations are determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS calculations are determined by dividing net income (loss) by the weighted average number of common shares outstanding plus the dilutive effect, calculated using (i) the “treasury stock” method for warrants and (ii) the “if converted” method for the preferred stock if their inclusion would not have been anti-dilutive. Commitments and Contingencies The Company reports and accounts for its commitments and contingencies in accordance with ASC 440 – Commitments and ASC 450 – Contingencies. We recognize a loss on a contingency when it is probable a loss will be incurred and that the amount of the loss can be reasonably estimated. No loss contingencies have been recorded for the years ended January 31, 2023 and 2022. Fair Value Measurements The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value: - Level 1: | Quoted prices in active markets for identical instruments; | - Level 2: | Other significant observable inputs (including quoted prices in active markets for similar instruments); | - Level 3: |
ForSignificant unobservable inputs (including assumptions in determining the year endedfair value of certain investments).
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The carrying values for cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued liabilities, and deferred revenue approximate their fair value due to their short maturities. Recent Accounting Pronouncements In December 2019, the Financial Accounting Standards Board issued guidance which simplifies the accounting for income taxes. The guidance amends the rules for recognizing deferred taxes for investments, performing intra-period tax allocations, and calculating income taxes in interim periods. It also reduces complexity in certain areas, including allocating taxes to members of a consolidated group. The Company adopted the new guidance during the year ended January 31, 2022. The adoption did not have a material impact on our financial statements. Note 3. Going Concern The Company’s consolidated financial statements are prepared in accordance with GAAP, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. Because the business is new and has a limited history, no certainty of continuation can be stated. The accompanying financial statements for the years ended January 31, 2023 and 2022, have been prepared to assume that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has had historically negative cash flow and net losses. Though the year ended January 31, 2022 resulted in positive cash flow and net income, there are no assurances the Company will generate a profit or obtain positive cash flow in the future. The Company has sustained its solvency for the years ended January 31, 2023 and 2022 through the support of its shareholder and chairman, Michael Hawkins, or companies controlled by Michael Hawkins, which raise substantial doubt about its ability to continue as a going concern. Management is taking steps to raise additional funds to address its operating and financial cash requirements to continue operations in the next twelve months. Management has devoted a significant amount of time to the raising of capital from additional debt and equity financing. However, the Company’s ability to continue as a going concern is dependent upon raising additional funds through debt and equity financing and generating revenue. There are no assurances the Company will receive the funding or generate the revenue necessary to fund operations. The financial statements contain no adjustments for the outcome of this uncertainty. Note 4. 832 Acquisition On June 21, 2021, the Company acquired all the equity interests of 832. This acquisition is consistent with the Company’s strategy of expanding its blockchain business. The purchase price consisted of 300,000 shares of common stock valued at $2.0 million at time of purchase. This business combination has been accounted for using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The purchase price recognized in our financial statements consisted of the following (amounts in thousands): Common stock | | $ | 2,043 | | Total purchase price | | $ | 2,043 | |
The Company’s final purchase price allocation is as follows (amounts in thousands): Cash | | $ | 20 | | Goodwill | | | 1,651 | | IP/Technology | | | 343 | | Non-compete agreements | | | 49 | | Accounts payable and accrued expenses | | | (20 | ) | Total purchase price | | $ | 2,043 | |
The goodwill recorded reflects the value to the Company of entry into blockchain technology. The operations of 832 are included in the consolidated statement of operations as of June 21, 2021. Note 5. Mercury Acquisition On June 30, 2021, the Company acquired all the equity interests of Mercury. This acquisition is consistent with the Company’s strategy of expanding its cryptocurrency business. The purchase price consisted of 450,000 shares of common stock valued at $1.3 million at time of purchase and $0.1 million of cash. This business combination has been accounted for using the acquisition method of accounting. The purchase price recognized in our financial statements consisted of the following (amounts in thousands): Cash | | $ | 65 | | Common stock | | | 1,350 | | Total purchase price | | $ | 1,415 | |
The Company’s purchase price allocation is as follows (amounts in thousands): Cash | | $ | 74 | | Accounts receivable | | | 33 | | Property, plant & equipment | | | 741 | | Goodwill | | | 1,319 | | Accounts payable and accrued expenses | | | (427 | ) | Deferred revenue | | | (3 | ) | Notes payable | | | (322 | ) | Total purchase price | | $ | 1,415 | |
The goodwill recorded reflects the value to the Company of Mercury’s mining operations. The operations of Mercury are included in the consolidated statement of operations as of July 1, 2021. Note 6. Vengar Acquisition On July 31, 2021, the Company acquired all the equity interests of Vengar. This acquisition is consistent with the Company’s strategy of expanding its blockchain business. The purchase price consisted of one million shares of common stock valued at $16.2 million at time of purchase and $0.1 million of cash. This business combination has been accounted for using the acquisition method of accounting. The purchase price recognized in our financial statements consisted of the following (amounts in thousands): Cash | | $ | 50 | | Common stock | | | 16,230 | | Total purchase price | | $ | 16,280 | |
The Company’s final purchase price allocation is as follows (amounts in thousands): Cash | | $ | 27 | | Property, plant & equipment | | | 4 | | Goodwill | | | 14,853 | | IP/Technology | | | 1,402 | | Non-compete agreements | | | 33 | | Accounts payable and accrued expenses | | | (39 | ) | Total purchase price | | $ | 16,280 | |
The goodwill recorded reflects the value to the Company of entry into zero-trust technology. The operations of Vengar are included in the consolidated statement of operations as of August 1, 2021. Note 7. Cryptocurrency Assets The Company transacts business with cryptocurrency assets. The Company records cryptocurrency assets as an intangible asset with infinite life. We classify cryptocurrency assets that have a market value and substantial liquidity as current intangible assets, which we value at fair market value in accordance with Statement No. 157. Cryptocurrencies that do not trade on a market or have limited liquidity are classified as non-current intangible assets and are recorded on a cost basis. The following chart shows our cryptocurrency assets (in thousands): Current Assets | | | As of January 31, | | | | 2023 | | | 2022 | | Coin Symbol | | FMV | | BTC | | $ | 4 | | | $ | 272 | | ETH | | | - | | | | 1 | | HEX | | | - | | | | 2,879 | | | | $ | 4 | | | $ | 3,152 | |
During the year ended January 31, 2023, the Company recorded in other income (expense), net fair value expense adjustments of $2.2 million and an expense of $0.2 million on the sales of cryptocurrencies. During the year ended January 31, 2022, the Company recorded in other income fair market value adjustments of $3.8 million and sales of cryptocurrencies, net of associated costs, of $1.2 million. Note 8. Property, Plant and Equipment Property, plant, and equipment consisted of the following (in thousands): | | As of January 31, | | | | 2023 | | | 2022 | | Land | | $ | 36 | | | $ | 36 | | Buildings and building improvements | | | 339 | | | | 329 | | Machinery and equipment | | | 211 | | | | 208 | | Furniture, fixtures, and office equipment | | | 75 | | | | 69 | | Computer equipment and computer software | | | 114 | | | | 238 | | Vehicles | | | 60 | | | | 181 | | | | | 835 | | | | 1,061 | | Less: Accumulated depreciation | | | (175 | ) | | | (60 | ) | Total property, plant and equipment, net | | $ | 660 | | | $ | 1,001 | |
Note 9. Goodwill Goodwill consisted of the following (in thousands): | | As of January 31, | | | | 2023 | | | 2022 | | 832 Acquisition | | $ | 1,651 | | | $ | 1,651 | | Mercury Acquisition | | | - | | | | 1,319 | | Vengar Acquisition | | | 14,853 | | | | 14,853 | | Total goodwill | | $ | 16,504 | | | $ | 17,823 | |
