UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2021 | |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________________________to________________________
Commission file number: 000-56037
Carrier EQ, LLC |
(Exact name of registrant as specified in its charter) |
Delaware | 37-1981503 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
186 Lincoln Street, Third Floor, Boston, MA | 02111 | |
(Address of principal executive offices) | (Zip Code) |
(Registrant’s Telephone Number, including Area Code): (617) 841-7207
Securities registered pursuant to Section 12(b) of the Act:
Title of each class registered | Trading Symbols | Name of each exchange on which registered |
Securities registered pursuant to section 12(g) of the Act:
AirTokens |
(Title of class) |
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ | ||
Non-accelerated filer þ | Smaller reporting company ☒ | ||
Emerging growth company ☒ |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act of 1934). Yes ¨ No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $0
as of March 31, 2021.
Table of Contents
Page | |||
PART I | |||
Item 1. | Business | 1 | |
Item 1A. | Risk Factors | 8 | |
Item 1B. | Unsolved Staff Comments | 8 | |
Item 2. | Properties | 8 | |
Item 3. | Legal Proceedings | 8 | |
Item 4. | Mine Safety Disclosures | 8 | |
PART II | |||
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 9 | |
Item 6. | Selected Financial Data | 9 | |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 9 | |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 20 | |
Item 8. | Financial Statements and Supplementary Data | 20 | |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 20 | |
Item 9A. | Controls and Procedures | 20 | |
Item 9B. | Other Information | 22 | |
PART III | |||
Item 10. | Directors, Executive Officers and Corporate Governance | 23 | |
Item 11. | Executive Compensation | 24 | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 25 | |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 25 | |
Item 14. | Principal Accounting Fees and Services | 26 | |
PART IV | |||
Item 15. | Exhibits, Financial Statement Schedules | 27 | |
Item 16. | Form 10-K Summary | 29 |
i |
Forward-Looking Statements
This report on Form 10-K contains forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. Forward-looking statements can be identified by words such as: "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may," "should," "will" and similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding:
· | Expected operating results. |
· | Expectations of the effect on our financial condition of claims, litigation, contingent liabilities and governmental and regulatory investigations and proceedings. |
· | Strategy for customer retention, operations, financial results and reserves. |
· | Strategy for risk management. |
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
· | Changes in consumer demand for, and acceptance of, the banQi digital banking application. |
· | The ability of borrowers to repay loans issued under the banQi lending platform which may be guaranteed by the Company. |
· | Our ability to support the business of banQi to boost the digital account and lending platform for low-income customers. |
· | Developments and changes in laws and regulations, whether in the U.S., Brazil or globally. |
· | The potential impact of any partnerships, strategic alliances or joint ventures or investments we may make. |
· | Disruptions to our technology network including computer systems and software, as well as natural events such as severe weather, fires, floods and earthquakes or man-made or other disruptions of our operating systems, structures or equipment. |
· | The occurrence of hostilities, political instability or catastrophic events. |
· | The novel coronavirus ("COVID-19") and its potential impact on our business. |
The ultimate accuracy of these forward-looking statements depends upon a number of known and unknown risks and events. Many factors could cause our actual results to differ materially from the forward-looking statements. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
ii |
PART I
Item 1. | Business. |
Overview
Our business was initially created to provide unbanked and financially underserved individuals in emerging markets mobile access to financial services. On September 11, 2018 Airfox entered into a services agreement, as amended on June 7, 2019 (the “Services Agreement”) with Via Varejo S.A., a corporation organized under the laws of the Federative Republic of Brazil ("Via Varejo") whereby, among other things, Airfox was provided with an exclusive agreement with Via Varejo’s Casas Bahia, a Brazilian retailer that specializes in furniture and home appliances, to digitize their parcelas (portions) program, where the retailer allows customers to pay for large purchases through monthly installments. banQi enables customers to make their payments digitally rather than traveling to a store, negotiating paperwork, and paying in cash. Our partnership with Via Varejo enabled users to make cash deposits into their banQi (defined below) balance at any of Via Varejo’s Casas Bahia stores across Brazil.
As a result of the events described below, we are now supporting the development, management and operation of a software technology platform consisting of two applications, a digital wallet application and an alternative credit scoring and lending application. The software technology platform was designed and built as a Software as Service or (SaaS) offering. The platform is currently operated in Brazil through banQi Instituição de Pagamento Ltda (“banQi”), a limited liability company organized under the laws of the Federative Republic of Brazil, which is part of the Via Varejo Group.
The wallet application, banQi is a digital banking application capable of leveraging machine learning capabilities to build alternative, smartphone-based credit risk models. banQi, available on Android and iOS, aims to eliminate the need for traditional financial institutions allowing those without bank accounts or credit cards to more easily and quickly make many everyday transactions using a smartphone. banQi will also create an alternative credit scoring system for use in connection with an alternative credit scoring and lending application.
We operate through Carrier EQ, LLC d/b/a Airfox, a Delaware limited liability company. CarrierEQ, Inc. d/b/a Airfox was incorporated on January 19, 2016 and on May 21, 2020, CarrierEQ, Inc. converted to a Delaware limited liability company and all shares of its common stock were converted into limited liability company interests. CarrierEQ, Inc. now exists as Carrier EQ, LLC. Unless the context otherwise requires, all references to “Airfox” “Company,” “we,” “our” or “us” and other similar terms means Carrier EQ, LLC d/b/a Airfox. Carrier EQ, LLC is a wholly-owned subsidiary of Lake Niassa Empreendimentos e Participacões Ltda., a limited liability company duly organized under the laws of the Federative Republic of Brazil ("Lake Niassa") that is, in turn, wholly-owned by Via Varejo.. Our Company operates as part of the Via Varejo Group.
On June 14, 2021, the Company, Lake Niassa and banQi entered into the 7th Amendment and Consolidation of the Articles of Association of banQi (the “7th Amendment”). Pursuant to the terms of the 7th Amendment, the Company and Lake Niassa (i) increased banQi 's share capital from BRL 1,000,000.00 (one million reais) to BRL 69,870,000.00 (sixty-nine million, eight hundred and seventy thousand reais), which represents an increase of BRL 68,870,000.00 (sixty-eight million, eight hundred and seventy thousand reais); and (ii) issued 68,870,000 (sixty-eight million, eight hundred and seventy thousand) new quotas, with par value of BRL 1.00 (one real) each, fully subscribed and paid up, in Brazilian currency, through the capitalization of Advances for Future Capital Increase ("AFAC") made by Lake Niassa.
Prior to entering into the 7th Amendment, our Company had a 99.99% ownership interest in banQi and Lake Niassa had a 0.01% ownership interest in banQi. Pursuant to the 7th Amendment, and the transfer of banQi’s share capital to Lake Niassa, our Company’s ownership interest in banQi decreased to 1.43% of the share capital of banQi, and Lake Niassa’s ownership interest in banQi increased to 98.57% of the share capital of banQi, which made Lake Niassa the controlling owner of banQi.
As a result of this change in control (the “Change in Control”), on June 14, 2021, the Company determined that it did not have a controlling interest over banQi, and banQi was deconsolidated from the Company's condensed consolidated financial statements and presented as discontinued operations in the Company’s consolidated financial information presented within this annual report. The presentation of the operations and results of banQi is further explained in Note 4 – Discontinued Operations in the notes to the audited consolidated financial statements appearing elsewhere in this Annual Report. No additional revenue has been recognized by our Company from June 14, 2021through September 30, 2021. On November 1, 2021 and December 14, 2021, Lake Niassa made a capital contribution to Airfox in the amount of $283,000 and $290,000 with no additional membership interests issued or ownership rights granted.
1
On June 30, 2021, Lake Niassa, the sole member of our Company, determined to discontinue the development of AirTokens and end the AirToken project related to the Company’s business. Lake Niassa made the determination that the Company does not have the ability to further develop AirTokens as part of its business plan in the absence of new laws or a definitive regulatory regime (in both the U.S. and Brazil) regarding the use and transferability of AirTokens (and other similar tokens issued on the Ethereum block chain that are classified as securities). Current laws and regulatory regimes do not provide for the Company to utilize the AirTokens as envisioned by the Company since AirTokens are no longer freely transferable and the previous market for AirTokens no longer exists. AirTokens were never fully developed and never gained full functionality. AirTokens are not currently freely transferable and no market exists for AirTokens. As a result of our Company discontinuing the development of AirTokens, AirTokens lost their functionality in full, and it is likely that no market for AirTokens will ever be re-created and that AirTokens will not again ever be freely transferable.
Currently, the Company's main functions and activities comprise of supporting banQi’s operation in Brazil, including assisting banQi with the management of the digital wallet application and the financial services provided to those without bank accounts or credit cards. Primarily due to the cancellation of the AirToken project and since the main features of the Company’s software and technology platform have been developed and funded to be applied in the Brazilian market,, as per the Services Agreement and related agreement, the Company's main functions and activities relating to the development and management of a software technology platform consisting of a digital wallet application and an alternative credit scoring and lending application have substantially migrated to banQi entity in Brazil, and our Company expects to continue transferring the remainder of its contracts with suppliers to Brazil, thereby reducing its activities in the U.S.
Our principal executive offices are located at 186 Lincoln Street, Third Floor, Boston, MA 02111, and our telephone number is: (617) 841-7207. Our website address is Airfox.com. No information found on our website is part of this report. Also, market data and certain industry forecasts used throughout this report were obtained from our internal analyses, market research, publicly available information, and industry publications. Industry publications generally provide that the information contained in such publications has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed.
2
Our Business Plan
Currently, our operations consist solely of supporting the development, management and operation of banQi’s software technology platform consisting of two applications, a digital wallet application and an alternative credit scoring and lending application. The software technology platform was designed and built as a Software as Service or (SaaS) offering. The platform is operated solely in Brazil through banQi, a company that is part of the Via Varejo Group. Our Company is also part of the Via Varejo Group.
On September 11, 2018 Airfox entered into the Services Agreement whereby, among other things, Airfox was provided with an exclusive agreement with Via Varejo’s Casas Bahia, a Brazilian retailer that specializes in furniture and home appliances, to digitize their parcelas (portions) program, where the retailer allows customers to pay for large purchases through monthly installments. Primarily due to the cancellation of the AirToken project and since the main features of the Company’s software and technology platform have been developed and funded to be applied in the Brazilian market, as per the Services Agreement and related agreements, the Company's main functions and activities relating to the development and management of a software technology platform consisting of a digital wallet application and an alternative credit scoring and lending application have substantially migrated to the banQi entity in Brazil, and our Company expects to continue transferring the remainder of its contracts with suppliers to Brazil; thereby reducing its activities in the U.S. Additionally, the parties are considering the termination of the Services Agreement. In the event the Services Agreement is terminated, it is likely that another agreement will not be entered into between Via Varejo and our Company.
As a result of the Change in Control, banQi is no longer a Company subsidiary and the intangible assets related to the capitalization of software developed within the scope of the Service Agreement have been written off. For additional information on this write off, See Note 4 – Discontinued Operations in the notes to the audited consolidated financial statements appearing elsewhere in this Annual Report.
Like banQi, Airfox is part of the Via Varejo Group. Airfox’s operations consist solely of supporting banQi in implementing banQi’s strategy described below and operationalizing banQi’s business. Airfox supports banQi’s teams in the design of banQi’s customer experience, its products and services and the development of its solutions and platforms. We are also responsible for hosting banQi's platform infrastructure and for managing all data information for banQi, including the Business Intelligence Systems.
Airfox is completely dependent on the success of banQi, and many aspects if our business are tied directly to banQi’s business. banQi is almost fully operational in Brazil, and most of banQi’s activities (including part of the software design and development) are migrating to Brazil. As the migration of Airfox's activities and operations to banQi is still being defined, there is presently no agreement between Airfox, banQi and Lake Niassa regarding current or future services to be provided to banQi by Airfox. Consequently, to date, Airfox has not been remunerated by banQi for services it has provided to banQi. Airfox has no other operations other than as described herein and currently has no source of revenue.
banQi
banQi, is a digital banking application that holds users’ cash and can be used to process a variety of consumer transactions. It is designed to meet the needs of those who primarily use cash because financial services are inaccessible to them. Airfox has partnered with some Brazilian payment processing companies which allow use of banQi at more than 300,000 physical locations throughout Brazil — including post offices and banks — that allow users to convert funds from Brazilian Reals to a banQi balance. Currently, users may deposit cash to banQi at these physical locations as a result of our current agreements with certain payment processing companies. To make a deposit to banQi through boletos, users need to issue a boleto in exchange for cash, and scan the bar code with their banQi app. Boletos are a means of payment that are processed in many locations, such as post offices, supermarket chains, convenience stores, and lottery ticket vendors throughout Brazil – they contain a barcode that serves as a unique routing number.
Once the deposit into banQi is processed, users can use banQi to engage in a variety of transactions directly through their mobile phone with merchants that accept banQi. For example, users can pay their monthly rent by scanning the barcode of boletos that relate to the rent bill directly into banQi. The banQi balance can also be transferred to other users of banQi – the transfer is instantaneous and is facilitated by Airfox’s backend system. Currently, transfers can be made to existing banQi users within banQi and to other banks. By allowing users to generate and pay boletos directly within banQi and initiate currency transfers digitally, banQi enables users to transfer the funds to the appropriate accounts in order to complete payment without having to go to a physical location or handle physical currency.
3
Additionally, banQi users can convert their banQi balance into cash by 1) transferring their banQi balance to their bank account (for the subset of banQi users who have a bank account) then withdrawing the funds at a bank branch location or any ATM within the bank’s network, or by 2) performing a cash withdrawal at Via Varejo’s Casas Bahia stores. To perform a cash withdraw at Casas Bahia, users would go to any cashier at Casas Bahia, initiate a cash withdraw in their banQi app, enter the employee code displayed on the cashier’s name tag, then present a government issued ID to the cashier for identity verification. The development of the bank transfer feature is complete, and the ability to withdraw cash at Casas Bahia stores is available in the Via Varejo’s Casas Bahia network.
As of September 30, 2021, banQi had 483 thousand active users (defined as those registered users who have made at least one transaction during the last 30 days) generating a total payment volume (TPV) of R$1.38 billion from October 1, 2020 to September 30, 2021. As of September 30, 2020, banQi had 143,000 active users generating a total payment volume (TPV) of R$100.4 million from October 1, 2019 to September 30, 2020.
banQi generates revenue from fixed recurring fees and transaction fees negotiated with merchant partners like Casas Bahia. banQi also generates revenue from transaction fees (and interchange fees from MasterCard debit card transactions) charged to a customer when conducting a wallet transaction for top-ups, boleto and utility payments so that its revenue will be a percentage of TPV. Additionally, banQi also generates revenue from interest income on the cash balances users maintain in banQi and from interchange fees from MasterCard prepaid card transactions.
banQi is also developing additional capabilities that expand its usability, and it is worth mentioning especially the development of a Credit Card with the extension of the partnership with Mastercard and the start of the Personal Loan operation for users of the banQi App with the partnership of a Financial Institution in Brazil and with the resources (funding) of Via Varejo.
banQi is becoming an alternative lending application that provides Via Varejo’s ecosystem significant growth opportunity. banQi’s ability to grow revenue is affected by, among other things, consumer spending patterns, merchant and consumer adoption of virtual and electronic payment methods, the expansion of commerce channels, the growth of mobile devices and merchant and consumer applications on those devices, the growth of consumers globally with internet and mobile access, the pace of transition from cash and checks to virtual and electronic forms of payment, banQi’s share of the virtual and electronic payments market, the acceptance of cryptocurrency and associated regulatory developments, and banQi’s ability to innovate new methods of payment that merchants and consumers value. The strategy to drive growth in the banQi app and alternative credit scoring and lending application includes the following:
· | Extending through strategic partnerships: by building strategic partnerships to acquire new customers and establish banQi’s role in the virtual and electronic payment processing and lending communities. |
· | Growing userbase: through expanding banQi’s customer base and scale, increasing customers’ use of products and services by better addressing their everyday needs related to accessing, managing and moving money and expanding the adoption of banQi’s solutions by new merchants and consumers. |
· | Offering of new products and services: development of new products, such as the credit card and personal loan, mentioned above, will make it possible for users of the banQi app to expand possibilities of access to credit and financial inclusion. |
Industry Trends - FinTech
In pursuing banQi’s growth strategy, Via Varejo’s Group intends to capitalize on the growth of the financial technology industry (“FinTech”).
FinTech, which is built on the merging of financial services with communications technology, is a growing industry for a variety of reasons. Developments in technology, including big data analytics, artificial intelligence, and mobile development, are combining to give FinTech companies and the services they offer, also referred to as FinTech platforms, an increasing advantage over traditional financial platforms. Faster payment networks typically reduce the time required to move money between accounts. banQi’s management believes that as it accumulates customer data, it will be possible to increase product sales by combining analytics and marketing to bring new products to market, improve service offerings, and make FinTech processes more efficient and transparent.
4
Brazil has continued to define itself as a leader in FinTech throughout Latin America. Regulation and technology are breaking down barriers to entry related to distribution, clearing the way for new entrants that could shrink asset and liability spreads and increase penetration. Larger, more-established financial service providers, particularly banks, must now comply with additional regulatory and capital requirements that are, at present, not required for payment institutions (a category of FinTech company). A lack of such requirements may pave the way for challenger banks, FinTech companies leveraging technology and software to digitize and streamline retail banking, to target underserved and unserved demographics. Mobile technology allows challenger banks to offer competitive retail banking services such as current accounts, savings accounts, loans, insurance, and credit cards to those who want to be able to bank from their phones instead of visiting a retail location. Additionally, Brazilians have historically had limited tools with which to manage personal finances, which has led to greater usage of expensive loans and a poor allocation of resources, and companies are using internet-based solutions to help users manage accounts and renegotiate loans, as well as to provide marketplaces for new loans and savings products.
Strategic Partnership
banQi, with the support of Airfox, is actively developing channel partners to leverage the scale, brand recognition, and strategic synergies that these partnerships bring to accelerate the acquisition of end-users and increase the value to them.
Mastercard Brasil
On June 12, 2019, banQi entered into a Strategic Alliance and Incentive Program Agreement (the “Program Agreement”) with Mastercard Brasil Soluções de Pagamento Digital Ltda. (“Mastercard Brasil”) and Via Varejo. As a licensee of MasterCard International, Inc. and a business partner of Mastercard Brasil, and it launched its prepaid card (the “Pre-paid Card”) and entered into an Incentive Program (as defined in the Program Agreement) in order to issue, expand and boost the Pre-paid Card base in Brazil as well as the number of transactions and turnover (sales revenue) generated by MasterCard Cards. As an incentive to support the launching of the Pre-paid Card, on December 16, 2019, Mastercard Brasil made to banQi in Brazil an incentive prepayment per sales revenue (the “Sales Revenue Incentive Prepayment”) totaling R$65 million (approximately U.S.$16 million in December 2019). The Sales Revenue Incentive Prepayment constituted the creation of a direct financial obligation on banQi since it constituted prepaid sales revenue from Mastercard Brasil. Via Varejo agreed to act as a guarantor of the Sales Revenue Incentive Prepayment obligations to Mastercard Brasil pursuant to the Program Agreement and a guaranty letter.
As a result of the deconsolidation of banQi, the Sales Revenue Incentive Prepayment is now reported in banQi's financial statements and no longer consolidated with Airfox's financial results.
For additional information on the Program Agreement, including information with regard to specific termination rights, See Note 5 – Mastercard Program Agreement in the notes to the audited consolidated financial statements appearing elsewhere in this Annual Report.
Geographic Markets
banQi’s geographic market is Brazil. The plan is to continue to focus efforts on expanding it to additional Casas Bahia locations throughout Brazil. The idea is to increase engagement, gain consumer trust, and enhance user understanding of banQi’s general functionality.
Competition
On a global scale, Latin America has the greatest opportunity for applications such as banQi. Within Brazil, numerous companies have produced applications with competing functionalities, however, Via Varejo believes few applications currently compete with the suite of solutions that banQi will eventually offers its users.
Brazilian Competitors
banQi currently faces at least two types of competitors in Brazil, payment application providers and digital banks.
· | Payment Application Providers: In this category, banQi’s largest competitors in Brazil are RecargaPay, PicPay, Ame Digital, Celcoin, Neon and MercadoPago. These applications directly compete with the banQi app functionalities. All of these competitors allow for bill pay, boleto pay, mobile recharge, money transfer, and various deposit methods. Many of these competitors’ payment applications are targeted towards more affluent Brazilians. |
· | Digital Banks: In this category, banQi’s largest competitors in Brazil are Nubank, Banco Inter, and PagBank. These digital banks are indirect competitors with banQi, as they bring competitive technology but a much greater variety in features. As with any bank, this allows for easy means to pay boletos, transfer and save money. Many of these digital banks preposition savings accounts, credit/debit cards, and direct integrations with the Central Bank in Brazil. |
5
Regulations That Affect banQi’s Business in Brazil
banQi is subject to a number of laws and regulations in Brazil, many of which are still evolving and could be interpreted in ways that could materially affect our business. While it is difficult to fully ascertain the extent to which new developments in the field of law will affect our business, there has been a trend towards increased consumer and data privacy protection.
Banking Regulations – Payment Institution
banQi is currently licensed with the Brazilian Central Bank per applicable regulations, as a payment institution.
Regulation of Business Activities in Brazil
Our business activities in Brazil are subject to Brazilian laws and regulations relating to payment schemes and payment institutions.
Regulation of Payment Institution and Payment Scheme Settlors.
banQi performs activities that are in particular subject to Law No. 12,865/13 and regulations from the Brazilian Central Bank and the CMN. In addition, Law No. 12,865/2013 prohibits payment institutions from performing activities that are restricted to financial institutions, which are regulated by Law No. 4,595/1964.
Licenses and Agreements
As a result of the Change in Control, the primary agreements related to banQi’s business operations and product offerings were migrated to banQi, and any related revenues, obligations and rights were transferred to banQi's financial statements and deconsolidated from Airfox's financial statements.
Technology & Technology Suppliers
banQi software technology platform was, and continues to be, developed “internally” by employees in the U.S., but mainly in Brazil. As of September 30, 2021, part of the development of the banQi technology platform takes place in Brazil, with Airfox providing some integrations with other technology platforms, as well as support for the hosting and infrastructure for the banQi platform and the development of specific modules, such as data intelligence.
banQi’s platforms are hosted in third party data centers on virtual cloud-based infrastructure (such as Digital Ocean, Google Cloud Computing and AWS). These data centers use a mixture of biometric access controls, redundant power, environmental controls and secure internet connection points to ensure uptime and data security. Machine learning technology is a key part of the application, and we rely on a third party to deliver banQi’s platform’s credit assessment capabilities. Our Company continuously monitors banQi’s services for availability, performance and security. We rely on our data center and service providers to maintain peak operating conditions in their businesses and to quickly address issues related to their service as they arise.
Intellectual Property
Our Company does not have any patents, and we do not have any patents in progress.
