UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
For
the quarterly period ended
For the transition period from ________ to __________
Commission
File Number:
(Exact name of registrant as specified in its charter)
| (State
or other jurisdiction of incorporation or organization) |
(IRS
Employer
| |
| (Address of principal executive offices) | ||
| ( |
| (Registrant's telephone number) |
| (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act: None.
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
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 (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
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,” “small reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☐ Large accelerated filer | ☐ Accelerated filer |
| ☒ |
|
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: common shares as of August 11, 2022.
| 1 |
| TABLE OF CONTENTS | ||
| Page | ||
| PART I – FINANCIAL INFORMATION | ||
| Item 1: | Financial Statements (unaudited) | 3 |
| Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 4 |
| Item 3: | Quantitative and Qualitative Disclosures About Market Risk | 11 |
| Item 4: | Controls and Procedures | 11 |
| PART II – OTHER INFORMATION | ||
| Item 1: | Legal Proceedings | 12 |
| Item 1A: | Risk Factors | 12 |
| Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds | 12 |
| Item 3: | Defaults Upon Senior Securities | 12 |
| Item 4: | Mine Safety Disclosure | 12 |
| Item 5: | Other Information | 12 |
| Item 6: | Exhibits | 13 |
| 2 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Our condensed consolidated financial statements included in this Form 10-Q are as follows:
Page Number |
|
| F-1 | Condensed Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021; |
| F-2 | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021 (unaudited); |
| F-3 | Condensed Consolidated Statements of Stockholders’ Deficit for the three and six months ended June 30, 2022 and 2021 (unaudited) |
| F-4 | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (unaudited); |
| F-5 | Notes to Condensed Consolidated Financial Statements (unaudited). |
| 3 |
BLOCKCHAIN OF THINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| June
30, 2022 | December
31, 2021 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Prepaid Expenses and Other Current Assets | ||||||||
| Digital Assets | ||||||||
| Total Current Assets | ||||||||
| Non-current Assets: | ||||||||
| Property and Equipment, net | ||||||||
| Deferred Income Taxes | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable and Accrued Expenses | $ | $ | ||||||
| Income Taxes Payable | ||||||||
| Deferred Revenue | ||||||||
| Sponsorship Loans Payable | ||||||||
| Current Portion of Note Payable | ||||||||
| Total Current Liabilities | ||||||||
| Long-term Liabilities: | ||||||||
| Note Payable, net of Current Portion | ||||||||
| Total Liabilities | ||||||||
| Stockholders' Equity (Deficit): | ||||||||
| Preferred stock; par value ; shares authorized; shares issued and outstanding as of June 30, 2022 and December 31, 2021 | ||||||||
| Common stock; par value ; shares authorized; shares issued and outstanding as of June 30, 2022 and December 31, 2021 | ||||||||
| Additional Paid-in Capital | ||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| Total Stockholders' Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders' Deficit | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-1 |
BLOCKCHAIN OF THINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue, net | $ | $ | $ | $ | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| Selling, General and Administrative | ||||||||||||||||
| Impairment of Digital Assets | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Loss From Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (Expense): | ||||||||||||||||
| Other Income | ||||||||||||||||
| Gain on Sale of Digital Assets | ||||||||||||||||
| Gain on Extinguishment of Debt | ||||||||||||||||
| Interest Expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Other Income, net | ||||||||||||||||
| Income (Loss) Before Income Taxes | ( | ) | ( | ) | ||||||||||||
| Income Tax Benefit (Expense) | ( | ) | ||||||||||||||
| Net Income (Loss) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| NET INCOME PER SHARE | ||||||||||||||||
| Net Income (Loss) per share, basic | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Net Income (Loss) per share, diluted | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Weighted average number of shares of common stock - basic | ||||||||||||||||
| Weighted average number of shares of common stock - diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-2 |
BLOCKCHAIN OF THINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(unaudited)
| Common Stock | ||||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders' Deficit | ||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net Income | ||||||||||||||||||||
| Balance as of March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Common Stock | ||||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders' Deficit | ||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Exercise of Stock Options | ||||||||||||||||||||
| Net Income | ||||||||||||||||||||
| Balance as of March 31, 2021 | ( | ) | ( | ) | ||||||||||||||||
| Exercise of Stock Options | ||||||||||||||||||||
| Net Income | ||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-3 |
BLOCKCHAIN OF THINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net Income (Loss) | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Cancelation of Interest on BCOT Token Refund Liability | ( | ) | ||||||
| Stock based Compensation | ||||||||
| Gain on Extinguishment of Debt | ( | ) | ||||||
| Impairment of Digital Assets | ||||||||
| Realized Gain on Sale of Digital Assets | ( | ) | ( | ) | ||||
| Deferred Income Tax Benefit | ( | ) | ||||||
| Changes in Assets and Liabilities: | ||||||||
| Prepaids and Other Current Assets | ||||||||
| Accounts Payable and Accrued Expenses | ( | ) | ||||||
| Income Taxes Payable | ||||||||
| BCOT Token Refund Liability | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Proceeds from sale of Digital Assets | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Repayments of Note Payable | ( | ) | ||||||
| Net Change in Cash | ( | ) | ||||||
| Cash, Beginning of Period | ||||||||
| Cash, End of Period | $ | $ | ||||||
| Supplemental disclosure of cash flows information: | ||||||||
| Cash paid during the period for interest | $ | $ | ||||||
| Noncash activity: | ||||||||
| Reclassification of BCOT Token Refund Liability to Deferred Revenue | $ | $ | ||||||
| Acquisition of Property and Equipment via Note Payable | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-4 |
BLOCKCHAIN OF THINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Nature of Operations
Blockchain
of Things, Inc. was incorporated in Delaware on
BCoT
is a technology company established to develop and implement blockchain technology, specifically by providing a platform, or web services
layer, designed to improve upon existing blockchain technology, including its security and ease of use. From December 2017 through July
2018, BCoT offered and sold $
Note 2 - Financial Condition and Management’s Plans
Going Concern
To
date, the Company has experienced recurring losses and negative cash flows from operations. As of June 30, 2022, the Company had cash
of $
The
accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern,
which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business.
