10-Q 1 bcot10q.htm

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2021

 

Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from ________ to __________

 

Commission File Number: 000-56170

 

Blockchain of Things, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   47-5080120
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer
Identification No.)

 

747 3rd Avenue

New York, New York 10017

(Address of principal executive offices)

 

(646) 926-2268
(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  Yes    No  

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes    No  

 

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

 

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

 

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

 

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

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 4,561,001 common shares as of April 30, 2021.

  

 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 10
Item 4: Controls and Procedures 10
     
PART II – OTHER INFORMATION
 
Item 1: Legal Proceedings 11
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 March 31, 2021 (unaudited) and December 31, 2020;
F-2 Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020 (unaudited);
F-3 Condensed Consolidated Statements of Stockholders’ Deficit for the three months ended March 31, 2021 and 2020 (unaudited)
F-4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited);
F-5 Notes to Condensed Consolidated Financial Statements (unaudited).

 

 3 

 

BLOCKCHAIN OF THINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

   March 31,  December 31,
   2021  2020
ASSETS      
Current Assets:         
Cash  $59,554   $20,257
Prepaid Expenses and Other Current Assets   2,412    3,445
Digital Assets   1,340,961    1,362,066
Total Current Assets   1,402,927    1,385,768
          
Non-current Assets:         
Property and Equipment, net   568    995
Total Assets  $1,403,495   $1,386,763
          
LIABILITIES AND STOCKHOLDERS' DEFICIT         
Current Liabilities:         
Accounts Payable and Accrued Expenses  $52,746   $617,729
Deferred Revenue   12,218,612    —  
BCOT Token Refund Liability   215,705    12,434,317
Sponsorship Loans Payable   20,000    20,000
Total Current Liabilities   12,507,063    13,072,046
          
Long-term Liabilities:         
Paycheck Protection Program Loan   —      42,900
Total Liabilities   12,507,063    13,114,946
          
Stockholders' Equity (Deficit):         
Common stock; par value $0.0001; 50,000,000 shares authorized; 4,556,834 shares issued and outstanding as of March 31, 2021; 50,000,000 shares authorized; 4,542,126 shares issued and outstanding as of December 31, 2020   456    454
Preferred stock; par value $0.0001; 10,000,000 shares authorized; 0 shares issued and outstanding as of March 31, 2021; 0 shares authorized, issued and outstanding as of December 31, 2020   —      —  
Additional Paid-in Capital   437    437
Accumulated Deficit   (11,104,461)   (11,729,074)
Total Stockholders' Deficit   (11,103,568)   (11,728,183)
Total Liabilities and Stockholders' Deficit  $1,403,495   $1,386,763

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

 F-1 

 

BLOCKCHAIN OF THINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited) 

 

  

Three Months Ended

March 31,

   2021  2020
          
Revenue, net  $—     $—  
          
Operating Expenses:         
Selling, General and Administrative   177,246    161,674
          
Loss From Operations   (177,246)   (161,674)
          
Other Income (Expense):         
Other Income   537,300    —  
Gain on Sale of Digital Assets   221,775    58,804
Gain on Extinguishment of Debt   42,900    —  
Interest Expense   (116)   (33,784)
Other Income (Expense), net   801,859    25,020
          
Net Income (Loss)  $624,613   $(136,654)
          
          
NET INCOME (LOSS) PER SHARE         
Net Income (loss) per share, basic  $0.14   $(0.03)
Net Income (loss) per share, diluted  $0.13   $(0.03)
          
Weighted average number of shares of common stock - basic   4,549,480    4,369,204
Weighted average number of shares of common stock - diluted   4,674,480    4,369,204

 

 

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

 F-2 

 

BLOCKCHAIN OF THINGS, INC. AND SUBSIDIARY

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, 2020   4,542,126   $454   $437   $(11,729,074)  $(11,728,183)
Exercise of Stock Options   14,708    2    —      —      2
Net Income   —      —      —      624,613    624,613
Balance as of March 31, 2021   4,556,834   $456   $437   $(11,104,461)  $(11,103,568)

 

  

 

                
    Common Stock               
    Shares    Amount    Additional Paid-In Capital    Accumulated Deficit    Total Stockholders’ Deficit
Balance as of December 31, 2019   4,358,079   $436   $437   $(11,285,903)  $(11,285,030)
Exercise of Stock Options   22,250    2    —      —      2
Net Loss   —      —      —      (136,654)   (136,654)
Balance as of March 31, 2020   4,380,329   $438   $437   $(11,422,557)  $(11,421,682)