Management considered the net losses since the Mercury acquisition as well as cash flow projections as indicators that a potential impairment of the goodwill related to Mercury may have occurred. Based on further analysis, management decided there was an impairment of goodwill. For the year ended January 31, 2023, the Company recorded an impairment charge of $1.3 million. Note 10. Debt On March 17, 2021, the Company entered into a loan agreement for $500,000 with Epic Industry Corp (“Epic”), a wholly owned company of Michael Hawkins, the Company’s Chairman of the board of directors. The loan was financed with $500,000 of GUSD cryptocurrency tokens, a stable coin. The interest rate was 3% per annum. The Company paid off the loan during the quarter ended July 31, 2021. As of January 31, 2023 and 2022, Mercury’s outstanding debt of $0.5 million and $0.6 million had a weighted average interest rate of 6.3% and 6.2%, respectively. The debt consists primarily of term loans and a line of credit with various financial institutions, and such debt is collateralized by the assets of Mercury. The debt has maturity dates ranging from 2023 through 2026. We were recently notified by the bank that the Mercury Acquisition triggered defaults under both Mercury's line of credit and term loan due to the change in ownership. Both the line of credit and term loan are classified as current liabilities. We are working on refinancing both loans. Note 11. Commitments and Contingencies The Company reports and accounts for its commitments and contingencies in accordance with ASC 440 – Commitments and ASC 450 – Contingencies. We recognize a loss on a contingency when it is probable a loss will be incurred and that the amount of the loss can be reasonably estimated. No loss contingencies have been recorded for the years ended January 31, 2023 and 2022. Note 12. Legal Proceedings The Company may be subject to legal proceedings and claims arising from contracts or other matters from time to time in the ordinary course of business. Management is not aware of any pending or threatened litigation where the ultimate disposition or resolution could have a material adverse effect on the Company’s financial position, results of operations or liquidity. Note 13. Related Parties and Related Party Transactions Related party balance sheet items (in thousands) | | | As of January 31, | | | | 2023 | | | 2022 | | Prepaid expenses | | $ | 2,000 | | | $ | 2,000 | | Accounts payable and accrued expenses | | | 28 | | | | 24 | | Loans payable | | | 13 | | | | 24 | |
Related party income statement items (in thousands) | | | For the Years Ended January 31, | | | | 2023 | | | 2022 | | Consulting expenses | | $ | 242 | | | $ | 142 | | Payroll expenses | | | 611 | | | | 253 | | Stock based compensation | | | 2,299 | | | | 1,375 | |
On May 13, 2020, the Company sold its 420 Cloud Software to First Bitcoin Capital, Inc., for the purchase price of $1.9 million. The $1.9 million was paid through the transfer of $0.5 million in First Bitcoin Capital, Inc. (“BIT”) cryptocurrency tokens and a $1.4 million convertible promissory note. The Company received 122,968,776.18 BIT tokens at the price of $0.004066098 per token. The convertible promissory note had a simple interest fee of 9% per year and may have been converted into First Bitcoin Capital Corp stock at a 10% discount to market or in additional BIT cryptocurrency tokens. The note had no expiration date. On July 6, 2021, the $1.4 million convertible promissory note was exchanged as part of the settlement agreement with BOTS, Inc (“BOTS”). On July 6, 2021, the Company entered into a settlement agreement with BOTS. Under the settlement agreement, BOTS agreed to return 250,000 shares of Series B Preferred stock to the treasury of the Company, in exchange for the assignment of the $1.4 million promissory note owed by First Bitcoin Capital Corp to the Company, along with all interest owed to date on the promissory note. In addition, the Company transferred 20,726,120 BIT tokens to BOTS. This was a related party transaction. Loans On March 17, 2021, the Company borrowed $500,000 from Epic. The Company paid off the loan during the quarter ended July 31, 2021. During the years ended January 31, 2023 and 2022, Michael Hawkins or Overwatch Partners, Inc. (“Overwatch”) paid multiple different expenses on behalf of the Company, which the Company treats as an account payable to related party. The total amount owed by the Company to Michael Hawkins or Overwatch as of January 31, 2023 and 2022 was $13,000 and $24,000, respectively. Warrants/Equity On April 17, 2020, the Company issued 50,000 shares of Series A Preferred Stock to Epic and 100,000 shares of Series A Preferred Stock to Overwatch for par value ($0.0001) for a total receipt of $15 paid by Epic. The agreement was originally between the Company and Epic. The 100,000 shares of Series A Preferred were issued to Overwatch at the discretion of Michael Hawkins, the sole owner of Epic. On April 17, 2020, Mike Hawkins was the Company’s CEO, and he was 50% owner of Overwatch. At the time, the issuance represented 33% of the Company’s stock on a fully diluted basis and 68% of voting control of the Company. The Company valued the stock under ASC 820 utilizing the Option Pricing Method to value conversion rights, and the Market Approach to value the voting control. The issuance of stock’s recorded value was $40,137,788. On April 12, 2021, Epic exercised a portion of the warrant it had and purchased 100,000 shares of common stock in exchange for $100,000. Epic elected to instruct the Company to issue the shares to Timothy Schucker and Anastasia Hawkins JTWROS. During the quarter ended April 30, 2021, the Company issued seven warrants to its officers and directors for the purchase of up to a total of 1,100,000 common shares of stock at $2.21 per share. On July 1, 2021, the Company entered into an Agreement to Cancel Consulting Agreement dated April 17, 2020. Under terms of the agreement, the Company will continue to pay Epic until it has generated $2,500,000 in commissions (representing $5,000,000 additional revenue to the Company). Furthermore, the Company issued 50,000 Series A Preferred shares to Epic to represent 40% of sales for the next $5,000,000 in sales generated through Epic. The $2,000,000 in commission due has been booked as a prepayment to Epic. The shares are earned as sales generated by Epic achieve certain sales targets. Epic will continue to generate 10% in commissions of business it brings to the Company. This agreement is in perpetuity. On August 9, 2021, Eric Jaffe exercised his warrants of 50,000 shares at the exercise price of $2.12 per share on a cashless basis, resulting in the issuance of 42,246 shares of common stock. Purchase of Software On January 3, 2022, the Company purchased software called ATrade Desktop Workstation Trading System from ATrade Investment Technologies, LLC (“ATrade”) for $1.0 million. The managing member of ATrade is Cedric Harris, who was the managing member of 832 and became Chief Research Officer of the Company. Sale of Vehicle On January 7, 2022, Render sold to Overwatch Personal Security two 2019 Ford Raptors. The total sales price for the two vehicles was the net book value on date of sale of $84,956. On August 11, 2022, our board of directors approved the sale of our 2022 Cadillac Escalade to Eric Jaffe, our former chief executive officer and current board member, for $91,983. Mr. Jaffe paid for the vehicle with 26,662 shares of his Company common stock. The shares are considered treasury stock. Sale of HEX On December 31, 2021, the Company sold to Epic 5 million HEX tokens at $0.20 per token for a total amount of $1.0 million. On August 14, 2022, to fund operations our board of directors approved the sale of 10 million HEX tokens to Michael Hawkins for $450,000. During the nine months ended October 31, 2022, the market price of HEX dropped. The Company recorded a loss on the transaction of approximately $47,000. On September 16, 2022, to fund operations our board of directors approved the sale of approximately 6.7 million HEX tokens and approximately 7 Bitcoins to Michael Hawkins for $304,747. During the nine months ended October 31, 2022, the market prices of HEX and Bitcoin dropped. The Company recorded a loss on the transaction of approximately $195,000. Note 14. Stockholders’ Equity Common Stock As of January 31, 2023 and 2022, the Company had 200 million common shares authorized, with 9,949,966 and 8,604,038 common shares at a par value of $0.0001 issued, respectively. As of January 31, 2023 and January 31, 2022, the Company had 9,923,304 and 8,604,038 common shares outstanding, respectively. On April 12, 2021, Epic exercised the warrant it had and purchased 100,000 shares of common stock in exchange for $100,000. Epic elected to issue the shares in the name of Timothy R Schucker and Anastasia Hawkins JTWROS, the daughter and son-in-law of Michael Hawkins. On May 23, 2021, the Company issued 5,000 shares of common stock to Sara Moline who provided services as an executive assistant for the Company for a three-month period. On May 23, 2021, the Company entered into an Investor Relations agreement with RedChip Companies. The term of the agreement was for one year. The Company paid $12,500 per month plus issued 75,000 shares of common stock. On June 21, 2021, the Company issued 300,000 shares of common stock as part of the 832 Acquisition. On June 24, 2021, the Company issued 5,000 shares of common stock each to Sophie Grinevald and Bill Regan who provided financial and accounting services to the Company for a three-month period. On June 30, 2021, the Company issued 450,000 shares of common stock as part of the Mercury Acquisition. On June 30, 2021, the Company issued 300,000 shares of common stock to Chris Carter as part of his employment contract for a three-year period. The shares shall be fully earned upon completion of his three-year contract. On July 31, 2021, the Company issued one million shares of common stock as part of the Vengar Acquisition. During the quarter ended July 31, 2021, the Company sold a total of 261,667 shares of common stock to various individuals for a total of $392,502 or an average price per share of $1.50. On August 9, 2021, Eric Jaffe exercised his warrants of 50,000 shares at the exercise price of $2.12 per share on a cashless basis, resulting in the issuance of 42,246 shares of common stock. On September 13, 2021, the Law Offices of Carl G. Hawkins exercised their warrant acquiring 40,000 shares at the exercise price of $1.00 per share through the conversion of the accounts payable owed by the Company for services provided. The shares were issued in the name of Carl G. Hawkins. During the quarter ended October 31, 2021, the Company sold 46,000 shares of common stock to an individual for $276,000 or $6.00 per share of common stock. On April 19, 2022, two warrants were exercised for a total of 500,000 shares of common stock resulting in the Company receiving $0.5 million. On June 3, 2022, the Law Offices