The Company believes that its ability to continue operations depends on its ability to generate
revenues and obtain funding that will be sufficient to sustain its operations until it markets its core product offerings and achieve
profitability and positive cash flows from operating activities. The Company continues to fund its operations through the sale of its
Digital Assets. As of June 30, 2022, the Company held
| F-5 |
The Company’s management has taken several actions in an effort to secure funding and generate revenue streams including:
| • | Added two additional offerings to the product line making the platform more robust and giving more options to the marketplace |
| • | Added NFT functionality to its product to attract new market segmentation |
| • | Relaunched a new website and marketed to various different segments of the industry verticals |
| • | Prepared offering documents for a potential offshore offering under Regulation S, promulgated under the Securities Act of 1933, as amended (the “Securities Act”) |
| • | Added a Director to the Company’s Board of Directors with fundraising experience to lead our efforts |
| • | Discussed with broker ways to raise additional capital |
| • | Hired a marketing manager and launched a marketing campaign to acquire customers |
| • | Added an additional development language to Catenis to facilitate the programming of integration |
| • | Hired a VP of Business Development |
| • | Appointed a New Board Member with Financial and Business M&A Experiences |
| • | Hired Landmark Ventures as a Sales Arm for the Company |
| • | Identified a lead generating company to help with the sales efforts |
| • | Presented products to potential clients from the leads generated from our sales efforts |
| • | Increased efforts for quarterly sign ups to the free account and follow-up strategies to increase exposure |
| • | Coordinated efforts for upcoming industry tradeshows with Booths and participation in interviews with industry leading news outlets |
Any securities offered will not be or have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. There is no assurance that the Company will be successful in obtaining funding or generating revenues sufficient to fund operations.
The condensed consolidated financial statements do not include any adjustments related to this uncertainty and as to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
Further, fulfilment of the Company’s obligations to its customers in order to realize the Deferred Revenue will require an insignificant amount of additional expense.
COVID-19
The outbreak of the Coronavirus Disease 2019, or COVID-19, which has been declared a global pandemic by the World Health Organization, has spread across the globe and is impacting worldwide economic activity. A public health epidemic, including COVID-19, poses the risk that we or our employees, contractors, and other partners may be prevented from conducting business for an indefinite period of time, including due to shutdowns and quarantines that may be requested or mandated by governmental authorities. While at this time, COVID-19 has not had a significant impact on the Company, it is not possible to estimate the impact that COVID-19 could have on our business in the future. The continued spread of COVID-19 and the measures taken by the governments of countries affected, particularly the United States, could disrupt the planned commercial activities of the Company and have a material impact on our business, financial condition or results of operations. The extent to which the COVID-19 outbreak impacts our results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact.
| F-6 |
Note 3 - Summary of Significant Accounting Policies
Basis of Presentation
In the opinion of management, the accompanying unaudited interim Condensed Consolidated Financial Statements of BCoT and its subsidiary, reflect all adjustments, including normal recurring accruals, necessary for a fair presentation. All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosure normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the Securities and Exchange Commission (“SEC”). The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited Condensed Consolidated Financial Statements are read in conjunction with the audited Consolidated Financial Statements contained in the Company’s Form 10-K for the year ended December 31, 2021. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the full year. The Consolidated Financial Statements as of December 31, 2021 are derived from audited financial statements included in the Company’s Form 10-K for the year ended December 31, 2021.
Use of Estimates
The preparation of the condensed consolidated 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 condensed consolidated financial statements includes the fair values of the Digital Assets, including the impairment assessments, as well as estimates related to stock-based compensation.
BCOT Security Tokens Revenue Recognition
The
Company issued BCOT Security Tokens for use by customers in Catenis. From December 2017 through early July 2018, the Company obtained
Ether, Bitcoin, Bitcoin Cash and Tether from customers totaling approximately $
The BCOT Security Tokens are issued on the Bitcoin blockchain and are used as independent programmable units of power that directly convert to Catenis credits which power the virtual devices and ultimately the entire Catenis system. These security tokens can be independently purchased, held, traded, and used on Catenis. Using the administrative interface, the customer can send BCOT Security Tokens to their account and they will be converted on a one-to-one basis into Catenis credits for their account. Each BCOT Security Token value is taken into account when calculating the amount of Catenis Credits required to pay for a given Catenis service when that service is consumed.
The Company evaluated the terms of sale of the BCOT Security Tokens and determined that, when sold, a BCOT Security Token represents an obligation of the Company with counterparties that were determined to be customers. Therefore, the Company determined that BCOT Security Tokens, when sold by the Company, are akin to prepayments of future services and are treated as deferred revenue in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”).
| F-7 |
Pursuant to the terms of the BCOT Security Tokens, there is no form of partnership, joint venture, agency or any similar relationship between a holder of a BCOT Security Token and the Company. Except as noted below, BCOT Security Tokens are non-refundable and do not pay interest and have no maturity date. BCOT Security Tokens confer only the right to be used to power the Catenis platform, BCoT’s product, 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 BCOT Security Tokens to customers, the associated liability to deliver the BCOT Security Tokens was satisfied. No additional BCOT Security Tokens were sold by the Company since this distribution.
Subsequent
to the distribution noted above, and pursuant to the Settlement Agreement (as defined and described further in Note 9), the Company was
obligated to refund amounts raised from the sale of BCOT Security Tokens for valid claims submitted and may incur other fines and penalties.