 

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

 F-3 

 

BLOCKCHAIN OF THINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

  

Three Months ended

March 31,

   2021  2020
CASH FLOWS FROM OPERATING ACTIVITIES:         
Net Income (Loss)  624,613   $(136,654)
Adjustments to reconcile net loss to net cash used in operating activities:         
Depreciation   427    426
Interest on BCOT Token Refund Liability   (537,300)   —  
Stock based Compensation   2    2
Gain on Extinguishment of Debt   (42,900)   —  
Realized Gain on Sale of Digital Assets   (221,775)   (58,804)
Changes in Assets and Liabilities:         
Prepaids and Other Current Assets   1,033    880
Accounts Payable and Accrued Expenses   (27,683)   (117,037)
Accounts Payable and Accrued Expenses (Interest Portion of BCOT Token Refund Liability)   —      33610
 Net cash used in operating activities   (203,583)   (277,577)
          
CASH FLOWS FROM INVESTING ACTIVITIES:         
Proceeds from sale of Digital Assets   242,880    282,575
          
CASH FLOWS FROM FINANCING ACTIVITIES:         
Repayments of Convertible Notes   —      (5,000)
          
Net Change in Cash   39,297    (2)
          
Cash, Beginning of Period   20,257    30,134
          
Cash, End of Period  $59,554   $30,132
          
Supplemental disclosure of cash flows information:         
          
Cash paid during the period for interest  $116   $11,974
          
          
Noncash activity:         
Reclassification of BCOT Token Refund Liability to Deferred Revenue  $12,218,612   $—  

 

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

 F-4 

 

BLOCKCHAIN OF THINGS, INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 - Organization and Nature of Operations

 

Blockchain of Things, Inc (“BCoT”), was incorporated in Delaware on July 15, 2015 with a principal place of business in New York, New York. BCoT has a 100% ownership interest in BCOT Global Holdings (“BCOT GH”), a limited liability company organized on March 29, 2018 under the laws of the Cayman Islands. Collectively, BCoT and BCOT GH are referred to as the “Company.”

 

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 $12,473,200 of digital tokens (“BCOT Tokens” or “tokens”; the “Offering”) for use of the Company’s blockchain platform and technology, called “Catenis Enterprise” and “Catenis Flow” (collectively, “Catenis”). BCoT intended to use the proceeds to continue to implement its business plan, which includes further developing and maintaining Catenis. Catenis is an integration layer to the global bitcoin blockchain. It allows companies to rapidly build blockchain based applications or simply integrate with existing systems. To date, the proceeds were used to fund the operations of the Company, which includes the payment of salaries to software developers and to pay for expenses associated with the settlement agreement with the SEC, further discussed in Note 9.

 

Note 2 - Financial Condition and Management’s Plans

 

The Company has experienced recurring losses and negative cash flows from operations. As of March 31, 2021, the Company had cash of $59,554, a working capital deficit of $11,104,136, total stockholders' deficit of $11,103,568 and an accumulated deficit of $11,104,461. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

Further, 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. 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.

 

The accompanying Condensed Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. The Company believes that its ability to continue operations depends on its ability to generate revenues and obtain funding that will be sufficient to sustain its operations until it rolls out its core product offerings and achieve profitability and positive cash flows from operating activities. The Company continues to fund its operations through the sale of its Digital Assets. As of March 31, 2021, the market value of these Digital Assets exceeds twelve months of the Company’s capital requirements. However, the market value of Digital Assets is subject to extreme market volatility.

 

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

 

·Added four additional offerings to the product line making the platform more robust and giving more options to the marketplace.
·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.

 

 F-5 

 

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.

 

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 SEC (“Securities Exchange Commission”). 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, 2020. The results of operations for the period ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year. The Consolidated Financial Statements as of December 31, 2020 are derived from audited financial statements included in the Company’s Form 10-K for the year ended December 31, 2020.

 

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 financial statements includes the fair values of the BCOT Token Refund Liability and Digital assets, including the impairment assessments, as well as estimates related to Stock Based Compensation.

 

Reclassification

 

Certain prior period amounts have been reclassified to conform to the current period presentation.