of Carl G. Hawkins exercised their warrant acquiring 35,000 shares at the exercise price of $1.00 per share through the conversion of the accounts payable owed by the Company for services provided. The shares were issued in the name of Carl G. Hawkins. On October 31, 2022, two warrants were exercised for a total of 250,000 shares of common stock, resulting in the Company having a receivable for $0.2 million. Since the receivable is from a stockholder, it is recorded as a contra-equity account. During the year ended January 31, 2023, stock based compensation expense related to stock grants was $356,000, which consisted of grants to employee of $300,000 and consultants of $56,000. During the year ended January 31, 2022, stock based compensation expense related to stock grants was $328,000, which consisted of grants to employee of $175,000 and consultants of $153,000. Preferred Stock Series A Preferred Stock As of January 31, 2023 and January 31, 2022, the Company had one million Series A Preferred shares, par value $0.0001, authorized, with 200,000 Series A Preferred shares issued and outstanding. The Series A Preferred stock converts into common stock at the option of the holder of the Series A Preferred, after twenty-four months of ownership. The conversion rate for every one share of Series A Preferred stock is 50 shares of common stock. Each share of Series A Preferred stock entitles the holder to 1,000 votes. Holders of Series A Preferred are entitled to share ratably in dividends, if any are declared. There are no redemption rights. In the event of dissolution, the holders of Series A Preferred are entitled to share pro rata all assets remaining after payment in full of all liabilities. During the year ended January 31, 2022, the Company issued 50,000 shares of Series A Preferred Stock to Epic. The issuance was done as a prepayment for services to generate sales for the Company. The shares are earned as sales generated by Epic achieve certain sales targets. Effective April 17, 2022, 150,000 shares of Series A Preferred Stock are eligible to be converted into common stock at the option of the holder of the Series A Preferred Stock. Effective June 16, 2023, the remaining 50,000 shares of Series A Preferred Stock will be eligible to be converted into common stock at the option of the holder of the Series A Preferred Stock. Series B PreferredStock As of January 31, 2023 and January 31, 2022, the Company had 1.5 million Series B Preferred shares, par value $0.0001, authorized, with 650,000 Series B Preferred shares issued and 400,000 Series B Preferred shares outstanding. The Series B Preferred stock converts into common stock at the option of the holder of the Series B Preferred, after twenty-four months of ownership. The conversion rate for every one share of Series B Preferred stock is ten shares of common stock. Each share of Series B Preferred stock entitles the holder to 100 votes. Holders of Series B Preferred are entitled to share ratably in dividends if any are declared. There are no redemption rights. In the event of dissolution, the holders of Series B Preferred are entitled to share pro rata all assets remaining after payment in full of all liabilities. On July 6, 2021, the Company entered into a settlement agreement with BOTS. Under the settlement agreement, BOTS agreed to return 250,000 shares of Series B Preferred stock to the treasury of the Company, in exchange for the assignment of the $1.4 million promissory note owed by First Bitcoin Capital Corp to the Company, along with all interest owed to date on the promissory note. In addition, the Company transferred 20,726,120 BIT tokens to BOTS. This was a related party transaction and was conducted at arm’s length. On April 29, 2020, BOTS converted five million of its common shares into 500,000 shares of Series B Preferred stock. BOTS is restricted from converting the Series B Preferred stock into common stock for a period of 24 months from the conversion. There was no gain or loss on conversion due to conversion terms. During the quarter ending July 31, 2021, BOTS returned to the treasury of the Company 250,000 shares of Series B Preferred stock in exchange for certain assets held by the Company. In addition, BOTS exchanged 125,000 shares of Series B Preferred stock with Epic Industry Corp and Paul Rosenberg in exchange for 50 million shares of BOTS stock held by Epic Industry Corp and Paul Rosenberg, for a total of 100 million BOTS common shares. Effective April 29, 2022, all shares of Series B Preferred Stock are eligible to be converted into common stock at the option of the holder of the Series B Preferred Stock. Series C Preferred Stock As of January 31, 2023, the Company had 2 million Series C Preferred shares, par value $0.0001, authorized, with one million Series C Preferred shares issued and outstanding. On March 17, 2022, the board of directors approved the conversion of two million shares of blank check preferred stock into two million shares of Series C Preferred Stock, par value $0.0001. The Series C Preferred Stock shall rank senior to the Company’s common stock, Series A Preferred Stock, and Series B Preferred Stock. Each holder of Series C Preferred Stock is entitled to one (1) vote for each share of Series C Preferred Stock held on all matters submitted to a vote of stockholders. Each share of Series C Preferred Stock shall be convertible, at the discretion of the holders, after six months of ownership, into shares of common stock. The number of common shares issued shall be at the rate of 30% less than the volume-weighted average price or $5.00 per share whichever is less. On April 19, 2022, the Company sold 250,000 shares of Series C Preferred Stock for $1.0 million. On June 14, 2022, our board of directors approved the early conversion of 250,000 shares of Series C Preferred Stock into 560,928 shares of common stock. On January 5, 2023, the Company sold one million shares of Series C Preferred Stock for $1.5 million to OEM partner, Alamo City Engineering Services. Note 15. Warrants On November 1, 2017, the Company issued seven warrants to officers, directors, and investors for the purchase of up to three million shares of common stock at $1.00 per share. Six of the warrants expired on November 1, 2022 at 5:00 PM Eastern Standard Time. A warrant for one million shares of common stock expires on November 1, 2027 at 5:00 PM Eastern Standard Time. The warrants contain participation rights to any registration statement filed by the Company. On February 1, 2021, the Company issued warrants to four directors of the Company (Mark Gilroy, Michael Hawkins, Paul Rosenberg, and Robert Adams) for the purchase of up to a total consolidated 500,000 shares of common stock at $2.21 per share. Each warrant holder was authorized to purchase up to 125,000 shares of common stock. Under the vesting schedule, 50,000 shares vested upon signing and 25,000 vest per year for three consecutive years. Mr. Gilroy’s and Mr. Rosenberg’s warrants expired on December 21, 2021 and January 23, 2022, respectively, which was three months after they left the board. The remaining warrants expire on January 31, 2026 at 5:00 PM Eastern Standard Time. On March 11, 2021, the Company issued warrants to three officers of the Company (Robert Adams, Eric Jaffe, and Michael Hawkins) for the purchase of up to a total consolidated 600,000 shares of common stock at $2.21 per share. Each warrant holder was authorized to purchase up to 200,000 shares of common stock. Under the vesting schedule, 50,000 shares vested upon signing and 50,000 vest per year for three consecutive years. The warrants expire on March 10, 2026 at 5:00 PM Eastern Standard Time. On June 21, 2021, the Company issued a warrant to one officer of the Company (Cedric Harris) for the purchase of up to a total of 200,000 shares of common stock at $5.25 per share. Under the vesting schedule, 50,000 shares vested upon signing and 50,000 vest per year for three consecutive years. The warrants expire on June 20, 2026 at 5:00 PM Eastern Standard Time. On July 31, 2021, the Company issued warrants to two officers of the Company (Toney Jennings and Brandon Hart) for the purchase of up to a total of 400,000 shares of common stock at $5.05 per share. Each warrant holder was authorized to purchase up to 200,000 shares of common stock. Under the vesting schedule, 50,000 shares vested upon signing and 50,000 vest per year for three consecutive years. The warrants expire on July 30, 2026 at 5:00 PM Eastern Standard Time. On September 15, 2021, the Company issued a warrant to one director of the Company (Richard Schaeffer) for the purchase of up to a total of 200,000 shares of common stock at $6.40 per share. Under the vesting schedule, 50,000 shares vested upon signing and 50,000 vest per year for three consecutive years. The warrant expires on September 14, 2026 at 5:00 PM Eastern Standard Time. On September 20, 2021, the Company issued a warrant to one director of the Company (Thomas Amon) for the purchase of up to a total of 125,000 shares of common stock at $6.80 per share. Under the vesting schedule, 50,000 shares vested upon signing and 25,000 vest per year for three consecutive years. The warrant expires on September 19, 2026 at 5:00 PM Eastern Standard Time. On September 20, 2021, the Company issued a warrant to a consultant of the Company (Sophie Grinevald) for the purchase of up to a total of 200,000 shares of common stock at $6.40 per share. Under the vesting schedule, 50,000 shares vested upon signing and 50,000 vest per year for three consecutive years. The warrant expires on September 19, 2026 at 5:00 PM Eastern Standard Time. On September 22, 2021, the Company issued a warrant to one officer of the Company (Bill Regan) for the purchase of up to a total of 400,000 shares of common stock at $6.40 per share. Under the vesting schedule, 100,000 shares vested upon signing and 100,000 vest per year for three consecutive years. The warrant expires on September 21, 2026 at 5:00 PM Eastern Standard Time. On September 30, 2021, the Company issued a warrant to