The Rescission Offer (as defined and described further in Note 9) deadline was February 21, 2021. Accordingly, as of June 30, 2022, all
valid claims have been submitted and the Company issued refunds to claimants of $
In
the first quarter of 2021, subsequent to the receipt of all valid Rescission Offer claims, the Company recognized the remaining amount
of $
Deferred Revenue
Deferred revenue represents BCOT Security Tokens that have been purchased by customers but not yet redeemed and utilized as Catenis credits for Catenis services.
Concentrations of Credit Risk and Off-Balance Sheet Risk
The Company is subject to concentration of risk with respect to the Digital Assets which are held in digital wallets. Private keys, which provide access to the Digital Assets, are held in secured vaults at banking institutions and a limited number of digital wallets. The Digital Assets are exchanged for United States Dollars (USD) in the normal course of business so that the Company may meet its operational needs. The Digital Assets are not insured and the exchange rate of the digital assets to USD experiences significant volatility.
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; installation to hardware; and (c) 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.
| F-8 |
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 has developed and continues to enhance Catenis, a platform, or web services layer, designed to improve upon existing blockchain
technology, including its security and ease of use. The technology primarily assists with four blockchain-based services: 1) message
transmission, 2) message logging, 3) digital asset generation, and 4) digital asset transfer. Due to the significant hurdles during development
and launch of Catenis, market adoption and recovery of the development costs is uncertain. Accordingly, the Company expensed $
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 and net operating and capital loss carryforwards 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 valuation allowance is reduced when it is determined that it is more likely than not that the deferred tax asset will 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 files a consolidated tax return, which incorporates the limited liability company subsidiary.
The Company accounts for stock-based compensation to employees and non-employees in conformity with the provisions of ASC 718, 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.
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.
To date, stock-based compensation is immaterial to the condensed consolidated financial statements.
| F-9 |
Fair Value Measurement
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.
The Company’s financial instruments include cash, accounts payable, sponsorship agreements, and a note payable. The fair values of cash, accounts payable, and sponsorship agreements approximate their stated amounts because of the short maturity of these financial instruments from the balance sheet date. The fair value of the note payable approximates its stated amount based on the interest rates currently available to the Company. Our sponsorship agreements are carried at fair value and based on Level 2 inputs.
Intangible Assets
Digital Assets held by the Company consist of Ethers, Bitcoins and Bitcoin Cash and are included in current assets in the Condensed Consolidated Balance Sheets. Digital assets such as Bitcoins, Ethers, and Bitcoin Cash are digital currencies considered cryptocurrencies that are not fiat currencies (i.e., a currency that is backed by a central bank or a national, supra- national or quasi-national organization) and are not backed by hard assets or other credits. Digital currencies are not financial assets because they are not an ownership interest in a company, or a contract establishing a right or obligation to deliver or receive cash or another financial instrument. Since they lack physical substance and have no limit on the useful life, digital currencies are considered to be indefinite-lived intangible assets under ASC 350, Intangibles–Goodwill and Other (“ASC 350”).
Indefinite-lived intangible assets are not subject to amortization. Instead, they are tested for impairment on an annual basis and more frequently if events or circumstances change that indicate that it’s more likely than not that the asset is impaired. As a result, the Company will only recognize decreases in the value of its Digital Assets, and any increase in value will be recognized upon disposition. Ether, Bitcoin, Bitcoin Cash are traded on exchanges in which there are observable prices in an active market, the Company views a decline in the quoted price below the cost to be an impairment indicator. The quoted price and observable prices for Ether, Bitcoin, and Bitcoin Cash are determined by the Company using a principal market analysis in accordance with ASC 820, Fair Value Measurement.
When the Company evaluates Ethers, Bitcoins, and Bitcoin Cash for impairment under ASC 350, each acquisition of Ether, Bitcoin, and Bitcoin Cash is considered a separate unit of account. The Company tracks the cost of each unit of Ether, Bitcoin, and Bitcoin Cash when received or purchased, when performing impairment testing and upon disposition either through sale or exchanged for goods or services. The realized gain or loss on sale of Digital Assets is included in a separate financial statement line item in the Condensed Consolidated Statements of Operations, while impairment of Digital Assets is included in operating expenses because of the nature of the assets.
The Company obtains the equivalency rate of the digital currencies to USD based on a global exchange rate from public exchange Gemini.
As
of June 30, 2022 and December 31, 2021, the Company’s adjusted cost basis was $
| F-10 |
Basic income (loss) per share (“Basic EPS”) is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted income (loss) per share (“Diluted EPS”) is computed by dividing the net income (loss) by the weighted average number of common shares outstanding during the reporting period while also giving effect to all potentially dilutive common shares that were outstanding during the reporting period.
For the three and six months ended June 30, 2022, the Company reported a net loss. As a result, basic and diluted loss per common share are the same. Therefore, in calculating net loss per share amounts, shares underlying the potentially dilutive common stock equivalents were excluded from the calculation of diluted net income per common share because their effect was anti-dilutive. The potentially dilutive common stock equivalents as of June 30, 2022 were and were not included in diluted EPS as their effect would be anti-dilutive.
For the three and six months ended June 30, 2021, the Company reported net income. Therefore, for purposes of calculating diluted net earnings per share, the weighted average number of common stocks includes all potentially dilutive common shares. There were no potentially dilutive common stock equivalents at June 30, 2021 to be included in diluted EPS.
Adoption of Recent Accounting Pronouncements
The Company's accounting policies are the same as those described in Note 3 to the Company's Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2021.
The Company has reviewed recent accounting pronouncements and concluded they are either not applicable to the business, or no material effect is expected on the condensed consolidated financial statements as a result of future adoption.