 

BCOT Tokens Revenue Recognition

 

The Company issued BCOT 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 $11,863,530 and cash of $609,670 in exchange for the BCOT Tokens.

 

The BCOT Token is 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 Tokens to their account and they will be converted on a one-to-one basis into Catenis Credits for their account. Each BCOT 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.

 

 F-6 

 

The Company evaluated the terms of sale of the BCOT Tokens and determined that, when sold, a BCOT Token represents an obligation of the Company with counterparties that were determined to be customers. Therefore, the Company determined that BCOT 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”).

 

Pursuant to the terms of the BCOT Tokens, there is no form of partnership, joint venture, agency or any similar relationship between a holder of a BCOT Token and the Company. Except as noted below, BCOT Tokens are non-refundable and do not pay interest and have no maturity date. BCOT 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 Tokens to customers, the associated liability to deliver the BCOT tokens was satisfied. No additional BCOT 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 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 March 31, 2021, all valid claims have been submitted and the Company revised the estimated refunds to be paid to claimants to $226,258, which includes $10,553 of accrued interest that is included in Accounts Payable and Accrued Expenses on the accompanying Condensed Consolidated Balance Sheets (see Notes 8 and 9). As of December 31, 2020, the Company estimated the amount of refunds to be paid to claimants at $12,982,170, which includes $547,853 of accrued interest that is included in Accounts Payable and Accrued Expenses on the accompanying Condensed Consolidated Balance Sheets (see Notes 8 and 9). Accrued interest of $537,300 previously accrued was released upon the conclusion of the Rescission Offer and is recorded in Other Income on the Condensed Consolidated Statements of Operations.

 

In the first quarter of 2021, subsequent to the receipt of all valid Rescission Offer claims, the Company recognized the remaining amount of $12,218,612 received from the issuance of BCOT Tokens as Deferred Revenue, until such time that customers convert the BCOT Tokens into Catenis credits and redeem for Catenis services (see Note 8).

 

Deferred Revenue

 

Deferred revenue represents BCOT 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-7 

 

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 $66,194 and $62,185 of software development during the three months ended March 31, 2021 and 2020, respectively.

 

Fair Value Measurement

 

The Company’s financial instruments include cash, accounts payable, sponsorship agreements and the BCOT Token Obligation. The fair values of cash, accounts payable, sponsorship agreements and the BCOT Token Obligation (as defined and described further in Note 8) approximate their stated amounts because of the short maturity of these financial instruments from the balance sheet date. Our sponsorship agreements are carried at fair value and based on Level 2 inputs.

 

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.

 

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.

Indefinite-lived intangible assets are not subject to amortization. Instead, they are tested for impairment on an annual basis and more frequently if events or circumstances change that indicate that it’s more likely than not that the asset is impaired. As a result of the aforementioned, the Company will only recognize decreases in the value of its Digital Assets, and any increase in value will be recognized upon disposition. Ether, Bitcoin and 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.

 

 F-8 

 

When the Company evaluates Ethers, Bitcoins and Bitcoin Cash for impairment under ASC 350, Intangible – Goodwill and Other, 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. Realized gain (loss) on sale of Digital Assets is included in caption Gain on Sale of Digital Assets on the Condensed Consolidated Statement 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 March 31, 2021, and December 31, 2020, the Company’s adjusted cost basis was $1,340,961 and $1,362,066, respectively. During the three months ended March 31, 2021 and March 31, 2020, the Company recognized no impairment losses. Please refer to Note 4 for additional information about Digital Assets.

 

Income (loss) per Common Share

 

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 months ended March 31, 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. The potentially dilutive common stock equivalents for the three months ended March 31, 2021 were 125,000 and were included in diluted EPS as their effect would be dilutive.

 

For the three months ended March 31, 2020, the Company reported a net loss. As a result, basic and diluted loss per common share is 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 for the three months ended March 31, 2020 were 199,167 and were not included in diluted EPS as their effect would be anti-dilutive.

 

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, 2020.