Myosin, Inc. for the purchase of up to a total of 100,000 shares of common stock at $7.00 per share. Under the vesting schedule, all of the shares vested upon signing. The warrant was subsequently cancelled. On October 21, 2021, the Company issued a warrant to a stockholder of the Company for the purchase of up to a total of 6,000 shares of common stock at $9.00 per share. Under the vesting schedule, all of the shares vested upon signing. The warrant expires on October 20, 2026 at 5:00 PM Eastern Standard Time. On January 11, 2022, the Company issued a warrant to an employee of the Company (Jessica Hunt) for the purchase of up to a total of 125,000 shares of common stock at $6.00 per share. Under the vesting schedule, 50,000 shares vested upon signing and 25,000 vest per year for three consecutive years. The warrant expired on June 15, 2022, which was three months after she left the Company.. On April 19, 2022, two warrants were exercised for a total of 500,000 shares of common stock resulting in the Company receiving $0.5 million. On April 19, 2022, the holder of the 250,000 shares of Series C Preferred Stock received a warrant to purchase 25,000 shares of common stock at the price of $9.00 per share. On June 3, 2022, the Law Offices of Carl G. Hawkins exercised their warrant acquiring 35,000 shares at the exercise price of $1.00 per share through the conversion of the accounts payable owed by the Company for services provided. The shares were issued in the name of Carl G. Hawkins. On October 31, 2022, two warrants were exercised for a total of 250,000 shares of common stock, resulting in the Company having a receivable for $0.2 million. Since the receivable is from a stockholder, it is recorded as a contra-equity account. A summary of warrant activity for years ended January 31, 2023 and January 31, 2022 is as follows: | | | | | Weighted | | | | | | | Average | | | | | | | Conversion | | | | Shares | | | Price | | | | | | | | | Warrants outstanding at January 31, 2021 | | | 2,675,000 | | | $ | 1.00 | | Cancelled/Expired | | | (350,000 | ) | | | 3.58 | | Exercised | | | (190,000 | ) | | | 1.32 | | Granted | | | 2,856,000 | | | | 4.54 | | Warrants outstanding at January 31, 2022 | | | 4,991,000 | | | $ | 2.83 | | Cancelled/Expired | | | (875,000 | ) | | | 1.71 | | Exercised | | | (785,000 | ) | | | 1.00 | | Granted | | | 25,000 | | | | 9.00 | | Warrants outstanding at January 31, 2023 | | | 3,356,000 | | | $ | 3.60 | |
During the year ended January 31, 2023, stock-based compensation expense related to warrant grants was $2,556,000, which consisted of grants to employees of $1,399,000, directors of $893,000, and consultants of $264,000. During the year ended January 31, 2022, stock-based compensation expense related to warrant grants was $1,647,000, which consisted of grants to employees of $735,000, directors of $759,000, and consultants of $153,000. Note 16. Treasury Stock Treasury stock consists of 250,000 shares of Series B Preferred stock and 26,662 shares of common stock. The shares are considered issued but not outstanding. Therefore, the shares are not used in the EPS calculations. Note 17. Income Taxes Domestic and foreign income before provision for income tax (in thousands): | | For the Years Ended January 31, | | | | 2023 | | | 2022 | | Domestic | | $ | (9,918 | ) | | $ | 3,152 | | Foreign | | | - | | | | - | | Total | | $ | (9,918 | ) | | $ | 3,152 | |
The income tax provision contains the following components (in thousands): | | For the Years Ended January 31, | | | | 2023 | | | 2022 | | Current | | | | | | | Federal | | $ | 112 | | | $ | 362 | | State | | | 32 | | | | 77 | | Foreign | | | - | | | | - | | Total Current | | | 144 | | | | 439 | | Deferred | | | | | | | | | Federal | | | (510 | ) | | | 327 | | State | | | (108 | ) | | | 69 | | Foreign | | | - | | | | - | | Total Deferred | | | (618 | ) | | | 396 | | Total Provision | | $ | (474 | ) | | $ | 835 | |
The components of the net deferred tax liability are as follows (in thousands): | | As of January 31, | | | | 2023 | | | 2022 | | Net operating loss carryforward | | $ | 700 | | | $ | - | | Stock compensation | | | 1,069 | | | | 406 | | Reserves | | | 11 | | | | - | | Total deferred tax assets | | | 1,780 | | | | 406 | | Less valuation allowance | | | (1,452 | ) | | | - | | Net deferred tax asset | | | 328 | | | | 406 | | | | | | | | | | | Fixed assets | | | (97 | ) | | | (116 | ) | Crypto fair value adjustment | | | - | | | | (536 | ) | Intangibles | | | (231 | ) | | | (371 | ) | Total deferred tax liabilities | | | (328 | ) | | | (1,023 | ) | | | | | | | | | | Net deferred tax liability | | $ | - | | | $ | (617 | ) | | | | | | | | | | Net Change in Valuation Allowance | | $ | 1,452 | | | | - | |
A reconciliation of the income taxes at the federal statutory rate to the effective tax rate is as follows ($ in thousands): | | For the Years Ended January 31, | | | | 2023 | | | 2022 | | Income (loss) before taxes | | $ | (9,918 | ) | | | | | $ | 3,152 | | | | | | | | | | | | | | | | | | | | Tax expense (benefit) at the statutory rate | | $ | (2,083 | ) | | | 21.00 | % | | $ | 662 | | | | 21.00 | % | State income taxes, net of federal benefit | | | (339 | ) | | | 3.40 | % | | | 116 | | | | 3.68 | % | Change in valuation allowance | | | 1,452 | | | | -14.60 | % | | | - | | | | 0.00 | % | Non-deductible stock compensation | | | 75 | | | | -0.80 | % | | | - | | | | 0.00 | % | Permanent differences | | | 277 | | | | -2.80 | % | | | 69 | | | | 2.19 | % | Return to Provision True Up | | | 144 | | | | -1.50 | % | | | (12 | ) | | | -0.38 | % | Tax on Income | | $ | (474 | ) | | | 4.70 | % | | $ | 835 | | | | 26.49 | % |
The net operating loss carryforwards as of January 31, 2023 are as follows (in thousands): | | Gross | | | Tax-Effected | | Federal - definite | | $ | - | | | $ | - | | Federal - indefinite | | | 2,751 | | | | 578 | | Total Federal NOL | | | 2,751 | | | | 578 | | | | | | | | | | | State | | | 2,682 | | | | 155 | | State difference | | | - | | | | (33 | ) | Total State NOL | | | 2,682 | | | | 122 | | | | | | | | | | | Total | | $ | 5,433 | | | $ | 700 | | | | | | | | | | | Net Operating Loss Summary by Jurisdiction | | | | | | | | | Federal | | $ | 2,751 | | | $ | 578 | | State | | | 2,682 | | | | 122 | | Foreign | | | - | | | | - | | Total | | $ | 5,433 | | | $ | 700 | |
The Company is in the process of filing back income tax returns from 2022 through the current year and subject to IRS examination for all years. The Company has reserved for any interest and penalty associated with the filings. Due to the non-filing of income tax returns, statutes of limitations on the potential examination of those income tax periods will continue to run until the returns are filed, at which time the statutes will begin. The Company expects to file all past due income tax returns within the next 12 months. Note 18. Net Income (Loss) Per Common Share | | For the Years Ended January 31, | | | | 2023 | | | 2022 | | | | (in thousands, except per share data) | | Numerator: | | | | | | | Net income (loss) | | $ | (9,444 | ) | | $ | 2,317 | | Denominator: | | | | | | | | | Weighted average common shares outstanding | | | 9,426 | | | | 7,460 | | Effect of dilutive securities: | | | | | | | | | Warrants | | | - | | | | 2,333 | | Preferred stock | | | - | | | | - | | Diluted shares outstanding | | | 9,426 | | | | 9,793 | | Basic: Net income (loss) per common share | | $ | (1.00 | ) | | $ | 0.31 | | Diluted: Net income (loss) per common share | | $ | (1.00 | ) | | $ | 0.24 | |
Note 19. Subsequent Events In accordance with ASC 855-10, Company management reviewed all material events through the date of this report and determined that there are no additional material subsequent events to report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None ITEM 9A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures. Disclosure controls and procedures (as defined in Rules 13a-15I and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures. We carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of January 31, 2023. In designing and evaluating the disclosure controls and procedures, management recognizes that there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their desired control objectives. Additionally, in evaluating and implementing possible controls and procedures, management is required to apply its reasonable judgment. Based on the evaluation described above, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report because we did not document our Sarbanes-Oxley Act Section 404 internal controls and procedures. As funds become available to us, we expect to implement additional measures to improve disclosure controls and procedures such as implementing and documenting our internal controls procedures. Scope of Management’s Report on Internal Control Over Financial Reporting N/A Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that: | | | | | | | January 31,
| | | | | | | | 2018
| | | | | | | | | Sales
| | | | | $ 1,342,056
| | Computer Lease
| | | | | 11,238
| | Cost of Services
| | | | | 221,612
| | Depreciation Expense
| | | | | 199,455
| | Freight and Shipping Costs
| | | | | 202
| | Software Maintenance
| | | | | 51,536
| Total Cost of Sales
| | | | | 484,042
| Gross Profit
| | | | | 858,014
| Selling, general, and administrative
| | | | | 26,902
| Professional fees
| | | | | 8,484
| Marketing & advertising
| | | | | 5,198
| Payroll
| | | | | 55,195
| Consultant fees
| | | | | 73,500
| Total operating expenses
| | | | | 169,279
| Net Income from operations (before taxes)
| | | 688,735
| Income Taxes - Current
| | | | | (234,170)
| Net income (after taxes)
| | | | | 454,565
| Gain (loss) attributable to non-controlling interest
| | | Net income (loss) attributable to controlling interest
| | $ 454,565
| Basic and diluted (Loss) per share:
| | | | | | Income per share from continuing operations
| | | 0.4066
| Income per share
| | | | | 0.4066
| Weighted average shares outstanding - basic and diluted
| | 1,118,082
| | | | | | | | | See accompanying notes to unaudited financial statements.