We registered “Airfox” and AirToken” and their related logos and certain other marks as trademarks in the United States.
We are the registered holder of a variety of domestic and international domain names that include “airfox”, “airfoxapp”, “airtoken” and similar variations.
Employees
As of September 30, 2021, we have 5 employees in our Boston office.
6
Emerging Growth Company
We are and we will remain an “emerging growth company” as defined under The Jumpstart Our Business Startups Act, or the JOBS Act, until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenues equal or exceed $1.07 billion, (ii) the last day of the fiscal year following the fifth anniversary of our initial public offering, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities, or (iv) the date on which we are deemed a “large accelerated filer” (with at least $700 million in public float) under the Exchange Act.
As an “emerging growth company”, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:
· | only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis” disclosure; |
· | reduced disclosure about our executive compensation arrangements; |
· | no requirement that we hold non-binding advisory votes on executive compensation or golden parachute arrangements; and |
· | exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting. |
We have taken advantage of some of these reduced burdens, and thus the information we provide you may be different from what you might receive from other public companies in which you hold securities.
In addition, Section 107 of the JOBS Act also 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 for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
7
Notwithstanding the above, we are also currently a “smaller reporting company,” meaning that we are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company and that had a public float of less than $250 million or annual revenues of less than $100 million during the most recently completed fiscal year. In the event that we are still considered a smaller reporting company, at such time as we cease being an emerging growth company, the disclosure we will be required to provide in our SEC filings will increase, but it will still be less than it would be if we were not considered either an emerging growth company or a smaller reporting company. Specifically, similar to emerging growth companies, smaller reporting companies are able to provide simplified executive compensation disclosures in their filings; are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting; and have certain other decreased disclosure obligations in their SEC filings, including, among other things, only being required to provide two years of audited financial statements in annual reports.
Item 1A. | Risk Factors. |
Not Required.
Item 1B. | Unresolved Staff Comments. |
Not Applicable.
Item 2. | Properties. |
Our corporate headquarters is a leased office facility located at 186 Lincoln Street, Third Floor, Boston, MA 02111 that consists of approximately 6,651 square feet. We also lease approximately 880 square feet of office space in Brazil. We believe that our office facilities are suitable and adequate for our business operations. Our annual base rent during our next fiscal year is approximately $0.33 million.
Item 3. | Legal Proceedings. |
We are not aware of any pending or threatened claims that our Company violated any federal or state securities laws. However, we cannot assure you that any such claim will not be asserted in the future or that the claimant in any such action will not prevail. For additional information, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources, and also see Note 16 - Commitments and Contingencies - Legal Proceedings in the notes to the audited consolidated financial statements appearing elsewhere in this Annual Report.
Item 4. | Mine Safety Disclosures. |
Not Applicable.
8
PART II
Item 5. | Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity Securities. |
Lake Niassa, a wholly owned subsidiary of Via Varejo, is the sole member of our Company.
Item 6. | Selected Financial Data. |
Not Applicable.
Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report.” The following discussion includes forward-looking statements about our business, financial condition and results of operations, including discussions about management’s expectations for our business. These statements represent projections, beliefs and expectations based on current circumstances and conditions and in light of recent events and trend and should not be construed either as assurances of performance or as promises of a given course of action. Instead, various known and unknown factors are likely to cause our actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. See the section titled “Forward-Looking Statements.”
OVERVIEW
Beginning in February 2017, the Company began exploring consumer applications of its legacy prepaid mobile applications. The Company initiated a business plan to introduce a mobile application that would allow users to earn digital tokens, exchange them for free or discounted mobile data and, ultimately, other goods and services in South America as part of a new international business and ecosystem (the “AirToken Project”). The AirToken Project included the issuance of digital tokens (“AirTokens”). The AirToken is an ERC-20 token issued on the Ethereum blockchain.
The Company obtained Ether and Bitcoin (collectively referred therein as the “Digital Assets”) in August 2017 through early October 2017 from those interested in obtaining AirTokens. The Company raised approximately $15.4 million for the purpose of developing the AirToken Project.
Subsequent to the distribution of AirTokens to those parties who contributed towards the funding of the AirToken Project, no AirTokens were sold by the Company.
On June 30, 2021, the Company discontinued the AirToken project as a result of the absence of new laws or a definitive regulatory regime (in both the U.S. and Brazil) regarding the use and transferability of AirTokens (and other similar tokens issued on the Ethereum block chain that are classified as securities), as necessary to gain functionality for their application in the Company’s legacy prepaid mobile application As a result of the discontinuation of the development of AirTokens, AirTokens lost their functionality in full.
The Company has experienced recurring losses and negative cash flows from operations. At September 30, 2021 and September 30, 2020, the Company had cash and cash equivalents of $0.5 million and $1.6 million, a working capital deficit of $4.6 million and $734 thousand, total member's deficit/stockholders' deficit $4.0 million and $10 million, respectively. To date, the Company has in large part, relied on debt and equity financing to fund its operations. The Company expects to continue to incur losses from operations.
On November 16, 2018, the Company entered into a settlement agreement with the SEC (the “SEC Settlement Agreement”). Initially with the Commonwealth of Massachusetts and ultimately pursuant to the SEC Settlement Agreement, the Company agreed to the certain actions including a) payment of a penalty, b) offer to refund consideration paid for AirTokens on or before October 5, 2017 in exchange for AirTokens, plus interest, c) filing a Form 10 to register the AirTokens as a class of securities and maintain timely filings of all reports required by Section 13(a) of the Exchange Act for at least one year from the date the Form 10 becomes effective (the “Effective Date”) and continue these filings until the Company is eligible to terminate its registration, and d) submit to the SEC a final report of its handling of all claims received within seven months from the Effective Date of the Form 10 registration statement filing. See Liquidity and Capital Resources for further details. The Company’s Form 10 registration statement is now effective, and we need to ensure that we will have the ability to prepare, on a timely basis, financial statements that comply with SEC reporting requirements.
9
In conjunction with the Settlement Agreement, AirToken claimants are entitled to return their AirTokens to our Company and receive a refund in the amount of consideration paid, plus interest, less the amount of any income received thereon. Pursuant to the Settlement Agreement, as modified in May 2019, our Company timely distributed the claim forms on June 28, 2019. The claims period closed on September 28, 2019. All forms were processed in accordance with the terms and provisions set forth by the Settlement Agreement. We received claim forms from 174 potential AirToken claimants during the claims period and we determined to approve payment on 163 out of the 174 claims, which is approximately 93% of the claim forms received during the claims period. On December 11, 2019 we commenced the process of notifying, via email only, all 174 Potential AirToken Claimants of our resolution of their claim.
On or before December 28, 2019 the Company paid all approved claims to approved claimants who returned their AirTokens to the Company (approximately 93.5% of the total dollar amount of all approved claim refunds). All amounts were refunded in cash and paid through the Company’s existing cash and cash equivalent reserves. The total claim amounts including interest, totaled $3.3 million on December 28, 2019. Certain approved claimants did not return their AirTokens to the Company. The Company did not pay approved claims to approved claimants who did not return their AirTokens to the Company. As of September 30, 2021, the amount that was not paid to claimants who had valid claims but failed to return their AirTokens was approximately $0.1 million. All unpaid approved claims are expected to be paid upon return to the Company of approved claimants’ AirTokens.
Since the Company is no longer continuing with the AirToken project, the Company should not recognize any revenue related to the research and development of the AirToken project, and the deferred revenue is no longer appropriate to be recorded on the balance sheet. The liability, Deferred revenue - AirToken Project, of approximately $12.5 million was extinguished and charged to Other Income in the Condensed Consolidated Statements of Comprehensive Loss.
In September 2018, the Company entered into the Services Agreement and related convertible notes agreement with Via Varejo whereby the Company could receive up to $10,256,000 by issuing convertible notes in connection with the Company’s software design and development services provided to Via Varejo. The Company has received the full $10,256,000 in cash and issued convertible notes for $2,500,000 on February 14, 2019, $3,500,000 on June 10, 2019, and $4,000,000 on September 6, 2019 under these agreements. See Note 10 – Via Varejo Services Agreement and Convertible Notes in the notes to the audited consolidated financial statements appearing elsewhere in this Annual Report. Additionally, the Company started recognizing revenue in January 2020 from the Upfront Payment of $256,000 related to the Via Varejo Services Agreement. On May 21, 2020, the convertible notes in the aggregate principal amount of $10,000,000 were converted into 13,339,510 shares of the Company’s common stock.
On June 12, 2019, banQi entered into a Program Agreement with Mastercard Brasil and Via Varejo. As a licensee of MasterCard International, Inc. and a business partner of Mastercard Brasil, we launched our prepaid card and entered into an Incentive Program (as defined in the Program Agreement) in order to issue, expand and boost the Pre-paid Card base in Brazil as well as the number of transactions and turnover (sales revenue) generated by MasterCard Cards. As an incentive to support the launching of our Pre-paid Card, on December 16, 2019 Mastercard Brasil made to our Company a Sales Revenue Incentive Prepayment totaling R$65 million (approximately $16 million in December 2019). The Sales Revenue Incentive Prepayment constitutes the creation of a direct financial obligation on our Company since it constitutes prepaid sales revenue from Mastercard Brasil to our Company. Via Varejo has agreed to act as a guarantor of our Sales Revenue Incentive Prepayment obligations to Mastercard Brasil pursuant to the Program Agreement and a guaranty letter.
10
As a Mastercard prepaid card issuer, banQi be entitled to receive Sales Revenue Incentive (as defined in the Program Agreement) pursuant to the Program Agreement. As a result, the Sales Revenue Incentive will be used to amortize the Sales Revenue Incentive Prepayment. Upon complete amortization of the Sales Revenue Incentive Prepayment, Mastercard will make quarterly payments of the Sales Revenue Incentive, calculated according to the value of transactions completed with the prepaid cards issued by banQi. banQi no minimum commitment of transaction volumes to be completed with the Prepaid Cards.
The Program Agreement has a term of ten years, unless earlier terminated by either party in accordance with specific provisions of the Program Agreement.
On February 7, 2020, pursuant to a written Call Exercise Notice (“Call Exercise Notice”), Via Varejo notified the Company and the Option Stockholders of Via Varejo’s intention to exercise the Call Right pursuant to the Call Option Agreement, through Lake Niassa Empreendimentos e Participações Ltda., a limited liability company duly organized under the laws of the Federative Republic of Brazil and 100% owned by Via Varejo (the “Buyer”), whereby (i) the Notes in the aggregate principal amount of $10,000,000 will be converted into shares of the Company’s common stock (the “Primary Shares”) and (ii) $6,000,000 of shares of the Company’s common stock will be purchased directly from the Option Stockholders (the “Secondary Shares”), such that Via Varejo shall own 80% of the Company’s common stock on a fully diluted basis (the “Transaction”). The agreed upon valuation of the Company for the purposes of the Transaction is $20 million.
Pursuant to the Call Exercise Notice, Via Varejo’s exercise of the Call Right, and its obligation to consummate the Transaction, is subject to and conditioned upon the satisfaction by the Company or the Option Stockholders of certain conditions (or waiver of such conditions by Via Varejo) prior to the consummation of the Transaction, which closed on May 21, 2020. These conditions include, among other things, (a) the Company amending its certificate of incorporation to provide for (i) a single class of common stock (and automatic conversion of any and all outstanding shares of preferred stock into common stock) and (ii) no preferential rights in favor of any person other than Via Varejo, (b) obtaining preemptive rights waivers’ from certain Option Stockholders and (c) the acceleration of vesting of all stock options issued under the Company’s 2016 Equity Incentive Plan, as amended whereby upon the consummation of the Transaction, all stock options then issued and outstanding under the Plan are cancelled in exchange for a cash payment (calculated based on the per share price in the form of the Second Amendment to Stock Purchase Agreement, dated as of May 18, 2020 entered into by the Buyer and certain employees of the Company (the “Employee SPAs”) funded by Via Varejo and made to the holders of such stock options. Additionally, the execution and delivery of a stock purchase agreement, substantially in the form contemplated by the Call Option Agreement, by each of Via Varejo, the Company and the Option Stockholders, is a condition to closing the Transaction.
On May 21, 2020, all 1,404,227 stock options then issued and outstanding under the Plan were cancelled in exchange for a cash payment of $3,331,255 (calculated based on the per share price in the Employee SPAs) funded by Via Varejo and made to the holders of such stock options.
On June 14, 2021, the Company, Lake Niassa and banQi entered into the 7th Amendment and Consolidation of the Articles of Association of banQi (the “7th Amendment”). Pursuant to the terms of the 7th Amendment, the Company and Lake Niassa (i) increased banQi's share capital from BRL 1,000,000.00 (one million reais) to BRL 69,870,000.00 (sixty-nine million, eight hundred and seventy thousand reais), which represents an increase of BRL 68,870,000.00 (sixty-eight million, eight hundred and seventy thousand reais); and (ii) issued 68,870,000 (sixty-eight million, eight hundred and seventy thousand) new quotas, with par value of BRL 1.00 (one real) each, fully subscribed and paid up, in Brazilian currency, through the capitalization of Advances for Future Capital Increase ("AFAC") made by Lake Niassa.
Prior to entering into the 7th Amendment, our Company had a 99.99% ownership interest in banQi and Lake Niassa had a 0.01% ownership interest in banQi. Pursuant to the 7th Amendment, and the transfer of banQi’s share capital to Lake Niassa, our Company’s ownership interest in banQi decreased to 1.43% of the share capital of banQi, and Lake Niassa’s ownership interest in banQi increased to 98.57% of the share capital of banQi, which made Lake Niassa the controlling owner of banQi.
As a result of the Change in Control, on June 14, 2021, the Company determined that it did not have a controlling interest over banQi, and banQi was deconsolidated from the Company's condensed consolidated financial statements and presented as discontinued operations in the Company’s consolidated financial information presented within this annual report. The presentation of the operations and results of banQi is further explained in Note 4 – Discontinued Operations in the notes to the audited consolidated financial statements appearing elsewhere in this Annual Report. No additional revenue has been recognized by our Company from June 14, 2021 through September 30, 2021. On November 1, 2021 and December 14, 2021, Lake Niassa made a capital contribution to Airfox in the amount of $283,000 and $290,000 with no additional membership interests issued or ownership rights granted.
11
As of June 30, 2021, banQi met all the conditions to be classified as discontinued operations, and because we consider the loss of the controlling interest of banQi to be a strategic shift that will have a major effect on our operations and financial results, represented a discontinued operation. All assets and liabilities associated with banQi were therefore classified as assets and liabilities of discontinued operations in our condensed consolidated balance sheets for the periods presented.
On June 30, 2021, Lake Niassa, the sole member of our Company, determined to discontinue the development of AirTokens and end the AirToken project related to the Company’s business. Lake Niassa made the determination that the Company does not have the ability to further develop AirTokens as part of its business plan in the absence of new laws or a definitive regulatory regime (in both the U.S. and Brazil) regarding the use and transferability of AirTokens (and other similar tokens issued on the Ethereum block chain that are classified as securities). Current laws and regulatory regimes do not provide for the Company to utilize the AirTokens as envisioned by the Company since AirTokens are no longer freely transferable and the previous market for AirTokens no longer exists. AirTokens were never fully developed and never gained full functionality. AirTokens are not currently freely transferable and no market exists for AirTokens. As a result of our Company discontinuing the development of AirTokens, AirTokens lost their functionality in full, and it is likely that no market for AirTokens will ever be re-created and that AirTokens will not again ever be freely transferable.
Currently, the Company's main functions and activities comprise of supporting banQi’s operation in Brazil, including assisting banQi with the management of the digital wallet application and the financial services provided to those without bank accounts or credit cards. Primarily due to the cancellation of the AirToken project and since the main features of the Company’s software and technology platform have been developed and funded to be applied in the Brazilian market, as per the Services Agreement and related agreement, the Company's main functions and activities relating to the development and management of a software technology platform consisting of a digital wallet application and an alternative credit scoring and lending application have substantially migrated to banQi entity in Brazil, and our Company expects to continue transferring the remainder of its contracts with suppliers to Brazil, thereby reducing its activities in the U.S.
banQi met the criteria within Accounting Standards Codification (“ASC”) 205-20, Presentation of Financial Statements to be reported as discontinued operations because the transaction was a strategic shift in business that had a major effect on our operations and financial results. Therefore, we have reported the historical results of banQi including the results of operations and cash flows as discontinued operations, and related assets and liabilities were retrospectively reclassified as assets and liabilities of discontinued operations for all periods presented herein. Unless otherwise noted, applicable amounts in the prior year have been recast to conform to this discontinued operations presentation. Refer to Note 3, “Summary of Significant Accounting Policies” of our consolidated financial statements included in this Annual Report on Form 10-K for additional information. Unless otherwise indicated, the following information relates to our continuing operations following the deconsolidation of banQi.
COVID-19
During this uncertain time, our critical priorities are the health and safety of our employees and contractors, all of whom began working from home and reduced travel to essential business needs. We currently have a Company-wide work-from-home program. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, local authorities, or that we determine are in the best interests of our employees. Our offices in Boston are open on a limited basis subject to certain state mandated safety standards.
In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China. This new coronavirus has caused a global health emergency and was declared a pandemic by the World Health Organization in March 2020 (“COVID-19 Outbreak”). We are continually monitoring the impacts the COVID-19 Outbreak could have on our business.
The COVID-19 pandemic has had and continues to have a significant impact on local, state, national and global economies. The actions taken by governments, as well as businesses and individuals, to limit the spread of the disease has significantly disrupted the Company’s normal activities. Numerous businesses, including our contractors, collaborative partners and suppliers have either shut down or are operating on a limited basis, employees have been furloughed or laid off and social distancing has been mandated through stay-in-place orders. The Company expects these actions to have a significant impact on the Company’s results of operations, particularly with respect to user acquisition marketing efforts, Total Payment Volume growth, research and development, and financial position.
12
We are subject to the risks arising from the COVID-19 Outbreak’s social and economic impacts. Our management believes that the social and economic impacts, which include but are not limited to the following, could have a significant impact on future financial condition, liquidity, and results of operations: (i) the duration and scope of the pandemic; (ii) governmental, business and individual actions that have been and continue to be taken in response to the pandemic, including travel restrictions, quarantines, social distancing, work-from-home and shelter-in-place orders and shut-downs; (iii) the impact on U.S. and global economies and the timing and rate of economic recovery; (iv) potential adverse effects on the financial markets and access to capital; (v) potential goodwill or other impairment charges; (vi) increased cybersecurity risks as a result of pervasive remote working conditions; and (vii) our ability to effectively carry out our operations due to any adverse impacts on the health and safety of our employees and their families.
In response to the COVID-19 Outbreak, our employees have been required to work from home. The significant increase in remote working, particularly for an extended period of time, could exacerbate certain risks to our business, including an increased risk of cybersecurity events and improper dissemination of personal or confidential information. We do not believe these circumstances have, or will, materially adversely impact our internal controls or financial reporting systems.
While the Company believes it is well positioned in the marketplace to navigate difficult market conditions in times of economic uncertainty, the Company believes this pandemic has adversely affected and has the potential to further adversely affect, its results of operations, financial condition, or liquidity for the year ending September 30, 2021 and beyond.
RESULTS OF OPERATIONS
Results of Operations for Fiscal 2021 and Fiscal 2020
The following comparative analysis of results of operations for Fiscal 2021 and Fiscal 2020 is based on the comparative audited consolidated financial statements, footnotes, and related information for the periods identified. This analysis should be read in conjunction with the consolidated financial statements and the notes to those statements that are included elsewhere in this Annual Report.
The following table shows our results of operations for the periods indicated. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.
For the Year Ending September 30, | Change | |||||||||||||||
2021 | 2020 | Dollars | Percentage | |||||||||||||
Revenue | $ | — | $ | — | $ | — | — | |||||||||
Cost of revenue | — | — | — | — | ||||||||||||
Selling, general and administrative | 7,543,086 | 14,863,557 | (7,320,471 | ) | (49 | %) | ||||||||||
Impairment of capitalized cost and other assets | 4,092,055 | — | 4,092,055 | (100 | %) | |||||||||||
Operating expenses | (11,635,141 | ) | (14,863,557 | ) | 3,228,416 | 22 | % | |||||||||
Other (expense) income, net | 13,161,768 | 1,164,307 | 11,997,461 | 1030 | % | |||||||||||
Income (loss) from continuing operations before income taxes | 1,526,637 | (13,699,250 | ) | 15,225,877 | (111 | %) | ||||||||||
Income tax benefit | (234,404 | ) | 207,410 | (441,814 | ) | (213 | %) | |||||||||
Net income (loss) from continuing operations | 1,292,223 | (13,491,840 | ) | (14,784,063 | ) | (110 | %) | |||||||||
Net income (loss) from discontinued operations | (10,851,961 | ) | (7,825,153 | ) | (3,026,808 | ) | 39 | % | ||||||||
Net loss | $ | (9,559,738 | ) | $ | (21,316,993 | ) | $ | 11,757,255 | (55 | %) |
13
Revenue
Airfox has no other operations other than as described herein and currently has no source of revenue. As the migration of Airfox's activities and operations to banQi is still being defined, there is presently no agreement between Airfox, banQi and Lake Niassa regarding current or future services to be provided to banQi by Airfox. Consequently, to date, Airfox has not been remunerated by banQi for services it has provided to banQi. Airfox has no other operations other than as described herein and currently has no source of revenue.
Operating expenses
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses for September 30, 2021 was $7.5 million representing a decrease of $7.3 million or a 54% decrease, as compared to $14 million for September 30, 2020. The primary component of the net decrease is due to the overall decrease of our operating activities as depreciation & amortization, Legal & Professional Fees and Salaries and wages. This decrease of our operating activities is attributed to the migration of activities to Brazil.
Other income, net
Other income, net for Fiscal 2021 and Fiscal 2020 was $13 million and $1 million, respectively. The increase in other (expense) income, net was primarily attributable to write off AirToken Project (discontinued).
Income Tax Benefit
Income tax benefit for Fiscal 2021 and Fiscal 2020 was $(234) thousand and $207 thousand, respectively.
Discontinued Operations
Primarily due to the cancellation of the AirToken project, among other reasons, the Company's main functions and activities relating to support the development and management of a software technology platform consisting of a digital wallet application and an alternative credit scoring and lending application are migrating to the banQi entity in Brazil.
In connection with the above strategy, the Company is transferring contracts with some suppliers to Brazil.
So, certain new features and enhancements for the VV digital wallet and for the personal loan product have been developed in Brazil.