 

The Company has reviewed other 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:

 

         Bitcoin      
   Ether  Bitcoin  Cash  Tether  Total
Balance at December 31, 2020  $375,173   $985,634   $1,259   $—     $1,362,066
Sale of Digital Assets   (21,105)   —      —      —      (21,105)
Impairment   —      —      —      —      —  
Balance at March 31, 2021  $354,068   $985,634   $1,259   $—     $1,340,961
                         
Balance at December 31, 2019  $698,710   $1,163,019   $1,259   $—     $1,862,988
Sale of Digital Assets   (216,309)   (7,462)   —      —      (223,771)
Impairment   —      —      —      —      —  
Balance at March 31, 2020  $482,401   $1,155,557   $1,259   $—     $1,639,217

 

 F-9 

 

The Company recognized $221,775 and $58,804 as a net gain on the sale of digital assets during the three months ended March 31, 2021 and March 31, 2020, respectively.

 

On June 25, 2018 the Company created 553,262,386 BCOT Tokens which are not recognized on the balance sheet and have zero carrying value. As of March 31, 2021 and December 31, 2020, respectively, the Company distributed 68,773,608 and 69,160,720 BCOT Tokens to third party wallets or smart contracts and was holding 484,488,778 and 484,101,666 BCOT Tokens. A total of 397,088 BCOT tokens were returned to the Company during the rescission period, of which 387,112 were returned during the three months ended March 31, 2021.

 

Note 5 – Accounts Payable and Accrued Expenses

 

Accounts Payable and Accrued Expenses consisted of the following as of:

 

   March 31,  December 31,
   2021  2020
Accrued interest on token refund liability  $10,553   $547,853
Legal and professional services   6,844    31,018
Software development   11,504    32,795
Other accrued liabilities   16,468    515
Credit card payable   7,377    5,547
Total Accounts Payable and Accrued Expenses  $52,746   $617,729

 

Note 6 – Debt

 

Sponsorship Agreements

 

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 cash payment associated with the remaining Sponsorship Agreement is variable and based on the amount of proceeds raised by the Company through the crowd sale campaign, in which the Company sold the cryptographic tokens in exchange for cash or cryptocurrency. The number of cryptographic tokens to be issued to the Sponsor is calculated as half of the Sponsor’s contribution amount divided by a price per cryptographic token equal to 65% of the crowd sale issuance price of a cryptographic token on the day of the crowd sale launch. Such obligation was contingent on the completion of the crowd sale. The crowd sale campaign began on June 27, 2018 and was completed on August 1, 2018 and raised $1,875. The Company was obligated to pay down the Sponsorship loan upon the completion of the crowd sale campaign.

 

The liability associated with the one outstanding Sponsorship Agreement as of March 31, 2021 and December 31, 2020 was determined to be $20,000 and was determined based on the ongoing legal matter (see Note 8 for further details).

 

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 $40,900 (the “PPP loan”). Under the PPP loan, the loan has a fixed interest rate of 1% per annum, a maturity date two years from the date of the funding of the loan, and deferral of payments for six months. Pursuant to the terms of the PPP loan, the Company applied for forgiveness of the loan in an amount equal to the sum of the following costs incurred by the Company during period beginning on the date of first disbursement of the loan and ending on the earlier of (a) the date that is 24 weeks after the date of funding or b) December 31, 2020: payroll costs, any payment of interest on a covered mortgage obligation, payment on a covered rent obligation, and any covered utility payment. The amount of PPP loan forgiveness was calculated in accordance with the requirements of the Paycheck Protection Program, including the provisions of Section 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), although no more than 40% of the amount forgiven can be attributable to non-payroll costs.

 

 F-10 

 

The Company used the proceeds for purposes consistent with the PPP and the loan was forgiven effective March 18, 2021. The Company has elected the policy to recognize the Gain on the extinguishment of debt upon notification that the loan was forgiven. The forgiveness of the loan is recorded as Gain on Extinguishment of Debt on the accompanying Condensed Consolidated Statement of Operations.

 

In addition to the SBA Loan, the Company received an advance of $2,000 ($1,000 per eligible employee). This advance was from the Small Business Administration Economic Injury Disaster Loans (“EIDL Advance”). The Company used the proceeds for purposes consistent with the PPP loan and the EIDL advance was forgiven effective March 18, 2021. The Company has elected the policy to recognize the Gain on the extinguishment of debt upon notification that the loan was forgiven. The forgiveness of the EIDL advance is recorded as Gain on Extinguishment of Debt on the accompanying Condensed Consolidated Statement of Operations.