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Basic and Diluted Net Earnings (Loss) Per Share
The Company followsASC Topic 260 – Earnings Per Share, andFASB 2015-06, Earnings Per Share to account for earnings per share. Basic earnings per share (“EPS”) calculations are determined by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.
Commitments and Contingencies
The Company reports and accounts for its commitments and contingencies in accordance withASC 440 – Commitments andASC 450 – Contingencies. We recognize a loss on a contingency when it is probable a loss will incur and that the amount of the loss can be reasonably estimated. The Company recognized $0 as a loss on contingencies in the year ending January 31, 2019 and January 31, 2018.
39
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Recent Accounting Pronouncements
The Company evaluated all recent accounting pronouncements issued and determined that the adoption of these pronouncements would not have a material effect on the financial position, results of operations, or cash flows of the Company.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (ASU 2016-08) which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. The new standard further requires new disclosures about contracts with customers, including the significant judgments the company has made when applying the guidance. We will adopt the new standard effective February 1, 2018, using the modified retrospective transition method. We finalized our analysis and the adoption of this guidance will not have a material impact on our financial statements and our internal controls over financial reporting.
In June 2014, the FASB issued ASU No. 2014-10, which eliminated certain financial reporting requirements of companies previously identified as “Development Stage Entities” (Topic 915). The amendments in this ASU simplify accounting guidance by removing all incremental financial reporting requirements for development stage entities. The amendments also reduce data maintenance and, for those entities subject to audit, audit costs by eliminating the requirement for development stage entities to present inception-to-date information in the statements of income, cash flows, and shareholder equity. Early application of each of the amendments is permitted for any annual reporting period or interim period for which the entity’s financial statements have not yet been issued (public business entities) or made available for issuance (other entities). Upon adoption, entities will no longer present or disclose any information required by Topic 915. The Company has adopted this standard and will not report inception-to-date information.
In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, “Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15, which is effective for annual reporting periods ending after December 15, 2015, extends the responsibility for performing the going-concern assessment to management and contains guidance on how to perform a going-concern assessment and when going-concern disclosures would be required under GAAP.
We do not anticipate that the adoption of ASU 2014-15 will have a material impact on our financial condition or results from operations. Management’s evaluations regarding the events and conditions that raise substantial doubt regarding our ability to continue as a going concern as discussed in the notes to our financial statements included elsewhere.
We have implemented all other new accounting pronouncements that are in effect and that may impact our financial statements and we do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or results of operations.
Note 3. Going Concern
The Company's financial statements are prepared using generally accepted accounting principles, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. Because the business is new and has a limited history, no certainty of continuation can be stated. The accompanying financial statements for the year ended January 31, 2019, has been prepared to assume that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
The Company has negative cash flow and there are no assurances the Company will generate a profit or obtain positive cash flow. The Company has sustained its solvency through the support of its single shareholder, MCIG, which raise substantial doubt about its ability to continue as a going concern.
Management is taking steps to raise additional funds to address its operating and financial cash requirements to continue operations in the next twelve months. Management has devoted a significant amount of time to the raising of capital from additional debt and equity financing. However, the Company’s ability to continue as a going concern is dependent upon raising additional funds through debt and equity financing and generating revenue. There are no assurances the Company will receive the necessary funding or generate the revenue necessary to fund operations. The financial statements contain no adjustments for the outcome of this uncertainty.
Note 4. Property, Plant and Equipment
In a major transaction, the Company acquired the 420 Cloud software environment which includes, 420 Cloud mobile, 420 Cloud browser, 420 Cloud API, WhoDab, BangPunch, 420 single sign-on mobile wallet, 420 job search, Weedistry, Ehesive, 420 cue, 420 wise guy, and Palm weed. While some of the software applications are currently in use, others are still under development. The Company launched its 420 cloud software service on April 20, 2017. The company has transferred all digital currency ATMs to assets held for sale as they are no longer going to be used by the company has and will be sold.
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The following is a detail of equipment:
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Property, Plant, and Equipment | For the year ended January 31, | | | | | | | | 2019 | | 2018 | Software (Capitalized) | $ | 3,137,164 | $ | 3,127,244 | Intangibles | | 7,753 | | - | Machinery & Equipment | | - | | 299,970.00 | Total acquisition cost | | 3,137,164 | | 3,427,214 | Accumulated depreciation | | 686,265 | | 199,455 | Total property, plant, and equipment | $ | 2,450,899 | $ | 3,227,760 |
Depreciation expense on property, plant and equipment was $486,812 for the year ended January 31, 2019 and $199,455 for the year ending January 31, 2018.
Note 5. Related Party Transactions
The following individuals/entities have been identified as related parties in accordance with the guidelines ofASC 850 – Related Party Disclosures:
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Related Parties
| Name/Entity
| | Position
| | Became
| | Ended
| Paul Rosenberg
| | Director
| | Inception
| | Current
| Alex Mardikian
| | CEO
| | Inception
| | Current
| Brandy Craig
| | CFO
| | November 1, 2017
| | Current
| MCIG, Inc.
| | Greater than 10% Owner
| | Inception
| | Current
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Related Party Transactions
On March 31, 2017, MCIG entered into a purchase agreement with APO Holdings, LLC to acquire the 420 Cloud Software Network (see Note 7 – Acquisitions). MCIG acquired the assets and assigned them to OBITX. The cost of the asset was recorded as an intercompany transfer. OBITX has utilized the acquired assets of the 420 Cloud Network for its base of operations.
On November 1, 2017, the company assigned all rights and obligations to the 420 Cloud Software Network to OBITX in exchange for 100,000 shares of Series A Preferred Stock and 500,000 shares of OBITX common stock. The cost basis of the Assets at the time of transfer was $3,043,285. MCIG conducted an independent review of the Assets in August 2017. The independent review stated that no impairment was needed and that the assets had a fair market value in excess of the current cost basis.
On March 13, 2017 MCIG acquired 10,000 shares of OBITX common shares representing 100% ownership at the time.
On August 1, 2017, the Company entered into a contract with MCIG for hosting and email services. In addition, the Company will provide additional marketing services for MCIG and other internet-based activities as mutually agreed upon. Under terms of the agreement, MCIG is to $2,000 per month for a period of 12 months. All additional services not identified are billed at an hourly rate of $150 per hour.
On November 1, 2017, the Company entered into a consulting agreement with Alex Mardikian, the Chief Executive Officer. The agreements call for $7,000 per month for a period of one year. The payments may be booked as a note due, which may be converted into shares of the company at a then-current price per share. The Company and consultant may elect to convert a portion of this into equity of the company. In addition, each consultant was authorized to purchase 50,000 shares of common stock at par value ($0.0001 per share) through a warrant, which was subsequently exercised, and each consultant was issued a seven-year warrant to acquire 250,000 shares of the Company Stock at $1.00 per share or at the opening price on a federally regulated exchange service, whichever is less.