Note 4 - Digital Assets
Changes in Digital Assets were as follows:
| Ether | Bitcoin | Bitcoin Cash | Total | |||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ||||||||||||
| Sale of Digital Assets | ( | ) | ( | ) | ||||||||||||
| Balance at March 31, 2022 | ||||||||||||||||
| Sale of Digital Assets | ( | ) | ( | ) | ||||||||||||
| Impairment | ( | ) | ( | ) | ||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ||||||||||||
| Sale of Digital Assets | ( | ) | ( | ) | ||||||||||||
| Balance at March 31, 2021 | ||||||||||||||||
| Sale of Digital Assets | ( | ) | ( | ) | ||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ||||||||||||
The Company recognized $
On June 25, 2018 the Company created
| F-11 |
Note 5 – Accounts Payable and Accrued Expenses
Accounts Payable and Accrued Expenses consisted of the following as of:
| June 30, | December 31, | ||||||
| 2022 | 2021 | ||||||
| Legal and professional services | $ | $ | |||||
| Software development | |||||||
| Salaries and benefits | |||||||
| Credit card payable | |||||||
| Other accrued liabilities | |||||||
| Total Accounts Payable and Accrued Expenses | $ | $ | |||||
Note 6 – Debt
Sponsorship Agreement
The
Company has one remaining financial sponsorship agreement (“Sponsorship Agreement”) with a counterparty (“Sponsor”).
Pursuant to the Sponsorship Agreement, the Company received contributions in the form of cash or Bitcoin. In return, the Sponsor is eligible
to receive repayment in the form of cash and cryptographic tokens that provide usability in our Catenis Enterprise product.
The
liability associated with the one outstanding Sponsorship Agreement as of June 30, 2022 and December 31, 2021 was determined to be $
U.S. Small Business Administration Loan and Advance
On April 16, 2020, the Company received a loan under
the U.S. Small Business Administration’s Paycheck Protection Program from Citibank, N.A. related to the COVID-19 crisis in the amount
of $
In addition to the SBA Loan, the Company received
an advance of $
| F-12 |
Note Payable
In
February 2022, the Company entered into a vehicle note payable for $
| Twelve
Months Ended June 30, |
Amount | |||||
| 2023 | $ | |||||
| 2024 | ||||||
| 2025 | ||||||
| 2026 | ||||||
| 2027 | ||||||
| Thereafter | ||||||
| Total | $ | |||||
Note 7 – Income Taxes
The
Company’s effective tax rate ("ETR") is calculated quarterly based upon current assumptions relating to the full year’s
estimated operating results and various tax-related items. The Company’s ETR was (
The Company has no uncertain tax positions related to federal and state income taxes. The 2018 and subsequent federal and state tax returns for the Company remain open for examination. In the event that the Company is assessed interest or penalties at some point in the future, it will be classified in the financial statements as tax expense.
Note 8 – BCOT Security Tokens and Deferred Revenue
As part of its private pre-sale and subsequent crowd
sale of BCOT Security Tokens, the Company obtained Cash, Bitcoin, Ether, Tether, and Bitcoin Cash from November 2017 through early August
2018 totaling $
The delivery of the Tokens prompted the SEC investigation, which resulted in the SEC settlement discussed in Note 9 and the BCOT Token Refund Liability. During the first quarter of 2021, subsequent to the receipt of the final Rescission Offer claims, the Company recognized the amounts received from the issuance of BCOT Security Tokens, less the refunds issued pursuant to the Rescission Offer, as Deferred Revenue until such time that customers convert the BCOT Security Tokens into Catenis credits and redeem for Catenis services.
| F-13 |
Note 9 – Commitments and Contingencies
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.
SEC Settlement
On December 18, 2019, the Company entered into a settlement agreement with the SEC (the “Settlement Agreement”) related to the determination by the SEC that BCOT Tokens were “securities”.
Pursuant to the Settlement Agreement, the Company agreed to the following:
| • | File a Form 10 to register the BCOT Tokens as a class of securities and maintain timely filings of all reports required by Section 13(a) of the Securities Act of 1934 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. |
| • | Distribute a refund claim form to any person or entity that purchased BCOT Tokens in the ICO before and including July 31, 2018 to recover the consideration paid for the BCOT Tokens, including interest, as described below. |
| • | 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. |
| • | Pay
a penalty of $ |
| • | 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. |
The Company approved twenty eligible claims
and was obligated to return such amounts totaling $
The remaining amount payable as of February
21, 2021, totaling $
In addition, if certain holders of BCOT Tokens affirmatively reject or fail to accept the Rescission Offer, they may have a right of rescission under the Securities Act of 1933 (the “Securities Act”) after the expiration of the Rescission Offer.
Consequently, if any offerees rejected the Rescission Offer, expressly or by failing to timely return a claim, the Company may continue to be potentially liable under the Securities Act for the purchase price or for certain losses if the BCOT Security Tokens have been sold. It may also be possible that by not disclosing that the BCOT Tokens were unregistered, and that they may face resale or other limitations, the Company may face contingent liability for noncompliance with applicable federal and state securities laws. Additionally, the Company may pay additional fines or penalties or other amounts in other jurisdictions.
Although purchasers of BCOT Tokens may still bring a suit against the Company under the Securities Act of 1933, the Company believes an unfavorable outcome, as a result of conducting a formal Rescission Offer, is not probable.
| F-14 |
Sponsor Litigation
The
one remaining Sponsor who has a Sponsorship Agreement with the Company in the amount of $
Other than with respect to the matters described above, we are not aware of any pending or threatened claims that we 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. The possibility that such claims may be asserted in the future will continue until the expiration of the applicable federal and state statutes of limitations. If the payment of additional rescission claims or fines is significant, it could have a material adverse effect on our cash flow, financial condition or prospects and the value of the BCOT Security Tokens.