Summary of Cash Flows Fiscal 2021 and Fiscal 2020
For the Year Ended September 30, | Change | |||||||||||
2021 | 2020 | Dollars | ||||||||||
Net cash used in operating activities | $ | 4,771,555 | $ | 5,792,775 | $ | (1,021,220 | ) | |||||
Net cash used in investing activities | $ | (1,980,976 | ) | $ | (3,392,979 | ) | $ | 1,412,003 | ||||
Net cash provided by financing activities | $ | 4,853,672 | $ | 7,851,508 | $ | (2,997,836 | ) |
Operating Activities
Net cash used in operating activities was $4.7 million for Fiscal 2021. Cash was consumed from operations by the loss of $4 million of Impairment write-off, non-cash items consisting primarily of amortization totaling $1.2 million, Transfer out of cash and restricted cash as part of deconsolidation totaling $6 million, stock-based compensation totaling $0.3 million, additional stock-based compensation due to cancellation of stock options totaling $3.1 million, net of recognizing $0.2 million of a deferred gain on AirTokens and the reversal of accrued interest related to conversion of convertible notes of $0.1 million. Changes in other working capital accounts had a positive impact of $6.4 million on cash, including deferred revenue – Mastercard Program Agreement of $12.5 million, offset by $1.5 million in AirToken refund liability.
14
Net cash used in operating activities for Fiscal 2020 was $5.7 million. Cash was consumed from operations by the loss of $10 million, less non-cash items of $2 million consisting principally of amortization of $0.8 million, stock-based compensation totaling $3 million and a realized loss on the sale of Digital Assets of $0.1 million. Changes in working capital accounts had a negative impact of $0.7 million on cash.
Investing Activities
Net cash used in investing activities during Fiscal 2021 was $1.9 million which substantially consisted of the acquisition of capitalized software costs relating to the Via Varejo Services Agreement.
Financing Activities
Net cash provided by financing activities was $4.8 million during Fiscal 2021, consisting primarily to capital contributions from Via Varejo of $4.8 million
Net cash provided by financing activities related primarily to capital contributions from Via Varejo of $5.8 million, and $1.7 million in proceeds from a related party in Fiscal 2020.
Liquidity and Capital Resources
The following table summarizes total current assets, liabilities and working capital deficit for the periods indicated:
September 30, 2021 | September 30, 2020 | Change Dollars | Change Percentage | |||||||||||||
Current assets | $ | 684,793 | $ | 2,741,555 | $ | (2,056,762 | ) | (75 | )% | |||||||
Current liabilities | 5,657,851 | 2,007,546 | 3,650,035 | (182 | )% | |||||||||||
Working capital deficit | $ | (4,972,788 | ) | $ | 734,009 | $ | (4,238,779 | ) | (577 | )% |
We have experienced recurring losses and negative cash flows from operations. At September 30, 2021 and 2020, we had a working capital deficit of $5 million and $734 thousand, respectively. The Company had cash and cash equivalents of $0.5 million and $1.6 million as of September 30, 2021 and 2020, respectively.
On November 16, 2018, the Company entered into a settlement agreement with the SEC (the “SEC Settlement Agreement”). Initially with the Commonwealth of Massachusetts and ultimately pursuant to the SEC Settlement Agreement, the Company agreed to the certain actions including a) payment of a penalty, b) offer to refund consideration paid for AirTokens on or before October 5, 2017 in exchange for AirTokens, plus interest, c) filing a Form 10 to register the AirTokens as a class of securities and maintain timely filings of all reports required by Section 13(a) of the Exchange Act for at least one year from the date the Form 10 becomes effective (the “Effective Date”) and continue these filings until the Company is eligible to terminate its registration, and d) submit to the SEC a final report of its handling of all claims received within seven months from the Effective Date of the Form 10 registration statement filing. See Liquidity and Capital Resources for further details. The Company’s Form 10 registration statement is now effective, and we need to ensure that we will have the ability to prepare, on a timely basis, financial statements that comply with SEC reporting requirements.
In conjunction with the Settlement Agreement, potential AirToken claimants are entitled to return their AirTokens to our Company and receive a refund in the amount of consideration paid, plus interest, less the amount of any income received thereon. Pursuant to the Settlement Agreement, as modified in May 2019, our Company timely distributed the claim forms on June 28, 2019. The claims period closed on September 28, 2019. All forms were processed in accordance with the terms and provisions set forth by the Settlement Agreement. We received claim forms from 174 potential AirToken claimants during the claims period and we determined to approve payment on 163 out of the 174 claims, which is approximately 93% of the claim forms received during the claims period. On December 11, 2019 we commenced the process of notifying, via email only, all 174 potential AirToken claimants of our resolution of their claim.
15
On or before December 28, 2019 the Company paid all approved claims to approved claimants who returned their AirTokens to the Company (approximately 93.5% of the total dollar amount of all approved claim refunds). All amounts were refunded in cash and paid through the Company’s existing cash and cash equivalent reserves. The total claim amounts including interest, totaled $3.3 million on December 28, 2019. Certain approved claimants did not return their AirTokens to the Company. The Company did not pay approved claims to approved claimants who did not return their AirTokens to the Company. As of September 30, 2021, the amount that was not paid to claimants who had valid claims but failed to return their AirTokens was approximately $0.1 million. All unpaid approved claims are expected to be paid upon return to the Company of approved claimants’ AirTokens.
In addition, if certain holders of AirTokens affirmatively rejected or failed to accept our 2019 rescission offer, they may continue to have a right of rescission under the Securities Act even though the rescission offer has expired. Consequently, if any offerees rejected the rescission offer, expressly or by failing to timely return a claim, we may continue to be potentially liable under the Securities Act for the purchase price or for certain losses if the AirTokens have been sold. It may also be possible that by not disclosing that the AirTokens were unregistered, and that they may face resale or other limitations, we may face contingent liability for noncompliance with applicable federal and state securities laws. Additionally, the Company may be required to pay additional fines, penalties or other amounts in other jurisdictions.
Financial Condition and Management’s Plans
The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. The Company believes that its ability to continue operations depends on its ability to generate revenues and obtain funding that will be sufficient to sustain its operations until it rolls out its core product offerings and achieve profitability and positive cash flows from operating activities.
The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, we will have sufficient funds to generate positive operating results. The consolidated financial statements do not include any adjustments related to this uncertainty and as to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.
In the event the Company is unable to raise additional debt or equity financing, it may:
1. | Have to cease operations, in which case the Company may file a petition for bankruptcy in U.S. Bankruptcy Court under Chapter 7, whereby a trustee will be appointed to sell off the Company’s assets, and the money will be used to pay off the Company’s debts in order of their priority. Or |
2. | File a petition for bankruptcy in U.S. Bankruptcy Court under Chapter 11 to restructure the Company’s debt. |
Further, the Company’s management can implement expense reductions, as necessary. However, there is no assurance that the Company will be successful in obtaining funding or generating revenues sufficient to fund operations.
Recently issued and adopted accounting pronouncements:
The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company's financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated financial statements and assures that there are proper controls in place to ascertain that the Company's consolidated financial statements properly reflect the change.
In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02 (“ASU 2016-02”), which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Targeted Improvements; and ASU No. 2018-20, Narrow-Scope Improvements for Lessors. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
16
The Company adopted ASU 2016-02 effective October 1, 2019 using the modified retrospective approach whereby the Company will continue to present prior period financial statements and disclosures under ASC 840. In addition, the Company elected the transition package of three practical expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification and initial direct costs. Further, the Company adopted a short-term lease exception policy, permitting the Company to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets.
Adoption of the new standard resulted in the recording of right-of-use assets and lease liabilities related to the Company’s operating leases. The standard did not materially affect the Company's consolidated net earnings or cash flows.
The Company has evaluated all recently issued accounting pronouncements and believes such pronouncements do not have a material effect on the Company's financial statements. See Note 3 of the Consolidated Financial Statements at September 30, 2021 and 2020.
Off-Balance Sheet Arrangements
We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP, and our discussion and analysis of its financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Note 3, “Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements appearing elsewhere in this Annual Report, describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. Management bases it estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of the asset and liabilities. Actual results may differ from these estimates and such differences may be material.
Revenue Recognition
The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of this standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
ASC 606 prescribes a 5-step process to achieve its core principle:
Step 1: Identify the contract with the customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations in the contract
Step 5: Recognize revenue when the Company satisfies a performance obligation
Display Advertising Services
The Company’s revenue historically was derived from display advertising services. The Company historically engaged in a business line known as Airfox Wireless related to technology that the Company developed that generates display advertising revenue for U.S. advertising networks. Pursuant to the Airfox Wireless model, the Company partnered with U.S. mobile telecommunications companies to have advertisers display advertisements on the lock screens of mobile devices and paid its partners a share of the ad revenue generated. The Company recognizes revenue, net of amounts retained by the third-party partners, pursuant to revenue sharing agreements. The form of the agreements was such that the Company provided services in exchange for a fee. The Company recognizes only the fee for providing its services as it has no latitude in establishing prices with third party advertisers.
17
In January 2019, the Company decided to no longer pursue the display advertising services as a part of the business plan as the revenue did not represent a significant portion of the Company operations. Additionally, the Company discontinued the Airfox Wireless business line earlier in 2019.
AirToken Project Development Services (Non ASC 606 Revenue)
The Company has obtained Ether and Bitcoin totaling approximately $15.3 million towards the development of the AirToken Project. Pursuant to the terms of the AirTokens, there is no form of partnership, joint venture, agency or any similar relationship between a holder of an AirToken and the Company and/or other individuals or entities involved with the AirToken Project. AirTokens are non-refundable and do not pay interest and have no maturity date. AirTokens confer only the right to services in the AirToken Project and confer no other rights of any form with respect to the Company, including, but not limited to, any voting, distribution, redemption, liquidation, proprietary (including all forms of intellectual property), or other financial or legal rights. Subsequent to the distribution of AirTokens to those parties who contributed towards the funding of the AirToken Project, no AirTokens were sold by the Company.
Pursuant to the Settlement Agreement (as defined and described further in Note 16), the Company was obligated to refund amounts raised for the purpose of developing the AirToken Project if valid claims were timely and properly submitted, subject to other fines and penalties.
On or before December 28, 2019, the Company paid all approved claims to approved claimants who returned their AirTokens to the Company (approximately 93.5% of the total dollar amount of all approved claim refunds). All amounts were refunded in cash and paid through the Company’s existing cash and cash equivalent reserves. The total claim amounts including interest, totaled $3.3 million on December 28, 2019. Certain approved claimants did not return their AirTokens to the Company. The Company did not pay approved claims to approved claimants who did not return their AirTokens to the Company. As of September 30, 2021, the amount that was not paid to claimants who had valid claims but failed to return their AirTokens was approximately $0.1 million. All unpaid approved claims are expected to be paid during next months upon return to the Company of approved claimants’ AirTokens. Refer to Note 16 for further information on the rescission offer.
Since the Company is no longer continuing with the AirToken project, the Company will not recognize any revenue related to the research and development of the AirToken project, and the deferred revenue is no longer recorded on the balance sheet. The liability, Deferred revenue - AirToken Project, of approximately $12.5 million was extinguished and charged to Other Income in the Condensed Consolidated Statements of Comprehensive Loss.
Via Varejo Services Agreement Revenue (ASC 606 Revenue)
The Company entered into a Services Agreement (the “Services Agreement”) as of September 11, 2018 (“the Agreement Effective Date”) with Via Varejo (the “Client”).
The Company has been engaged to support the design and development of a mobile software module and application programming interface that will provide the banQi’s customers with access to certain mobile payment functionality. The Company provides certain services, including hosting, maintenance and operation of banQi.
During Phase 1, there was a payment of $0.3 million (“Upfront Payment”) from the Client to be recognized as revenue commencing when the product was ready for its intended use and ratably over the remaining term of the Services Agreement through the duration of the Services Agreement.
Now the agreement as it was conceived is no longer being executed, as many activities and operations are migrating to Brazil. So, the total revenue recognized for the years ended September 30, 2021 and 2020 totaled $0 and $0, respectively.
18
Stock-based Compensation
The Company accounts for stock-based compensation to employees and non-employees in conformity with the provisions of ASC 718, Compensation - Stock Based Compensation. The Company expenses stock-based compensation to employees and non-employees over the requisite service period based on the estimated grant-date fair value of the awards. The Company accounts for forfeitures as they occur. Stock-based awards are recognized on a straight-line basis over the requisite service period. For stock-based employee compensation, cost recognized at any date will be at least equal to the amount attributable to share-based compensation that is vested at that date. The Company estimates the fair value of stock option grants using the Black-Scholes option-pricing model and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.
Common shares issued to third parties for services provided are valued based on the estimated fair value of the Company’s common shares.
All stock-based compensation costs are recorded in Selling, General and Administrative Expenses in the Condensed Consolidated Statements of Operations. All stock-based compensation awards were cancelled as pursuant to the Transaction which occurred on May 21, 2020 (see Note 12).
In August 2020, the Company established the Share Based Payment Program with Cash Settlement - Phantom Shares of Via Varejo S.A. (the "Plan"). Pursuant to the Plan, the Company's Board of Directors may grant cash-settled shares, referred to as "Phantom Shares," to the Company's employees as part of the employees' remuneration package. Each Phantom Share will represent the employee's right to receive the full amount corresponding to the average quotation of 3 (three) common shares of Via Varejo S.A. in the 20 (twenty) trading sessions at B3 - Brazil, Bolsa, Balcão immediately prior to vesting, as established in the Plan. The Phantom Shares vest over a service period of five years.
As of June 14, 2021, there is no liability reported related to the Phantom Shares due the deconsolidation of banQi. No Phantom Shares have vested as of September 30, 2021.
Income Taxes
Income taxes are recorded in accordance with ASC 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. The Company recognizes any interest and penalties accrued related to unrecognized tax benefits as income tax expense.
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating loss for financial-reporting and tax-reporting purposes. Accordingly, for Federal and State income tax purposes, the benefit for income taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax asset for the years ended September 30, 2021 and 2020.
19
Software Development Costs
Due to the discontinuity of the AirToken Project, the Company does not capitalize costs related to software developed or obtained for internal use in accordance with the ASC 350-40, Internal-Use Software (“ASC 350-40”). The following illustrates the various stages and related processes of computer software development in accordance with ASC 350-40:
· | Preliminary project stage: (a) conceptual formulation of alternatives; (b) evaluation of alternatives; (c) determination of existence of needed technology; and (d) final selection of alternatives. Internal and external costs incurred during the preliminary project stage are expensed as incurred. |
· | Application development stage: (a) design of chosen path, including software configuration and software interfaces; (b) coding; (c) installation to hardware; and (d) testing, including parallel processing phase. Internal and external costs incurred to develop internal-use computer software during the application development stage are capitalized. |
· | Post-implementation-operation stage: (a) training; and (b) application maintenance. Internal and external costs incurred during the post-implementation-operation stage are expensed as incurred. |
Certain costs incurred are considered enhancements, modifications to existing internal-use software that result in additional functionality. Enhancements normally require new software specifications and may also require a change to all or part of the existing software specifications. When this additional functionality is determinable, the related costs can be capitalized. Otherwise, costs are expensed as incurred. Capitalization of internal-use software costs ceases when a computer software project is substantially complete and ready for its intended use. The Company would begin amortization when the product is available for general release or use if it is applicable.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Not Applicable.
Item 8. | Financial Statements and Supplementary Data |
Our Financial Statements of are attached as Appendix A (following Exhibits) and included as part of this Form 10-K Report. A list of our Financial Statements is provided in response to Item 15 of this Form 10-K Report.
Item 9. | Changes In And Disagreements With Accountants On Accounting and Financial Disclosure |
Not Applicable.
Item 9A. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, our Company evaluated the effectiveness and design and operation of its disclosure controls and procedures. Our Company’s disclosure controls and procedures are the controls and other procedures that we designed to ensure that our Company records, processes, summarizes, and reports in a timely manner the information that it must disclose in reports that our Company files with or submits to the Securities and Exchange Commission. Our principal executive officer and principal financial officer reviewed and participated in this evaluation. Based on this evaluation, our Company made the determination that as of the end of the period covered by this Annual Report on Form 10-K its disclosure controls and procedures were not effective at the reasonable assurance level.
The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board include the following:
For the year ended September 30, 2021, we did not effectively apply the Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO framework, due primarily to an insufficient complement of personnel possessing the appropriate accounting and financial reporting knowledge and experience to determine the appropriate accounting for non-recurring transactions and transactions requiring more complex accounting judgment. The Company has not established an audit committee which led to ineffective oversight in the establishment and monitoring of required internal controls and procedures.
We did not maintain an appropriate level of evidence of the effectiveness of controls over the preparation and review of certain reconciliations utilized in the financial close processes to ensure that the information recorded in the general ledger was complete and accurate, including the stock-based compensation process. In addition, we did not maintain effective controls over the preparation and review of the consolidated financial statements to ensure that we identified and accumulated all required supporting information to ensure the completeness and accuracy of the information contained in the consolidated financial statements.
20
In addition, as a result of the foregoing errors, the Company has determined that there was a material weakness in internal control over financial reporting related to its ICO and AirToken Gains revenue recognition procedures. Our management has re-evaluated its assessment of our disclosure controls and procedures and internal control over financial reporting as of September 30, 2021 and concluded that each was ineffective as of that date due to the existence of the foregoing material weakness.
Lastly, we did not implement appropriate general information technology controls as the Company did not maintain effective logical access and program change controls over our third-party systems, including the general ledger system.
Management’s Remediation Initiatives:
In an effort to remediate the identified material weakness and enhance our internal controls, we have initiated the following measure:
· | We will continue to utilize an accounting and financial reporting advisory firm with significant experience with publicly held companies to assist our management in evaluating significant transactions and conclusions reached regarding technical accounting matters and financial reporting disclosures for the foreseeable future. |
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal controls over financial reporting based on the framework in Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of September 30, 2021.
The Company's internal control over financial reporting includes policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. 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. In addition, the design of any system of controls is based in part on certain assumptions about the likelihood of future events, and controls may become inadequate if conditions change. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
This annual report does not include an attestation report of our Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit our Company to provide only management’s attestation in this annual report.
Changes in Internal Control Over Financial Reporting
No change in our Company’s internal control over financial reporting occurred during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
21
Inherent Limitations on Effectiveness of Controls
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Item 9B. | Other Information |
Not Applicable.
22
PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
Identity of executive officers
Name | Age | Position | ||
Lisbeth Reimer | 48 | Principal Executive Officer and Principal Financial Officer |
Business experience of directors, executive officers, and significant employees
Ms. Reimer, age 48, has over twenty (20) years of management, finance, and accounting experience. Since November 2020, Ms. Reimer has been serving as the Finance Executive Officer of banQi Instituição de Pagamento Ltda, a limited liability company organized under the laws of the Federative Republic of Brazil (“banQi”) and 99,99% owned by the Company, where she is responsible for Treasury, Accounting and FP&A. She will continue in this position with banQi while performing her duties as the Company’s Principal Executive Officer and Principal Financial Officer. From September 2018 to November 2020, she served as an associated consultant at Symnetics, a business consulting firm in Sao Paulo, SP, Brazil, where she participated in strategic planning projects, and from April 2016 to May 2018, Ms. Reimer was the Finance Director at Autopass, an electronic ticket operator in Sao Paulo, SP, Brazil, where she was responsible for Treasury, Accounting and FP&A.
Our Company does not have a board of directors.
Our Company entered into a Limited Liability Company Agreement (the “LLCA”) and our Company is managed in accordance with, and the rights and obligations of the members of the Company are governed by, the LLCA. Lake Niassa is the Sole Member of our Company with sole authority to manage our Company or delegate management of our Company to one or more officers.
Delinquent Section 16(a) Reports
To the best of our knowledge, based solely upon a review of Forms 3 and 4 and amendments thereto furnished to our Company during its most recent fiscal year and Forms 5 and amendments thereto furnished to our Company with respect to its most recent fiscal year, and any written representation referred to in paragraph (b)(1) of Item 405 of Regulation S-K, all of our executive officers and greater-than-ten percent stockholders complied with all Section 16(a) filing requirements. with the following exceptions: Lisbeth Reimer filed late a Form 3 Initial Statement of Beneficial Ownership of Securities.
23
Code of Ethics
Our Company has adopted a Code of Ethics and Conduct that applies to all of the Company’s employees, including our principal executive officer and principal financial officer. A copy of our Code of Ethics and Conduct is available for review on our Company’s website Airfox.com. The Company intends to disclose any changes in or waivers from its Code of Ethics and Business Conduct by posting such information on its website.
We are responsible for creating paths that help to democratize financial services for thousands of people. We want to continue this journey of growth with integrity, ethics and respect for current legislation. In order to spread our culture of transparency, inclusion, diversity and honesty, we have adopted the same Code of Ethics and Conduct that applies to all employees who are based in Brazil. Our Code of Ethics and Conduct, which is in line of Brazilian regulation and the best practices of financial market, establishes the fundamental principles of professional ethics for all Brazilian employees and provides a conceptual framework that these professionals must follow. We also provide the same compliance training to employees in Brazil that we provide to our employees in the United States.
Audit Committee
Our Company does not have a separately designated standing audit committee in place; our Sole Manager, Lake Niassa, currently serves, in that capacity. This is due to our development stage and small executive management team. We will continue to evaluate, from time to time, whether a separately designated standing audit committee should be put in place. We do not have an audit committee financial expert as that term is defined by the rules promulgated by the Securities and Exchange Commission due to our smaller size, limited revenues and the fact that none of our securities currently trade on any exchange or other trading medium.
Item 11. | Executive Compensation. |
The table below summarizes all compensation awarded to, earned by, or paid to our Named Executive Officers for the fiscal year ended September 30, 2021.
Summary Compensation Table
Name and Principal Position | Year | Salary ($) | Bonus ($) | Total ($) | |||||||||||
(a) | (b) | (c) | (d)5 | (f) | |||||||||||
Lisbeth Reimer1 | 2021 | 64,700 | — | 64,700 | |||||||||||
PEO, PFO | |||||||||||||||
Victor Santos2 | 2021 | 292,458 | 414,971 | 707,429 | |||||||||||
CSO | |||||||||||||||
Douglas Lopes3 | 2021 | 188,903 | 106,152 | 295,055 | |||||||||||
CFO | |||||||||||||||
Emanuel Moecklin4 | 2021 | 75,737 | 414,971 | 490,708 | |||||||||||
CTO |
—————
1. | Ms. Reimer was named as an executive officer on May 25, 2021. Ms. Reimer’s current written employee agreement with banQi includes her duties as the Company’s Principal Executive Officer and Principal Financial Officer, and Ms. Reimer is fully compensated by banQi in Brazil, including her base salary and annual bonuses, which are determined by banQi. The amounts were converted into US dollars using the monthly currency conversion from the Central Bank of Brazil. |
2. | Mr. Santos resigned from our Company on May 25, 2021. Mr. Santos received a salary of $200,000 per year plus guaranteed annual bonus payments pursuant to a written employment agreement effective May 21, 2020. |
3. | Mr. Lopes resigned from our Company on May 25, 2021. Mr. Lopes received a salary of $200,000 per year plus guaranteed annual bonus payments pursuant to a written employment agreement effective May 21, 2020. |
24
4. | Mr. Moecklin was named as an executive officer on May 21, 2020 and resigned from our Company on December 31, 2020. Mr. Moecklin received a salary of $200,000 per year plus guaranteed annual bonus payments pursuant to a written employment agreement effective May 21, 2020. Previously, Mr. Moecklin served as a non-executive officer where he received a salary of $200,000 per year pursuant to a written employment agreement effective July 15, 2016, which also provided him with eligibility to receive an annual discretionary bonus and other types of bonus compensation, in addition to option compensation. |
5. | The amounts in column (d) reflect annual bonus compensation paid to our named executive officers pursuant to their respective employee agreements in effect during FY2021. |
Outstanding equity awards at fiscal year-end table.