On November 1, 2017, the Company entered into a consulting agreement with Brandy Craig, the Chief Financial Officer. The agreements call for $3,500 per month for a period of one year. The payments may be booked as a note due, which may be converted into shares of the company at a then-current price per share. The Company and consultant may elect to convert a portion of this into equity of the company. In addition, each consultant was authorized to purchase 50,000 shares of common stock at par value ($0.0001 per share) through a warrant, which was subsequently exercised, and each consultant was issued a seven-year warrant to acquire 250,000 shares of the Company Stock at $1.00 per share or at the opening price on a federally regulated exchange service, whichever is less.
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On November 1, 2017, the Company entered into a consulting agreement with Paul Rosenberg, the Director. The agreements call for $3,500 per month for a period of one year. The payments may be booked as a note due, which may be converted into shares of the company at a then-current price per share. . The Company and consultant may elect to convert a portion of this into equity of the company. In addition, each consultant was authorized to purchase 50,000 shares of common stock at par value ($0.0001 per share) through a warrant, which was subsequently exercised, and each consultant was issued a seven-year warrant to acquire 250,000 shares of the Company Stock at $1.00 per share or at the opening price on a federally regulated exchange service, whichever is less.
The Company entered a Line of Credit with MCIG, for up to $500,000 in funding on November 1, 2016. The Line of Credit will terminate on April 30, 2019. It was given at a 0% interest rate and is payable upon termination date with the option to convert the agreement into equity at a 15% discount to the then current market rate. Since inception, the Company had various transactions in which MCIG paid expenses on behalf of the Company. As of April 30, 2018, the Company borrowed $3,635,253.42 from MCIG. $3,043,285 of which represents the 420 Cloud Software Network that was exchanged for 100,000 shares of Series A Preferred Stock and 500,000 shares of OBITX common stock on November 1, 2017. The Line of Credit was increased to $1,000,000 on January 1, 2018. As of January 31, 2019, the amount outstanding on the Line of Credit with MCIG is $618,277.
On November 1, 2017, the company issued five-year warrants for the purchase of a combined total of 3,000,000 common shares to seven individuals/entities at the purchase price of $1.00 per share.
On November 1, 2017 Alex Mardikian, the company’s Chief Executive Officer, purchased 50,000 shares of common stock for $5.00.
On November 1, 2017 Brandy Craig, the company’s Chief Financial Officer, purchased 50,000 shares of common stock for $5.00.
On November 1, 2017 Paul Rosenberg, the company’s Director, purchased 500,000 shares of common stock for $50.00.
On November 1, 2017 Paul Rosenberg entered into an agreement with the company to purchase up to 5,000,000 shares of common stock at the price of $0.10 per share. As of the time of this filing Mr. Rosenberg has purchased 2,500,000 for $250,000.
On November 1, 2017 APO Holdings, LLC purchased 1,500,000 shares of common stock with certain registration rights for $150,000.
On June 14, 2018 the Company entered a Line of Credit with APO Holdings for up to $100,000 at any one time. The Line of Credit may be cancelled at any time by either party providing 30 days written notice of cancellation. It was given at a 0.6% interest rate and may be paid at any time with no definitive payoff date. As of January 31, 2019 the current outstanding on the line of credit is $77,400 principal and $2.37 interest.
On June 30, 2018 OBITX provided services to their subsidiary altCUBE in the amount of $25,167. This amount was made up of General Administrative expenses of $1,250, Website Design of $16,009, Marketing Expense $7,168, and Website Maintenance of $740. In January 2019 altCUBE was written off as discontinued operations.
Note 6. Commitments and Contingencies
The Company entered into a commitment for its corporate offices on January 4, 2019. The commitment is for a period of twelve (12) months at the rate of $69 per month. The Company may utilize additional space on an as needed basis at an hourly or daily rate.
Note 7. Acquisitions
On March 31, 2017, MCIG acquired software code for a cloud-based social media platform to be known as 420Cloud, which was assigned to OBITX. The Company considers the acquisition of 420Cloud as a purchase of an asset, not a business. In this particular acquisition, the Company acquired software code and supporting functions for five different software packages that had not been finalized, marketed, and launched at the time of acquisition. The Company expects to continue to expend a significant amount of time and capital to further develop the software.
At the time of acquisition, the assets have no operational income and could not generate revenue without major consideration and effort by the Company. The following table summarizes the estimated fair values of the assets acquired and their accounting classifications, at the date of acquisition. We assumed the liability and responsibility to complete the software as it was designed for with the intent to market.
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420Cloud Accounting Classifications
| Software - 420 Cloud - Mobile
| | $
| 677,389
| Software - 420 Cloud – Browser
| | | 315,709
| Software – 420 Cloud API
| | | 90,116
| Software - Whodab
| | | 67,587
| Software - Ehesive
| | | 450,882
| Software – 420 Cloud – Single Sign On
| | | 450,882
| Software – 420 Job Search
| | | 135,173
| Software – Weedistry
| | | 45,058
| Software – Marketaro
| | | 112,644
| Software – 420 Cue
| | | 450,882
| Software – 420 Wise Guy
| | | 225,593
| Software – Palm Weed
| | | 22,529
| Total assets acquired
| | $
| 3,044,444
| Due to Shareholder – MCIG, Inc.
| | $
| 3,044,444
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Note 8. Stockholders’ Equity
Common Stock
As of January 31, 2018 and January 31, 2019, the Company had 200,000,000 common shares authorized, with 5,460,000 common shares at a par value of $0.0001 issued and outstanding. No additional common stock was issued for the year ended January 31, 2019. The shares were issued per the below table:
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Common Stock | | Shares | | Par Value | | APIC | Alex Mardikian | | 50,000 | | $ 5 | | $ - | Brandy Craig | | 50,000 | | 5 | | - | Carl G. Hawkins | | 50,000 | | 5 | | - | Andrus | | 50,000 | | 5 | | - | Epic Industry Corp | | 250,000 | | 25 | | - | Paul Rosenberg | | 500,000 | | 50 | | - | Paul Rosenberg | | 2,500,000 | | 250 | | 249,750 | APO Holdings, LLC | | 1,500,000 | | 150 | | 149,850 | MCIG | | 510,000 | | 51 | | 276,600 | Total | | 5,460,000 | | $ 546 | | $ 676,200 |
As of January 31, 2018 and January 31, 2019, the company had 1,000,000 Series A Preferred shares authorized, with 100,000 Series A Preferred shares at a par value of $10 issued and outstanding. No additional Series A Preferred stock was issued for the year ended January 31, 2019.
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Series A Preferred | | Shares | | Par Value | | APIC | MCIG | | 100,000 | | 10 | | 2,766,625 | Total | | 100,000 | | 10 | | 2,766,625 |
Note 9. Basic Income per Share before Non-Controlling Interest
Basic Income Per Share - The computation of basic and diluted loss per common share is based on the weighted average number of common shares outstanding during each period.
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Basic Income Per share | For the Year Ended January 31, | | | 2019 | | 2018 | Net (loss) income | | (2,119,785) | | 688,735 | Basic (loss) income per share | | (0.3813) | | 0.6160 | Basic weighted average number of shares outstanding | | 5,460,000 | | 5,460,000 |
The computation of basic loss per common share is based on the weighted average number of shares outstanding during the period.
Note 11. Warrants
On November 1, 2017 the Company issued 7 warrants to officers, directors, and investors for the purchase of up to 3,000,000 shares of common stock at $1.00 per share. The warrants expire on November 1, 2022 at 5:00 PM Eastern Standard Time. The warrants contain participation rights to any registration statement filed by the Company.The Holder shall not be entitled to exercise their Warrant when the number of shares exercised by the Warrant Holder would cause the Holder to exceed 4.99% of the total outstanding common stock.
A summary of warrant activity for year ended January 31, 2019 is as follows:
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| | | | Weighted | | | | | | Average | | | | | | Conversion | | | | Shares | | Price | | | | | | | | Warrants outstanding at January 31, 2018 | | | 3,000,000 | | $ | 1.00 | | | | | | | | | | Exercised | | | - | | $ | - | | Granted | | | 3,000,000 | | $ | 1.00 | | Warrants outstanding at January 31, 2019 | | | 3,000,000 | | $ | 1.00 | | | | | | | | | |
Note 10. Subsequent Events
There are no subsequent events.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures.
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures.
We carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of January 31, 2019. In designing and evaluating the disclosure controls and procedures, management recognizes that there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their desired control objectives. Additionally, in evaluating and implementing possible controls and procedures, management is required to apply its reasonable judgment. Based on the evaluation described above, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report because we did not document our Sarbanes-Oxley Act Section 404 internal controls and procedures.
As funds become available to us, we expect to implement additional measures to improve disclosure controls and procedures such as implementing and documenting our internal controls procedures.