 

Note 7 – Income Taxes

 

The Company’s effective tax rate is calculated quarterly based upon current assumptions relating to the full year’s estimated operating results and various tax-related items. The Company’s effective tax rate was 0% for the three months ended March 31, 2021 and March 31, 2020. The difference between the effective tax rate of 0% and the U.S. federal statutory rate of 21% for the three months ended March 31, 2021 and March 31, 2020 was primarily due to recognizing a full valuation allowance on deferred tax assets.

 

The Company determined that, based on all available evidence, both positive and negative, including the Company’s latest forecasts and cumulative losses to date, it was not more likely than not that its deferred tax assets would be realized and therefore it continued to record a full valuation allowance as of March 31, 2021. As a result, there is no provision for income taxes other than state minimum taxes.

 

The net operating losses generated to date will carryforward indefinitely. Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income.

 

The Company has no uncertain tax positions related to federal and state income taxes. The 2017 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 Tokens and Deferred Revenue

 

As part of its private pre-sale and subsequent crowd sale of BCOT Tokens, the Company obtained Cash, Bitcoin, Ether, Tether, and Bitcoin Cash from November 2017 through early August 2018 totaling $12,445,318 for BCOT Tokens which was recorded as a liability (the “BCOT Token Delivery Obligation”) until such time as the BCOT Tokens were delivered in the first quarter of 2019.

 

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 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 Tokens, less the refunds issued pursuant to the Rescission Offer, as Deferred Revenue until such time that customers convert the BCOT Tokens into Catenis credits and redeem for Catenis services.

 

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.

 

 F-11 

 

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 $250,000 to the SEC.
·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

 

In conjunction with the Settlement Agreement with the SEC, parties who obtained BCOT Tokens from the Company on or before July 31, 2018 (the “Potential BCOT Token Claimants”) were entitled to a refund in the amount of consideration paid, plus interest, less the amount of any income received thereon. The Company must distribute by electronic means claim forms to the Potential BCOT Token Claimants within 60 days of the filing (the “Rescission Offer”) of the Company’s registration statement on Form 10 or the date that the Form 10 becomes effective, whichever is sooner. The Potential BCOT Token Claimants must submit claims forms within three months of this date (the “Claim Form Deadline”). The Company must settle all valid claims within three months of the Claim Form Deadline.

 

The Company approved twenty eligible claims and is obligated to return such amounts totaling $226,258, inclusive of interest of $10,553. These claims were refunded during April 2021.

 

The remaining amount payable as of December 31, 2020 totaling $12,218,612 has been reclassified to deferred revenue as it represents advances from customers to be utilized for services provided by the Company.

 

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, should any offerees reject 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 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-12 

 

Sponsor Litigation

The one remaining Sponsor who has a Sponsorship Agreement with the Company in the amount of $20,000 has filed suit against the company asserting claims of breach of contract. The amount of monetary damages sought is unclear from the complaint. The Company believes the claims are without merit and seeks to dismiss the case and to contest the matter as may be required. The Company believes that the potential loss in this case is the $20,000 per the Sponsorship Agreement and continues to accrue the Sponsorship Liability.

 

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 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 each of the three months ended March 31, 2021 and March 31, 2020, the Company paid $34,519 to related parties for software development and consulting services. As of March 31, 2021 and December 31, 2020, respectively, $11,504 and $11,513 was due to a related party, Hiades Technologia LTDA, for software development services performed and is included in Accounts Payable and Accrued Expenses in the Condensed Consolidated Balance Sheets.

 

Note 11 – Subsequent Events

 

The Company has evaluated subsequent events through May 14 , 2021, which is the date the Consolidated Financial Statements were available to be issued, and determined that in April 2021, the Company refunded $226,258 to customers, subsequent to the Company’s validation of the rescission claims during the rescission period. No other material subsequent events have occurred.

 

 F-13 

 

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 will be 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. A 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.

 

 4 

 

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 of-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.

 

Plan of Operation

 

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. In the new relaunch of our product, 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.

  

Our plan of operations is as follows:

 

Market Our Product and Website

 

Our new website containing a self-service shopping cart as a simple way to purchase our product has been launched. We are now focusing our efforts on raising capital during this period and for the rest of 2021. 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. Our plan of operations following the completion is as follows.

 

Office Establishing, Furnishing and Accounting and Legal Fees (Duration 4th – 12th Month, Approximate Cost $1,375,000)

 

As we are at the initial stage of product relaunch and have been caught in the middle of the pandemic with our Headquarter in New York City, 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 soon as the City reopens, we will implement the rental of the office space that can accommodate additional staff, we will also need to bring on marketing and sales help: one employee for each role will be sufficient while continuing with our present staff of two. 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.