Not Applicable
Compensation of Directors
Not Applicable
Employment Agreements
Other than as described in the footnotes to the Summary Compensation Table above, our Company does not have any written employment agreements with any of its executive officers.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Our Company entered into a Limited Liability Company Agreement (the “LLCA”) and our Company is managed in accordance with, and the rights and obligations of the members of the Company are governed by, the LLCA. Lake Niassa is the Sole Member of our Company with sole authority to manage our Company or delegate management of our Company to one or more officers. Pursuant to the LLCA, the limited liability company interests in our Company are represented by one class of interests. The limited liability company interests of the Sole Member, Lake Niassa, is 100%. Lake Niassa’s address is Rua Samuel Klein, #83, Centro, CEP 09510-125, na Cidade São Caetano do Sul, Estado de São Paulo.
Securities Authorized for Issuance under Equity Compensation Plans
Not Applicable.
Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
For additional information related to this Item 13, See Note 18 – Related Party Transaction in the notes to the audited consolidated financial statements appearing elsewhere in this Annual Report.
Transactions with Related Persons
None. For other information related to this topic, See Note 18 – Related Party Transaction in the notes to the audited consolidated financial statements appearing elsewhere in this Annual Report.
Policies and Procedures for Related-Party Transactions
Our Company does not have any formal written policies or procedures for related party transactions. Lake Niassa, our Sole Member reviews and approves all related party transactions and other matters pertaining to the integrity of management, including potential conflicts of interest and adherence to standards of business conduct. See “Parent Company” below.
25
Parent Company
Our Company is a wholly-owned subsidiary of Lake Niassa that is, in turn, wholly-owned by Via Varejo. Our Company entered into a Limited Liability Company Agreement (the “LLCA”) and our Company is managed in accordance with, and the rights and obligations of the members of the Company are governed by, the LLCA. Lake Niassa is the Sole Member of our Company with sole authority to manage our Company or delegate management of our Company to one or more officers. Pursuant to the LLCA, the limited liability company interests in our Company are represented by one class of interests. The limited liability company interests of the Sole Member, Lake Niassa, is 100%. Lake Niassa’s address is Rua Samuel Klein, #83, Centro, CEP 09510-125, na Cidade São Caetano do Sul, Estado de São Paulo.
Director Independence
We have no board of directors. None of our securities are listed or trade on any securities or currency exchange or other established public trading market. Lake Niassa is the Sole Member of our Company with sole authority to manage our Company or delegate management of our Company to one or more officers.
Our Company does not have a separately designated nominating or compensation committee or committee performing similar functions. Lake Niassa is the Sole Member of our Company with sole authority to manage our Company or delegate management of our Company to one or more officers.
Item 14. | Principal Accounting Fees and Services. |
Audit Fees.
The aggregate fees billed for the years ended September 30, 2021 and September 30, 2020 for professional services rendered by Morison Cogen, LLP for the audit of the Company’s annual financial statements and review of financial statements included in the Company’s Form 10-Q or services that are normally provided by Morison Cogen, LLP in connection with statutory and regulatory filings or engagements were $190 thousand for the year ended September 30, 2021 and 176 thousand for the year ended September 30, 2020.
Audit-Related Fees.
Fees billed for the years ended September 30, 2021 and September 30, 2020 for assurance and related services rendered by Morison Cogen, LLP that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported under the category Audit Fees described above were $0for the year ended September 30, 2021 and $0 for the year ended September 30, 2020.
Tax Fees.
Fees billed for the years ended September 30, 2021 and September 30, 2020 for tax compliance services rendered by Morison Cogen, LLP were $0 for the year ended September 30, 2021 and $0 for the year ended September 30, 2020.
All Other Fees.
Fees billed for the years ended September 30, 2021 and September 30, 2020 for products and services provided by Morison Cogen, LLP, other than the services reported in the Audit Fees, Audit-Related Fees, and Tax Fees categories above were $0for the year ended September 30, 2021 and $0 for the year ended September 30, 2020.
Audit Committee Pre-Approval Policies.
The Company’s audit committee currently does not have any pre-approval policies or procedures concerning services performed by Morison Cogen, LLP. All the services performed by Morison Cogen, LLP that are described above were pre-approved by the Company’s audit committee.
None of the hours expended on Morison Cogen, LLP’s engagement to audit the Company’s financial statements for the years ended September 30, 2021 and September 30, 2020 were attributed to work performed by persons other than Morison Cogen, LLP’s full-time, permanent employees.
26
PART IV
Item 15. | Exhibits, Financial Statement Schedules |
(a) | The following Audited Financial Statements are filed as part of this Form 10-K Report: |
Report of Independent Registered Public Accounting Firm | |
Consolidated Balance Sheets as of September 30, 2021 and 2020 | |
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended September 30, 2021 and 2020 | |
Consolidated Statements of Member’s and Stockholders’ Deficit for the Years Ended September 30, 2021 and 2020 | |
Consolidated Statements of Cash Flows for the Years Ended September 30, 2021 and 2020 | |
Notes to Consolidated Financial Statements | |
27
(b) | The following exhibits are filed as part of this report. |
INDEX TO EXHIBITS
28
———————
* Confidential portions of this exhibit have been omitted from the exhibit.
Item 16. | Form 10-K Summary |
None
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Carrier EQ, LLC | ||
By: | /s/ Lisbeth Reimer | |
Name: Lisbeth Reimer | ||
Title: PEO/PFO (Principal Executive and Financial Officer) |
Date: January 21, 2022
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ Lisbeth Reimer | Principal Executive and Financial Officer | January 21, 2022 | ||
Lisbeth Reimer |
30
CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Sole Member of Carrier EQ, LLC d/b/a AirFox and Subsidiaries
Opinion of the Financial Statements
We have audited the accompanying consolidated balance sheets of Carrier EQ, LLC d/b/a AirFox and Subsidiaries (the Company) as of September 30, 2021 and 2020, and the related consolidated statements of operations and comprehensive loss, member’s deficit, and cash flows for each of the years in the two-year period ended September 30, 2021, and the related notes (collective 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 September 30, 2021 and 2020 and the results of their operations and cash flows for each of the years in the two-year period ended September 30, 2021, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company’s losses from development activities raise substantial doubt about their ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the sole responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated 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 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 required that we plan and preform the audit to obtain reasonable assurance about whether the consolidated 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 the 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 of 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 consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Morison Cogen LLP
We have served as the Company’s auditor since 2019
Blue Bell, PA
January 21, 2022
F-2 |
CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES
BALANCE SHEETS
September 30, 2021 | September 30, 2020 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 498,720 | $ | 1,658,028 | |||
Prepaid expenses and other current assets | 186,073 | 1,083,527 | |||||
Current Assets of discontinued operations | — | 2,788,888 | |||||
Total current assets | 684,793 | 5,530,443 | |||||
Non-current assets: | |||||||
Intangibles, net | — | 4,292,046 | |||||
Security deposits | 280,616 | 320,108 | |||||
Lease right of use assets | 1,585,543 | 1,979,658 | |||||
Investment in related affiliate | 252,000 | — | |||||
Due from related party | — | 1,400,000 | |||||
Due from affiliates | — | (4,589,610) | |||||
Non-current assets of discontinued operations | — | 4,775,401 | |||||
Total non-current assets | 2,118,159 | 8,177,603 | |||||
Total assets | $ | 2,802,952 | $ | 13,708,046 |
LIABILITIES AND MEMBER'S DEFICIT | |||||||
Current liabilities: | |||||||
Accounts payable | $ | — | $ | 301,003 | |||
Accrued liabilities | 236,258 | 1,149,514 | |||||
AirToken refund liability | 119,790 | 163,561 | |||||
Lease liability, current portion | 217,539 | 393,468 | |||||
Due to related party | 5,083,994 | — | |||||
Current liabilities of discontinued operations | — | 4,471,902 | |||||
Total current liabilities | 5,657,581 | 6,749,448 | |||||
Long-term liabilities: | |||||||
Deferred gain on issuance of AirTokens for Services, net of current portion | — | 396,790 | |||||
Lease liability, net of current portion | 1,548,075 | 1,758,196 | |||||
Deferred revenue - AirToken Project, net of current portion | — | 12,529,824 | |||||
Non-current liabilities of discontinued operations | — | 11,602,345 | |||||
Total liabilities | 7,205,656 | 33,036,603 | |||||
Commitments and contingencies (Note 16) | |||||||
Carrier EQ, LLC member's deficit: | |||||||
Member's deficit; 1,227,635 limited liability company units outstanding as of September 30, 2021 and 2020 | (4,402,704) | (20,899,904) | |||||
Accumulated other comprehensive income | — | 1,572,382 | |||||
Total member's deficit attributable to Carrier EQ, LLC members | (4,402,704) | (19,327,522) | |||||
Non-controlling interest in subsidiary | — | (1,035) | |||||
Total member's deficit | (4,402,704) | (19,328,557) | |||||
Total liabilities and member's deficit | $ | 2,802,952 | $ | 13,708,046 |
The accompanying notes are an integral part of these consolidated financial statements
F-3 |
CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Years Ended September 30, | ||||||||
2021 | 2020 | |||||||
Revenue | $ | — | $ | — | ||||
Operating expenses: | ||||||||
Cost of Revenue | — | — | ||||||
Selling, general and administrative | 7,543,086 | 14,863,557 | ||||||
Impairment of capitalized cost and other assets | 1,092,055 | — | ||||||
Total operating expenses | 11,635,141 | 14,863,557 | ||||||
Loss from operations | (11,635,141 | ) | (14,863,557 | ) | ||||
Other (expense) income: | ||||||||
Realized loss on sale of digital assets | — | (1,392 | ) | |||||
Unrealized FX Income | (113,064 | ) | 1,221,235 | |||||
Other Misc. Income | 13,174,659 | — | ||||||
Interest income (expense), net | 100,173 | (55,536 | ) | |||||
Other income, net | 13,161,768 | 1,164,307 | ||||||
Income (loss) before income taxes | 1,526,627 | (13,699,250 | ) | |||||
Income tax (expense) benefit | (234,404 | ) | 207,410 | |||||
Net income (loss) | 1,292,223 | (13,491,840 | ) | |||||
Net loss from discontinued operations | (10,851,961 | ) | (7,825,153 | ) | ||||
Net loss | (9,559,738 | ) | (21,316,993 | ) | ||||
Net income attributable to non-controlling interest | (1,035 | ) | — | |||||
Net loss attributable to Carrier EQ, LLC and Carrier EQ, Inc. | (9,560,773 | ) | (21,316,993 | ) | ||||
Other comprehensive income | ||||||||
Foreign currency translation adjustment | (875,085 | ) | — | |||||
Total comprehensive loss | $ | (10,435,858 | ) | $ | (21,316,993 | ) |
The accompanying notes are an integral part of these consolidated financial statements
F-4 |
CARRIER EQ LLC d/b/a AIRFOX INC. AND SUBSIDIARY
STATEMENT OF MEMBER'S DEFICIT
CARRIER EQ LLC
|
| CARRIEREQ, INC. |
| CARRIER EQ LLC | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| Preferred Stock |
| Preferred Stock |
| Common Stock |
| Treasury Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Additional Paid-In Capital |
| Accumulated Other Comprehensive Income (Loss) |
| Noncontrolling Interest |
| Accumulated Deficit |
| Accumulated Other Comprehensive Income |
| Membership Interests |
| Member's Deficit |
| Noncontrolling Interest |
| Total Deficit | ||||||||||||||||||||||||||||
Balance at September 30, 2020 |
| — |
|
| $ | — |
|
| — |
|
| $ | — |
|
| — |
|
| $ | — |
|
| — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| — |
|
| $ | — |
| $ | 1,572,382 |
| $ | 1,277,635 |
| $ | (20,899,904) |
|
| (1,035) |
|
| $ | (19,328,557) |
| |||
Noncontrolling interest |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1,035 |
|
| 1,035 |
| |||||||||||
Additional paid-in capital |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 4,853,672 |
|
| — |
|
| 4,853,672 |
| |||||||||||
Gain from deconsolidation of subsidy |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (697,297) |
|
| — |
|
| 21,204,301 |
|
| — |
|
| 21,204,301 |
| ||||||||||||
Net loss |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (9,560,773) |
|
| — |
|
| (9,560,773) |
| |||||||||||
Foreign currency translation |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (875,085) |
|
| — |
|
| — |
|
| — |
|
| (875,085) |
| |||||||||||
Balance at September 30, 2021 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| $ | — |
|
| 1,277,635 |
|
| $ | (4,402,704) |
|
| $ | — |
|
| $ | (4,402,704) |
|
The accompanying notes are an integral part of these consolidated financial statements
F-5 |
CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBER’S AND STOCKHOLDERS’ DEFICIT
|
| CARRIEREQ, INC. |
| CARRIER EQ LLC | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| Preferred Stock |
| Preferred Stock |
| Common Stock |
| Treasury Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Additional Paid-In Capital |
| Accumulated Other Comprehensive Income (Loss) |
| Noncontrolling Interest |
| Accumulated Deficit |
| Accumulated Other Comprehensive Income |
| Membership Interests |
| Member's Deficit |
| Noncontrolling Interest |
| Total Deficit | ||||||||||||||||||||||||||||
Balance at September 30, 2019 |
|
|
| $ | 27 |
|
|
|
| $ | 11 |
|
|
|
| $ | 78 |
|
|
|
| $ | (240,005) |
|
| $ | 2,014,658 |
|
| $ | 110,363 |
|
| (252) |
|
| $ | (21,025,864) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| $ | (19,140,984) |
| |||||||
Convertible notes converted into common stock |
| — |
|
| — |
|
| — |
|
| — |
|
|
|
| 133 |
|
| — |
|
| — |
|
| 9,999,867 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 10,000,000 |
| ||||||||||||
Conversion of Preferred One and Preferred One A shares to common stock |
|
|
| (27) |
|
|
|
| (11) |
|
|
|
| 38 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| ||||||||||||||
Cancellation of common stock previously outstanding |
| — |
|
| — |
|
| — |
|
| — |
|
|
|
| (80) |
|
| — |
|
| — |
|
| 80 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| ||||||||||||
Simple Agreements for Future Equity converted into common stock |
| — |
|
| — |
|
| — |
|
| — |
|
|
|
| 5 |
|
| — |
|
| — |
|
| 239,894 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 239,899 |
| ||||||||||||
Stock compensation related to accelerated vesting options |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 114,979 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 114,979 |
| |||||||||||
Capital contributions - Via Varejo |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 5,821,004 |
|
| — |
|
| 5,821,004 |
| |||||||||||
Stock based compensation |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 210,603 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 210,603 |
| |||||||||||
Options exercised |
| — |
|
| — |
|
| — |
|
| — |
|
|
|
| 9 |
|
| — |
|
| — |
|
| 188,371 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 188,380 |
| ||||||||||||
Noncontrolling interest |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (461) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (322) |
|
| (783) |
| |||||||||||
Retirement of treasury stock |
|
|
| — |
|
|
|
| — |
|
| — |
|
| — |
|
|
|
| 240,005 |
|
| (240,005) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| ||||||||||||||
Net loss |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (10,644,371) |
|
| — |
|
| — |
|
| (10,671,839) |
|
| — |
|
| (21,316,210) |
| |||||||||||
Foreign currency translation |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 998,269 |
|
| — |
|
| — |
|
| 463,750 |
|
| — |
|
| — |
|
| — |
|
| 1,462,019 |
| |||||||||||
Issuance of common stock to Option Stockholders |
| — |
|
| — |
|
| — |
|
| — |
|
|
|
| 80 |
|
| — |
|
| — |
|
| (80) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| ||||||||||||
Issuance of common stock to Option Holders due to cancellation of stock options |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3,331,255 |
|
| — |
|
| 3,331,255 |
| |||||||||||
Payment to Option Holders due to cancellation of stock options |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (238,719) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (238,719) |
| |||||||||||
Purchase of membership units - Carrier EQ, LLC |
| — |
|
| — |
|
| — |
|
| — |
|
|
|
| (263) |
|
| — |
|
| — |
|
| (12,289,648) |
|
| (1,108,632) |
|
| 713 |
|
| 31,670,235 |
|
| 1,108,632 |
|
| 1,277,635 |
|
| (19,380,324) |
|
| (713) |
|
| — |
| ||||||||||||
Balance at September 30, 2020 (as restated) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| $ | 1,572,382 |
|
| 1,277,635 |
|
| $ | (20,899,904) |
|
| $ | (1,035) |
|
| $ | (19,328,557) |
|
The accompanying notes are an integral part of these consolidated financial statements
F-6 |
CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
Years Ended September 30, | ||||||||
2021 | 2020 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income (loss) from continuing operations | $ | 1,292,233 | $ | (13,491,840 | ) | |||
Net (loss) from discontinued operations | (10,851,961 | ) | (7,825,153 | ) | ||||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
Amortization and Depreciation | 1,213,738 | 838,473 | ||||||
Impairment write-off | 4,092,055 | — | ||||||
Stock based compensation | — | 325,582 | ||||||
Additional stock based compensation due to cancellation of stock options | — | 3,092,536 | ||||||
Reversal of accrued interest related to conversion of convertible notes | — | (104,856 | ) | |||||
Realized loss on sale of digital assets | — | 1,398 | ||||||
Gain on issuance of AirTokens for services | (396,790 | ) | — | |||||
Gain from reversal of deferred revenue due to discontinuance of airtoken project | (12,529,824 | ) | — | |||||
Inflation adjustment to deferred revenue Master card Program | 1,560,768 | — | ||||||
Increase (decrease) in assets, net of effect of deconsolidation | ||||||||
Transfer out of cash and restricted cash as part of deconsolidation | (6,320,023 | ) | — | |||||
Accounts receivable | (421,268 | ) | (842,065 | ) | ||||
Prepaid expenses and other current and long-term assets | 1,023,743 | 664,671 | ||||||
Due from related party | 1,400,000 | (1,400,000 | ) | |||||
Other assets | 130,664 | — | ||||||
Increase (decrease) in liabilities, net of effect of deconsolidation | ||||||||
Accounts payable | (301,003 | ) | (520,609 | ) | ||||
Operating lease right of use assets and liabilities | 8,065 | 136,825 | ||||||
Accrued liabilities and other current liabilities | 4,764,452 | 4,987,145 | ||||||
Deferred revenue - Mastercard Program Agreement | — | 11,520,725 | ||||||
Other deferred revenue | (18,858 | ) | (97,208 | ) | ||||
AirToken refund liability | (43,771 | ) | (3,078,387 | ) | ||||
Due to related party | 10,756,899 | — | ||||||
Net cash used in operating activities | (4,771,555 | ) | (5,792,775 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of property and equipment | (155,016 | ) | (2,713 | ) | ||||
Acquisition of intangible assets | (1,825,960 | ) | (3,390,266 | ) | ||||
Net cash used in investing activities | (1,980,976 | ) | (3,392,979 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Capital contributions - Via Varejo | 4,853,672 | 5,821,004 | ||||||
Proceeds from Paycheck, Protection, and Program loan | — | 537,732 | ||||||
Payment of principal from Paycheck, Protection, and Program loan | — | (537,732 | ) | |||||
Proceeds from Via Varejo for payment to Option Holders due to cancellation of stock options | — | 3,331,255 | ||||||
Payment to Option Holders due to cancellation of stock options | — | (3,331,255 | ) | |||||
Proceeds from related party | — | 1,572,124 | ||||||
Proceeds from convertible notes | — | — | ||||||
Proceeds from exercise of options | — | 188,380 | ||||||
Net cash provided by financing activities | 4,853,672 | 7,581,508 | ||||||
Effect of exchange rate changes on cash and cash equivalents | (875,085 | ) | (574,438 | ) | ||||
Net decrease in cash and cash equivalents | (2,773,944 | ) | (2,178,684 | ) | ||||
Cash and cash equivalents, beginning of year | 3,272,664 | 5,451,348 | ||||||
Cash and cash equivalents, end of year | $ | 498,720 | $ | 3,272,664 |
The accompanying notes are an integral part of these consolidated financial statements
F-7 |
CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended September 30, | ||||||||
2021 | 2020 | |||||||
Supplemental disclosure of non-cash transactions: | ||||||||
Due to related party resulting from the deconsolidation of subsidiary | $ | 5,431,853 | $ | — | ||||
Investment in related affiliate no longer eliminated in consolidation | (252,000 | ) | — | |||||
Convertible debt instrument settled through issuance of common stock | — | (10,000,000 | ) | |||||
Simple agreement for future equity settled through issuance of common stock | — | (239,899 | ) | |||||
Purchase of membership units - Carrier EQ, LLC | — | (263 | ) | |||||
Cancellation of common stock | — | (80 | ) | |||||
Conversion to common stock - Series One | — | (27 | ) | |||||
Conversion to common stock - Series One A | — | (11 | ) | |||||
Conversion of Preferred One and Preferred One A shares to common stock | — | 38 | ||||||
Issuance of common stock to Option Stockholders | — | 80 | ||||||
Retirement of treasury stock | — | 240,005 | ||||||
Operating lease right of use assets and liabilities | — | 2,465,218 | ||||||
AirToken refund liability | — | — | ||||||
AirToken obligation | — | — | ||||||
Deferred revenue - AirToken project | — | — |
The accompanying notes are an integral part of these condensed consolidated financial statements
F-8 |
CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Organization and Nature of Operations
Carrier EQ, LLC, doing business as Airfox (the “Company”), was incorporated in Delaware on May 21, 2020 with a principal place of business in Boston, Massachusetts. Airfox was previously formed as a corporation, CarrierEQ, Inc. and was incorporated in Delaware on January 19, 2016.
Airfox had at that time a 100% ownership interest in AirToken GmbH, a Swiss GmbH. Airfox and Airtoken GmbH are collectively referred to herein, as the “Company.” On April 6, 2020, Airtoken GmbH was dissolved.
On May 21, 2020, Airfox filed a certificate of conversion (the “Certificate of Conversion”) to convert the Corporation to a Limited Liability Company and to change the Airfox’s name from “CarrierEQ, Inc.” to “Carrier EQ, LLC” The conversion and name change became effective on May 21, 2020. Airfox (the Company) filed a certificate of formation of Carrier EQ, LLC (the “Certificate of Formation”) on May 21, 2020.