Scope of Management’s Report on Internal Control Over Financial Reporting
N/A
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
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·●
| Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; | | | | ·
| ● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that our receipts and expenditures are being made only in accordance with authorizations of our management and board of directors; and | ·
| | | | ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or timely detectiondisposition of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Our Chief Executive Officer and Chief Financial Officer have performed an evaluation of our internal control over financial reporting under the framework in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. The objective of this assessment was to determine whether our internal control over financial reporting was effective as of January 31, 2023 and 2022. Based on the results of its assessment, our management concluded that our internal control over financial reporting was not effective as of January 31, 2023 and 2022 based on such criteria. 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 were: Risk Assessment – We did not have an effective risk assessment process. From a governance perspective, we historically did not have a formal process to identify, update and assess risks, including changes in our business practices that could significantly impact our consolidated financial statements as well as the system of internal control over financial reporting. Control Environment – We did not maintain an effective control environment as evidenced by: 45 |
Risk Assessment – We did not have an effective risk assessment process. From a governance perspective, we historically did not have a formal process to identify, update and assess risks, including changes in our business practices that could significantly impact our consolidated financial statements as well as the system of internal control over financial reporting.
Control Environment – We did not maintain an effective control environment as evidenced by:
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· | Lack of majority independent board members. | ·
| · | An insufficient number of personnel to adequately exercise appropriate oversight of personnel to adequately exercise appropriate oversight of accounting judgements and estimates. |
Control Activities – We did not have control activities that were designed and operating effectively to identify and address all likely sources of material misstatements, including non-standard transactions. In addition, management review controls were not sufficient or in place to identify all potential accounting errors.estimates.
Information and Communications – We did not implement appropriate information technology controls related to access rights for certain financial spreadsheets that are relevant to the preparation of the consolidated financial statements and our system of internal control over financial reporting. In addition, we did not implement the appropriate information technology disaster recovery controls in place to ensure the completeness of financial information surrounding Terra Tech revenues and inventory.
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Control Activities – We did not have control activities that were designed and operating effectively to identify and address all likely sources of material misstatements, including non-standard transactions. In addition, management review controls were not sufficient or in place to identify all potential accounting errors. Information and Communications – We did not implement appropriate information technology controls related to access rights for certain financial spreadsheets that are relevant to the preparation of the consolidated financial statements and our system of internal control over financial reporting. In addition, we did not implement the appropriate information technology disaster recovery controls in place to ensure the completeness of financial information. Monitoring – We did not maintain effective monitoring of controls related to the financial close and reporting process. In addition, we did not maintain the appropriate level of review and remediation of internal control over financial reporting deficiencies throughout interim and annual financial periods. We have not had sufficient time to fully remediate the aforementioned deficiencies and/or there was insufficient passage of time to evidence that the controls that were implemented were effective. Therefore, the aforementioned control deficiencies continued to exist as of January 31, 2023. We believe the control deficiencies described herein, individually, and when aggregated, represent material weaknesses in our internal control over financial reporting as of January 31, 2023 since such deficiencies result in a reasonable possibility that a material misstatement in our annual or interim consolidated financial statements may not be prevented or detected on a timely basis by our internal controls. As a result of our assessment, we have therefore concluded that our internal control over financial reporting was not effective as of January 31, 2023. This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only the management’s report in this annual report. Material Weakness Discussion and Remediation We believe that the consolidated financial statements included in this Annual Report on Form 10-K for the year ended January 31, 2023 fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP. We were not able to fully implement and/or test the design and the operating effectiveness of our control procedures as of January 31, 2023. This required us to design new processes and controls concurrently, and thus did not allow us sufficient time to fully implement and/or test the design and operating effectiveness of the new controls. We intend to continue to take appropriate and reasonable steps to make necessary improvements to our internal control over financial reporting, including: Monitoring – We did not maintain effective monitoring of controls related to the financial close and reporting process. In addition, we did not maintain the appropriate level of review and remediation of internal control over financial reporting deficiencies throughout interim and annual financial periods.
We have not had sufficient time to fully remediate the aforementioned deficiencies and/or there was insufficient passage of time to evidence that the controls that were implemented during 2019 were effective. Therefore, the aforementioned control deficiencies continued to exist as of January 31, 2019. We believe the control deficiencies described herein, individually and when aggregated, represent material weaknesses in our internal control over financial reporting at January 31, 2019 since such deficiencies result in a reasonable possibility that a material misstatement in our annual or interim consolidated financial statements may not be prevented or detected on a timely basis by our internal controls. As a result of our assessment, we have therefore concluded that our internal control over financial reporting was not effective at January 31, 2019.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only the management's report in this annual report
Material Weakness Discussion and Remediation
We believe that the consolidated financial statements included in this Annual Report on Form 10-K for the year ended January 31, 2019 fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.
We were not able to fully implement and/or test the design and the operating effectiveness of our control procedures as of January 31, 2019. This required us to design new processes and controls concurrently, and thus did not allow us sufficient time to fully implement and/or test the design and operating effectiveness of the new controls.
We intend to continue to take appropriate and reasonable steps to make necessary improvements to our internal control over financial reporting, including:
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| · | Continuing to improve the control environment through (i) being staffed with sufficient number of personnel to address segregation of duties issues, ineffective controls and to perform control monitoring activities, (ii) increasing the level of GAAP knowledge through retaining of a technical accountant, (iii) implementing formal process to account for non-standard transactions, and (iv)(iii) implementing and formalizing management oversight of financial reporting at regular intervals; | | · | Continuing to update the documentation of our internal control processes, including implementing formal risk assessment processes; | | · | Implementing control activities that address relevant risks and assure that all transactions are subject to such control activities; | | · | Ensure systems that impact financial information and disclosures have effective information technology controls; | | · | Executing plan to increase number of independent directors to enhance corporate governance and Board composition;composition of the board of directors; | | · | Implementing plan to increase oversight and review of ad hoc spreadsheets while also working to reduce their use. |
We believe that the remediation measures described above will strengthen our internal control over financial reporting and remediate the material weaknesses we have identified. We expect that our remediation efforts, including design, implementation and testing will continue throughout fiscal year 2024. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting during the year ended January 31, 2023 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitation on the Effectiveness of Internal Controls Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. ITEM 9B. OTHER INFORMATION. None. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE. All of our directors hold office until the next annual meeting of stockholders and until their successors have been elected and qualified or until their earlier resignation or removal unless their office is earlier vacated in accordance with our bylaws, or he or she becomes disqualified to act as a director. Our officers shall hold office until the meeting of the board of directors following the next annual meeting of stockholders and until their successor has been elected and qualified or until his earlier resignation or removal. The board of directors may remove any officer for cause or without cause. In January 2023, the board of directors expanded from five directors to seven directors. The two additional board seats are currently vacant. Our executive officers and directors and their respective ages as of the date of this Annual Report are as follows: Name | | Director or Officer Since | | Age | | Positions | Directors: | | | | | | | Richard C. Schaeffer, Jr. (1) | | 2021 | | 74 | | Director | Robert E. Adams(1) | | 2020 | | 51 | | Director | Thomas G. Amon(1) | | 2021 | | 75 | | Director | Eric C. Jaffe | | 2021 | | 52 | | Director | Michael W. Hawkins | | 2020 | | 60 | | Director and Chairman of the Board of Directors | Officers: | | | | | | | Toney E. Jennings | | 2021 | | 63 | | Chief Executive Officer and Chief Operating Officer | William C. Regan | | 2021 | | 64 | | Chief Financial Officer | Brandon L. Hart | | 2021 | | 54 | | Chief Technology Officer |
(1) | Implementing plan to increase oversightFits criteria as an “Independent Director,” as defined in NYSE Listed Company Manual, Section 303A.02(a)(i) and review of ad hoc spreadsheets while also working to reduce their use.
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We believe that the remediation measures described above will strengthen our internal control over financial reportingNASDAQ Listing Rules 5005(a)(20) and remediate the material weaknesses we have identified. We expect that our remediation efforts, including design, implementation and testing will continue throughout fiscal year 2019.5605(a)(2) (footnotes incorporated).