 

 5 

 

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 raise approximately $1,375,000 in equity or debt offerings. In case we succeed to raise $1,800,000, 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 5 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 relaunch our website 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 $1,375,000 in funds. For far better operation we need to raise $1,800,000 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-$847,000)

 

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 marketing and a sales professional. If we hit our projection of raising $1,375,000, we might afford to hire, the marketing and sales professional to run and maintain the sales and marketing operation. For operation of higher standard, we need to raise $1,800,000. 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 1,375,000, 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.

  

Advertising and Marketing Strategy and Administration (Duration 4th-12th Month, Approximate Cost $88,000)

 

To get into focus of our potential customers we intend to use the marketing strategies, such as web advertisements, social web communities marketing and event speaking. The plan of our active marketing campaign to promote our platform services includes attending and speaking at various events, including blockchain and cryptocurrency events. Additionally, we will do online marketing via advertising online 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.

 

 6 

 

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  $154,000 
Website Servers and Maintenance  $13,200 
Advertising Marketing Strategy, Events, Travel, Admin  $88,000 
Staff and additional Recruiting  $847,000 
Total  $1,375,000 

 

Results of Operations for the Three Months Ended March 31, 2021 and 2020

 

Revenues

 

We are a start-up company and have not generated any significant revenues for the three months ended March 31, 2021 and 2020. 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 $177,246 for the three months ended March 31, 2021, as compared with $161,674 for the same period ended 2020. Our operating expenses for all periods consisted mainly of selling, general and administrative expenses. The detail by major category within selling, general and administrative expenses is reflected in the table below.

 

      Three months ended March 31,
      2021  2020
Salaries, Wages & Benefits        95,839   83,222
Stock-based Compensation        2   2
Professional Fees        8,664   33,005
Board Fees        —     -
Investor Relations        —     -
Consultants        10,116   5,000
Advertising and promotion        8,505   -
Depreciation and amortization        426   426
Development and maintenance        34,519   34,519
Office, Facility, and other        12,693   5,118
Travel and entertainment        6,482   382
    Totals    177,246   161,674

 

The increase of $15,572 in our selling, general and administrative expenses for the three months ended March 31, 2021 versus the same period ended 2020 is largely the result of increased spending on salaries, wages and benefits, office expenses and consulting fees, offset by a reduction in spending on professional fees.

 

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.

 

 7 

 

Other Income

 

We had other income of $801,859 for the three months ended March 31, 2021, as compared with other income of $25,020 for the same period ended 2020.

 

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 $221,775 in the gain of Digital Assets, is the reason for our other income for the three months ended March 31, 2021. Our other income for the three months ended March 31, 2020 is the result of a $58,804 gain on the sale of Digital Assets, offset by interest expense of $33,784.

 

Net Income/Net Loss

 

We recorded net income in the amount of $624,613 for the three months ended March 31, 2021, as compared with a net loss of $136,654 for the same period ended 2020. Our net income for the three months ended March 31, 2021 is the result of other income exceeding operating expenses. Our losses for the other period is attributable to operating expenses and other expenses, together with a lack of any revenues.

Liquidity and Capital Resources

 

As of March 31, 2021, we had total current assets of $1,402,927, mainly consisting of digital assets, compared with current liabilities of $12,507,063, resulting in a working capital deficit of $11,104,136. This represents an increase from our working capital deficit of approximately $11,686,278 at December 31, 2020.

 

Operating activities used $203,583 in cash for the three months ended March 31, 2021, as compared with $277,577 used for the same period ended 2020. Our negative operating cash flow for 2021 was the result of adjustments to interest on BCOT token refund liability and the gain on the sale of Digital Assets, while the negative operating cash flow for 2020 was the result of our net loss combined with changes in accountants payable and accrued expenses.

Investing activities provided $242,880 in cash for the three months ended March 31, 2021, as compared with $282,575 for the same period ended 2020. Our positive investing cash flow for both periods was the result of proceeds from the sale of Digital Assets.

 

Financing activities provided no cash for the three months ended March 31, 2021, as compared with $5,000 used for the same period ended 2020. Our negative financing cash flows for 2020 was the result of repayments of convertible promissory notes.