On May 21, 2020, the Company was fully acquired by Via Varejo S.A, a corporation organized under the laws of the Federative Republic of Brazil (“Via Varejo”) through Lake Niassa Empreendimentos e Participações Ltda. ("Lake Niassa"), a limited liability company duly organized under the laws of the Federative Republic of Brazil and wholly-owned by Via Varejo (the "Transaction").
On June 14, 2021, the Company, Lake Niassa and banQi Instituição de Pagamento Ltda (formerly known as AirFox Servicos E Intermediacoes Ltda (“banQi”), a limited liability company organized under the laws of the Federative Republic of Brazil entered into the 7th Amendment and Consolidation of the Articles of Association of banQi (the “7th Amendment”). Pursuant to the terms of the 7th Amendment, the banQi and Lake Niassa (i) increased banQi 's share capital from BRL 1,000,000.00 (one million reais) to BRL 69,870,000.00 (sixty-nine million, eight hundred and seventy thousand reais), which represents an increase of BRL 68,870,000.00 (sixty-eight million, eight hundred and seventy thousand reais); and (ii) issued 68,870,000 (sixty-eight million, eight hundred and seventy thousand) new quotas, with par value of BRL 1.00 (one real) each, fully subscribed and paid up, in Brazilian currency, through the capitalization of Advances for Future Capital Increase ("AFAC") made by Lake Niassa.
Prior to entering into the 7th Amendment, the Company had a 99.99% ownership interest in banQi and Lake Niassa had a 0.01% ownership interest in banQi. Pursuant to the 7th Amendment, and the transfer of banQi’s share capital to Lake Niassa, the Company’s ownership interest in banQi decreased to 1.43% of the share capital of banQi, and Lake Niassa’s ownership interest in banQi increased to 98.57% of the share capital of banQi, which makes Lake Niassa the controlling owner of banQi.
As a result of this change in control, on June 14, 2021, the Company determined that it did not have a controlling interest over banQi, and banQi was deconsolidated from the Company's consolidated financial statements and presented as discontinued operations in the Company’s consolidated financial information presented within this annual report. The presentation of the operations and results of banQi is further explained in Note 4.
Beginning in February 2017, the Company began exploring consumer applications of its legacy prepaid mobile applications. The Company initiated a business plan to introduce a mobile application that would allow users to earn digital tokens, exchange them for free or discounted mobile data and, ultimately, other goods and services in South America as part of a new international business and ecosystem (the “AirToken Project”). The AirToken Project included the issuance of digital tokens (“AirToken(s)”). The AirToken is an ERC-20 token issued on the Ethereum blockchain.
The Company obtained Ether and Bitcoin (collectively referred therein as the “Digital Assets”), in August 2017 through early October 2017 from those interested in obtaining AirTokens. The Company raised approximately $15.4 million for the purpose of developing the AirToken Project.
On June 30, 2021, Lake Niassa the sole member of Carrier EQ, LLC determined to discontinue the development of AirTokens and end the AirToken project related to the Company’s business. At this time, the Company does not have the ability to further develop AirTokens as part of its business plan in the absence of new laws or a definitive regulatory regime (in both the U.S. and Brazil) regarding the use and transferability of AirTokens (and other similar tokens issued on the Ethereum block chain that are classified as securities). Current laws and regulatory regimes do not provide for the Company to utilize the AirTokens as envisioned by the Company since AirTokens are no longer freely transferable and the previous market for AirTokens no longer exists. AirTokens were never fully developed and never gained full functionality. As previously stated, AirTokens are not currently freely transferable, and no market exists for AirTokens.
F-9 |
As a result of the Company discontinuing the development of AirTokens, AirTokens will lose their functionality in full, and it is likely that no market for AirTokens will ever be re-created and that AirTokens will not again ever be freely transferable.
Since the Company is no longer continuing with the AirToken project, the Company should not recognize any revenue related to the research and development of the AirToken project, and the deferred revenue is no longer appropriate to be recorded on the balance sheet. The liability - AirToken Project, of approximately $12.5 million was extinguished and charged to Other Income in the Consolidated Statements of Comprehensive Loss.
Currently, the Company's main functions and activities comprise of supporting banQi’s operation in Brazil, including assisting banQi with the management of the digital wallet application and the financial services provided to those without bank accounts or credit cards. Primarily due to the cancellation of the AirToken project and since the main features of the Company’s software and technology platform have been developed and funded to be applied in the Brazilian market (as per the Services Agreement and the Call Option Agreement), the Company's main functions and activities relating to the development and management of a software technology platform consisting of a digital wallet application and an alternative credit scoring and lending application have substantially migrated to the banQi entity in Brazil.
In connection with the above strategy, the Company is transferring contracts with some suppliers to Brazil and reducing its activities in the US.
Note 2 – Financial Condition and Management’s Plans
The Company has experienced recurring losses and negative cash flows from operations. At September 30, 2021, the Company had cash and cash equivalents of $0.5 million, a working capital deficit of $4.6 million, and total member's deficit of $4.0 million.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business.
The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, the Company will have sufficient funds to generate positive operating results. The financial statements do not include any adjustments related to this uncertainty and as to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
In the event the Company is unable to raise additional debt or equity financing, it may:
1. | Have to cease operations, in which case the Company may file a petition for bankruptcy in U.S. Bankruptcy Court under Chapter 7, whereby a trustee will be appointed to sell off the Company’s assets, and the money will be used to pay off the Company’s debts in order of their priority. Or |
2. | File a petition for bankruptcy in U.S. Bankruptcy Court under Chapter 11 to restructure the Company’s debt. |
COVID-19 Risks, Impacts and Uncertainties
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 Outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 Outbreak as a pandemic, based on the rapid increase in exposure globally. The Commonwealth’s “Reopening Massachusetts” process is underway. The Company is subject to the risks arising from the COVID-19 Outbreak’s social and economic impacts.
F-10 |
The Company’s management believes that the social and economic impacts, which include but are not limited to the following, could have a significant impact on future financial condition, liquidity, and results of operations: (i) the duration and scope of the pandemic; (ii) governmental, business and individual actions that have been and continue to be taken in response to the pandemic, including travel restrictions, quarantines, social distancing, work-from-home and shelter-in-place orders and shut-downs; (iii) the impact on U.S. and global economies and the timing and rate of economic recovery; (iv) potential adverse effects on the financial markets and access to capital; (v) potential goodwill or other impairment charges; (vi) increased cybersecurity risks as a result of pervasive remote working conditions; and (vii) the Company’s ability to effectively carry out its operations due to any adverse impacts on the health and safety of the Company’s employees and their families.
In response to the COVID-19 Outbreak, the Company’s employees have been required to work from home. The significant increase in remote working, particularly for an extended period of time, has been exacerbating certain risks to the Company’s business, including an increased risk of cybersecurity events and improper dissemination of personal or confidential information.
Note 3 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) as determined by Financial Accounting Standards Board (the “FASB”) within its Accounting Standards Codification (“ASC”) and under the rules and regulations of the United States Securities and Exchange Commission (“SEC”).
The Company has elected not to apply pushdown accounting to the accompanying standalone condensed consolidated financial statements in accordance with ASC 805 Business Combinations ("ASC 805").
The Company is an emerging growth company as the term is used in The Jumpstart Our Business Startups Act, enacted on April 5, 2012 and has elected to comply with certain reduced public company reporting requirements, however, the Company may adopt accounting standards based on the effective dates for public entities.
As of June 14, 2021, the operations of banQi were deconsolidated from the Company, as the Company no longer had a controlling interest in banQi. The Company accounted for the loss in controlling interest as discontinued operations in banQi in accordance with Accounting Standards Codification, ASC 205, Discontinued Operations and Accounting Standards Update, ASU, No. 2014-08, Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASC 205 requires that a component of an entity that has been disposed of or is classified as held for sale and has operations and cash flows that can be clearly distinguished from the rest of the entity be reported as assets held for sale and discontinued operations. In the year a component of an entity has been disposed of or classified as held for sale, the results of operations for the years presented are reclassified into separate line items, net of tax, in the consolidated statements of comprehensive loss. Assets and liabilities are also reclassified into separate line items on the related consolidated balance sheets for the periods presented. The statements of cash flows for the years presented are also reclassified to reflect the results of discontinued operations as separate line items. ASU 2014-08 requires that only a disposal of a component of an entity, or a group of components of an entity, that represents a strategic shift that has, or will have, a major effect on the reporting entity’s operations and financial results be reported in the financial statements as discontinued operations. ASU 2014-08 also provides guidance on the financial statement presentations and disclosures of discontinued operations.
Due to the deconsolidation of banQi during the third quarter of fiscal 2021, in accordance with ASC 205, Discontinued Operations, the Company has classified the results of banQi as discontinued operations in our consolidated statements of operations and cash flows for all years presented. All assets and liabilities associated with banQi were therefore classified as assets and liabilities of discontinued operations in our condensed consolidated balance sheets for the years presented. All amounts included in the notes to the consolidated financial statements relate to continuing operations unless otherwise noted. For additional information, see Note 4, Discontinued Operations.
Principles of Consolidation
Prior to June 14, 2021 the Company had a controlling interest in banQi and, prior to April 6, 2020, had a 100% interest in AirToken GmbH; accordingly, the Company consolidated these entities and records non-controlling interests to reflect the economic interest of the non-controlling equity holders. On April 6, 2020, Airtoken GmbH was dissolved.
F-11 |
On June 14, 2021, the Company’s ownership of banQi was reduced from 99.99% to 1.43% and thus the Company effectively lost a controlling interest over banQi. The net assets of banQi were deconsolidated from the condensed consolidated financial statements on that date, and the Company's current 1.43% interest in banQi is recorded as an investment under the cost method on the Company’s condensed consolidated balance sheets.
The change in ownership represents a transfer of net assets between entities under common control, because all entities are owned by the same common parent entity, Lake Niassa, and thus the gain on deconsolidation of banQi was recorded against accumulated deficit The Company will also record a cost method investment in banQi for their respective investment in the entity, and any previously recorded non-controlling interest will be removed from the balance sheet.
All intercompany transactions have been eliminated in consolidation. The Company is not involved with variable interest entities.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates. The most significant accounting estimates inherent in the preparation of the Company's financial statements includes, but not limited to, estimated lives of intangible assets, intangible asset impairment, revenue recognition and deferred tax valuation allowance.
Foreign Currency
The Company had operations in Brazil until June 14, 2021, where the local currency is used to prepare the financial statements which are translated into the Company’s reporting currency, U.S. dollars. The local currency is the functional currency for the operations outside the United States. Changes in the exchange rates between this currency and the Company’s reporting currency, are partially responsible for some of the periodic changes in the condensed consolidated financial statements prior to June 14, 2021. Assets and liabilities of the Company’s foreign operations until June 14, 2021 are translated into U.S. dollars at the spot rate in effect at the applicable reporting date. Revenues and expenses of the Company’s foreign operations are translated at the average exchange rate during the applicable period. The resulting unrealized cumulative translation adjustment is recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized and unrealized transaction gains and losses generated by transactions denominated in a currency different from the functional currency of the applicable entity are recorded in other income (loss) in the period in which they occur. Upon deconsolidation, the balance was eliminated against the member’s deficit.
Revenue Recognition
The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of this standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
ASC 606 prescribes a 5-step process to achieve its core principle:
Step 1: | Identify the contract with the customer | |
Step 2: | Identify the performance obligations in the contract | |
Step 3: | Determine the transaction price | |
Step 4: | Allocate the transaction price to the performance obligations in the contract | |
Step 5: | Recognize revenue when the Company satisfies a performance obligation |
AirToken Project Development Services (Non ASC 606 Revenue)
The Company determined that its token issuances represented obligations to perform software development services and accounts for the proceeds received in the token issuances in accordance with ASC 730-20, Research and Development – Research and Development Arrangements (“ASC 730-20”). At the time of, and in conjunction with the token issuances, the Company’s obligation was to develop a live, operational, de-centralized network with token functionality including, at a minimum, features including a digital wallet, credit scoring and peer-to-peer networking (collectively, the “AirToken Project”). Due to the significant hurdles in developing the AirToken Project, technological feasibility had not been established at the time of the token issuances and, therefore, all of the Company’s development costs were expensed.
F-12 |
The Company, beginning in August 2017 through early October 2017, obtained Ether and Bitcoin totaling approximately $15.3 million (and cash of $0.1 million) towards the development of the AirToken Project. Pursuant to the terms of the AirTokens, there is no form of partnership, joint venture, agency or any similar relationship between a holder of an AirToken and the Company and/or other individuals or entities involved with the AirToken Project. AirTokens are non-refundable and do not pay interest and have no maturity date. AirTokens confer only the right to services in the AirToken Project and confer no other rights of any form with respect to the Company, including, but not limited to, any voting, distribution, redemption, liquidation, proprietary (including all forms of intellectual property), or other financial or legal rights. Subsequent to the distribution of AirTokens to those parties who contributed towards the funding of the AirToken Project, no AirTokens were sold by the Company.
Pursuant to the Settlement Agreement (as defined and described further in Note 16), the Company was obligated to refund amounts raised for the purpose of developing the AirToken Project if valid claims were submitted.
On or before December 28, 2019, the Company paid all approved claims to approved claimants who returned their AirTokens to the Company (approximately 93.5% of the total dollar amount of all approved claim refunds). All amounts were refunded in cash and paid through the Company’s existing cash and cash equivalent reserves. The total claim amounts including interest, totaled $3.3 million on December 28, 2019. Certain approved claimants did not return their AirTokens to the Company. The Company did not pay approved claims to approved claimants who did not return their AirTokens to the Company. As of September 30, 2021, the amount that was not paid to claimants who had valid claims but failed to return their AirTokens was approximately $0.1 million.
Effective October 1, 2019, the Company was not able to estimate a date to conclude the development of the AirToken Project due to regulatory matters that affect the continuity of the development process. Due to this reason, the AirToken Project was on hold and no revenue has been recognized from the AirToken Project.
On June 30, 2021, Lake Niassa determined to discontinue the development of AirTokens and end the AirToken project related to the Company’s business. At this time, the Company does not have the ability to further develop AirTokens as part of its business plan in the absence of new laws or a definitive regulatory regime (in both the U.S. and Brazil) regarding the use and transferability of AirTokens (and other similar tokens issued on the Ethereum block chain that are classified as securities). Current laws and regulatory regimes do not provide for the Company to utilize the AirTokens as envisioned by the Company since AirTokens are no longer freely transferable and the previous market for AirTokens no longer exists. AirTokens were never fully developed and never gained full functionality. As previously stated, AirTokens are not currently freely transferable and no market exists for AirTokens. As a result of the discontinuation of the development of AirTokens, AirTokens will lose their functionality in full, and it is likely that no market for AirTokens will ever be re-created and that AirTokens will not again ever be freely transferable.
Since the Company is no longer continuing with the AirToken project, the Company has not recognized any revenue related to the research and development of the AirToken project, and the deferred revenue is no longer appropriate to be recorded on the balance sheet. The liability, Deferred revenue - AirToken Project, of approximately $12.5 million are extinguished and charged to Other Income in the Condensed Consolidated Statements of Comprehensive Loss.
Mastercard Revenue and Sale Incentives (ASC 606 Revenue)
On December 16, 2019, banQi, received R$65 million (approximately U.S. $16 million in December 2019) from Mastercard Brasil Soluções de Pagamento Digital Ltda. (“Mastercard Brasil”) pursuant to a Strategic Alliance and Incentive Program Agreement (the “Program Agreement”) entered into between banQi, Mastercard Brasil and Via Varejo S.A. (“Via Varejo”) on June 12, 2019 (See Note 5).
Pursuant to the Program Agreement, banQi, as a licensee of MasterCard International, Inc. and a business partner of Mastercard Brasil, entered into the Incentive Program (as defined in the Program Agreement) in order to issue, expand and boost the prepaid card (“Pre-paid Card”) base of banQi, as well as the number of transactions and turnover (sales revenue) generated by MasterCard Cards.
As a Mastercard prepaid card issuer, banQi is entitled to receive Sales Revenue Incentives pursuant to the Program Agreement. As a result, the Sales Revenue Incentives is used to amortize the Sales Revenue Incentive Prepayment received on December 11, 2019. Upon complete amortization of Incentive Prepayment, Mastercard makes quarterly payments of the Sales Revenue Incentive, calculated according to the value of transactions completed with the prepaid cards issued by the banQi. banQi have no minimum commitment of transaction volumes to be completed with the prepaid cards.
F-13 |
The revenue from the Program Agreement was recognized until June 14, 2021, the date on which the Company no longer had a controlling interest over banQi, thus no additional revenue was recognized from that date through September 30, 2021.
The Company recognizes the revenue as earned on a monthly basis, based on a fixed percentage of the total dollar value of card transactions completed during the month in accordance with the terms in the agreement. The Company has identified one performance obligation that meets the series provision and recognizes revenue over time. The Company Sales incentives totaling $343 thousand and $10 thousand have been earned for the years ended September 30, 2021 and September 30, 2020, respectively, and $3,085 and $6,802 has been earned for the years ended September 30, 2021 and September 30, 2020, respectively, and meets the guidance to be classified as a series.
In connection to the Program Agreement, the Company also entered into an agreement with Mastercard, an Interchange Manual (“Interchange Fee Agreement”) from Mastercard dated June 18, 2019, which details the fees paid by a merchant’s bank to banQi to compensate for the value and benefits that merchant receives when it accepts electronic payments.
The fee is a specified percentage of the total dollar amount of a card transaction, and a fixed percentage based on the type of card transaction (i.e. merchant type, national vs. international, etc.), based on the schedule of fees outlined in the Interchange Fee Agreement (“Interchange Fee Revenue”).
On a monthly basis, the Company earns revenue from the Interchange Fee received. The Company has identified one performance obligation that meets the series provision and recognizes revenue over time. Interchange Fee Revenue totaling $94 thousand and $3,085 has been earned for the years ended September 30, 2021 and September 30, 2020, respectively, and meets the guidance to be classified as a series. The revenue from the Interchange Fee Revenue was recognized until June 14, 2021, the date on which the Company no longer had a controlling interest over banQi, thus no additional revenue was recognized from that date through September 30, 2021.
Via Varejo Services Agreement Revenue (ASC 606 Revenue)
The Company entered into a Services Agreement (the “Services Agreement”) as of September 11, 2018 (“the Agreement Effective Date”) with Via Varejo (the “Client”).
The Company was engaged to design and develop a mobile software module and application programming interface that provides the Client’s customers with access to certain mobile payment functionality, and that integrates banQi (“VV Wallet Services”). The Company provided certain services, including hosting, maintenance and operation of banQi, The VV Wallet Services were structured into four phases. The Phases are - Phase 1: Specifications and Customization; Phase 2: Features; Phase 3: License and Maintenance Services and Phase 4: Rollout.
The development of the VV Wallet Services was considered a bundled performance obligation that included the development of the API and software as a service which is hosted on the Company’s servers. In addition to the software as a service performance obligation, the Company provided support services for the software as a service. The Client was considered to simultaneously receive and consume the benefits provided by the Company’s performance as the Company performed the services. Accordingly, the revenue from Service Charges was recognized over time based on the number of transactions made by Client customers with banQi.
During Phase 1, there was a payment of $0.3 million (“Upfront Payment”) from the Client to be recognized as revenue commencing when the product was ready for its intended use and ratably over the remaining term of the Services Agreement through the duration of the Services Agreement. The total revenue recognized for the years ended September 30, 2021 and September 30, 2020 totaled $202 thousand and $24.9 thousand, respectively. The revenue from the Upfront Payment was recognized through June 14, 2021, the date on which the Company no longer had a controlling interest over banQi, thus no additional revenue was recognized from that date through September 30, 2021.
F-14 |
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks and money market instruments.
Accounts Receivable and Allowance for Doubtful Accounts
As of September 30, 2021, there was a minimal amount of accounts receivable as the Company no longer consolidates the operations of banQi.
Concentrations of Credit Risk and Off-Balance Sheet Risk
The Company is subject to concentration of credit risk with respect to their cash and cash equivalents, which the Company attempts to minimize by maintaining cash and cash equivalents with institutions of sound financial quality. At times, cash balances may exceed limits federally insured by the Federal Deposit Insurance Corporation. The Company had cash and cash equivalents, including amounts held in financial institutions in the USA that totaled $498 thousand.
The Company believes it is not exposed to significant credit risk due to the financial strength of the depository institutions in which the funds are held. The Company has no financial instruments with off-balance sheet risk of loss.
Long-Lived Assets, Including Definite Intangible Assets
Long-lived assets and other indefinite-lived intangibles are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. The Company’s definite-lived intangible assets primarily consisted of various domain names and websites. For long-lived assets used in operations, impairment losses was only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. The Company measures the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value.
Security Deposits
Security deposits primarily include monies being held subject to a security agreement (“Security Agreement”) with Mastercard, Inc. executed on June 7, 2019. The Security Agreement is related to the Services Agreement to ensure a minimum amount of users for the cards. On April 22, 2020 Mastercard returned $1.2 million plus interest in cash deposit to the Company. Upon Mastercard issuing the minimum number of cards to users, the $0.3 million was paid back to the Company in November 2021. The Company has classified this amount as non-current assets as these funds are not highly liquid and cannot be easily converted into cash.
Included in the security deposits balance as of September 30, 2021 are $281 thousand associated with the VV Wallet, which is being operated by banQi in Brazil. Airfox has entered into discussions with Mastercard and banQi to transfer this asset to banQi. The companies worked out the final details until November 2021, after the Airfox's September 30, 2021 year-end.
Investment in related affiliate
After the deconsolidation of banQi, the Company's remaining investment in banQi of $252 thousand is recorded on the cost method, since the Company no longer has control of banQi and has an ownership percentage of 1.43% as of September 30, 2021.
Due to Related Party
Amounts due to banQi as of September 30, 2021 are $5 million and have been calculated based on the loan agreements between the companies. The loan must be refunded for its amount in Brazilian currency (Real) until April, 2025, by a single payment (principal plus accrued interest) or by advance payments. The current interest rate determined in the agreements is 1.0% per year and, as the debt amount is in Brazilian currency, the effect of exchange variation is also considered, totaling $572 thousand, for the years ended September 30, 2021.
F-15 |
Software Development Costs
The Company capitalizes costs related to software developed or obtained for internal use in accordance with the ASC 350-40, Internal-Use Software (“ASC 350-40”). The following illustrates the various stages and related processes of computer software development in accordance with ASC 350-40:
·
● | Preliminary project stage: (a) conceptual formulation of alternatives; (b) evaluation of alternatives; (c) determination of existence of needed technology; and (d) final selection of alternatives. Internal and external costs incurred during the preliminary project stage are expensed as incurred. |
● | Application development stage: (a) design of chosen path, including software configuration and software interfaces; (b) coding; (c) installation to hardware; and (d) testing, including parallel processing phase. Internal and external costs incurred to develop internal-use computer software during the application development stage are capitalized. |
● | Post-implementation-operation stage: (a) training; and (b) application maintenance. Internal and external costs incurred during the post-implementation-operation stage are expensed as incurred. |
Certain costs incurred are considered enhancements, modifications to existing internal-use software that result in additional functionality. Enhancements normally require new software specifications and may also require a change to all or part of the existing software specifications. When this additional functionality is determinable, the related costs are capitalized. Otherwise, costs are expensed as incurred. Capitalization of internal-use software costs ceases when a computer software project is substantially complete and ready for its intended use. The Company begins amortization when the product is available for general release or use.