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Richard C. Schaeffer, Jr. was appointed as a Director of the Company on September 21, 2021. Mr. Schaeffer serves as chairman of the Compensation, Nomination and Risk Committees and is a member of the Audit Committee. Mr. Schaeffer has almost 50 years in the Information Security, Cyber Security, and Intelligence space. Mr. Schaeffer is a former Senior Executive with the National Security Agency (NSA), where he held many positions. Since retiring in 2010, Mr. Schaeffer has continued to pursue his passion for improving the security of U.S. and partner interests in the cyber domain. He started a private consulting firm, Riverbank Associates, LLC, located in Severna Park, Maryland, bringing visionary leadership, management, and technical experience to his clients’ challenges. His client base includes a full range of private sector companies, from small start-ups to mid-size companies, to large system integrators and commercial businesses. He serves on the advisory boards of a number of government, private sector and non-profit companies and organizations. He also serves as an Outside Director on the boards of three companies addressing the concern of foreign investment and control over elements of foreign owned companies providing products and services to classified U.S. Government clients. He remains a strong advocate in the area of cyber education and training, believing that the Nation’s future in the complex world of cyberspace depends upon a corps of professionals who are well equipped to deal with a rapidly changing technology and threat environment. Throughout his career, Mr. Schaeffer has been recognized for his vision, leadership, and commitment to excellence. He is known for his strategic thinking, ability to build cohesive teams, political savvy, technical competence, extensive network of cyber and intelligence professionals, and ability to communicate complex topics to any audience. Robert E. Adams was appointed as a Director of the Company on May 11, 2020. Mr. Adams serves as chairman of the Audit Committee and is a member of the Compensation, Nomination, and Risk Committees of the Company. From March 11, 2021 to July 31, 2021, he served as the Company’s CTO. He has been working in the blockchain and cryptocurrency markets since 2015. Mr. Adams was an early adopter of Bitcoin and Ethereum. Mr. Adams recently served as the Technology Director for Blue Cross/Blue Shield of Florida with its headquarters in Jacksonville, Florida. While employed there he managed a budget of more than $100 million per year with more than 45,000 employees. Mr. Adams left his employment with Blue Cross/Blue Shield of Florida to further his entrepreneurial spirit within the blockchain and cryptocurrency markets.
Thomas G. Amon was appointed as a Director of the Company on September 21, 2021. Mr. Amon is a member of the Audit and Risk Committees. Mr. Amon is an attorney licensed to practice in the State of New York. Mr. Amon is a Harvard graduate earning his law degree from the University of Virginia. He is a corporate and M&A specialist with over 40 years’ experience representing small and medium sized companies and investment funds. Mr. Amon currently serves as general counsel of an energy company based in New York and Houston Texas. He is acting general counsel and founder of Military Talent Group, Inc., providing recruitment and retention services to veterans, Fortune 500 companies and state and local governments. He also serves as a member of the board of the New York City Tech Foundation. Eric C. Jaffe was appointed as the Chief Executive Officer of the Company on March 15, 2021, and as a Director of the Company on October 23, 2021. Mr. Jaffe stepped down as CEO on July 31, 2022. Mr. Jaffe is a member of the Risk Committee. Mr. Jaffe is an industry leading technology professional, CEO, and serial entrepreneur, bringing a wealth and expertise to the Company in business management. In his career he has had the opportunity to lead or be a part of many great teams that have leveraged vision, strategy, technology, and great people to create great companies. His experience has focused on the manufacturing, legal, non-profit, blockchain and technology industries. Mr. Jaffe has grown companies from start-up to successful acquisition that have grown into national leaders in their space. He has been a part of no less than 11 technology company acquisitions and has continually been on the forefront of emerging technologies. Mr. Jaffe was an early adopter of Bitcoin and blockchain having championed it and created companies around it since 2015. Through his consulting practice, he has helped no less than 35 major companies set their technology strategy and accelerate their business growth. He is a graduate of Florida International University with a degree in Business Management and carries multiple technological certifications. Michael W. Hawkins was appointed as the CEO/CFO/Director on April 17, 2020 and as Chairman of the board on April 22, 2020. Mr. Hawkins is a member of the Compensation and Nomination Committees. Mr. Hawkins stepped down as CEO of the Company on March 15, 2021, and CFO of the Company on September 23, 2021. Prior to this, he had served as the Chief Financial Officer of MCIG, Inc., since April 8, 2016 through August 2019. Prior to fulfilling this role, Mr. Hawkins was the Managing Member of Epic Industry, LLC and the Chief Financial Officer for ICA Solutions, Inc. Mr. Hawkins has worked in the hospitality and entertainment, blockchain, satellite, retail, manufacturing, distribution, and construction industries, providing executive level services as CEO, CFO, and COO to multiple nanotech public and privately held companies. Mr. Hawkins earned his B.S. in Computer Science and Business Administration from University of Maryland, University College. Toney E. Jennings was appointed as the Chief Executive Officer of the Company on July 31, 2022, and the Chief Operating Officer of the Company on July 31, 2021, upon the acquisition by the Company of Vengar, where Mr. Jennings was CEO. Mr. Jennings is a cybersecurity pioneer that has been leading teams in the cybersecurity and information technology fields for over 30 years. Prior to his involvement in developing the world’s first zero-trust data platform, he was CEO of Encryptics, Inc, which developed rights-managed data encryption and protection solutions. He was also Chairman of SignaCert, Inc., having purchased the IP and assets from Harris Corporation. SignaCert delivered comprehensive and affordable compliance verification and continuous monitoring solutions to both enterprise and government customers. One of his earlier successes was as a founder, CEO, and Chairman of WheelGroup Corporation, the creators of the first commercially available intrusion detection system, delivered through its successful sale to Cisco Systems. Earlier in his career, Mr. Jennings led teams at Trident Data Systems and as an officer at the Air Force Information Warfare Center, conducting penetration testing and vulnerability assessments of operational Department of Defense networks. William C. Regan was appointed as the Chief Financial Officer of the Company on September 23, 2021. Mr. Regan brings more than 40 years of finance and accounting experience, including more than 25 years at public companies and more than seven years at technology companies. He has extensive transactional experience including two IPOs and numerous acquisitions, divestitures, and financings. Prior to joining the Company, Mr. Regan was Senior Vice President and Chief Financial Officer of Fornetix, a technology company with an advanced encryption key management solution. Mr. Regan began his career as an auditor, then as a tax advisor, with Arthur Andersen & Co., and subsequently held a number of accounting roles with increasing responsibility, including Controller positions at JH Capital Group, Rentech, Inc., National Golf Properties, Inc., Digital Insight Corporation and DTS Digital Cinema, and Chief Financial Officer positions at Weintraub Financial Services, Inc. and Beaufort California, Inc. Mr. Regan had been a consultant with the Company between May 2021 and September 2021. Mr. Regan holds a bachelor’s degree in Business Administration – Accounting from California State Polytechnic University, Pomona and is a Certified Public Accountant (inactive). Brandon L. Hart was appointed as the Chief Technology Officer of the Company on July 31, 2021, upon the acquisition by the Company of Vengar, where he previously held the same position. With over 25 years of experience in the technology sector, Mr. Hart has spent more than 15 years developing innovative zero trust data protection and control solutions. He has more than 16 years filling the role of senior management in technology companies. His career began with Lucent Technologies where he was rapidly promoted through the ranks to become Operations Assistant to the Director of Operations for Worldwide Broadband Services. He has participated in the development and award of more than ten patents, primarily focusing on data security and crypto key management. | | 33 | There have been no changes in our internal control over financial reporting during the year ended January31, 2019that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitation on the Effectiveness
| Table of Internal ControlsContents |
Family Relationships There are no family relationships between or among the above directors, executive officers or persons nominated or charged by us to become directors or executive officers. Board Leadership Structure Mr. Hawkins currently serves as the Chairman of our board of directors. Robert Adams currently serves as the Chairman of the Audit Committee. Richard C. Schaeffer, Jr., currently serves as the Chairman of the Compensation, Nomination, and Risk Committees. Conflicts of Interest Members of our management and board are associated with other firms involved in a range of business activities. Consequently, there are potential inherent conflicts of interest in their acting as officers and directors of our company. Although the officers and directors are engaged in other business activities, we anticipate they will devote an important amount of time to our affairs. Our officers and directors are now and may in the future become shareholders, officers, or directors of other companies, which may be formed for the purpose of engaging in business activities similar to ours. Accordingly, additional direct conflicts of interest may arise in the future with respect to such individuals acting on behalf of us or other entities. Moreover, additional conflicts of interest may arise with respect to opportunities which come to the attention of such individuals in the performance of their duties or otherwise. Currently, we do not have a right of first refusal pertaining to opportunities that come to their attention and may relate to our business operations. Our officers and directors are, so long as they are our officers or directors, subject to the restriction that all opportunities contemplated by our plan of operation which come to their attention, either in the performance of their duties or in any other manner, will be considered opportunities of, and be made available to us and the companies that they are affiliated with on an equal basis. A breach of this requirement will be a breach of the fiduciary duties of the officer or director. If we, or the companies with which the officers and directors are affiliated, both desire to take advantage of an opportunity, then said officers and directors would abstain from negotiating and voting upon the opportunity. However, all directors may still individually take advantage of opportunities if we should decline to do so. Except as set forth above, we have not adopted any other conflict of interest policy with respect to such transactions. Involvement in Certain Legal Proceedings Except as noted below, none of the following events have occurred during the past five years and are material to an evaluation of the ability or integrity of any director or officer of the Company: Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
ITEM 9B. OTHER INFORMATION.
None.
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