 

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.

 

We have insufficient cash to operate our business at the current level for the next twelve months and insufficient cash to achieve our business goals. 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.

 

 8 

 

In recent months, management has taken several actions in an effort to secure funding and generate revenue streams. We have attended various meetings with parties that may be interested in an offering of traditional equity or debt securities. We have approached a licensed broker and we are in discussions with that broker on different ways to raise additional capital. We have added 4 additional offerings to the product line making the platform robust and giving more options to the market place. We have relaunched with a new website and marketing to various different segments of the industry verticals. We have also re-engineered part of the product offering allowing regular consumers to use the platform without the need to purchase or hold BCOT Tokens. We have added a new RUST connectivity client for our API’s allowing developers who use the RUST programing language to easily connect to the Catenis platform.

 

As mentioned previously, we have estimated expenditures for the next 12 months will be approximate $1,375,000 without considering the expenditures related to the Claims Process. During the current reporting period, 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 March 31, 2021, 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 March 31, 2021. 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

 

We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.

 

 9 

 

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 March 31, 2021, 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, 2021: (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

 

SEC Settlement

 

As previously disclosed, we submitted an offer of settlement (the “Offer”) to the SEC that it accepted into an order (the “Order”) on or about December 18, 2019.

 

Specifically, pursuant to the Order of the SEC, we agreed to the following:

 

  1) File a press release within 14 days of the Order.

 

  2) File a Registration Statement under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) within 120 days of the Order.

 

  3) Distribute a claim form and post the same to our website no later than 60 calendar days after the date of the filing of this Registration Statement, or on the date 7 days after the Registration Statement becomes effective, whichever date is sooner, informing all persons and entities that purchased BCOT Tokens from us of their potential claims under Section 12(a) of the Securities Act, including the right to sue to recover the consideration paid for the BCOT Tokens with interest thereon and further informing purchasers that they may submit the written claim form to us within 3 months (the “Claim Form Deadline”).  On July 28, 2020, the SEC granted the Company an extension of three weeks, or until August 21, 2020, to mail out the Claims Forms to Potential BCOT Token Claimants.

 

  4) Maintain the Registration and make timely reports under the Exchange Act at least until the later of (1) the Claims Form Deadline; (2) such time as we have filed all reports required for the fiscal year within which the Registration Statement became effective; and (3) such time as we are eligible to terminate our registration pursuant to Rule 12g-4 under the Exchange Act.

 

  5) Pay the amounts due under Section 12(a) of the Securities Act to each purchaser using the claim form within 3 months of the Claim Form Deadline.

 

  6) Submit to the SEC a monthly report of the claims received and the claims paid.

 

  7) Submit a final report of the handling of all claims within 7 months.

 

  8) Pay a civil monetary penalty in the amount of $250,000.00 to the SEC.

 

As of the date of this Quarterly Report, we have registered our BCOT Security Tokens under the Exchange Act, distributed the notice and claim forms, maintained our registration with the SEC (to date), paid each eligible claimant the amount due, submitted monthly reports to the SEC (to date), and paid the SEC $250,000 representing the civil monetary penalty.

 

We have submitted the required monthly reports to the SEC of the claims received and the claims paid. We also have submitted to the SEC a final report of the handling of all claims. A final Certification of all undertakings will be submitted.

 

As mentioned, we have complied with the rescission claim process as provided for in the Order. After our distribution of the notice and claim forms, twenty (20) eligible claims 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.

 

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Other than with respect to our settlement with the SEC, 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 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 Tokens.

 

New York Litigation

 

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. The Note of Issue is scheduled to be filed in May 2021 by order of the court.

 

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 until the outcome of the SEC settlement and claims distribution process has been completed. 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, 2021.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The 14,708 increase in common shares outstanding as of March 31, 2021 is due to vesting of incentive stock options. These securities were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.

 

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 March 31, 2021 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: May 17, 2021    
  By: /s/ Andre De Castro
    Andre De Castro
  Title: Chief Executive Officer,
Principal Executive Officer, and Director
     
  Blockchain of Things, Inc.
Date: May 17, 2021    
  By: /s/ Deborah de Castro
    Deborah de Castro
  Title: Chief Financial Officer, VP of Operations, Secretary, Treasurer
Principal Financial Officer,
Principal Accounting Officer and Director

 

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