The Company has capitalized software costs relating to the Via Varejo Services Agreement and began amortization on January 1, 2020 as the product was ready for its intended use and has been amortized through the contract term until September 2023. The amortization expense related to the Via Varejo Services Agreement capitalized software for the years ended September 30, 2021 and September 30, 2020 totaled $0.4 million and $1.4 million, respectively.
The Company capitalized costs related to the development and maintenance of its website in accordance with ASC 350-50, Website Development Costs. Accordingly, costs expensed as incurred include planning the website, developing the applications and infrastructure until technological feasibility is established and operating the site such as training administration and maintenance.
Effective June 14, 2021, Airfox ceased recognizing amortization expense on these capitalized software costs and the expense the remaining balance.
Capitalizing Software Costs in Connection with Hosting Arrangements and Software as a Service Arrangements
For the operation in Brazil at banQi, the Company developed certain software that are considered to be part of cloud computing arrangement (or hosting arrangement), whereby, a user or a customer of software does not take possession of the Company’s software; rather, the software is accessed on an as-needed basis over the Internet.
Therefore, when the software is used to produce a product or in a process to provide a service to a customer, and the customer is not given the right to obtain or use the software, the related costs are accounted for in accordance with ASC 350-40. When a hosting arrangement includes multiple modules or components, capitalized costs are amortized on a module-by-module basis. When a module or component is substantially ready for its intended use, amortization begins, regardless of whether the overall hosting arrangement is being placed in service in planned stages. If the module’s functionality is entirely dependent on the completion of one or more other modules, then amortization does not begin until that group of interdependent modules is substantially ready for use.
Impairment of Long-term Assets
The Company evaluates the recoverability of tangible and intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.
F-16 |
Leases
The Company categorizes leases at their inception as either operating or finance leases based on the criteria in ASC 842, Leases (“ASC 842”). The Company adopted ASC 842 on October 1, 2019, using the modified retrospective approach, and has established a Right-of-Use (“ROU”) Asset and a current and non-current Lease Liability for each lease arrangement identified. The lease liability is recorded at the present value of future lease payments discounted using the discount rate that approximates the Company’s incremental borrowing rate for the lease established at the commencement date, and the ROU asset is measured as the lease liability plus any initial direct costs, less any lease incentives received before commencement. The Company recognizes a single lease cost, so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis.
Advertising
Advertising costs are expensed as incurred and included in selling, general and administrative expenses and amounted to $29 thousand and $175 thousand for the years ended September 30, 2021 and 2020, respectively.
Income Taxes
Income taxes are recorded in accordance with ASC 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. The Company recognizes any interest and penalties accrued related to unrecognized tax benefits as income tax expense.
Gain on issuance of AirTokens for services
AirTokens issued to vendors for services in connection with raising monies for the purpose of developing the AirToken Project were accounted for in accordance with ASC 845-30-1, Nonmonetary Transactions, which requires that the AirTokens to be recognized at fair value and resulted in recognizing a deferred gain of approximately $1.7 million in October 2017. The fair value of the AirTokens issued was based on the last price paid ($0.02) by initial investors in acquiring.
On June 30, 2021, Lake Niassa determined to discontinue the development of AirTokens and end the AirToken project related to the Company’s business. At this time, the Company does not have the ability to further develop AirTokens as part of its business plan in the absence of new laws or a definitive regulatory regime (in both the U.S. and Brazil) regarding the use and transferability of AirTokens (and other similar tokens issued on the Ethereum block chain that are classified as securities). Current laws and regulatory regimes do not provide for the Company to utilize the AirTokens as envisioned by the Company since AirTokens are no longer freely transferable and the previous market for AirTokens no longer exists. AirTokens were never fully developed and never gained full functionality. As previously stated, AirTokens are not currently freely transferable, and no market exists for AirTokens. As a result of the Company discontinuing the development of AirTokens, AirTokens will lose their functionality in full, and it is likely that no market for AirTokens will ever be re-created and that AirTokens will not again ever be freely transferable.
Since the Company is no longer continuing with the AirToken project, the Company should not recognize any revenue related to the research and development of the AirToken project, and the deferred revenue is no longer appropriate to be recorded on the balance sheet. The liability, Deferred revenue - AirToken Project, of approximately $13 million, as of June 30, 2021, was extinguished and charged to Other Income in the Condensed Consolidated Statements of Comprehensive Loss.
F-17 |
Distinguishing Liabilities from Equity
The Company relies on the guidance provided by ASC 480, Distinguishing Liabilities from Equity, to classify certain redeemable and/or convertible instruments. The Company first determines whether a financial instrument should be classified as a liability. The Company will determine the liability classification if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional obligation that the Company must or may settle by issuing a variable number of its equity shares.
Once the Company determines that a financial instrument should not be classified as a liability, the Company determines whether the financial instrument should be presented between the liability section and the equity section of the balance sheet. The Company will determine temporary equity classification if the redemption of the financial instrument is outside the control of the Company (i.e., at the option of the holder). Otherwise, the Company accounts for the financial instrument as permanent equity.
The Company records its financial instruments classified as liability, temporary equity or permanent equity at issuance at the fair value, or cash received.
The Company records its financial instruments classified as liabilities at their fair value at each subsequent measurement date. The changes in fair value of these financial instruments are recorded as other expense/income.
Hedging
The Company does not use derivative instruments to hedge exposures to cash flows, market or foreign currency risks. The Company evaluates its financial instruments, including equity-linked financial instruments, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives.
The Company accounts for stock-based compensation to employees and non-employees in conformity with the provisions of ASC 718, Compensation - Stock Based Compensation. The Company expenses stock-based compensation to employees and non-employees over the requisite service period based on the estimated grant-date fair value of the awards. The Company accounts for forfeitures as they occur. Stock-based awards are recognized on a straight-line basis over the requisite service period. For stock-based employee compensation cost recognized at any date will be at least equal to the amount attributable to share-based compensation that is vested at that date. The Company estimates the fair value of stock option grants using the Black-Scholes option-pricing model and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.
Common shares issued to third parties for services provided are valued based on the estimated fair value of the Company’s common shares.
All stock-based compensation costs are recorded in selling, general and administrative expenses in the consolidated statements of operations. All stock-based compensation awards were cancelled pursuant to the Transactions which occurred on May 21, 2020.
In August 2020, the Company established the Share Based Payment Program with Cash Settlement - Phantom Shares of Via Varejo S.A. (the "Plan"). Pursuant to the Plan, the Company's Board of Directors may grant cash-settled shares, referred to as "Phantom Shares," to the Company's employees as part of the employees' remuneration package. Each Phantom Share will represent the employee's right to receive the full amount corresponding to the average quotation of 3 (three) common shares of Via Varejo S.A. in the 20 (twenty) trading sessions at B3 - Brazil, Bolsa, Balcão immediately prior to vesting, as established in the Plan. The Phantom Shares vest over a service period of five years.
As of June 14, 2021, there is no liability reported related to the Phantom Shares due the deconsolidation of banQi. No Phantom Shares have vested as of September 30, 2021.
F-18 |
Fair Value Measurement
The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable and short and long-term debt. The fair values of cash and cash equivalents, accounts receivable, and accounts payable approximate their stated amounts because of the short maturity of these financial instruments.
The valuation hierarchy is composed of three levels. The classification within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels within the valuation hierarchy under ASC 820 are described below:
Level 1 — | Assets and liabilities with unadjusted, quoted prices listed on active market exchanges. Inputs to the fair value measurement are observable inputs, such as quoted prices in active markets for identical assets or liabilities. | |
Level 2 — | Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with similar underlying terms, as well as direct or indirect observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals. | |
Level 3 — | Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions, and valuation techniques when little or no market data exists for the assets or liabilities. |
Adoption of Recent Accounting Pronouncements
In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02 (“ASU 2016-02”), which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Targeted Improvements; and ASU No. 2018-20, Narrow-Scope Improvements for Lessors. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The Company adopted ASU 2016-02 effective October 1, 2019 using the modified retrospective approach whereby the Company will continue to present prior period financial statements and disclosures under ASC 840. In addition, the Company elected the transition package of three practical expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification and initial direct costs. Further, the Company adopted a short-term lease exception policy, permitting the Company to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets.
Adoption of the new standard resulted in the recording of right-of-use assets and lease liabilities related to the Company’s operating leases, totaling $2.3 and $2.4 million, respectively, recorded on the Company’s consolidated balance sheet as of October 1, 2019. The standard did not materially affect the Company's consolidated net earnings or cash flows.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends disclosure requirements on fair value measurements in Topic 820. This amendment modifies the valuation process of fair value measurements by removing the disclosure requirements for the valuation processes for Level 3 fair value measurements, clarifying the timing of the measurement uncertainty disclosure, and including the changes in unrealized gains and losses for recurring Level 3 fair value measurements in other comprehensive income if held at the end of the reporting period. It also allows the disclosure of other quantitative information in lieu of the weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 and should be applied prospectively for the most recent period presented in the initial fiscal year of adoption. The Company adopted ASU 2018-13 effective October 1, 2020 and there was no material impact on the Company's results of operations, financial position and cash flows.
In August 2018, the FASB issued ASU 2018-15, Intangibles, Goodwill and Other (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (“ASU 2018-15”), which requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance in ASC 350-40. The new standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted ASU 2018-15 effective October 1, 2020 and there was no material impact on the Company's results of operations, financial position and cash flows.
F-19 |
Recent Accounting Pronouncements
The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company's financial reporting, the Company undertakes a study to determine the consequences of the change to its condensed consolidated financial statements and assures that there are proper controls in place to ascertain that the Company's condensed consolidated financial statements properly reflect the change.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, that changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for losses. In addition, an entity will have to disclose significantly more information about allowances and credit quality indicators. The new standard is effective for the Company for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of the pending adoption of the new standard on its condensed consolidated financial statements and intends to adopt the standard on October 1, 2023.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which modifies ASC 740 to reduce complexity while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 2019-12 is effective for the Company for interim and annual reporting periods beginning after December 15, 2021. The Company is currently assessing the impact of ASU 2019-12, but it is not expected to have a material impact on the Company’s condensed consolidated financial statement.
In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies an issuer’s accounting for convertible instruments by reducing the number of accounting models that require separate accounting for embedded conversion features. ASU 2020-06 also simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification and makes targeted improvements to the disclosures for convertible instruments and earnings-per-share (EPS) guidance. This update will be effective for the Company’s fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Entities can elect to adopt the new guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The Company is currently evaluating the impact of the pending adoption of the new standard on its financial statements and intends to adopt the standard as of October 1, 2024.
Reclassifications
Certain reclassifications have been made to the 2020 consolidated financial statements in order to conform to the 2021 financial statement presentation.
Note 4 – Discontinued Operations
The Company has determined the loss of a controlling interest and deconsolidation of the operations of banQi as of June 14, 2021 represents a strategic shift that will have a major effect on the business and therefore meets the criteria for classification as discontinued operations at September 30, 2021 and prior periods presented in the consolidated financial statements. Accordingly, the assets and liabilities associated with the operations of banQi have been classified as discontinued operations in the accompanying consolidated balance sheets, consolidated statements of comprehensive loss, and consolidated cash flows for all years presented.
F-20 |
The assets and liabilities that were included in the June 14, 2021 deconsolidation of banQi consist of the following:
Schedule of discontinued operations | ||||
BALANCE SHEET | As of June 14, 2021 | |||
Cash and cash equivalents | $ | 6,110,979 | ||
Restricted cash | 209,044 | |||
Accounts receivable, net | 1,279,169 | |||
Prepaid expenses and other current assets | 369,445 | |||
Intangibles, net | 855,156 | |||
Property and equipment, net | 148,922 | |||
Security deposits | 9,051 | |||
Due from affiliates | 5,431,853 | |||
Accrued liabilities | 8,789,203 | |||
Other deferred revenue, current portion | 51,877 | |||
Due to related party | 12,676,882 | |||
Deferred revenue - Mastercard Program Agreement | 13,081,493 | |||
Other deferred revenue, net of current portion | 69,168 | |||
Foreign capital | 252,000 | |||
Gain from deconsolidation of banQi | $ | (20,507,004 | ) |
The results from the discontinued operations have been reflected in the Consolidated Statement of Operations and Comprehensive Loss for the year ended September 30, 2021 consist of the following:
Schedule of discontinued operations | ||||
Year Ended | ||||
September 30, 2021 | ||||
Revenue | $ | 1,065,450 | ||
Operating expenses: | ||||
Selling, general and administrative | 12,017,284 | |||
Total operating expenses | 12,017,284 | |||
Loss from operations | (10,951,835 | ) | ||
Other (expense) income: | ||||
Interest income (expense), net | 99,874 | |||
Other (expense) income, net | 99,874 | |||
Loss before income taxes | (10,851,961 | ) | ||
Net income (loss) | (10,851,961 | ) | ||
Net loss attributable to non-controlling interest | — | |||
Net loss attributable to CarrierEQ, Inc. | (10,851,961 | ) |
F-21 |
As a result of the discontinued operations, the previously presented 2020 financial statements have been revised to present the consolidated financial statements of the continuing operations separate from the discontinued operations. The effects on the Consolidated Balance Sheet as of September 30, 2020 were as follows:
Schedule of discontinued operations, previously presented | ||||||||||||
September 30, 2020 | ||||||||||||
As previously | ||||||||||||
Reported | Adjustment | As Revised | ||||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 3,272,664 | $ | 1,614,636 | $ | 1,658,028 | ||||||
Accounts receivable | 857,901 | 857,901 | — | |||||||||
Prepaid expenses and other current assets | 1,399,878 | 316,351 | 1,083,527 | |||||||||
Current assets of discontinued operations | — | (2,788,888 | ) | 2,788,888 | ||||||||
Total current assets | 5,530,443 | — | 5,530,443 | |||||||||
Non-current assets: | ||||||||||||
Intangibles, net | 4,325,105 | 33,059 | 4,292,046 | |||||||||
Property and equipment. Net | 3,790 | 3,790 | — | |||||||||
Security deposits | 338,386 | 18,278 | 320,108 | |||||||||
Lease right of use assets | 1,979,658 | — | 1,979,658 | |||||||||
Investment in related affiliate | — | — | — | |||||||||
Due from related party | 1,400,000 | — | 1,400,000 | |||||||||
Due from affiliates | — | 4,589,610 | (4,589,610 | ) | ||||||||
Other assets | 130,664 | 130,664 | — | |||||||||
Non-current assets of discontinued operations | — | (4,775,401 | ) | 4,775,401 | ||||||||
Total non-current assets | 8,177,603 | — | 8,177,603 | |||||||||
Total assets | $ | 13,708,046 | $ | — | $ | 13,708,046 | ||||||
LIABILITIES AND MEMBER'S DEFICIT | ||||||||||||
Current liabilities: | ||||||||||||
Accounts payable | 301,003 | — | 301,003 | |||||||||
Accrued liabilities | 4,261,009 | 3,111,495 | 1,149,514 | |||||||||
Other deferred revenue. current portion | 58,283 | 58,283 | — | |||||||||
AirToken refund liability | 163,561 | — | 163,561 | |||||||||
Lease liability, current portion | 393,468 | — | 393,468 | |||||||||
Due to related party | 1,572,124 | 1,572,124 | — | |||||||||
Current liabilities of discontinued operations | — | (4,741,902 | ) | 4,741,902 | ||||||||
Total current liabilities | 6,749,448 | — | 6,749,448 | |||||||||
Long-term liabilities: | ||||||||||||
Deferred revenue - Mastercard Program Agreement | 11,520,725 | 11,520,725 | — | |||||||||
Deferred gain on issuance of AirTokens for Services | 396,790 | 8,145,544 | 396,790 | |||||||||
Lease liability, net of current portion | 1,758,196 | — | 1,758,196 | |||||||||
Deferred revenue - AirToken Project | 12,529,824 | — | 12,529,824 | |||||||||
Other deferred revenue, net of current portion | 81,620 | 81,620 | — | |||||||||
Long-term liabilities of discontinued operations | — | (11,602,345 | ) | 11,602,345 | ||||||||
Total liabilities | $ | 33,036,603 | $ | — | $ | 33,036,603 | ||||||
Carrier EQ, LLC member's deficit: | ||||||||||||
Member's deficit; 1,277,635 limited liability company units outstanding as of June 30, 2021 and September 30, 2020 | (20,899,904 | ) | (10,352,340 | ) | (10,547,564 | ) | ||||||
Accumulated other comprehensive income (loss) | 8,145,544 | 1,572,382 | (1,572,382 | ) | ||||||||
Accumulated other comprehensive income of discontinued operations | 1,572,382 | 8,779,958 | (7,207,576 | ) | ||||||||
Total member's deficit attributable to Carrier EQ, LLC member | (19,327,522 | ) | — | (19,327,522 | ) | |||||||
Non-controlling interest in subsidiary | (1,035 | ) | — | (1,035 | ) | |||||||
Total member's deficit | (19,328,557 | ) | — | (19,328,557 | ) | |||||||
Total liabilities and member's deficit | $ | 13,708,046 | $ | — | $ | 13,708,046 |
F-22 |
The effects on the Consolidated Statement of Comprehensive Loss for the year ended September 30, 2020 were as follows:
Year Ended September 30, 2020 | ||||||||||||
As Previously Reported | Adjusted | As Revised | ||||||||||
Revenue | $ | 246,344 | $ | (246,344 | ) | $ | — | |||||
Operating expenses: | ||||||||||||
Cost of revenue | 114,839 | (114,839 | ) | — | ||||||||
Selling, general and administrative | 23,009,101 | (8,145,544 | ) | 14,863,557 | ||||||||
Impairment of digital assets | — | — | — | |||||||||
Total operating expenses | 23,123,940 | (8,260,383 | ) | 14,863,557 | ||||||||
Loss from operations | (22,877,596 | ) | (8,014,040 | ) | (14,863,557 | ) | ||||||
Other (expense) income: | ||||||||||||
Realized loss on sale of digital assets | (1,392 | ) | — | (1,392 | ) | |||||||
Unrealized FX income | 1,221,235 | — | 1,221,235 | |||||||||
Gain on AirToken issuance for services | — | — | — | |||||||||
Interest income (expense), net | 133,350 | (188,886 | ) | (55,536 | ) | |||||||
Other (expense) income, net | 1,353,193 | (188,886 | ) | 1,164,307 | ||||||||
Income (loss) before income taxes | (21,524,403 | ) | (7,825,154 | ) | (13,699,250 | ) | ||||||
Income tax benefit | 207,410 | — | 207,410 | |||||||||
Income (loss) from Continuing Operations | ||||||||||||
Net income (loss) from discontinued operations | — | — | — | |||||||||
Net loss | (21,316,993 | ) | (7,825,154 | ) | (13,491,840 | ) | ||||||
Net loss attributable to non-controlling interest | — | — | — | |||||||||
Net loss attributable to Carrier EQ, LLC | (21,316,993 | ) | (7,825,154 | ) | (13,491,840 | ) | ||||||
Other comprehensive income | ||||||||||||
Foreign currency translation adjustment | — | — | — | |||||||||
Total comprehensive loss | $ | (13,491,840 | ) | $ | (7,825,153 | ) | $ | (13,491,480 | ) |
The depreciation, amortization and significant operating noncash items of the discontinued operations were as follows:
Year Ended September 30, 2021 | Year Ended September 30, 2020 | ||||||
Depreciation and amortization | $ | 1,213,738 | $ | 838,473 | |||
F-23 |
Note 5 – Mastercard Program Agreement
On December 16, 2019, banQi, received R$65 million (approximately $16 million in December 2019) from Mastercard Brasil pursuant to the “Program Agreement” entered into between banQi, Mastercard Brasil and Via Varejo Via Varejo on June 12, 2019.
Pursuant to the Program Agreement, banQi, as a licensee of MasterCard International, Inc. and a business partner of Mastercard Brasil, entered into the Incentive Program (as defined in the Program Agreement) in order to issue, expand and boost the prepaid card (“Pre-paid Card”) base of banQi as well as the number of transactions and turnover (sales revenue) generated by MasterCard Cards. The Program Incentives monies (as defined in the Program Agreement) cannot be used for the benefit of any product of any Mastercard competitor and/or any card brand other than the Mastercard Network. As an incentive to support the launching of Pre-paid Card, on December 16, 2019 Mastercard Brasil made to BanQi the incentive prepayment per sales revenue ("Sales Revenue Incentive Prepayment") totaling R$65 million.
As a Mastercard prepaid card issuer, banQi will be entitled to receive Sales Revenue Incentive pursuant to the Program Agreement. As a result, the Sales Revenue Incentive will be used to amortize the Sales Revenue Incentive Prepayment received on December 11, 2019. Upon complete amortization of Incentive Prepayment, Mastercard will make quarterly payments of the Sales Revenue Incentive, calculated according to the value of transactions completed with the prepaid cards issued by the banQi. banQi will have no minimum commitment of transaction volumes to be completed with the prepaid cards.
The Sales Revenue Incentive Prepayment constitutes the creation of a direct financial obligation on banQi since it constitutes prepaid sales revenue from Mastercard Brasil to banQi. Via Varejo has agreed to act as a guarantor of banQi’s Sales Revenue Incentive Prepayment obligations to Mastercard Brasil pursuant to the Program Agreement and a Guaranty Letter.
The Program Agreement has a term of ten years, unless earlier terminated by either party in accordance with specific provisions of the Program Agreement. The Program Agreement also establishes that the remaining balance of the prepaid incentive amount shall be updated every year ended at 72% of the Brazilian federal funds rate, the "SELIC" rate (or 'over Selic') as of the payment date of the incentive, which turns the incentive agreement into a financial debt instrument. If the Agreement was ever terminated, even as of the ending of the effective term of ten years or before, the Company shall make the full payment of the remaining sales incentive prepaid balance at the actual termination date.
The Company will recognize the revenue as earned on a monthly basis, based on a fixed percentage of the total dollar value of card transactions completed during the month in accordance with the terms in the agreement. Also, the company will recognize finance expenses related to the SELIC adjustment on a yearly basis, as stated by the agreement. The Company has identified one performance obligation that meets the series provision and recognizes revenue over time. The Company Sales incentives totaling $343 thousand and $429, for the years ended September 30, 2021 and September 30, 2020 respectively, and meets the guidance to be classified as a series.