Note 10 – Related Party Transactions
In
the ordinary course of business, the Company has contracted entities that are owned or operated by the Company’s officers for software
development. During the three and six months ended June 30, 2022, the Company incurred $
Note 11 – Subsequent Events
The Company has analyzed its operations subsequent to June 30, 2022 to the date these financial statements were issued and has determined that it does not have any material subsequent events to disclose in these financial statements.
| F-15 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, cybersecurity, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.
Overview
We were originally incorporated as Blockchain of Things, Inc. in Delaware on July 15, 2015. We are a technology company established to develop and implement blockchain technology, specifically by providing a platform, or web services layer, designed to improve upon existing blockchain technology, including its security and ease of use.
Our core product offering is Catenis Services, which acts as a platform on which third-party developers are able to build applications using Catenis’ core functionality (e.g., secure messaging, smart-assets, etc.) as a building block.
The Catenis platform makes it easier for third-party developers and tinkerers to build new software or integrate existing software with blockchain capabilities. This is done by using Catenis’ connectivity points called Application Programming Interfaces (APIs). Catenis’ core functionality is made available via these connectivity points. They are; peer-to-peer secure messaging, contents logging (files, movies, music, etc.) to the blockchain, creation, and transfer of smart-assets (commonly referred to as tokens), administrative rights management of both messaging and logging, and notification of interactions with the blockchain. All collectively called Catenis services. These services can be used to add additional functionality to new software or enhance existing software.
Catenis uses a credit system called “Catenis Service Credits” (Credits) to control the expense it incurs by using the bitcoin blockchain. It is an internal system of accounting for each customer’s account. Credits are not controlled via a central database for accounting as this would make the system centralized and vulnerable to a coordinated centralized attack rendering all connectivity points inoperable. To keep the system resilient and decentralized these credits are instead encoded (in binary) within the blockchain (in a technical part of the blockchain called inputs/outputs). They are specifically encoded on the address(s) assigned to the 3rd party software that is using the services Catenis provides. Standard Tokens on the bitcoin blockchain are created in the same way, they are also encoded (in binary) within the blockchain. BCOT Security Tokens are bitcoin blockchain tokens. BCOT Security Tokens, when accepted by the system, converts one-to-one to a Catenis credit for a given customer account. The distinction, while subtle, is significant, when a customer’s account receives a Catenis credit, this credit is now internal to the platform, used as a unit of account, gets consumed upon usage, and does not have the ability to leave the platform. In other words, they cannot be accessed or transferred in any way externally.
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Catenis service credits are consumed and used as a unit of account for when bitcoins are spent by the system to pay for a Catenis paid service (i.e.: logging to the blockchain, sending a transaction message, etc.). The cost of the service is expressed in bitcoins because the bitcoin blockchain fees are paid in bitcoins. These fees are not fixed and fluctuate based on the price of bitcoin and the fee market. The system takes the current BCOT Security Tokens price (in dollars) and the current bitcoin price (also in dollars) and calculates the amount of Catenis service credits required to pay the service cost. By using this proprietary technology, we can achieve decentralization for a system of accountability that typically requires a centrally vulnerable database.
When using Catenis to integrate with the bitcoin blockchain via its connectivity points (APIs) it significantly reduces the cost, difficulty, and time for developers. Developers need only send a message to the message API and Catenis will automatically encrypt the message, calculate the cost of the message, pay the cost, produce a message signature (Hash), place that signature into a bitcoin transaction for auditing, place the content of the message (file, Music, Video, etc.) into a globally distributed file system, log to the blockchain when the message was read and notify the sending party. Also, a developer never needs to buy, hold, or secure bitcoins reducing liability for our customers. Catenis does not only do this for message sending it does the same for recording of immutable data to the blockchain, creating digital assets (Tokens) and across the set of all our services. One call to our APIs and Catenis handles the difficult interactions with the blockchain on behalf of the developer.
Additionally, it improves upon the bitcoin blockchain by adding features across its 2nd layer that the bitcoin blockchain does not natively support. These include, military grade encryption, permission rights, permission rights management, notifications of occurrences, message read receipts, cryptographic proofs of who recorded the immutable data, issuance of tokens, delivery of content to a globally distributed file system (IPFS), and off-chain message capabilities so transaction message fees are significantly reduced. Since the bitcoin blockchain lives everywhere through “nodes” on computers throughout the world, applications connected to Catenis are accessible at any location on the planet. You can even send a transaction message using a block stream satellite connection and receive a transaction message when your application is connected to Catenis service endpoints.
Our company’s products offer a broad range of functionality that enhances the underlying blockchain adding security services, encryption services, notification services, ability to log or send any type of content that gets anchored and recorded on the global bitcoin blockchain. We also provide consultative, education, and professional services around our product offering as value-added services. Our products and services are being offered to companies as an enterprise offering. We are providing self-service functionality allowing any developer, hobbyist, small company along with enterprise corporations to also take advantage of using the Catenis platform.
Plan of Operation
Our plan of operations is as follows:
Market Our Product and Website
Our website contains the 2 Product offerings: Developer and Enterprise. The Developer account is self-service registration that allows users to have access to the Catenis Platform in the TestNet environment with a limited quantity of credits at no charge. The Enterprise account is the full Catenis platform using the production environment requiring an annual license fee. The Startup offering is the same as the Enterprise offering with a special annual license pricing for startups, independent developers, and educational institutions with revenue under $3 million. Through these offerings, we will target different segments of the market and have a mix of customer that will give the company agility to mold as the industry matures.
We are now focusing our efforts on raising capital for the rest of 2022. Our operations will be limited due to the limited amount of funds on hand. Now that we have completed the Claims Process, our specific goal is to profitably sell our product and raise funds to continue our operations.
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Office Establishing, Furnishing and Accounting and Legal Fees (Duration 4th – 12th Month, Approximate Cost $1,700,000)
As we are at the initial stage of product relaunch and have been caught in the middle of the pandemic with our headquarters recently moved to Miami, Florida, we had to delay the plan to rent office space that can accommodate our CEO, staff, and some room to receive our customers and partners. As of February 15, 2022, however, we have located and leased office space in Florida which is now the new Headquarter.