Note 6 – Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
Prepaid expenses and other current assets | ||||||||
September 30, 2021 | September 30, 2020 | |||||||
Service contract | $ | — | $ | 349,000 | ||||
Research and Development tax credit | 141,200 | 496,965 | ||||||
Prepaid expense | 44,873 | 237,562 | ||||||
Total Prepaid expenses and other current assets | $ | 186,073 | $ | 1,083,527 |
F-24 |
Note 7 – Intangible Assets, Net
The following table summarizes the Company’s definite-lived intangible assets:
Intangible Assets, Net | ||||||||||||||||||||||||
September 30, 2021 | ||||||||||||||||||||||||
Estimated Useful Life (Years) | Gross Carrying Amount | Additions | Impairment / banQi deconsolidation | Accumulated Amortization | Net Carrying Value | |||||||||||||||||||
Domain names | 3 | $ | 140,012 | $ | — | (16,338 | ) | $ | (123,674 | ) | $ | — | ||||||||||||
Capitalized software costs towards VV Wallet | 3 | 4,855,125 | 1,012,937 | (4,031,860 | ) | (1,836,202 | ) | — | ||||||||||||||||
Website | 3 | 282,645 | — | (43,867 | ) | (220,893 | ) | — | ||||||||||||||||
Software | 3 | 42,123 | — | (42,123) | — | — | ||||||||||||||||||
$ | 5,319,905 | $ | 1,012,937 | (4,134,188 | ) | $ | (2,198,654 | ) | $ | — |
September 30, 2020 | ||||||||||||||||||||||||
Estimated Useful Life (Years) | Gross Carrying Amount | Additions | BanQi deconsolidation | Accumulated Amortization | Net Carrying Value | |||||||||||||||||||
Domain names | 3 | $ | 140,012 | $ | — | — | $ | (98,137 | ) | $ | 41,875 | |||||||||||||
Capitalized software costs towards VV Wallet | 3 | 1,500,058 | 3,355,067 | (33,059) | (702,477 | ) | 4,119,589 | |||||||||||||||||
Website | 3 | 272,083 | 10,562 | — | (185,122 | ) | 97,523 | |||||||||||||||||
Software | 3 | 17,486 | 24,637 | — | (9,064) | 33,059 | ||||||||||||||||||
$ | 1,929,639 | $ | 3,390,266 | (33,059 | ) | $ | (994,800 | ) | $ | 4,292,046 |
The Company uses the straight-line method to determine the amortization expense for its definite-lived intangible assets. The amortization expense related to the definite-lived intangible assets was $1.2 million and $1.0 million for years ended September 30, 2021 and 2020.
Note 8 – Accrued liabilities
Accrued liabilities consisted of the following:
Accrued liabilities | ||||||||
September 30, 2021 | September 30, 2020 | |||||||
Customer deposits | $ | — | $ | — | ||||
Accrued compensation | 219,752 | 779,114 | ||||||
Other accrued liabilities | — | 183 | ||||||
Accrued accounts payable | — | 196,609 | ||||||
Credit card payable | 16,506 | 26,261 | ||||||
Legal and professional | — | 130,347 | ||||||
Total accrued liabilities | $ | 236,258 | $ | 1,149,514 | ||||
F-25 |
Note 9 – Debt
Note Payable – Paycheck Protection Program Loan
On April 21, 2020, the Company received $0.5 million in loan funding from the Paycheck Protection Program (the “PPP”), established pursuant to the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and administered by the U.S. Small Business Administration (“SBA”). The unsecured loan (the “PPP Loan”) is evidenced by a promissory note of the Company dated April 21, 2020 (the “Note”) in the principal amount of $0.5 million, to Silicon Valley Bank (the “Bank”), the lender.
Under the terms of the Note and the PPP Loan, interest accrues on the outstanding principal at the rate of 1.0% per annum. The term of the Note is two 2 years, though it may be payable sooner in connection with an event of default under the Note. To the extent the loan amount is not forgiven under the PPP, the Company is obligated to make equal monthly payments of principal and interest, beginning seven months from the date of the Note, until the maturity date.
The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, the Company may apply for and be granted forgiveness for all or part of the PPP Loan. The amount of loan proceeds eligible for forgiveness is based on a formula that takes into account a number of factors, including the amount of loan proceeds used by the Company during the eight-week period after the loan origination for certain purposes including payroll costs, rent payments on certain leases, and certain qualified utility payments, provided that at least 75% of the loan amount is used for eligible payroll costs; the employer maintaining or rehiring employees and maintaining salaries at certain levels; and other factors. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible costs during the covered eight-week period will qualify for forgiveness. The Company intends to use the entire Loan amount for qualifying expense, though no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part.
The Note may be prepaid in part or in full, at any time, without penalty. The Note provides for certain customary events of default, including, but not limited to, failing to make a payment when due under the Note, failure to do anything required by the Note, the Company defaulting under certain agreements in favor of any third party, making false statements, the Company’s insolvency, and the commencement of creditor or forfeiture proceedings against the Company. Upon the occurrence of an event of default, the Bank has customary remedies and may, among other things, require immediate payment of all amounts owed under the Note, collect all amounts owing from the Company, and file suit and obtain judgment against the Company.
On May 21, 2020, the PPP loan of $0.5 million plus interest of $433 was paid back in full by the Company.
Note 10 – Via Varejo Services Agreement and Convertible Notes
Services Agreement
The Company entered into a Services Agreement (the “Services Agreement”) as of September 11, 2018 (“the Agreement Effective Date”) with Via Varejo S.A., a corporation organized under the laws of the Federative Republic of Brazil (the “Client”) and those stockholders of the Company that have signed the Call Option Agreement (defined below) as well as any stockholder of the Company who signs a joinder to the Services Agreement after September 11, 2018 (the “Stockholders”). Concurrently, the Client and the Company have entered into a convertible note purchase and call option agreement (the “Call Option Agreement”) The Client has the irrevocable option to acquire shares of the Company’s capital stock owned by certain stockholders and convert notes issued, in connection with the Call Option Agreement, into shares of the Company’s capital stock representing, in the aggregate, up to eighty percent (80%) of the Company’s common stock (the “Call Option”). The Company may issue up to $10 million in convertible notes for cash dependent on the completion of designated phases outlined in the Services Agreement.
The Client has engaged the Company to design and develop a mobile software module and application programming interface that will provide Client customers with access to certain mobile payment functionality, and that integrates banQi (“VV Wallet Services”). In conjunction with the Services Agreement, the Company will provide certain services, including hosting, maintenance and operation of banQi (the “VV Ongoing Services”). The VV Wallet Services are structured into four phases. The Phases are - Phase 1: Specifications and Customization; Phase 2: Features; Phase 3: License and Maintenance Services and Phase 4: Rollout.
F-26 |
The Client will make the following payments to the Company:
· | $0.3 million, non-refundable, to be paid within thirty days of the date of the Services Agreement. This payment was received on December 14, 2018, and the Company has recognized $37 thousand and $0 of the revenue for the years ended September 30, 2020 and 2019, respectively. |
· | $2.5 million, to be paid upon completion of Phase 1, in exchange for a convertible note in the same amount to be issued by the Company. This payment was received on February 14, 2019 and the Company issued a Convertible Note (defined below). |
· | $3.5 million, to be paid upon completion of Phase 2, in exchange for a convertible note in the same amount to be issued by the Company. This payment was received on June 10, 2019 and the Company issued a convertible note. |
· | $4 million, to be paid upon completion, as defined, of Phase 3, in exchange for a convertible note in the same amount to be issued by the Company. This payment was received on September 6, 2019 and the Company issued a convertible note. |
On May 21, 2020, convertible notes in the aggregate principal amount of $10 million were converted into shares of the Company’s Common Stock in connection with the Call Exercise Notice received from the Client. The common stock was subsequently cancelled.
In consideration for the VV Ongoing Services rendered by the Company, the Client will pay the Company amounts monthly pursuant to the terms of the Services Agreement (the “Service Charges”).
The development of the VV Wallet Services is considered a bundled performance obligation that includes the development of the API and software as a service which is hosted on the Company’s servers. In addition to the software as a service performance obligation, the Company will provide support services for the software as a service. The Client is considered to simultaneously receive and consume the benefits provided by the Company’s performance as the Company performs the services. Accordingly, the revenue from Service Charges will be recognized over time based on the number of transactions made by Client customers with banQi. As of the date of the financial statements no revenue has been received or recognized. Revenue will not be recognized until banQi is utilized by the Client customers.
The Company has begun recognizing the upfront payment of $0.3 million (“Upfront Payment”) on January 1, 2020 as revenue, ratably over the remaining term of the Services Agreement through the duration of the Services Agreement. The funding received in exchange for the convertible notes is not considered revenue but is a liability of the Company. The total revenue recognized for the years ended September 30, 2020 and 2019 totaled $37 thousand and $0, respectively.
All payments to the Company under the Services Agreement will be based in U.S. dollars except those in connection with the Service Charges, which will be in Brazilian Real.
This Services Agreement has a term of five years, unless earlier terminated by either the Client or the Company as set forth below:
i. | The Client may terminate the Services Agreement at its sole discretion upon written notice to the Company at any time prior to the completion of Phase 1, |
ii. | In the event that the Company is not able to complete any of its deliverables for any phase of the Services Agreement; |
iii. | After the commencement of Phase 3, provided that the Phase 3 funding has been paid to the Company; |
iv. | At any time, if the Company’s obligation under the Settlement Agreement exceeds $15 million (as defined in Note 16); or |
v. | If the Call Option expires without being exercised. |
In the event that this Services Agreement is terminated by the Client, the Company shall retain all right, title and ownership interest in and to banQi and the Company shall retain the payment of $0.3 million received in December 2018.
Either Party shall be entitled to terminate the Services Agreement upon written notice to the other party, in the event of a material breach, as defined in the Services Agreement, by the other party and that the breaching party has failed to remedy such breach within the applicable period.
F-27 |
If there is a Company liquidity event, as defined in the Services Agreement, within five years of the date of termination, the Company will, within ten business days from the closing of such liquidity event, pay to Client an amount equivalent to eighty percent (80%) of the proceeds from such liquidity event(s), less the Liquidated Damages Amount. In addition, and pursuant to certain data transfer limitations, as defined in the Services Agreement, the Company shall grant to Client a market-priced, royalty-bearing, non-exclusive, non-sublicensable, non-transferable, revocable license to use and operate the banQi App for a term of thirty (30) years.
In the event that the Services Agreement is terminated by Client pursuant to a material technical breach, as defined in the Services Agreement, by the Company:
i. | The outstanding convertible notes shall become immediately due and payable; |
ii. | The Company shall pay to Client liquidated damages in the amount of $500 thousand (the “Reduced Liquidation Damages Amount”) within five business days of termination; |
iii. | Certain data transfer limitations will apply; and |
iv. | If there is any Company liquidity event within two years of the date of termination, the Company shall, within ten business days from the closing of such liquidity event, pay to Client an amount equivalent to: eighty percent (80%) of the proceeds from such Company Liquidity Event(s), less the Reduced Liquidated Damages Amount the (“Liquidated Damages Amount”). |
In the event that the Services Agreement is terminated by the Company pursuant to a material breach, as defined in the Services Agreement, by Client:
i. | The convertible notes shall be canceled; |
ii. | The Call Option shall be terminated; |
iii. | Certain data transfer limitations will apply; |
iv. | The banQi License shall be immediately terminated; and |
v. | The Company will retain the payment of $256 thousand and any funding it has received as of the date of such termination, and Client shall not be entitled to convert any convertible notes into common stock of the Company and shall not be entitled to exercise the Call Option. |
The Company shall have the right to terminate the Services Agreement, upon written notice to Client, commencing two years after the Call Option Expiration Date, in the event that Client does not exercise its Call Option.
In the event that the Services Agreement is terminated by the Company the convertible notes shall remain outstanding and the Company may repay the obligations under the convertible notes at any time until the respective convertible note maturity date without any penalty; and data transfer limitations apply.
Either Party may terminate the Services Agreement if either Party experiences or undergoes a bankruptcy event. In the event that this Services Agreement is terminated:
i. | Due to a Company Bankruptcy Event: |
a. | The outstanding convertible notes shall become immediately due and payable; and |
b. | Certain data transfer limitations apply. |
ii. | Due to a Client bankruptcy event: |
a. | the convertible notes shall remain outstanding, and the Company may repay the obligations under the convertible notes without penalty at any point until the maturity date; and |
b. | Certain data transfer limitations apply. |
Convertible Notes
On September 11, 2018 the Company entered into an agreement (the “Notes Agreement”) to sell up to $10 million of one or more Convertible Promissory Notes (the “Notes”) to the Client. The Company received cash and issued convertible notes totaling $2.5 million, $3.5 million, and $4 million on February 14, 2019, June 10, 2019, and September 6, 2019 respectively, under these agreements. On May 21, 2020, convertible notes in the aggregate principal amount of $10 million were converted into 13,339,510 million common shares of the Company, and immediately cancelled pursuant to the terms of the Call Exercise Notice.
F-28 |
Interest Rates
The outstanding principal amount of the Notes bear interest at the annual rate of 1.00%, compounded monthly. If any amount payable under the Notes are not paid when due, such overdue amount shall bear interest of 3.00%.
The Notes were converted based on the principal outstanding amount of the Notes and excluded any accrued and unpaid interest due under the Notes at the conversion date, and the accrued and unpaid interest of approximately $105 thousand was forgiven per the terms in the Notes Agreement.
Call Option
The Call Option Period for the Notes is the period commencing on the Agreement Effective Date and ending upon the earlier to occur of (a) November 30, 2020 or (b) 30 days following the date on which banQi has been downloaded 12 million times in the aggregate by customers in Brazil for use with the VV Wallet Services (the "Call Option Period End Date"). The Call Option Period End Date may be extended to September 30, 2021 by certain events detailed in the Notes Agreement (collectively, the “Call Options Expiration Date”).
The Notes features both primary and secondary call rights in which, during the Call Option Period, at the option of the Client, the Notes may be converted into $10 million and $6 million, respectively, of the Company’s Common Stock. On May 21, 2020, the convertible notes in the aggregate amount of $10 million was converted into shares of the Company’s Common Stock, and an additional $6 million of shares of the Company Common Stock (8,003,706 shares) was purchased directly from certain Company stockholders (the “Option Stockholders”). The Common Stock was immediately cancelled pursuant to the terms of the Call Exercise Notice, and the Buyer received 100% membership interests in the Company.
The Company analyzed the call options and determined they did not meet the definition of derivatives and therefore they will not be bifurcated from the host agreement.
Exercise of Call Rights
During the Call Option Period, the Client may choose to exercise certain call rights (the “Call Rights”). In such instance, the Client will notify the Company and specify that the exercise is with respect to one of the following alternatives:
a. | Majority Exercise - An aggregate amount of (i) Notes equal to $4 million being converted into shares of the Company’s Common Stock (“Primary Shares”) and (ii) $6 million of shares of the Company’s Common Stock being purchased directly from the Stockholders (“Secondary Shares”), provided, that, in the event that there are less than $4 million in Notes outstanding ("Insufficient Notes") at the time the Client elects to exercise the Call Rights, the Company agrees to issue to the Client, at an established valuation of the Company, as defined in the Notes Agreement (the “Agreed Valuation”) and the Client agrees to purchase, such additional shares of the Company’s common stock in an amount such that when combined with, and after giving effect to, the conversion of the Insufficient Notes into Primary Shares and the purchase of $6 million in Secondary Shares, The Client shall own at least a majority of the shares of Company Stock then issued and outstanding, on a fully diluted basis; or |
b. | Eighty Percent Exercise - An aggregate amount of (i) Notes equal to $10 million being converted into Primary Shares and (ii) $6 million of Secondary Shares being purchased from the Stockholders, such that the Client shall own 80% of the Company Stock on a fully diluted basis, provided, that, in the event that, at the time the Client elects to exercise the Call Right, there are less than $6 million of Secondary Shares available for purchase from the Stockholders, the Company agrees to issue to the Client, at the Agreed Valuation, and Client agrees to purchase, such additional shares of the Company’s common stock in an amount such that when combined with, and after giving effect to, the conversion of the Notes into Primary Shares and the purchase of the Secondary Shares available for purchase from the Stockholders, the Client shall own at least 80% of the shares of common stock then issued and outstanding, on a fully diluted basis. |
On May 21, 2020, the convertible notes in the aggregate amount of $10 million was converted into 13,339,510 shares of the Company’s Common Stock, and an additional $6 million of shares of the Company Common Stock was purchased directly from Option Stockholders, totaling 8,003,706 shares. The common stock was subsequently cancelled, and the Buyer received 100% membership interests in the Company.
F-29 |
Call Exercise Notice and Business Combination
On February 7, 2020, Via Varejo notified the Company and the Option Stockholders of Via Varejo’s intention to exercise its call right pursuant to a Convertible Note Purchase and Call Option Agreement, dated as of September 11, 2018, as amended on June 10, 2019 by the First Amendment to the Convertible Note Purchase and Call Option Agreement, through Lake Niassa (the “Buyer”), whereby (i) convertible notes in the aggregate principal amount of $10 million will be converted into shares of the Company’s common stock and (ii) $6 million of shares of the Company’s common stock will be purchased directly from the Option Stockholders, such that, after purchasing the Primary Shares and the Secondary Shares, Via Varejo shall own 80% of the Company’s common stock on a fully diluted basis (the “Transaction”). The agreed upon valuation of the Company for the purposes of the Transaction is $20 million. The Transaction closed on May 21, 2020. On May 21, 2020, the Buyer, Via Varejo, the Company and Victor Santos, solely in his capacity as the Company’s Representative (as such term is defined in the Call Option Agreement) entered into that certain Side Letter Agreement (the “Side Letter”), which defined the term “Diligence Liabilities,” as such term is used in the Call Option Agreement.
Pursuant to the Call Exercise Notice, Via Varejo’s exercise of the Call Right, and its obligation to consummate the Transaction, is subject to and conditioned upon the satisfaction by the Company or the Option Stockholders of certain conditions (or waiver of such conditions by Via Varejo) prior to the consummation of the Transaction, which closed on May 21, 2020. These conditions include, among other things, (a) the Company amending its certificate of incorporation to provide for (i) a single class of common stock (and automatic conversion of any and all outstanding shares of preferred stock into common stock) (the “Conversion of Shares”) and (ii) no preferential rights in favor of any person other than Via Varejo, (b) obtaining preemptive rights waivers’ from certain Option Stockholders and (c) the acceleration of vesting of all stock options issued under the Company’s 2016 Equity Incentive Plan, as amended (the “Plan”) whereby upon the consummation of the Transaction, all stock options then issued and outstanding under the Plan are cancelled in exchange for a cash payment (calculated based on the per share price contained in the form of Second Amendment to Stock Purchase Agreement, dated as of May 18, 2020 entered into by the Buyer and certain employees of the Company (the “Employee SPAs”)) funded by Via Varejo and made to the holders of such stock options. Additionally, the execution and delivery of a stock purchase agreement, substantially in the form contemplated by the Call Option Agreement, by each of Via Varejo, the Company and the Option Stockholders, is a condition to closing the Transaction.
On May 21, 2020, the number of shares of common stock issued upon the conversion of the Notes was 13,339,510. The aggregate number of shares of common stock purchased from the Option Stockholders was 8,003,706. The Buyer purchased a total of 3,168,226 shares of common stock pursuant to the Employee Stock Purchase Agreements (“SPAs”) and the Non-Employee SPAs. Immediately upon closing of the Transaction and the purchase of the common shares of the Company pursuant to the Employee SPAs and Non-Employee SPAs, the Buyer owned 24,511,442 common shares.
Additionally, in connection with the Call Exercise Notice, the two outstanding SAFE agreements in the aggregate fair value amount of $240 thousand were converted into 474,996 common shares of the Company, which was paid to the holders of the SAFEs by the Buyer, and determined pursuant to the terms of the Call Exercise Notice.
The Buyer also purchased 279,354 shares of common stock from five shareholders, who were not included in the purchase of common stock related to the Call Option Agreement, SPAs, or SAFE agreements (the “Remaining Shareholders”) as described above. The Buyer acquired each share of common stock owned by the Remaining Shareholders pursuant to the Employee SPAs and the Non-Employee SPAs.
The Buyer owned an aggregate of 25,265,794 common shares of the Company from the above transactions, which were immediately cancelled on May 21, 2020, and the Buyer received 100% membership interests in the Company.
Concurrently with the consummation of the Transaction and as a condition precedent under the Call Option Agreement, the Company’s Board of Directors cancelled all outstanding options to purchase Company common stock granted under the Plan. All of the holders of the outstanding options issued under the Plan were immediately cancelled and, in consideration for such cancellation, were entitled to a lump sum cash payment from the Company, funded by Via Varejo.
F-30 |
Note 11 - Simple Agreement for Future Equity
In July 2017, the Board of Directors of the Company approved and designated a right to Investors for certain shares of the Company’s capital stock (otherwise known as Simple Agreement for Future Equity (“SAFE”), utilizing a valuation estimate, as defined, (“Valuation Cap”) and 80% discount rate (the “Discount Rate”). On July 15, 2017, the Company entered into two SAFE’s in the amount of $0.2 million, and $0.1 million, respectively. The number of shares to be issued upon conversion of the SAFE’s are subject to the following:
· | Equity Financing – Prior to the expiration of termination of the SAFEs, if there is an equity financing that occurs, the Company is to automatically issue a number of shares of Preferred Stock, equal to the Purchase amount divided by the Conversion Price of shares. |
· | Conversion Price – Means either: (1) the SAFE Price or (2) the Discount Price, whichever calculation results in the greater number of shares of Preferred Stock. The SAFE Price is the price per share equal to the Valuation Cap divided by the Company’s capitalization amount on a fully-diluted basis. The Discount Price is the price per share of the equity instrument sold in an Equity Financing multiplied by the Discount Rate. |
· | Liquidity Event – If there is Liquidity Event, as defined, before the scheduled termination of the SAFE instruments, the holder of a SAFE can either (i) receive a cash payment equal to the amount paid for the SAFE (“SAFE Amount”) or (ii) automatically receive from the Company a number of shares of Common Stock equal to the SAFE Amount divided by the price per share from the Liquidation Event. The SAFE amount is due and payable by the Company to the holder of a SAFE concurrent with a Liquidation Event. If there are insufficient funds to pay the holders of SAFEs, the remaining funds available for distribution will be done on a pro rate basis among the holders in proportion with their SAFE Amounts. |
· | Dissolution Event – Upon a dissolution event that occurs before the expiration of the SAFEs, the Company will pay an amount equal to the SAFE Amount to the holder at the time of the Dissolution Event. If the Company has insufficient funds to make complete payment to all holders of SAFEs, the Company will then be liable to distribute available assets to the holder for the remaining portion due. |
The Company evaluated the SAFEs in accordance with ASC 480-10 and determined that the SAFEs represented an obligation that the Company must settle by issuing a variable number of its equity shares, the monetary value of which is known when entering into the SAFE.
On May 21, 2020, in connection with the Call Exercise Notice, the two outstanding SAFE agreements in the aggregate fair value amount of $0.2 million were converted into common shares of the Company, which was paid to the holders of the SAFEs by the Buyer, and determined pursuant to the terms of the Call Exercise Notice, which were immediately cancelled.