Our new location at 3401 North Miami Avenue, Suite 230 in Miami Florida offers a professional environment to accommodate our relocation and afford us to plan for a new headquarters that will house our management and staff, and have added space to for customers and partners.
We have hired a Marketing Manager. We will also need to bring on sales help: one employee for each role will be sufficient while continuing with our present staff. We will also need sufficient money for SEC compliance, which includes legal and accounting fees. We estimate these expenses will add an additional cost of $242,000 in the next 12 months.
We will also need to have funding for a marketing campaign that we estimate to be $44,000 and additionally travel, meal, events, and administrative expenses which would also add an additional $44,000 of expense. To meet this basic requirement, we will need to raise approximately $1,700,000 in equity or debt offerings. In case we succeed to raise $2,000,000 we may rent or obtain an office with better facilities, attend conventions and trade shows, expand our marketing reach to obtain diverse clients and partnerships. We would also increase our engineering team by an additional head count having a total of 6 employees and be able to add new features to our product offerings.
At the initial stage the Company is at now, we do not require any special equipment above the servers required to run both our sandbox and production environments. Both of these environments are externally hosted. Our basic needs are as follows: 3 servers for the sandbox environment and 5 servers for the production environment. Additionally, each staff member will need a computer and mobile phone. As we expect to expand our product offering to attract customers worldwide, we will have to rent or lease additional server to store website and platform and in-application data. As we expect business to grow, we might need additional data storage for the server and increased server footprint. To complete this stage, we need to sell at least $1,700,000 in funds. For far better operation we need to raise $2,000,000 to lease a more robust server environment and add additional engineering staff, which we expect to need as our customer base grows. Increasing our engineering team will also be a key component to staying competitive and addressing software functionality and bugs that will appear. With the money gained we can modestly increase our engineering team to two additional people.
Staff Recruiting (Duration 6th -12th Month, Approximate Cost $550,000-$ 947,000)
Our primary services are software sales and consulting of individuals, so our Company requires additional personnel only as it grows. At the initial stage, we expect that most of the jobs are due to be executed by our CEO, CFO and external consulting partners. To increase sales, we will need a VP of Sales and a sales professional. If we hit our projection of raising $1,700,000, we might afford to hire, the VP of Sales and sales professional to run and maintain the sales operation. For operation of higher standard, we need to raise $2,000,000. We will use the additional funds to hire an additional engineer to build product enhancements and support maintenance of the product. To stay relevant and competitive we will need additional engineering staff. If we succeed in raising $1,700,000, we plan to hire 2 engineers to help on a regular basis as technicians to maintain the website, the server, and enhance the product.
Our President and CEO, Andre De Castro will be in charge of our web domain and front-end shopping cart system. An outside consulting firm Hiades Tecnologia LTDA, which we have been using for several years will take the lead on product enhancements until additional help is needed. Once we increase our sales, we plan to hire a web developer and a web designer to help us with the design and development of our website. We do not have any written agreements with any web developers or web designers at current time. Updating and improving our platform product and website will continue throughout the lifetime of our operations. We intend to employ the functions which we find useful, such as an automated system for our regular customers or subscribers, and product enhancements to stay competitive.
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Advertising and Marketing Strategy and Administration (Duration 4th-12th Month, Approximate Cost $ 188,000)
To get into focus of our potential customers we intend to use the marketing strategies, such as web advertisements, social web communities marketing, sponsoring of events, event speaking and having booths at major industry trade shows. The plan of our active marketing campaign to promote our platform services includes attending and speaking at various events, including blockchain and cryptocurrency events, webinars, and podcasts. Also, joining Associations that focuses on Blockchain verticals. Additionally, we will do online marketing via search engines and social media. Our market goes beyond domestic boarders, therefor marketing efforts for each country will be tailored to each individual market we decide to focus on.
Estimated Expenses for the Next 12 Months
The following provides an overview of our estimated expenses to fund our plan of operation over the next twelve months.
| SEC reporting and compliance | $ | 242,000 | |
| Office conference room | $ | 30,800 | |
| Consulting services | $ | 254,000 | |
| Website Servers and Maintenance | $ | 38,200 | |
| Advertising Marketing Strategy, Events, Travel, Admin | $ | 188,000 | |
| Staff and additional Recruiting | $ | 947,000 | |
| Total | $ | 1,700,000 |
Results of Operations for the Three Months Ended June 30, 2022 and 2021
Revenues
We are a start-up company and have not generated any significant revenues for the three and six months ended June 30, 2022 and 2021. We can provide no assurance that we will generate sufficient revenues from our Catenis platform to sustain a viable business operation. In order to generate revenues, we must first continue to sell our platform and market our services.
Operating Expenses
We incurred operating expenses in the amount of $326,271 and $646,402 for the three and six months ended June 30, 2022, respectively, as compared with $259,178 and $436,424 for the three and six months ended June 30, 2021, respectively. Our operating expenses for all periods consisted mostly of selling, general and administrative expenses. The detail by major category within selling, general and administrative expenses for the six months ended June 30, 2022 and 2021 is reflected in the table below.
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Salaries, Wages & Benefits | $ | 299,853 | $ | 227,644 | |||||||
| Stock-based Compensation | $ | — | $ | 15 | |||||||
| Professional Fees | $ | 34,752 | $ | 33,003 | |||||||
| Board Fees | $ | — | $ | — | |||||||
| Investor Relations | $ | — | $ | — | |||||||
| Consultants | $ | 88,130 | $ | 50,122 | |||||||
| Advertising and promotion | $ | 56,864 | $ | 17,663 | |||||||
| Depreciation and amortization | $ | 5,679 | $ | 852 | |||||||
| Development and maintenance | $ | 69,032 | $ | 57,553 | |||||||
| Office, Facility, and other | $ | 63,588 | $ | 31,605 | |||||||
| Travel and entertainment | $ | 28,504 | $ | 17,967 | |||||||
| Totals | $ | 646,402 | $ | 436,424 | |||||||
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The increase of $209,978 in our selling, general and administrative expenses for the six months ended June 30, 2022 versus the same period ended 2021 is largely the result of increased spending across most of the above categories, but those most prominent are related to compensating management, consultants and professionals. These expenditures related to salaries, wages, and benefits and other human resource related costs is due to the expansion of our team to support additional growth and the added cost of legal and accounting compliance.
We have increased our advertising and promotion spending in 2022 for industry events such as Bitcoin 2022 in early April 2022, CryptoCircle Happy Hour, Blockchain Supply Chain Association of Canada, Consensus 2022 held in Texas in June, ITEXPO The Blockchain Event 2022, and others. We have increased our social media presence with podcast interviews by our CEO speaking about our technologies and opportunities in the blockchain industry, educational videos, articles in tech publications and email newsletters. We believe these past experiences were vital to the company, as we learned more about what customers want out of our technology. We are hopeful that these efforts will expand our presence in the industry and present opportunities for collaboration and clients for our Catenis platform. However, given the current economic downturn, it may be more difficult to get clients on board with new innovative technologies that we offer.
We also spent more on office expenses as we moved and opened our new headquarters to Florida.
We expect our selling, general and administrative expenses to increase in future quarters as we continue with our reporting obligations with the SEC and the increased expenses associated with increased operational activity, which is expected for the balance of the year.
Other Income
We had other income of $275,257 and $575,593 for the three and six months ended June 30, 2022, respectively, as compared with other income of $409,239 and $1,211,098 for the three and six months ended June 30, 2021, respectively. Our other income for the six months ended June 30, 2022 is the result of a $577,504 gain on the sale of Digital Assets, offset by interest expense of $1,911.
As of December 31, 2020, the Company estimated the amount of refunds to be paid to claimants in our Claims Process at $12,982,170, which includes $547,853 of accrued interest that is included in Accounts Payable and Accrued Expenses. Accrued interest of $537,300 previously accrued was released upon the conclusion of the Rescission Offer and it, along with a $631,014 in the gain of Digital Assets, is the reason for our other income for the six months ended June 30, 2021.
Net Income/Loss
We recorded a net loss in the amount of $53,150 and $3,441 for the three and six months ended June 30, 2022, respectively, as compared with net income of $150,016 and $774,674 for the three and six months ended June 30, 2021, respectively.
Liquidity and Capital Resources
As of June 30, 2022, we had total current assets of $1,283,319, mainly consisting of digital assets, compared with current liabilities of $13,929,332, mainly consisting of deferred revenue, resulting in a working capital deficit of $12,646,013. This represents an increase from our working capital deficit of approximately $12,593,602 as of March 31, 2022 and $10,960,574 at December 31, 2021.
Operating activities used $589,415 in cash for the six months ended June 30, 2022, as compared with $679,378 used for the same period ended 2021. Our negative operating cash flow for 2022 was largely the result of the realized gain on the sale of Digital Assets offset by income taxes payable. Our negative operating cash flow for 2021 was the result of the deferred income tax benefit, the realized gain on the sale of Digital Assets offset by income taxes payable.
Investing activities provided $611,901 in cash for the six months ended June 30, 2022, as compared with $676,924 for the same period ended 2021. Our positive investing cash flow for both periods was the result of proceeds from the sale of Digital Assets.
Financing activities used $10,392 in cash for the six months ended June 30, 2022, as compared with no financing activities for the same period ended 2021. Our negative financing cash flows for 2022 was the result of repayments of notes payable.
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Financial Condition and Management’s Plans
We believe that our ability to continue operations depends on our ability to obtain funding that will be sufficient to sustain our operations until we have significant and sustainable revenues on our core product offerings with the goal of and achieving 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 execute our intended business plan or generate positive operating results. The accompanying 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.
The success of our business plan beyond the next 12 months is contingent upon us obtaining additional financing. We intend to fund operations through debt and/or equity financing arrangements, which may be insufficient to fund our capital expenditures, working capital, or other cash requirements. We do not have any formal commitments or arrangements for the sales of stock or the advancement or loan of funds at this time. There can be no assurance that such additional financing will be available to us on acceptable terms, or at all.
Through last year until now, the Company’s management has taken several actions in an effort to secure funding and generate revenue streams including:
| • | Added two offerings to the product line making the platform more robust and providing diversified options to the marketplace; |
| • | Added NFT functionality to its product to attract new market segmentation; |
| • | Relaunched a new website and marketed to various different segments of the industry verticals; |
| • | Prepared offering documents for a potential offshore offering under Regulation S, promulgated under the Securities Act of 1933, as amended (the “Securities Act”); |
| • | Added a Director to the Company’s Board of Directors with fundraising experience to lead our efforts; |
| • | Discussed with broker ways to raise additional capital; |
| • | Hired a marketing manager and launched a marketing campaign to acquire customers; |
| • | Added an additional development language to Catenis to facilitate the programming of integration; |
| • | Hired a VP of Business Development; |
| • | Appointed a New Board Member with Financial and Business M&A Experiences; |
| • | Hired Landmark Ventures as a Sales Arm for the Company; |
| • | Identified a lead generating company to help with the sales efforts; |
| • | Presented our products to potential clients from the leads generated from our sales efforts; |
| • | Increased efforts for quarterly sign ups to our free account and follow-up strategies to increase exposure; and |
| • | Coordinated efforts for upcoming industry tradeshows with Booths and participation in interviews with industry leading news outlets |
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Any securities offered will not be or have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. There is no assurance that the Company will be successful in obtaining funding or generating revenues sufficient to fund operations.