F-31 |
Note 12 – Preferred Stock
Series One and One-A Preferred Stock Purchase Agreement
On July 15, 2016, the Company sold to accredited investors an aggregate of
shares of Series One and of Series One-A Preferred Shares (collectively, “Preferred Stock”).
The Preferred Stock was convertible into the Company’s Common Stock on a 1 for 1 basis at the holders’ option. The Preferred Stock did not contain any redemption provisions. The Preferred Stock did not pay dividends and vote together with the common stock of the Company as a single class on all actions to be taken by the stockholders of the Company.
On May 21, 2020, in connection with the February 7, 2020 written Call Exercise Notice from Via Varejo (“Call Exercise Notice”), the aggregate of 2,652,072 shares of Series One and 1,046,146 of Series One-A Preferred Shares were converted into the Company’s Common Stock during the Transaction which were subsequently cancelled.
The Company amended its Certificate of Incorporation and filed the Second Restated Certificate of Incorporation (the “Restated Certificate of Incorporation”) with the Delaware Secretary of State on May 21, 2020, to provide for (i) a single class of common stock (and automatic conversion of any and all outstanding shares of preferred stock into common stock) and (ii) no preferential rights in favor of any shareholder.
Note 13 – Common Stock
On January 25, 2016, the Company issued 20 thousand, which at the time represented 6% of the capital stock of the Company. As part of this transaction, the Company agreed to issue additional shares of common stock (for no additional consideration) to maintain the investor’s ownership interest at 6% of the total capital stock upon a subsequent equity financing greater than $250 thousand. This 6% ownership is calculated on a fully diluted basis, including all outstanding shares of common and preferred stock, all outstanding options and warrants, phantom stock, stock appreciation rights, and any shares reserved for issuance under the Company’s equity incentive plans. However, the capital stock excluded shares issuable, but contingent on conversion of any current or future convertible debt and equity instruments (which would include the SAFE’s).
shares of common stock to an investor (the “Investor”) for a purchase price of $
The contingent issuance of shares of common stock to the Investor was evaluated to determine whether the embedded feature would be required to be recorded as a derivative liability. It was determined the embedded feature qualifies for equity classification.
On February 28, 2018 the Company repurchased 0.2 million. The Company recorded these repurchased shares as Treasury shares in its consolidated balance sheet.
shares of common stock which it had previously granted to an independent entity in exchange for $
On May 21, 2020, in connection with the Call Exercise Notice, all of the Company’s previously outstanding common stock was purchased by the Buyer, which is included in the total aggregate of 25,265,794 of the Company’s Common Stock that was purchased by the Buyer during the Transaction. All shares of common stock were immediately then cancelled, including the shares held in treasury.
The Company established a 2016 Equity Incentive Plan (the “Plan”) during 2016 and issued stock-based awards to certain employees and non-employees under this plan. The Plan provides for the issuance of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock units and other stock awards.
On February 3, 2020, the Company’s Board of Directors approved an amendment to the Plan to decrease the aggregate number of shares of the Company’s common stock that may be issued pursuant to Stock Awards (as defined in the Plan) from
to ; and waived the restrictions on transfer and right of first refusal in favor of the Company, as set forth in the Company’s Amended and Restated Bylaws, for certain stockholders.
Additionally, on February 3, 2020, the Company’s Board of Directors approved the acceleration of vesting of
outstanding stock option awards awarded to employees and a third-party.On February 6, 2020, the Board approved the acceleration of vesting of
outstanding stock options awarded to a third-party.
F-32 |
On February 26, 2020, the Board approved the acceleration of vesting of
outstanding stock options awarded to employees and other third-parties.
On May 21, 2020, concurrently with the consummation of the Transaction and as a condition precedent under the Call Option Agreement, the Company’s Board of Directors cancelled all outstanding options to purchase the Company’s Common Stock granted under the Plan. All of the holders of the outstanding options issued under the Plan were immediately cancelled and, in consideration for such cancellation were entitled to a lump sum cash payment from the Company.
The Company lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historical volatility of a set of publicly traded peer companies. Due to the lack of historical exercise history, the expected term of the Company’s stock options for employees has been determined utilizing the “simplified” method for awards. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The expected dividend yield is zero based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.
The fair value of the Company’s common stock was estimated to be $0.29 at September 30, 2019. There was no common stock outstanding at September 30, 2021 and 2020. In order to determine the fair value, the Company considered, among other things, the Company’s business, financial condition and results of operations; the lack of marketability of the Company’s common stock; the market performance of comparable publicly traded companies; and U.S. and global economic and capital market conditions.
The Company used the Black-Scholes option-pricing model to estimate the fair value of options issued using the following assumptions:
Stock option valuation assumptions | |||||
Fiscal 2020 | |||||
Price of Common Stock | $ | - | |||
Volatility | - % | ||||
Expected term (in years) | - | ||||
Risk free rate | % - % |
On May 21, 2020, as a result of the Transaction, there was a change in control when the Company was fully acquired by Via Varejo, and as a condition precedent under the Call Option Agreement, the Company’s Board of Directors cancelled all outstanding options. As noted in the 2016 Equity Incentive Plan Amendment, for instances where a change in control occurs, vesting will be accelerated for all outstanding stock award and a cash payment will be paid to all Option Stockholders by Via Varejo. The total unrecognized compensation cost based on the fair value of the options was recognized as stock-based compensation expense on May 21, 2020 totaling $3.3 million, contributed by Via Varejo to the Company and paid from the Company to the Option Holders. The conversion price per option was determined pursuant to the terms of the Call Exercise Notice. Any additional payment over the original fair value of the stock options ($0.2 million) was recognized by the Company as additional stock-based compensation expense due to the cancellation of stock options, which totaled $3.1 million at May 21, 2020. There were options issued or outstanding for the years ended September 30, 2021 and 2020. The expense for stock-based compensation awards was $ and $ million for the years ended September 30, 2021 and 2020, respectively. The expense for stock-based compensation related to the Phantom Shares was $ thousand for the years ended September 30, 2021 and 2020, respectively.
million. Additionally, all of the holders of the outstanding options issued under the Plan (“Option Holders”) were immediately cancelled and, in consideration for such cancellation, were entitled to a lump sum cash payment totaling $
F-33 |
Note 15 – Concentrations
Accounts Payable
As of September 30, 2021 and 2020, the Company had approximately 0% and 83%, respectively, of its accounts payable balances held by its top five vendors. During the period ending September 30, 2020, the Company had two of its vendors accounting for more than 10% each of the Company’s accounts payables balances.
Note 16 – Commitments and Contingencies
Operating Leases
The Company has operating leases primarily consisting of office space with remaining lease terms of 1 to 8 years, subject to certain renewal options as applicable.
Leases with an initial term of years ended or less are not recorded on the balance sheet, and the Company does not separate lease and non-lease components of contracts. There are no material residual guarantees associated with any of the Company’s leases, and there are no significant restrictions or covenants included in the Company’s lease agreements. Certain leases include variable payments related to common area maintenance and property taxes, which are billed by the landlord, as is customary with these types of charges for office space.
The Company determined that the exercise of the renewal option became reasonably certain for its office space in Boston and Brazil; therefore, the payments associated with the renewal are now included in the measurement of the lease liability and ROU asset for those locations. The useful life of the Boston and Brazil office spaces will extend through February 2028 and September 2021, respectively. In February 2021, the Company modified the terms of Brazilian Lease agreement with the landlord, and the Company decided to reduce the length of the contract to April 30, 2021, as the remote work has been practiced by mostly employees and the office facilities are not being fully used. Considering the new terms, this agreement specifically is not applicable to the Operating Lease approach and its ROU was fully amortized in the current quarter. The Company is evaluating options of other locations. The remaining amounts of this agreement of lease liabilities and ROU were fully amortized.
The Company’s lease agreements generally do not provide an implicit borrowing rate. Therefore, the Company used a benchmark approach to derive an appropriate imputed discount rate. The Company benchmarked itself against other companies of similar credit ratings and comparable quality and derived imputed rates, which were used to discount its real estate lease liabilities. The Company used estimated incremental borrowing rates of 7.52%, 5.73%, and 9.68% on October 1, 2019 for all leases that commenced prior to that date, for two office spaces in Boston, Massachusetts, and one office space in Brazil, respectively.
The Company entered into a sublease agreement with a subtenant on March 1, 2020, and the rent commencement date was April 1, 2020. There was approximately $0 and $30 thousand of sublease income recognized related to this agreement for the years ended September 30, 2021 and 2020, respectively, which was recorded as a reduction to rent expense on the Consolidated Statements of Operations and Comprehensive Loss. No related party transactions for lease arrangements have occurred.
Lease Costs
The table below presents certain information related to the lease costs for the Company’s operating leases for the years ended September 30, 2021 and 2020:
Lease cost | ||||||||
Year Ended September 30, | ||||||||
2021 | 2020 | |||||||
Components of total lease cost: | ||||||||
Operating lease expense | $ | 294,133 | $ | 672,460 | ||||
Total lease cost | $ | 294,133 | $ | 672,460 |
F-34 |
Lease Position as of September 30, 2021
Right of use lease assets and lease liabilities for our operating leases were recorded in the consolidated balance sheet as follows:
Schedule of lease Balance sheet | ||||
As of | ||||
September 30, 2021 | ||||
Assets | ||||
Operating lease right of use assets | $ | 1,585,543 | ||
Total lease assets | 1,585,543 | |||
Liabilities | ||||
Current liabilities: | ||||
Operating lease liability, current portion | $ | 217,539 | ||
Noncurrent liabilities: | ||||
Operating lease liability, net of current portion | 1,548,075 | |||
Total lease liability | $ | 1,765,614 |
Lease Terms and Discount Rate
The table below presents certain information related to the weighted average remaining lease term and the weighted average discount rate for the Company’s operating leases as of September 30, 2021:
Weighted average remaining lease term and weighted average discount rate | ||||
Weighted average remaining lease term (in years) – operating leases | 6.35 | |||
Weighted average discount rate – operating leases | 7.5 | % |
Undiscounted Cash Flows
Future lease payments included in the measurement of lease liabilities on the condensed consolidated balance sheet as of September 30, 2021, for the following five fiscal years and thereafter were as follows:
Future lease payments | |||||
Year ending September 30, | Operating Leases | ||||
Remaining 2021 | $ | 80,366 | |||
2022 | 326,453 | ||||
2023 | 333,104 | ||||
2024 | 339,755 | ||||
2025 | 346,406 | ||||
2026 | 353,055 | ||||
2027 | 359,714 | ||||
2028 | 152,420 | ||||
Total Minimum Lease Payments | 2,210,907 | ||||
Less effects of discounting | (525,659 | ) | |||
Present value of future minimum lease payments | $ | 1,765,614 |
Legal Proceedings
The Company may be involved in various lawsuits, claims and proceedings incidental to the ordinary course of business. The Company accounts for such contingencies when a loss is considered probable and can be reasonably estimated.
Between August and October 2017, the Company offered and sold AirTokens pursuant to the 2017 ICO and raised approximately $15 million in capital. The SEC determined that the AirToken offering was an offer and sale of “securities” as defined by Section 2(a)(1) of the Securities Act. On November 16, 2018 the Company settled the 2017 ICO matter with the SEC pursuant to the Settlement Agreement. As part of the Settlement Agreement, Airfox agreed to offer rescission rights to the Potential AirToken Claimants and paid a penalty of $0.3 million to the SEC.
F-35 |
On March 15, 2019, the Company filed an initial registration statement on Form 10 with the SEC under the Exchange Act on a voluntary basis in connection with the Settlement Agreement and to provide current information to Potential AirToken Claimants pursuant to Section 12(a) of the Securities Act. The Form 10 registration statement became effective on May 14, 2019, and on October 18, 2019 we were notified that the SEC had completed its review of the Form 10 registration statement.
In conjunction with the Settlement Agreement, Potential AirToken Claimants are entitled to return their AirTokens to the Company and receive a refund in the amount of consideration paid, plus interest, less the amount of any income received thereon. Pursuant to the Settlement Agreement, as modified in May 2019, our Company timely distributed the claim forms on June 28, 2019. The claims period closed on September 28, 2019. All forms were processed in accordance with the terms and provisions set forth by the Settlement Agreement. The Company received claim forms from 174 Potential AirToken Claimants during the claims period and the Company determined to approve payment on 163 out of the 174 claims, which is approximately 93% of the claim forms received during the claims period. On December 11, 2019 The Company commenced the process of notifying, via email only, all 174 Potential AirToken Claimants of our resolution of their claim.
On or before December 28, 2019 the Company paid all approved claims to approved claimants who returned their AirTokens to us (approximately 93.5% of the total dollar amount of all approved claim refunds). All amounts were refunded in cash and paid through the Company's existing cash and cash equivalent reserves. The total claim amounts including interest, totaled $3.3 million on December 28, 2019. Certain approved claimants did not return their AirTokens to the Company. The Company did not pay approved claims to approved claimants who did not return their AirTokens to the Company. As of September 30, 2021, the amount that was not paid was approximately $0.1 million.
Additionally, the Settlement Agreement requires our Company to:
· | Maintain timely filings of all reports required by Section 13(a) of the Exchange Act for at least one year from the date the Form 10 becomes effective (the “Effective Date”) and continue these filings until the Company is eligible to terminate its registration pursuant to Rule 12g-4 under the Securities Exchange Act of 1934. |
· | Provide monthly reports to the SEC which include the amount of the claims paid, and any claims not paid as well as the reasons for non-payment. |
· | Submit to the SEC a final report of its handling of all claims received within seven months from the Effective Date of the Form 10 filing. |
Also, on November 16, 2018, The Company entered into a settlement with the Massachusetts Securities Division related to the issuance of AirTokens in the 2017 ICO whereby the Company agreed to pay a penalty of $0.1 million to the Commonwealth of Massachusetts.
As a result of the Company’s inability to timely resolve these accounting issues, the Company did not timely file with the SEC the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019, June 30, 2019 and June 30, 2021, and the Company’s annual report on Form 10-K for the year ended September 30, 2019, which puts the Company in violation of Section 13(a) of the Exchange Act and the Settlement Agreement. In addition, the Company did not timely file certain Current Reports on Form 8-K. As a result of the Company’s failure to timely file these various reports, the SEC may through civil or administrative actions seek monetary and non-monetary relief from the Company, including fines, penalties, undertakings and conduct-based injunctions, and officer and director bars and suspensions.
On December 30, 2019 a claimant who purchased AirTokens in the 2017 ICO whose claim was denied for failure to comply with the deadlines and the claim process filed a civil lawsuit against the Company in the Supreme Court of the State of New York, County of New York. The lawsuit alleges a claim of sale of unregistered securities to the plaintiff under Section 12(a) of the Securities Act of 1933 in connection with the plaintiff’s purchase of AirTokens in the 2017 ICO.. On February 25, 2020, the matter was settled and the lawsuit was dismissed.
The claims period officially came to a close on September 28, 2019. All claims were processed in accordance with the terms and provisions set forth in the SEC Order.
F-36 |
Other than with respect to the matters described above, the Company is not aware of any pending or threatened claims that we violated any federal or state securities laws. However, the Company cannot assure that any such claim will not be asserted in the future or that the claimant in any such action will not prevail. The possibility that such claims may be asserted in the future will continue until the expiration of the applicable federal and state statutes of limitations.
Note 17 – Income Taxes
A nominal provision for taxes has been recorded as the Company has incurred net operating losses since inception. Significant components of the Company’s net deferred income tax assets of $464,379 and $496,053 September 30, 2021 and September 30, 2020 consisted of income tax loss carryforwards. These amounts are available for carryforward indefinitely for use in offsetting taxable income. Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carry-forward period. Prior to May 21, 2020 the Company was organized as a C Corporation for tax purposes. As of May 21, 2020, the Company was converted from a C Corporation to a limited liability company ("LLC"). As a result of this transaction the Company believes it has lost the right to utilize its net operating loss carryovers, non-refundable tax credits and charitable contribution carryover assets associated with the original corporation with which the Company was organized within. Generally, only a Company that has generated a net operating loss should be able to then utilize that net operating loss to reduce its own future profits. In late December 2020, the Company filed Form 8832 with the Internal Revenue Service in order to elect C corporation tax classification for the LLC. The Company filed this request within the 90-day time period allowed for automatic approval of the Company’s tax classification request. On May 21, 2020, the Company was fully acquired by Via Varejo S.A, a corporation organized under the laws of the Federative Republic of Brazil (“Via Varejo”) through Lake Niassa Empreendimentos e Participações Ltda., a limited liability company duly organized under the laws of the Federative Republic of Brazil and wholly-owned by Via Varejo (“Transaction”). As a result of the Transaction, the utilization of some of the net operating loss carryforwards generated in both prior and the current fiscal years may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. As of the date of these financial statements, the Company has not undertaken an effort to convince the IRS that the Company’s net operating losses prior to and through May 21, 2020 should be maintained and available for the Company’s future benefit. The Company may or may not do this in the future. The Company may also have lost the use of the net operating loss assets as a result of IRC 382. The Company may undertake an Internal Revenue Code (“IRC”) 382 study to estimate the amount of the net operating losses that may be utilized in the future. However, whatever the outcome of the IRC 382 study is, the IRS would still have to approve the Company’s right to utilize such carryovers in the future. However, throughout the Company’s history the Company has generated substantial net operating losses. These deferred tax assets arising from the future tax benefits are currently considered not likely to be realized and are thus reduced to zero by an offsetting valuation allowance. As a result, there is no provision for income taxes other than those amounts required to properly accrued for the various state minimum income taxes owed by the Company to the jurisdictions in which it operates. The income tax benefit for the years ended September 30, 2021 and 2020 consists of refundable research and development tax credits.
As of September 30, 2021 and 2020, the Company had net operating loss carryforwards of approximately $25.5 million and $14.1 million respectively. The net operating loss carryforwards included the following components:
Operating Loss Carryforwards | ||||||||
Year Ended September 30, 2021 | Year Ended September 30, 2020 | |||||||
Federal | $ | (12,691,356 | ) | $ | (2,328,359 | ) | ||
Massachusetts | (12,760,356 | ) | (2,328,359 | ) | ||||
Brazil | — | (9,435,239 | ) | |||||
Net operating loss carryforwards | $ | (25,451,712 | ) | $ | (14,091,957 | ) |
F-37 |
An income tax (provision) benefit of $0.2 million and $0.2 million has been recognized for the years ended September 30, 2021 and 2020, respectively. The Company's loss before provision for income taxes for the years ended September 30, 2021 and 2020 was as follows:
Income (loss) before provision for income taxes | ||||||||
Year Ended September 30, 2021 | Year Ended September 30, 2020 | |||||||
Domestic | $ | (9,236,559 | ) | $ | (4,656,718 | ) | ||
Foreign | — | (7,825,154 | ) | |||||
Loss before income taxes | $ | (9,236,559 | ) | $ | (16,353,765 | ) |
The components of the (provision) benefit for income taxes for the years ended September 30, 2021 and 2020 consisted of the following:
Components of the (provision) benefit for income taxes | ||||||||
Year Ended September 30, 2021 | Year Ended September 30, 2020 | |||||||
Federal | $ | 234,404 | $ | 207,866 | ||||
State | — | (456 | ) | |||||
Foreign | — | — | ||||||
Benefit for income taxes | $ | 234,404 | $ | 207,410 |
A reconciliation of the statutory U.S. federal rate to the Company’s effective tax rate consists of the following:
Reconciliation of the federal income tax rate | ||||||||
September 30, | ||||||||
2021 | 2020 | |||||||
Tax computed at statutory federal income tax rate | 21.0 | % | 21.0 | % | ||||
At statutory rate | $ | 2,007,545 | $ | 4,520,125 | ||||
State taxes | 604,175 | 865,793 | ||||||
Foreign taxes | — | 234,755 | ||||||
Valuation allowances | 502,196 | (577,749 | ) | |||||
Inflation adjustment, non-deductible for tax purposes | (327,761 | ) | — | |||||
Tax credits | (92,078 | ) | (254,678 | ) | ||||
Book loss on disposal of assets in excess of tax | (63,907 | ) | — | |||||
Amortization in excess of tax | (69,153 | ) | (100,777 | ) | ||||
Expiration of net operating losses | — | (5,278,673 | ) | |||||
Loss of foreign net operating loss due to deconsolidation of foreign subsidiary | (2,264,457 | ) | — | |||||
Other | (530,965 | ) | (798,614 | ) | ||||
Provision for income taxes | $ | 234,404 | $ | 207,410 |
The tax effects of the temporary differences and carry forwards that give rise to deferred tax assets consist of the following:
Deferred tax assets | ||||||||
September 30, | ||||||||
2021 | 2020 | |||||||
Deferred tax assets: | ||||||||
Net operating loss carryovers | $ | 3,585,013 | $ | 2,939,681 | ||||
Other | 466,716 | 4,011,375 | ||||||
Total deferred tax assets | 4,152,729 | 6,951,056 | ||||||
Less valuation allowance | (3,688,350 | ) | (6,455,003 | ) | ||||
Deferred tax asset, net of valuation allowance | $ | 464,379 | $ | 496,053 |
F-38 |
The Company has determined, based upon available evidence, that it is more likely than not that the majority of the net deferred tax asset will not be realized and, accordingly, has provided a full valuation allowance against all components of the deferred tax asset other than the Company’s refundable research and development (R&D) Federal tax credits of $0.5 million as of September 30, 2021 and $0.5 million as of September 30, 2020. Based on this analysis, the Company determined that a valuation allowance of $3.7 million was required as of September 30, 2021, resulting in $0.5 million in net deferred tax asset and a valuation allowance of $5.4 million as of September 30, 2019, resulting in a net deferred tax asset of $0.5 million. The Company anticipates receiving the full value of this refundable tax credit during the fiscal year ending September 30, 2022. However, the receipt of the payments for the refundable tax credit are primarily dependent on the processing timeline at the Internal Revenue Service, for which the Company has no control.
At September 30, 2021 and 2020, the Company had no uncertain tax positions related to federal and state income taxes, respectively. The total amount of unrecognized tax benefits was $0 and $0 at September 30, 2021 and 2020, respectively. The Company will recognize interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2021, the Company had 0 accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s statement of operations. The Company does not anticipate a material change to unrecognized tax benefits in the year ending September 30, 2022.
The 2018 and subsequent federal and state tax returns for the Company remain open for examination.
Note 18 – Related Party Transaction
The related party transactions between the Company and Via Varejo were revenue totaling $32.3 thousand and $37.6 thousand recognized from the upfront payment for the years ended September 30, 2021 and 2020, respectively, for software development services and $361.9 thousand and $57.0 thousand from transactional fees related to the Via Varejo service agreement as of September 30, 2021 and 2020, respectively.
Note 19 – Subsequent Events
On November 01, 2021 and December 14, 2021, Lake Niassa made a capital contribution to Airfox in the amount of $283 and $290 thousand, with no additional membership interests issued or ownership rights granted.
F-39 |