As mentioned previously, we have estimated expenditures for the next 12 months will be approximate $1,700,000 without considering the expenditures related to the Claims Process. As of Q3 of 2021, we have concluded the Claims Process and paid out the claims. After our distribution of the notice and claim forms, twenty (20) eligible claimants responded and we provided each with a rescission payment plus interest. Eighteen (18) of these claims were paid in US Dollars totaling $196,272.53 and two (2) claims valued at $29,984.64 USD were paid with 13.05741 in Ethereum cryptocurrency, which amounted to $29,984.64 USD at the applicable rate.
The conclusion of the Claims Process has been helpful in assessing our capital requirements going forward. As a result of the payouts made in the Claims Process, we have less assets available for current and future expenditures, and thus less available to meet expenditures, which in turn creates more urgency to raise capital. We plan to continue our efforts at raising capital and to sell our product offerings. However, there is no assurance that we will be successful in obtaining funding or generating revenues sufficient to fund operations.
Off Balance Sheet Arrangements
As of June 30, 2022, there were no off-balance sheet arrangements.
Going Concern
The accompanying financial statements have been prepared in conformity with generally accepted accounting principle, which contemplate our continuation as a going concern. However, we have limited revenues from inception through June 30, 2022. We currently have negative working capital, and have not completed our efforts to establish a stabilized source of revenues sufficient to cover operating costs over an extended period of time.
Management anticipates that we will be dependent, for the near future, on additional investment capital to fund operating expenses. We intend to position the company so that we may be able to raise additional funds through the capital markets. In light of management’s efforts, there are no assurances that we will be successful in this or any of our endeavors or become financially viable and continue as a going concern.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Our critical accounting policies are set forth in Note 3 to the financial statements.
Recently Issued Accounting Pronouncements
The Company's accounting policies are the same as those described in Note 3 to the Company's Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2021.
The Company has reviewed recent accounting pronouncements and concluded they are either not applicable to the business, or no material effect is expected on the condensed consolidated financial statements as a result of future adoption.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are not required to provide the information required by this Item.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2022, our disclosure controls and procedures were not effective due to the presence of material weaknesses in internal control over financial reporting.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management identified the following material weaknesses which have caused management to conclude that our disclosure controls and procedures were not effective: (i) inadequate segregation of duties and effective risk assessment; and (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC guidelines.
Remediation Plan to Address the Material Weaknesses in Internal Control over Financial Reporting
Our company plans to take steps to enhance and improve the design of our internal controls over financial reporting. During the period covered by this quarterly report on Form 10-Q, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we plan to implement the following changes during our fiscal year ending December 31, 2022: (i) appoint additional qualified personnel to address inadequate segregation of duties and ineffective risk management; and (ii) adopt sufficient written policies and procedures for accounting and financial reporting. The remediation efforts set out are largely dependent upon our securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected in a material manner.
Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error 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. Due to 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, within our company have been detected.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
Rahul Manchanda v. Blockchain of Things, Inc., Index No. 656523/2019, New York County, NY Supreme Court (filed November 5, 2019)
The Plaintiff, Rahul Manchanda, has alleged claims for breach of contract, the covenant of good faith and fair dealing, and requested an accounting from BCoT. The amount of monetary damages sought is unclear from the complaint, although it asserts that the Plaintiff invested $20,000 with BCoT to launch a crowdfunding campaign and that “defendant is required to pay to plaintiff his pro rata portion of the gains on his investment as set forth in the Contract.” BCoT contacted the insurance company about this litigation and coverage was rejected.
On December 3, 2019, BCoT filed a motion to dismiss the claims on the grounds of res judicata (the Plaintiff filed and voluntarily dismissed with prejudice the very same claims in a federal court action); lack of ripeness (the crowdfunding campaign has not been completed because of the SEC investigation); the amount in controversy (the $20,000 investment) does not meet the $25,000 jurisdictional threshold for the court in which the Plaintiff filed the case.
On January 2, 2020, the Plaintiff filed an opposition to the motion to dismiss and on January 6, 2020 BCoT filed a reply brief. This motion is thus fully briefed and awaiting a decision form the Court. The matter is in discovery and depositions have been completed in April of 2021. On June 19, 2021 Plaintiff’s lawyer dropped out of the case citing he was no longer able to work with his client.
On September 16, 2021, a new lawyer representing Plaintiff entered the case. On February 10, 2022 a NYS Note of Issue Notification: New York – Commercial Contract was issued, a document that lets the court know that all discovery has been completed and that the lawsuit is ready for trial. The case will sit on the trial calendar and await a trial date. It can take months for a case to receive a trial date.
BCoT believes that the Plaintiff’s claims are without merit and there is a high likelihood that the claims will be dismissed, or at the very least, stayed by the Court or go to trial by jury. BCoT intends to vigorously contest this matter and has no plans to settle out of court at this time.
Item 1A: Risk Factors
See risk factors included in our Annual Report on Form 10-K filed with the SEC on March 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Mine Safety Disclosure
N/A
Item 5. Other Information
None
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Item 6. Exhibits
| Exhibit Number | Description of Exhibit | |
| 31.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101** | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 formatted in Extensible Business Reporting Language (XBRL). |
** Provided herewith
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SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Blockchain of Things, Inc. | ||
| Date: August 11, 2022 | ||
| By: | /s/ Andre De Castro | |
| Andre De Castro | ||
| Title: | Chief Executive Officer, Principal Executive Officer, and Director | |
| Blockchain of Things, Inc. | ||
| Date: August 11, 2022 | ||
| By: | /s/ Deborah de Castro | |
| Deborah de Castro | ||
| Title: | Chief Financial Officer, VP of Operations, Secretary, Treasurer Principal Financial Officer, | |
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